Attached files
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EX-31.1 - EX-31.1 - WILLIAMS COAL SEAM GAS ROYALTY TRUST | d69847exv31w1.htm |
EX-32.1 - EX-32.1 - WILLIAMS COAL SEAM GAS ROYALTY TRUST | d69847exv32w1.htm |
EX-15.1 - EX-15.1 - WILLIAMS COAL SEAM GAS ROYALTY TRUST | d69847exv15w1.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
þ | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended September 30, 2009
or
o | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For
the transition period from _____ to _____
Commission File Number: 1-11608
WILLIAMS COAL SEAM GAS ROYALTY TRUST
(Exact name of registrant as specified in its charter)
Delaware (State or other jurisdiction of incorporation or organization) |
75-6437433 (I.R.S. Employer Identification No.) |
Trust Division
U.S. Trust, Bank of America Private Wealth Management
901 Main Street
17th Floor
Dallas, Texas 75202
(Address of principal executive offices)
(Zip code)
U.S. Trust, Bank of America Private Wealth Management
901 Main Street
17th Floor
Dallas, Texas 75202
(Address of principal executive offices)
(Zip code)
(214) 209-2400
(Registrants telephone number, including area code)
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, 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 (not yet
applicable to registrant)
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 Exchange Act). Yes o No þ
Number of units of beneficial interest outstanding at November 6, 2009: 9,700,000
TABLE OF CONTENTS
Table of Contents
PART I FINANCIAL INFORMATION
Item 1. Financial Statements.
The financial statements included herein have been prepared by Bank of America, N.A., as
Trustee (the Trustee) of Williams Coal Seam Gas Royalty Trust (the Trust), pursuant to the
rules and regulations of the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in annual financial statements have been condensed or omitted
pursuant to such rules and regulations, although the Trustee believes that the disclosures are
adequate to make the information presented not misleading. It is suggested that these condensed
financial statements and notes thereto be read in conjunction with the financial statements and
notes thereto included in the Trusts Annual Report on Form 10-K for the year ended December 31,
2008 (the 2008 Annual Report). The December 31, 2008 balance sheet is derived from the audited
balance sheet of that date. In the opinion of the Trustee, all adjustments, consisting only of
normal recurring adjustments, necessary to present fairly the assets, liabilities and trust corpus
of the Trust as of September 30, 2009, the distributable income (expenses in excess of income) for
the three-month and nine-month periods ended September 30, 2009 and 2008, and the changes in trust
corpus for the nine-month periods ended September 30, 2009 and 2008, have been included. The
distributable income for such interim periods is not necessarily indicative of the distributable
income for the full year.
The financial statements as of September 30, 2009, and for the three-month and nine-month
periods ended September 30, 2009 and 2008 included herein have been reviewed by Ernst & Young LLP,
an independent registered public accounting firm, as stated in their report appearing herein.
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Report of Independent Registered Public Accounting Firm
The Trustee
Williams Coal Seam Gas Royalty Trust
Williams Coal Seam Gas Royalty Trust
We have reviewed the condensed statement of assets, liabilities and trust corpus of the Williams
Coal Seam Gas Royalty Trust as of September 30, 2009, and the related condensed statements of
distributable income (expenses in excess of income) for the three-month and nine-month periods
ended September 30, 2009 and 2008, and the condensed statements of changes in trust corpus for the
nine-month periods ended September 30, 2009 and 2008. These financial statements are the
responsibility of the Trustees management.
We conducted our review 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, 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 financial statements, these financial statements have been prepared
on a modified cash basis of accounting, which is a comprehensive basis of accounting other than
U.S. generally accepted accounting principles.
Based on our review, we are not aware of any material modifications that should be made to the
condensed financial statements referred to above for them to be in conformity with the basis of
accounting described in Note 2.
We have previously audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the statement of assets, liabilities and trust corpus of the
Williams Coal Seam Gas Royalty Trust as of December 31, 2008, and the related statements of
distributable income and changes in trust corpus for the year then ended not presented herein, and
in our report dated March 12, 2009, we expressed an unqualified opinion on those financial
statements and included an explanatory paragraph regarding the Williams Coal Seam Gas Royalty
Trusts ability to continue as a going concern. In our opinion, the information set forth in the
accompanying condensed statement of assets, liabilities and trust corpus as of December 31, 2008,
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/ Ernst & Young LLP | ||||
Tulsa, Oklahoma
November 6, 2009
November 6, 2009
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WILLIAMS COAL SEAM GAS ROYALTY TRUST
CONDENSED
STATEMENTS OF ASSETS, LIABILITIES AND TRUST CORPUS (UNAUDITED)
September 30, | December 31, | |||||||
2009 | 2008 | |||||||
(Unaudited) | ||||||||
ASSETS |
||||||||
Current Assets cash and cash equivalents |
$ | 52,542 | $ | 45,419 | ||||
Royalty interests in oil and gas properties
(less accumulated amortization
of $133,725,319 at
September 30, 2009 and
$132,988,670 at December 31,
2008) (Note 2) |
4,841,345 | 5,577,994 | ||||||
TOTAL ASSETS |
$ | 4,893,887 | $ | 5,623,413 | ||||
LIABILITIES AND TRUST CORPUS |
||||||||
Current Liabilities: |
||||||||
Accounts payable |
$ | 191,436 | $ | 31,193 | ||||
Trust corpus 9,700,000 units of
beneficial interest authorized
and outstanding (Note 2) |
4,702,451 | 5,592,220 | ||||||
TOTAL LIABILITIES
AND TRUST CORPUS |
$ | 4,893,887 | $ | 5,623,413 | ||||
The accompanying notes are an integral part of these financial statements. See
accountants review report.
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WILLIAMS COAL SEAM GAS ROYALTY TRUST
CONDENSED STATEMENTS OF DISTRIBUTABLE INCOME (EXPENSES IN
EXCESS OF INCOME) (UNAUDITED)
THREE MONTHS | THREE MONTHS | |||||||
ENDED | ENDED | |||||||
September 30, 2009 | September 30, 2008 | |||||||
Royalty income (Notes 2 and 7) |
$ | 77,767 | $ | 3,629,317 | ||||
Interest income |
42 | 6,058 | ||||||
Total |
77,809 | 3,635,375 | ||||||
General and administrative
expenses (Note 4) |
(182,005 | ) | (155,777 | ) | ||||
Distributable income (expenses in excess of
income) |
$ | (104,196 | ) | $ | 3,479,598 | |||
Distributable income (expenses in excess of
income) per unit
(9,700,000 units) (Note 2) |
$ | (.01 | ) | $ | .36 | |||
The accompanying notes are an integral part of these financial statements. See
accountants review report.
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WILLIAMS COAL SEAM GAS ROYALTY TRUST
CONDENSED STATEMENTS OF DISTRIBUTABLE INCOME (UNAUDITED)
NINE MONTHS | NINE MONTHS | |||||||
ENDED | ENDED | |||||||
September 30, 2009 | September 30, 2008 | |||||||
Royalty income (Notes 2 and 7) |
$ | 2,403,029 | $ | 7,775,852 | ||||
Interest income |
841 | 13,952 | ||||||
Total |
2,403,870 | 7,789,804 | ||||||
General and administrative
expenses (Note 4) |
(820,886 | ) | (704,677 | ) | ||||
Distributable income |
$ | 1,582,984 | $ | 7,085,127 | ||||
Distributable income per unit
(9,700,000 units) (Note 2) |
$ | 0.16 | $ | 0.73 | ||||
The accompanying notes are an integral part of these financial statements. See
accountants review report.
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WILLIAMS COAL SEAM GAS ROYALTY TRUST
CONDENSED STATEMENTS OF CHANGES IN TRUST CORPUS (UNAUDITED)
NINE MONTHS | NINE MONTHS | |||||||
ENDED | ENDED | |||||||
September 30, 2009 | September 30, 2008 | |||||||
Trust corpus, beginning of period |
$ | 5,592,220 | $ | 6,877,977 | ||||
Amortization of royalty interests (Note 2) |
(736,649 | ) | (868,661 | ) | ||||
Distributable income |
1,582,984 | 7,085,127 | ||||||
Distributions to Unitholders (Note 5) |
(1,736,104 | ) | (6,951,298 | ) | ||||
Trust corpus, end of period |
$ | 4,702,451 | $ | 6,143,145 | ||||
Distributions per unit
(9,700,000 units) (Note 5) |
$ | 0.18 | $ | 0.72 | ||||
The accompanying notes are an integral part of these financial statements. See
accountants review report.
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WILLIAMS COAL SEAM GAS ROYALTY TRUST
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
1. TRUST ORGANIZATION AND PROVISIONS
Williams Coal Seam Gas Royalty Trust (the Trust) was formed as a Delaware business trust
pursuant to the terms of the Trust Agreement of Williams Coal Seam Gas Royalty Trust (as amended,
the Trust Agreement) entered into effective as of December 1, 1992, by and among Williams
Production Company, a Delaware corporation (WPC), as trustor; The Williams Companies, Inc., a
Delaware corporation (Williams), as sponsor; Bank of America, N.A. (as successor to NationsBank
of Texas, N.A.), a national banking association (the Trustee); and Chase Bank (as successor to
Chemical Bank Delaware), a Delaware banking corporation (the Delaware Trustee) (the Trustee and
the Delaware Trustee are sometimes referred to collectively as the 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 report on Form
10-Q to U.S. Trust, Bank of America Private Wealth Management shall describe the legal entity Bank
of America, N.A.
The Trust was formed to acquire and hold certain net profits interests (the Royalty
Interests) in proved natural gas properties located in the San Juan Basin of New Mexico and
Colorado (the Underlying Properties) owned by WPC. The Trust was initially created effective as
of December 1, 1992, with a $100 contribution by WPC. On January 21, 1993, the Royalty Interests
were conveyed to the Trust by WPC pursuant to the Net Profits Conveyance (the Conveyance) entered
into effective as of October 1, 1992, by and among WPC, Williams, the Trustee and the Delaware
Trustee, in consideration for all the 9,700,000 authorized units of beneficial interest in the
Trust (Units). WPC transferred its Units by dividend to its parent, Williams, which sold an
aggregate of 5,980,000 Units to the public through various underwriters in January and February
1993 (the Public Offering). Subsequently, Williams sold to the public an additional 151,209
Units. During the second quarter of 1995, Williams transferred its remaining Units to Williams
Holdings of Delaware, Inc. (WHD), a separate holding company for Williams non-regulated
businesses. Effective July 31, 1999, WHD was merged into Williams, and by operation of the merger,
Williams assumed all assets, liabilities and obligations of WHD, including without limitation,
ownership of WHDs Units. Effective August 11, 2000, Williams sold its Units to Quatro Finale IV
LLC, a Delaware limited liability company (QFIV), in a privately negotiated transaction.
Williams retained the voting rights and retained a call option on the transferred Units, and QFIV
was granted a put option on the Units. Through a series of exercises of its call option,
Williams reacquired an aggregate of 3,568,791 Units from December 2001 through June 2003. Williams
has informed the Trustee that it has subsequently sold 2,779,500 of these Units through November
1, 2009 and owned a remaining 789,291 Units as of such date.
Effective May 1, 1997, WPC sold the Underlying Properties subject to and burdened by the
Royalty Interests to Quatro Finale LLC, an unaffiliated Delaware limited liability company.
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Ownership of the Underlying Properties reverted back to WPC effective February 1, 2001,
pursuant to the terms of the May 1, 1997 transaction. Pursuant to a Purchase and Sale Agreement
dated March 14, 2001 (the 2001 Transaction Agreement), and effective March 1, 2001, WPC sold the
Underlying Properties subject to and burdened by the Royalty Interests to Quatro Finale V LLC, an
unaffiliated Delaware limited liability company. The sale of the Underlying Properties is
expressly permitted under the Trust Agreement. Effective January 1, 2003, ownership of the
Underlying Properties once again reverted back to WPC after it exercised its right to repurchase
interests in the Underlying Properties from Quatro Finale V LLC pursuant to the 2001 Transaction
Agreement. Unless otherwise dictated by context, references herein to WPC with respect to the
ownership of the Underlying Properties for any period from May 1, 1997 through February 1, 2001,
and for the period from March 1, 2001 through December 31, 2002, shall be deemed to refer to Quatro
Finale.
The Trustee has the power to collect and distribute the 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 and is not empowered to otherwise manage or take part in the business 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.
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 consist primarily of a net profits interest (the NPI) in the Underlying
Properties. The NPI generally entitles the Trust to receive 60 percent of the NPI Net Proceeds, as
defined below, attributable to (i) gas produced and sold from WPCs net revenue interests (working
interests less lease burdens) in the properties in which WPC has a working interest (the WI
Properties) and (ii) the revenue stream received by WPC attributable to its 35 percent net profits
interest in 5,348 gross acres in La Plata County, Colorado (the Farmout Properties). NPI Net
Proceeds consists generally of the aggregate proceeds attributable to WPCs net revenue interest,
based on the sale at the wellhead of gas produced from the WI Properties and the revenue stream
received by WPC from its 35 percent net profits interest in the Farmout Properties, less certain
taxes and costs.
The Royalty Interests also include a 20 percent interest in WPCs Infill Net Proceeds from the
sale of production since well spacing rules have been effectively modified and additional wells are
drilled on producing drilling blocks on the WI Properties (the Infill Wells) during the term of
the Trust. Infill Net Proceeds consists generally of the aggregate proceeds, based on the price
at the wellhead, of gas produced from WPCs net revenue interest in any Infill Wells less certain
taxes and costs.
On October 15, 2002, the New Mexico Oil and Gas Commission (NMOCD) revised the field rules for
the Basin Fruitland Coal (Gas) Pool to allow optional second (infill) wells on the standard 320
acre spacing unit in certain designated areas of the pool (the non fairway wells). On July 17,
2003, the NMOCD further modified the field rules for the Basin Fruitland Coal (Gas) Pool to allow
these infill wells on the standard 320 acre spacing unit in all areas of the pool. The WI
Properties contain 484 infill locations designated as proved locations according to
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U.S. Securities and Exchange Commission (SEC) guidelines. As of September 30, 2009, 437
infill locations are proved developed producing and 47 locations are proved undeveloped.
The Infill Wells reached payout in the aggregate in 2008, resulting in the Trust receiving its
20 percent interest in WPCs Infill Net Proceeds through the second quarter of 2009. However, as
of September 30, 2009, WPC has informed the Trustee that due to the net deficit realized by the
Infill Wells during the third quarter, the Infill Net Profit Costs now exceed the Infill Net Profit
Gross Proceeds by approximately $335,000. The Trust will not be liable for such excess costs, and
such excess costs will hereafter constitute Excess Infill Net Profit Costs until recovered by WPC.
The Trust will not receive its 20 percent interest in WPCs Infill Net Proceeds until such time as
the Infill Net Profits Gross Proceeds exceeds the Infill Net Profit Costs on an aggregate basis.
The complete definitions of Infill Net Proceeds, Infill Net Profit Costs, Excess Infill Net Profit
Costs, and Infill Net Profit Gross Proceeds are set forth in the Conveyance.
The decrease in royalty income for the quarter ended September 30, 2009 compared to the same
quarter in 2008 is primarily due to lower production and significantly lower natural gas prices,
impacting the net profits interest due to the Trust. Production volumes are affected by changes in
sales prices for natural gas produced and costs that are deducted in calculating the NPI Net
Proceeds. Royalty income for the nine month period ended September 30, 2009 would have been
$1,637,213 if the Trust had not received an overpayment from WPC of $765,816 in the second quarter of 2009. Williams has
informed the Trust that it waives any right to seek repayment of such amount.
2. BASIS OF ACCOUNTING
The Trust will terminate no later than December 31, 2012, subject to earlier termination under
certain circumstances described in the Trust Agreement (the Termination Date). Cancellation of
the Trust will occur on or following the Termination Date when all Trust assets have been sold and
the net proceeds therefrom distributed to holders of Units in the Trust (Unitholders).
One of the circumstances for which the Trust is subject to termination prior to December 31,
2012 is in the event that when a computation is performed as of each December 31, the net present
value (discounted at 10 percent) of the estimated future net revenues (calculated in accordance
with criteria established by the SEC) for proved reserves attributable to the Royalty Interests but
using the average monthly Blanco Hub Spot Price for the past calendar year less certain gathering
costs, is equal to or less than $30 million. The net present value of the estimated future net
revenues computed as described above by the independent petroleum engineers as of December 31, 2008
was approximately $65 million. While the results of this computation did not trigger an early
termination of the Trust as of December 31, 2008, future computations are subject to numerous
uncertainties in estimating the future net revenues, including changes in pricing, costs and
production volumes.
The current outlook for 2009 commodity prices is significantly lower than the prices realized
during 2008, resulting in uncertainty regarding the Trusts ability to avoid a termination
triggering event in accordance with the provisions of the Trust Agreement when the test is next
performed as of December 31, 2009. The simple average monthly Blanco Hub Spot Price for the
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first nine months of 2009 was $3.00 compared to the average price of $7.21 that was used by
the independent petroleum engineers as of December 31, 2008 who calculated the net present value of
the estimated future net revenues as of such date to be approximately $65 million. Additionally,
the computed value could be negatively impacted by future revisions to the underlying reserve
estimates. As a result, there is substantial doubt regarding the Trusts ability to continue as a
going concern. Should the Trusts computed net present value fall below the $30 million stipulated
threshold as of December 31, 2009, which appears increasingly likely as the average price for the
first nine months of 2009 is significantly lower than the average price for 2008, the Trust will
terminate effective March 1, 2010. The accompanying financial statements do not include any
adjustments that might result from the outcome of this uncertainty, including the ultimate liquidation of the Trust and its assets.
The termination of the Trust and the subsequent sale of the Royalty Interests would be taxable
events to the Unitholders for Federal income tax purposes. Generally, a Unitholder will realize
gain or loss equal to the difference between the amount realized on the sale of the Royalty
Interests upon the termination of the Trust and such Unitholders adjusted basis in his 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. State tax consequences may also result to Unitholders upon the termination of the Trust
and the sale of the Royalty Interests. Each Unitholder should consult such Unitholders own tax
advisor regarding Trust tax compliance matters, including the Federal and state tax implications
concerning a termination of the Trust and the sale of the Royalty Interests.
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 United States
Generally Accepted Accounting Principles (GAAP). Preparation of the Trusts financial statements
on such basis includes the following:
| Revenues are recognized in the period in which amounts are received by the Trust. Routine general and administrative expenses are recognized on an accrual basis. No amounts have been accrued for services which may be required in the future related to the possible termination of the Trust. | ||
| Amortization of the Royalty Interests is calculated on a unit-of-production basis and charged directly to trust corpus. | ||
| Distributions to Unitholders are recorded when declared by the Trustee (See Note 5). | ||
| Loss contingencies are recognized in the period in which amounts are paid by the Trust. |
The financial statements of the Trust differ from financial statements prepared in accordance
with GAAP. For example, royalty income is not accrued in the period of production, amortization of
the Royalty Interests is not charged against operating results, and loss contingencies are not
charged to operating results until paid. This comprehensive basis of accounting other than GAAP
corresponds to the accounting permitted for royalty trusts by the
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SEC, as specified by Staff Accounting Bulletin Topic 12:E, Financial Statements of Royalty
Trusts.
In December 2008, the SEC released Final Rule, Modernization of Oil and Gas Reporting. The
new disclosure requirements include provisions that permit the use of new technologies to determine
proved reserves if those technologies have been demonstrated empirically to lead to reliable
conclusions about reserves volumes. The new requirements also will allow companies to disclose
their probable and possible reserves to investors. In addition, the new disclosure requirements
require companies to: (a) report the independence and qualifications of its reserves preparer or
auditor; (b) file reports when a third party is relied upon to prepare reserves estimates or
conducts a reserves audit; and (c) report oil and gas reserves using an average price based upon
the prior 12-month period rather than year-end prices. In September 2009, the Financial Accounting
Standards Board (FASB) announced a proposed accounting standards update to align the oil and gas
reserve estimation and disclosure requirements of Extractive Industries Oil and Gas (Topic 932)
with the requirements in the SEC Final Rule. The new disclosure requirements are effective for
financial statements for fiscal years ending on or after December 31, 2009. The effect of the SEC
rule and the proposed FASB update has not been determined.
3. 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 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 U.S. Treasury
Regulations (and includes custodians, nominees, certain joint owners, and brokers holding an
interest for a custodian in a street name, referred to herein collectively as middlemen).
Therefore, the Trustee considers the Trust to be a widely held fixed investment trust (WHFIT) for
U.S. Federal income tax purposes. U.S. Trust, Bank of America Private Wealth Management, 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 U.S.
Treasury Regulations governing the information reporting requirements of the Trust as a WHFIT.
Notwithstanding the foregoing, the middlemen holding Trust Units on behalf of the 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 Form 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.
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4. RELATED PARTY TRANSACTIONS
Williams provides accounting, bookkeeping and informational services to the Trust in
accordance with an Administrative Services Agreement effective December 1, 1992. The fee is
$50,000 per quarter, escalating 3 percent each October 1 commencing October 1, 1993. For the three
and nine month periods ended September 30, 2009, the Trust expensed $80,235 and
$240,706, respectively, as compared to $77,898 and $233,695 for the comparable period in
2008. At September 30, 2009, accounts payable includes $160,470 due Williams (none at
December 31, 2008). Substantially all production from the WI Properties is sold to a Williams
subsidiary. Additionally, all royalty income is received from Williams.
The interests of Williams and its affiliates and the interests of the Trust and the
Unitholders with respect to the Underlying Properties could at times be different. As a working
interest owner in the WI Properties, WPC could have interests that conflict with the interests of
the Trust and Unitholders. For example, such conflicts could be due to a number of factors
including, but not limited to, future budgetary considerations and the absence of any contractual
obligation on the part of WPC to spend for development of the WI Properties, except as noted
herein. Such decisions may have the effect of changing the amount or timing of future
distributions to Unitholders. WPCs interests may also conflict with those of the Trust and
Unitholders in situations involving the sale or abandonment of Underlying Properties. WPC has the
right at any time to sell any of the Underlying Properties subject to the Royalty Interests and,
under certain circumstances, may abandon any of the WI Properties. Such sales or abandonment may
not be in the best interests of the Trust. In addition, WPX Gas Resources (hereinafter defined)
has the right, exercisable in its sole discretion, to terminate its Minimum Purchase Price
(hereinafter defined) commitment under the Gas Purchase Contract (hereinafter defined), Williams
interest could conflict with those of the Trust and Unitholders to the extent the interests of WPX
Gas Resources, under the Gas Purchase Contract, or Williams Field Services Company and WPX Gas
Resources, under the Gas Gathering Contract, differ from the interests of the Trust and the
Unitholders. Except for amendments to the Gas Gathering Contract or Gas Purchase Contract that
must be approved by the vote of a majority of the Unitholders present at a meeting at which a
quorum is present if such amendment would materially adversely affect Trust revenues, no mechanism
or procedure has been included to resolve potential conflicts of interest between the Trust,
Williams, WPC or their affiliates.
5. DISTRIBUTIONS TO UNITHOLDERS
The Trustee determines for each 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, on or prior to the last day of the month following the
end of each calendar quarter from the Royalty Interests, plus, with certain exceptions, any other
cash receipts of the Trust during such quarter, over the liabilities of the Trust paid or accrued
during such quarter, 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.
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The Trustee distributes the Quarterly Distribution Amount within 60 days after the end of each
calendar quarter to each person who was a Unitholder of record on the associated record date (i.e.,
the 45th day following the end of each calendar quarter or if such day is not a business day, the
next business day thereafter), together with interest estimated to be earned on such amount from
the date of receipt thereof by the Trustee to the payment date.
In addition to the regular quarterly distributions, under certain circumstances specified in
the Trust Agreement (such as upon a purchase price adjustment, if any, or pursuant to the sale of a
Royalty Interest), the Trust would make a special distribution (a Special Distribution Amount).
A Special Distribution Amount would be made when amounts received by the Trust under such
circumstances aggregated in excess of $9,000,000. The record date for 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 or unless such day is within 10 days of 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). Distribution to Unitholders of a Special Distribution Amount will
be made no later than 15 days after the Special Distribution Amount record date.
6. SUBSEQUENT EVENTS
The
Trustee has evaluated events occurring subsequent to the quarter ended
September 30, 2009 through November 6, 2009. Subsequent to September 30, 2009, the Trust declared the following distribution:
Quarterly | ||||
Record | Payment | Distribution | ||
Date | Date | per Unit | ||
November
16, 2009
|
November 27, 2009 | $.022074 |
The
distribution per unit was $.022074 attributable to the third quarter of 2009
(payable in the fourth quarter of 2009) as compared to no distribution attributable to the second
quarter of 2009. The increase in distributions is mainly the result
of higher natural gas prices.
7. CONTINGENCIES
WPX Gas Resources Company (WPX Gas Resources, as successor in interest to Williams Gas
Marketing Company), purchases natural gas produced from the WI Properties (except for certain small
volumes) at the wellhead under the terms of a gas purchase contract dated October 1, 1992, as
amended (the Gas Purchase Contract). The Gas Purchase Contract provides for a pricing mechanism
during an initial 5-year period, which expired on December 31, 1997, and continuing for one or more
consecutive additional 1-year terms unless and until WPX Gas Resources exercises its annual option,
exercisable 15 days prior to the end of each contract year, to discontinue purchasing gas under the
pricing mechanism of the Gas Purchase Contract and instead purchase gas at a monthly market-based
price. WPX Gas Resources has not exercised this option and therefore the pricing mechanism will
continue to remain in effect through at least December 31, 2009.
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Under the pricing mechanism of the Gas Purchase Contract, when the market price is less than
$1.70 per MMBtu (the Minimum Purchase Price), the Trust will be paid the Minimum Purchase Price
for the gas and an account (the Price Credit Account) will be maintained to identify the accrued
and unrecouped amount of payments made to the Trust in excess of the market price. Any amounts in
the Price Credit Account are subject to future recoupment when the market price exceeds the Minimum
Purchase Price. As of September 30, 2009, there were no remaining unrecouped price credits in the
Price Credit Account. To the extent there may in the future be a balance in the Price Credit
Account, the entitlement to recoup price credits means that if and when the index price is above
the Minimum Purchase Price, future royalty income paid to the Trust would be reduced until such
time as such Price Credit Account is once again reduced to zero. Corresponding cash distributions
to Unitholders would also be reduced.
While the terms of the Gas Purchase Agreement pricing mechanism remain in place and no balance
exists in the Price Credit Account, when the market price for natural gas exceeds $1.94 per MMBtu
(as was the case during the first nine months of 2009), the Trust receives only 50 percent of the
excess of the market price over the $1.94 price per MMBtu before reduction for gathering,
processing and certain other costs.
WPC has notified the Trust that certain royalty matters are currently being litigated by a
federal regulatory agency and another producer. Although neither WPC nor the Trust is a party to
the litigation, the final outcome of that case might lead to a future unfavorable impact on the
Trusts royalty income and distributions.
The majority of the production attributable to the Trust is within Federal Units. Unit
participating areas are formed by pooling production from the participating area. Entitlement to
the pooled production is based on each partys acreage in the participating area divided by the
total participating acreage. Wells drilled outside the participating area may create an
enlargement to the participating area and a revision of the Unit ownership entitlement. The Bureau
of Land Management (BLM) must approve Unit participating area expansions. The effective date for
Unit expansions is retroactive to the date the well creating the expansion was tested. WPC
notified the Trust that the third quarter 2009 royalty distribution to the Trust was positively
impacted by approximately $28,500 for minor corrections.
The royalty income presented in the accompanying statements of distributable income is on an
entitlement basis and reflects WPCs estimated impact of the most recent BLM participating area
approvals through September 30, 2009.
Item 2. Trustees Discussion and Analysis of Financial Condition and Results of Operations.
When excess cash is available, the Trust 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 Underlying Properties, which are owned by WPC and
not the Trust.
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Distributable income of the Trust generally consists of the excess of royalty income plus
interest income over the general and 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. Currently, funds are 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 (FDIC). 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 WPX Gas
Resources 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. Additional risks are described
in Item 1A Risk Factors of the 2008 Annual Report.
The amount of distributable income of the Trust for any quarter may differ from the amount of
cash available for distribution to Unitholders in such quarter due to differences in the treatment
of the expenses of the Trust in the determination of those amounts. The financial statements of
the Trust are prepared on a modified cash basis pursuant to which general and administrative
expenses of the Trust are recognized when incurred whereas royalty income is recognized when
received. Consequently, the reported distributable income of the Trust for any quarter is
determined by deducting from the income received by the Trust the amount of expenses incurred by
the Trust during such quarter. The amount of cash available for distribution to Unitholders,
however, is determined in accordance with the provisions of the Trust Agreement and reflects the
deduction from the income actually received by the Trust of the amount of expenses actually paid or
accrued by the Trust and adjustments for changes in reserves for unpaid liabilities. See Note 5 to
the financial statements of the Trust appearing elsewhere in this report on Form 10-Q for
additional information regarding the determination of the amount of cash available for distribution
to Unitholders.
The Trustee had previously announced that the Trust would not make a distribution for the
third quarter of 2009 because Trust expenses exceeded royalty income for the quarter. While the
Trustee has announced that the Trust will make a distribution for the fourth quarter of 2009
(attributable to the third quarter of 2009), if natural gas prices remain at current levels or
decrease, royalty income may not exceed Trust expenses in future quarters, in which case no
distributions will be made.
There is substantial doubt as to the Trusts ability to continue as a going concern.
Commodity prices have decreased over the past year, and underlying reserves are depleting. If the
Trusts computed net present value of the estimated future net revenues for proved reserves
attributable to the Royalty Interests falls below the $30 million stipulated threshold as of
December 31, 2009, we will be forced to terminate the Trust pursuant to the termination and
liquidation provisions in the Trust Agreement. As of December 31, 2008, the net present value of
the estimated future net revenues for proved reserves attributable to the Royalty Interests
computed in accordance with the Trust Agreement, using an average 2008 index price of $7.21, by the
independent petroleum engineers, was $65 million. While the results of this computation did not
trigger an early termination of the Trust as of December 31, 2008, future computations are subject
to the numerous uncertainties in estimating the future net revenues as described in
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Item 1ARisk Factors in the 2008 Annual Report. The negative commodity price environment
throughout 2009 and the outlook for the remainder of 2009 have to date negatively impacted actual
index prices used in the Trusts termination calculation, and it appears increasingly likely that
it will impact the December 31, 2009 termination evaluation and trigger termination of the Trust in
accordance with the provisions of the Trust Agreement. The simple average monthly Blanco Hub Spot
Price for the first nine months of 2009 was $3.00 compared to the average price of $7.21 that was
used by the independent petroleum engineers as of December 31, 2008 who calculated the net present
value of the estimated future net revenues as of such date to be approximately $65 million. Trust
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, including changes in pricing, costs and production volumes. As a result, the
ability of the reserves to exceed the threshold in the future is uncertain, and there is
substantial doubt regarding the Trusts ability to continue as a going concern. See Termination
and Liquidation of the Trust below for a further description of the termination provisions of the
Trust Agreement. There can be no assurance that future distributions, including any distributions
upon an liquidation and termination of the Trust will equal or exceed the purchase price paid by
Unitholders for Units. See Part II, Item 1A Risk Factors.
Three Months and Nine Months Ended September 30, 2009 Compared to Three Months and Nine Months
Ended September 30, 2008
For the quarter ended September 30, 2009, royalty income received by the Trust amounted to
$77,767 as compared to $3,629,317 received for the same quarter in 2008. The decrease in royalty
income is primarily due to lower production and significantly lower natural gas prices, impacting
the net profits interest due to the Trust. Production volumes are affected by changes in sales
prices for natural gas produced and costs that are deducted in calculating the NPI Net Proceeds.
Production related to the royalty income received by the Trust in the third quarter of 2009 was
153,226 MMBtu as compared to 911,187 MMBtu for the same quarter in 2008.
Royalty income for the nine months ended September 30, 2009 was $2,403,029 as compared to
$7,775,852 for the same period in 2008. Royalty income for the nine month period ended September
30, 2009 would have been $1,637,213 if the Trust had not received an overpayment from WPC of
$765,816. Williams has informed the Trust that it waives any right to seek repayment of such
amount. Production related to the royalty income received by the Trust for the nine months ended
September 30, 2009 was 1,282,103 MMBtu as compared to 2,444,287 MMBtu for the nine months ended
September 30, 2008. The decrease in royalty income is attributed to lower prices compared to the
previous year.
Interest income for the three month period ended September 30, 2009 was lower due to lower
interest rates and less funds available for investment compared to the same period in 2008.
Interest income for the nine month period was lower than the same period for 2008 due to lower
interest rates and less funds available for investment. General and administrative expenses for
the three month period ended September 30, 2009 increased by $26,228 compared to the same period in
2008 due to increased professional fees. General and administrative expenses for the
nine month period ended September 30, 2009 increased by $116,209 compared to
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the same period in 2008 due to increased professional fees.
Expenses in excess of distributable income for the quarter ended September 30, 2009 were
$104,196 or $(0.01) per Unit compared to distributable income of $3,479,598 or $.36 per Unit for the
same quarter in 2008. This decrease in income was the result of lower royalty income as previously
described. No distribution was made in the third quarter of 2009 because Trust expenses exceeded
royalty income for the period. Distributable income for the nine months ended September 30, 2009
was $1,582,984 or $0.16 per Unit as compared to $7,085,127 or $0.73 per Unit for the same period in
2008. This decrease was the result of lower production volumes and lower prices and, as described
above, the 2009 distributions were benefited by the overpayment amount from WPC. If natural gas
prices remain at current levels or decrease, royalty income may not exceed Trust expenses in future
quarters (as was the case in the prior quarter), in which case no distributions will be made.
Because the Trust incurs administrative expenses throughout a quarter but receives its royalty
income only once in a quarter, the Trustee established in the first quarter of 1993 a cash reserve
for the payment of expenses and liabilities of the Trust. The Trustee thereafter has adjusted the
amount of such reserve in certain quarters as required for the payment of the Trusts expenses and
liabilities, in accordance with the provisions of the Trust Agreement. The Trustee has maintained
a cash reserve that will be reduced by Trust expenses in excess of royalty income.
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 WPCs 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. Cash
yields will cease when Trust expenses exceed royalty income, as was the case in the third quarter
of 2009. If natural gas prices remain at current levels or decrease, cash yields may cease for the
foreseeable future, including, potentially, through termination of the Trust.
Royalty income received by the Trust in a given calendar quarter will generally reflect the
sum of (i) net proceeds from the sale of gas produced from the WI Properties during the preceding
calendar quarter, plus (ii) cash received by WPC with respect to the Farmout Properties either (a)
during the preceding calendar quarter or (b) if received in sufficient time to be paid to the
Trust, in the month immediately following such calendar quarter. Accordingly, the royalty income
for the quarter ended September 30, 2009, was based on production volumes and natural gas prices
for the period April 2009 through June 2009, as shown in the table below. Due to delays associated
with the receipt of income related to the Farmout Properties, the Trusts royalty income for the
third quarter of 2009 reflects estimated production volumes from the Farmout Properties for the
months of March 2009 through May 2009, as shown in the table below. The net production volumes
included in the table below are for production attributable to net profits of the Underlying
Properties, and not for production attributable to the Trusts Royalty Interests. Prices since
June 30, 2009 have remained at relatively low levels and will reduce or eliminate the future
distributions of the Trust. In turn, lower prices will affect the
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future reserve quantities of the Trust and will impact the value determined in the annual
termination calculation and the fair value of the interests upon subsequent sale, if applicable.
Three Months | Three Months | |||||||
Ended | Ended | |||||||
June 30, 2009 | June 30, 2008 | |||||||
Production (MMBtu) (1) |
||||||||
WI Properties |
13,813 | (2) | 1,248,685 | (3) | ||||
Farmout Properties |
238,672 | 269,960 | ||||||
Infill Properties (5)(6) |
8,676 | (5) | 0 | (6) | ||||
Blanco Hub Spot Price ($/MMBtu) (4) |
$ | 2.59 | $ | 9.19 | ||||
Net Wellhead Price WI Properties
($/MMBtu) (4) |
$ | .76 | $ | 4.08 |
(1) | Million British Thermal Units. | |
(2) | The WI Properties realized a net deficit from the Net Profits Interest for the three month period ended September 30, 2009; therefore, no production quantities related to that period are presented. The production quantity above is comprised entirely of favorable retroactive adjustments of 13,813 MMBtu. | |
(3) | Includes unfavorable retroactive adjustments of 48,788 MMBtu. | |
(4) | Simple average of estimates for the months included in the period presented. | |
(5) | There was no distribution from the Infill Properties for the three month period ended September 30, 2009 as described in Note 1 to the financial statements of the Trust. The production quantity above reflects favorable retroactive adjustments of 8,676 MMBtu. | |
(6) | No distribution was made for Infill Properties. |
Production from the WI Properties is generally sold by WPC to WPX Gas Resources pursuant to
the Gas Purchase Contract that provides certain protections for WPC and Unitholders by providing
that WPX Gas Resources will purchase gas from WPC at a minimum purchase price of $1.70 even when
the applicable index price (which is equal to 97% of the Blanco Hub Spot Price) falls below $1.70
per MMBtu, provided that WPX Gas Resources is entitled to accrue price credits in the amount of any
excess of the minimum price so paid over the applicable index price. When the applicable index
price exceeds $1.70 per MMBtu, WPX Gas Resources is entitled to recoup any price credits previously
accrued. When the applicable index price is greater than $1.94 per MMBtu, the Gas Purchase Contract
protects and benefits WPX Gas Resources by allowing it to purchase gas from WPC at a contract price
equal to $1.94 per MMBtu plus only 50 percent of the difference between the applicable index price
and $1.94 per MMBtu. The Gas Purchase Contract also provides that the price paid for gas by WPX
Gas Resources is reduced by the amount of gathering, processing and certain other costs paid by WPX
Gas Resources. See Item 2 Properties The Royalty Interests Gas Purchase Contract in the
2008 Annual Report for detailed information about the Gas Purchase Contract and its impact on Trust
income.
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The initial five-year term of the pricing provision (Primary Term) of the Gas Purchase
Contract expired on December 31, 1997. Following the expiration of the Primary Term, the pricing
provision will continue in effect for one or more consecutive additional one-year terms (each such
term a Contract Year) unless and until WPX Gas Resources exercises its annual option, exercisable
15 days prior to the end of each Contract Year, to discontinue purchasing gas from WPC under the
pricing provision of the Gas Purchase Contract and instead purchase gas at a monthly price equal to
the index price of 97% of the Blanco Hub Spot Price. WPX has not yet exercised this option and the
pricing mechanism of the Primary Term therefore has been and will continue to remain in effect
through at least December 31, 2009.
For the nine months ended September 30, 2009, which is based on production volumes and natural
gas prices for the nine months ended June 30, 2009, the Blanco Hub Spot Price was above $2.00 per
MMBtu, and therefore the applicable index price under the Gas Purchase Contract, which is equal to
97% of the Blanco Hub Spot Price, was above $1.94 per MMBtu through such period. In general, under
the Gas Purchase Contract, the Trust only receives the benefit of 50 percent of any amount by which
the applicable index price exceeds $1.94 per MMBtu. Consequently, pursuant to the terms of the Gas
Purchase Contract, WPX Gas Resources paid WPC an amount for gas purchased equal to $1.94 per MMBtu,
less the costs paid by WPX Gas Resources to gather and process such gas and deliver it to specified
delivery points plus 50 percent of the excess of the applicable index price over $1.94 per MMBtu.
The Blanco Hub Spot Price remained above $2.00 per MMBtu in October 2009.
The information in this report on Form 10-Q concerning production and prices relating to the
Underlying Properties is based on information prepared and furnished by WPC to the Trustee. The
Trustee has no control over and no responsibility relating to the operation of the Underlying
Properties.
Termination and Liquidation of the Trust
With respect to the Trust termination provisions as outlined in the Trust Agreement, the net
present value of the estimated future net revenues computed in accordance with the Trust Agreement,
using an average 2008 index price of $7.21, by the independent petroleum engineers as of December
31, 2008 was approximately $65 million. While the results of this computation did not trigger an
early termination of the Trust as of December 31, 2008, future computations are subject to the
numerous uncertainties in estimating the future net revenues. As indicated in Note 2 to the
financial statements in Item 1, commodity prices realized in 2009 are significantly lower than the
prices realized during 2008, resulting in uncertainty regarding the Trusts ability to avoid a
termination triggering event in accordance with the provisions of the Trust Agreement when the test
is next performed as of December 31, 2009. The simple average monthly Blanco Hub Spot Price for
the first nine months of 2009 was $3.00 compared to the average price of $7.21 that was used by the
independent petroleum engineers as of December 31, 2008 who calculated the net present value of the
estimated future net revenues as of such date to be approximately $65 million. Additionally, the
computed value could be negatively impacted by future revisions to the underlying reserve
estimates. As a result, there is substantial doubt regarding the Trusts ability to continue as a
going concern. Should the Trusts computed net present value fall below the $30 million stipulated
threshold as of December 31, 2009, the Trust will terminate effective March 1, 2010.
The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty, including the ultimate liquidation of the Trust and its assets.
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Pursuant to the terms of the Trust Agreement, the Trust will terminate no later than December
31, 2012 or upon the first to occur of certain events, including (i) the disposition by the Trust
of all Royalty Interests; (ii) following an affirmative vote in favor of termination of the Trust
by the holders of record of more than 50% of the then outstanding Units; (iii) such time as the
ratio of cash received by the Trust with respect to the Royalty Interests (excluding the effect on
cash distributions received by the Trust in respect of the Royalty Interests of excess capital
costs) to administrative costs of the Trust is less than 1.2 to 1.0 for three (3) consecutive
calendar quarters, and (iv) March 1 of any calendar year if, based on a reserve report as of
December 31 of the prior year, it is determined that, as of such date, the net present value
(discounted at 10 percent) of the estimated future net revenues (calculated in accordance with
criteria established by the SEC) for proved reserves attributable to the Royalty Interests but
using the average monthly Blanco Hub Spot Price for the past calendar year less certain gathering
costs is equal to or less than $30 million (the date of the first of such occurrences is referred
to herein as the Termination Date). As indicated in Note 2, the 2009 commodity price environment
has resulted in uncertainty regarding the Trusts ability to avoid a termination event pursuant to
the terms of the Trust Agreement.
The Blanco Hub Spot Price means the posted index price of spot gas delivered to pipelines per
MMBtu (dry basis) as published in the first issue of the month during which gas is delivered or
such determination is made, as the case may be, in Inside FERCs Gas Market Report for El Paso
Natural Gas Company, San Juan, or in the event a Blanco Hub posted index price is at some time in
the future reported by Inside FERCs Gas Market Report, then the Blanco Hub posted index price will
be substituted in place of the El Paso Natural Gas Company, San Juan posted index price.
Following termination, the Trustee and the Delaware Trustee will continue to act as trustees
of the Trust until all remaining Trust assets have been sold and the net proceeds from such sales,
if any, are distributed to Unitholders.
Upon the termination of the Trust, the Trustee will use best efforts (as defined in the Trust
Agreement) to sell any remaining Royalty Interests for cash pursuant to the procedures described in
the Trust Agreement. The Trustee will retain an investment banking firm (the Advisor) on behalf
of the Trust who will assist the Trustee in selling the remaining Royalty Interests then owned by
the Trust (the Remaining Royalty Interests). WPC has the right, but not the obligation to make a
cash offer, to purchase all Remaining Royalty Interests following termination of the Trust as
described in the following paragraph. The ultimate sales price to be received for the Remaining
Royalty Interests may be more or less than the net present value to be determined at December 31,
2008 for the early termination computation, as this net present value is not intended to be an
estimate of fair value.
WPC may, within 60 days following the Termination Date, 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 WPC,
the Trustee will decide, based on the recommendation of the Advisor, to either (i) accept such
offer (in which case no sale to WPC will be made unless a fairness opinion is given by the Advisor
that the purchase price is fair to the Trust and Unitholders) or (ii) defer action on such offer.
If the Trustee defers action on WPCs offer, the offer will be deemed withdrawn and the Trustee
will then use Best Efforts (as defined in the Trust Agreement), assisted by the
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Advisor to obtain alternative offers for the Remaining Royalty Interests. At the end of a 120-day
period following the Termination Date, the Trustee is required to notify WPC of the highest of any
other offers (net of any commissions or other fees payable by the Trust), acceptable to the Trustee
(which must be an all-cash offer), received during such period (the Highest Acceptable Offer).
WPC then has the exclusive 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 WPCs initial offer (or if WPC 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 WPCs initial 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 WPC to submit another
offer for consideration by the Trustee and may accept or reject such offer. Acceptance of an offer
by the Trustee shall be conditioned upon the opinion of the Advisor of the fairness of the offer.
If a sale of the Remaining Royalty Interests is made or a definitive contract for sale of the
Remaining Royalty Interests is entered into within a 150-day period following the Termination Date,
the buyer of the Remaining Royalty Interests, and not the Trust or Unitholders, will be entitled to
all proceeds of production attributable to the Remaining Royalty Interests following the
Termination Date.
In the event that WPC does not purchase the Remaining Royalty Interests, the Trustee may
accept any offer for all or any part (not more than six parts) of the Remaining 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 not involving a
public auction. If any Remaining 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 public auction to the highest cash bidder, which sale may
be to WPC or any of its affiliates. Notice of such sale by auction shall be mailed at least 30
days prior to such sale to each Unitholder at his address as it appears on the ownership ledger of
the Trustee.
WPCs purchase rights, as described, may be exercised by WPC and each of its
successors-in-interest and assigns. WPCs purchase rights are fully assignable by WPC to any
person. The costs of liquidation, including the fees and expenses of the Advisor, and the
Trustees liquidation fee will be paid by the Trust.
The sale of the Remaining Royalty Interests and the termination of the Trust will be taxable
events to the Unitholders for Federal income tax purposes. Generally, a Unitholder will realize
gain or loss equal to the difference between the amount realized on the sale of the Remaining
Royalty Interests upon 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. State
tax consequences may also result to Unitholders upon the termination of the Trust and the sale of
the Remaining Royalty Interests. Each Unitholder should consult his own tax
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advisor regarding Trust tax compliance matters, including Federal and state tax implications
concerning the sale of the Remaining Royalty Interests and the termination of the Trust.
There can be no assurance that future distributions, including any distributions upon a
liquidation and termination of the Trust will equal or exceed the purchase price paid by
Unitholders for Units. See Part II, Item 1A Risk Factors.
Pending SEC Rule and FASB Standards
In December 2008, the SEC released Final Rule, Modernization of Oil and Gas Reporting. The
new disclosure requirements include provisions that permit the use of new technologies to determine
proved reserves if those technologies have been demonstrated empirically to lead to reliable
conclusions about reserves volumes. The new requirements also will allow companies to disclose
their probable and possible reserves to investors. In addition, the new disclosure requirements
require companies to: (a) report the independence and qualifications of its reserves preparer or
auditor; (b) file reports when a third party is relied upon to prepare reserves estimates or
conducts a reserves audit; and (c) report oil and gas reserves using an average price based upon
the prior 12-month period rather than year-end prices. In September 2009, the Financial Accounting
Standards Board (FASB) announced a proposed accounting standards update to align the oil and gas
reserve estimation and disclosure requirements of Extractive Industries Oil and Gas (Topic 932)
with the requirements in the SEC Final Rule. The new disclosure requirements are effective for
financial statements for fiscal years ending on or after December 31, 2009. The effect of the SEC
rule and the proposed FASB update has not been determined.
Forward-Looking Statements
This 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, which are intended to be covered by the safe harbor created thereby. All
statements other than statements of historical fact included in this report on Form 10-Q,
including, without limitation, statements contained in this Trustees Discussion and Analysis of
Financial Condition and Results of Operations regarding the Trusts financial position and
industry conditions and potential termination of the Trust, are forward-looking statements.
Although the Trustee believes that the expectations reflected in such forward-looking statements
are reasonable, it can give no assurance that such expectations will prove to have been correct.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The only assets of and sources of income to the Trust are the Royalty Interests, which
generally entitle the Trust to receive a share of the net profits from natural gas production from
the Underlying Properties. Consequently, the Trusts financial results can be significantly
affected by fluctuations in natural gas prices and the Trust has commodity price risk exposure
associated with the natural gas markets in the United States. The Trust does not engage in any
hedging activities to manage its price risk associated with natural gas production from the
Underlying Properties. The Royalty Interests do not entitle the Trust to control or influence the
operation of the Underlying Properties or the sale of gas produced therefrom. Natural gas
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produced from the WI Properties, which comprises the majority of production attributable to
the Royalty Interests, is currently sold by WPC pursuant to the terms of the Gas Purchase Contract.
Although the Trust is not a party to the Gas Purchase Contract, the Gas Purchase Contract may
significantly impact revenues to the Trust. Although the Gas Purchase Contract mitigates the risk
to the Trust of low gas prices, it also limits the ability of the Trust to benefit from the effects
of higher gas prices, particularly to the extent a balance exists in the Price Credit Account. See
Item 2 Properties The Royalty Interests Gas Purchase Contract in the 2008 Annual Report for
detailed information about the Gas Purchase Contract and its impact on the Trust and Unitholders.
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. Currently, funds are
invested in Bank of America money market accounts which are backed by the good faith and credit of
Bank of America, N.A., but are not insured by the FDIC. 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. 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 WPX Gas Resources 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.
See Part II, Item 1A Risk Factors Funds held by the Trustee are not insured by the Federal
Deposit Insurance Corporation, and future royalty income may be subject to risks relating to the
creditworthiness of third parties. Information contained in Bank of America, N.As periodic
filings with the SEC is not incorporated by reference into this quarterly report on Form 10-Q and
should not be considered part of this report or any other filing that the Trust makes with the SEC.
The market prices of the Units are determined by the buyers and sellers on the New York Stock
Exchange. The Trust does not make market on any Units and is not in any position to advise any
Unitholder on any market position. Unitholders should be aware that any position of the market
concerning the Units is beyond the Trusts control and on any given day, various market conditions
will affect the market of the Units.
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 that may be held by the Trust, the Trustee believes
that the Trust is not subject to any material interest rate risk. The Trust does not engage in
transactions in foreign currencies that could expose the Trust or Unitholders to any foreign
currency related market risk.
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Item 4. Controls and Procedures.
The Trust maintains a set of disclosure controls and procedures designed to ensure that
information required to be disclosed by the Trust in reports that it files or submits under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time
periods specified in the SEC rules and forms. In addition, the disclosure controls and procedures
are designed to ensure that the information required to be disclosed by the Trust is accumulated
and communicated to the Trustee to allow timely decisions regarding required disclosure. As of the
end of the period covered by this report on Form 10-Q, 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 Rule 13a-15 and 15d-15. Based upon that evaluation, the Trustee concluded
that the Trusts disclosure controls and procedures are effective in 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
WPC. There has not been any change in the Trusts internal control over financial reporting during
the period covered by this report on Form 10-Q that has materially affected, or is reasonably
likely to materially affect, the Trusts internal control over financial reporting.
PART II OTHER INFORMATION
Item 1. Legal Proceedings.
Not applicable.
Item 1A. Risk Factors.
Except as set forth below, there has been no material changes in the risk factors disclosed in
Part I, Item 1A of the Trusts 2008 Report for the year ended December 31, 2008.
Current commodity prices may result in minimal or no future distributions, and distributions,
including any distributions upon a termination and liquidation of the Trust may not equal or exceed
the purchase price paid by a Unitholder for Units.
If commodity prices remain at current levels or decrease, Trust expenses may exceed royalty
income (as was the case during the prior quarter), in which case, distributions may cease for the
foreseeable future, including, potentially, through termination of the Trust. The market price for
Trust Units is based on a variety of factors outside the control of the Trustee. There is no
guarantee that future distributions, including any distributions upon a termination and liquidation
of the Trust will equal or exceed the purchase price paid by the Unitholder.
There is substantial doubt about our ability to continue as a going concern.
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There is substantial doubt as to our ability to continue as a going concern. The factors
contributing to this concern include commodity prices that have decreased over the past year and
depleting underlying reserves. Please read Note 2 to Item 8 Financial Statement and
Supplementary Data Notes to Financial Data in our Annual Report on Form 10-K for the year ended
December 31, 2008, which included our independent registered public accounting firms report
accompanying the financial statements included therein containing a statement expressing
substantial doubt as to the Trusts ability to continue as a going concern. If the Trusts
computed net present value of the estimated future net revenues for proved reserves attributable to
the Royalty Interests falls below the $30 million stipulated threshold as of December 31, 2009, we
will be forced to terminate the Trust pursuant to the termination and liquidation provisions in the
Trust Agreement. As of December 31, 2008, the net present value of the estimated future net
revenues for proved reserves attributable to the Royalty Interests computed in accordance with the
Trust Agreement, using an average 2008 index price of $7.21, by the independent petroleum
engineers, was approximately $65 million. While the results of this computation did not trigger an
early termination of the Trust as of December 31, 2008, future computations are subject to the
numerous uncertainties in estimating the future net revenues as described in Item 1ARisk
Factors to our annual report on Form 10-K for the year ended December 31, 2008. The negative
commodity price environment throughout 2009 and the outlook for the remainder of 2009 have to date
negatively impacted actual index prices used in the Trusts termination calculation, and it appears
increasingly likely that it will impact the December 31, 2009 termination evaluation and trigger
termination of the Trust in accordance with the provisions of the Trust Agreement. The simple
average monthly Blanco Hub Spot Price for the first nine months of 2009 was $3.30 compared to the
average price of $7.21 that was used by our independent petroleum engineers as of December 31, 2008
who calculated the net present value of the estimated future net reserves as of such date to be
approximately $65 million. Trust 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, including changes in pricing, costs and
production volumes. As a result, the ability of the reserves to exceed the threshold in the future
is uncertain, and there is substantial doubt regarding the Trusts ability to continue as a going
concern.
Funds held by the Trustee are 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, funds are invested in Bank of America 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 (FDIC). 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. 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 WPX Gas
Resources and other purchases of the natural gas produced from the Underlying Properties, as well
as risks associated with fluctuations in the price of natural gas.
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Items 2 through 5.
Not applicable.
Item 6. Exhibits.
The exhibits listed below are filed as part of this report on Form 10-Q:
EXHIBIT | ||
NUMBER | EXHIBIT | |
4.1
|
Trust Agreement of Williams Coal Seam Gas Royalty Trust effective as of December 1, 1992, by and among Williams Production Company, The Williams Companies, Inc. and Chemical Bank Delaware and Bank of America, N.A. (as successor to NationsBank of Texas, N.A.), as trustees (filed as Exhibit 4.1 to the Registrants Form 10-K for the year ended December 31, 1992 and incorporated herein by reference). | |
4.2
|
First Amendment to the Trust Agreement of Williams Coal Seam Gas Royalty Trust effective as of December 15, 1992, by and among Williams Production Company, The Williams Companies, Inc., Chemical Bank Delaware and Bank of America, N.A. (as successor to NationsBank of Texas, N.A.) (filed as Exhibit 4.2 to the Registrants Form 10-K for the year ended December 31, 1992 and incorporated herein by reference). | |
4.3
|
Second Amendment to the Trust Agreement of Williams Coal Seam Gas Royalty Trust effective as of January 12, 1993, by and among Williams Production Company, The Williams Companies, Inc., Chemical Bank Delaware and Bank of America, N.A. (as successor to NationsBank of Texas, N.A.) (filed as Exhibit 4.3 to the Registrants Form 10-K for the year ended December 31, 1992 and incorporated herein by reference). | |
4.4
|
Net Profits Conveyance effective as of October 1, 1992, by and among Williams Production Company, The Williams Companies, Inc., and Bank of America, N.A. (as successor to NationsBank of Texas, N.A.), and Chemical Bank Delaware (filed as Exhibit 4.4 to the Registrants Form 10-K for the year ended December 31, 1992 and incorporated herein by reference). | |
15.1
|
Letter regarding unaudited interim financial information dated November 6, 2009, from the independent Registered Public |
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EXHIBIT | ||
NUMBER | EXHIBIT | |
Accounting Firm which acknowledges awareness of the use in registration statement of a report on unaudited interim financial information. | ||
31.1
|
Certification by Ron E. Hooper, Senior Vice President and Administrator of Bank of America, Trustee of Williams Coal Seam Gas Royalty Trust, dated November 6, 2009, and submitted pursuant to Rule 13a-14(a)/15d-14(a) and pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32.1
|
Certificate by Bank of America, Trustee of Williams Coal Seam Gas Royalty Trust, dated November 6, 2009, and submitted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350). |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
WILLIAMS COAL SEAM GAS ROYALTY TRUST |
||||
By: | BANK OF AMERICA, N.A., Trustee | |||
By: | /s/ RON E. HOOPER | |||
Ron E. Hooper | ||||
Senior Vice President and Administrator | ||||
(The Trust has no directors or executive officers.)
Date: November 6, 2009
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INDEX TO EXHIBITS
EXHIBIT NUMBER | EXHIBIT | |
4.1
|
Trust Agreement of Williams Coal Seam Gas Royalty Trust effective as of December 1, 1992, by and among Williams Production Company, The Williams Companies, Inc. and Chemical Bank Delaware and Bank of America, N.A. (as successor to NationsBank of Texas, N.A.), as trustees (filed as Exhibit 4.1 to the Registrants Form 10-K for the year ended December 31, 1992 and incorporated herein by reference). | |
4.2
|
First Amendment to the Trust Agreement of Williams Coal Seam Gas Royalty Trust effective as of December 15, 1992, by and among Williams Production Company, The Williams Companies, Inc., Chemical Bank Delaware and Bank of America, N.A. (as successor to NationsBank of Texas, N.A.) (filed as Exhibit 4.2 to the Registrants Form 10-K for the year ended December 31, 1992 and incorporated herein by reference). | |
4.3
|
Second Amendment to the Trust Agreement of Williams Coal Seam Gas Royalty Trust effective as of January 12, 1993, by and among Williams Production Company, The Williams Companies, Inc., Chemical Bank Delaware and Bank of America, N.A. (as successor to NationsBank of Texas, N.A.) (filed as Exhibit 4.3 to the Registrants Form 10-K for the year ended December 31, 1992 and incorporated herein by reference). | |
4.4
|
Net Profits Conveyance effective as of October 1, 1992, by and among Williams Production Company, The Williams Companies, Inc., and Bank of America, N.A. (as successor to NationsBank of Texas, N.A.), and Chemical Bank Delaware (filed as Exhibit 4.4 to the Registrants Form 10-K for the year ended December 31, 1992 and incorporated herein by reference). | |
15.1
|
Letter regarding unaudited interim financial information dated November 6, 2009, from the independent Registered Public Accounting Firm which acknowledges awareness of the |
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EXHIBIT NUMBER | EXHIBIT | |
use in registration statement of a report on unaudited interim financial information. | ||
31.1
|
Certification by Ron E. Hooper, Senior Vice President and Administrator of Bank of America, Trustee of Williams Coal Seam Gas Royalty Trust, dated November 6, 2009, and submitted pursuant to Rule 13a-14(a)/15d-14(a) and pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32.1
|
Certificate by Bank of America, Trustee of Williams Coal Seam Gas Royalty Trust, dated November 6, 2009, and submitted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350). |
30