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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
[_] 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 1-7884
MESA ROYALTY TRUST
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
TEXAS 74-6284806
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
TEXAS COMMERCE BANK
NATIONAL ASSOCIATION
CORPORATE TRUST DIVISION
712 MAIN STREET
HOUSTON, TEXAS 77002
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (713) 216-6369
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
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UNITS OF BENEFICIAL INTEREST NEW YORK STOCK EXCHANGE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
NONE
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 [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of 1,863,590 Units of Beneficial Interest in
Mesa Royalty Trust held by non-affiliates of the registrant at the closing sales
price on March 20, 1997, of $44 5/8 was approximately $83,163,000.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
As of March 20, 1997, 1,863,590 Units of Beneficial Interest in Mesa
Royalty Trust.
Documents Incorporated By Reference: None.
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TABLE OF CONTENTS
PART I
PAGE
Item 1. Business....................................................... 1
Description of the Trust.................................... 1
Description of the Units.................................... 2
Description of Royalty Properties........................... 4
Contracts................................................... 20
Regulation and Prices....................................... 21
Item 2. Properties..................................................... 22
Item 3. Legal Proceedings.............................................. 22
Item 4. Submission of Matters to a Vote of Security Holders............ 22
PART II
Item 5. Market for the Registrant's Common Equity and Related
Unitholder Matters......................................... 23
Item 6. Selected Financial Data....................................... 23
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations......................... 23
Item 8. Financial Statements and Supplementary Data................... 26
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.......................... 33
PART III
Item 10. Directors and Executive Officers of the Registrant............ 33
Item 11. Executive Compensation........................................ 33
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................... 33
Item 13. Certain Relationships and Related Transactions................ 34
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K.................................................. 34
SIGNATURES............................................................... 35
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Form 10-K includes "forward-looking statements" within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. All statements other than
statements of historical facts included in this Form 10-K are forward-looking
statements. Although the Working Interest Owners have advised the Trust that
they believe that the expectations reflected in the forward-looking statements
contained herein are reasonable, no assurance can be given that such
expectations will prove to have been correct. Important factors that could cause
actual results to differ materially from expectations ("Cautionary
Statements") are disclosed in this Form 10-K, including without limitation in
conjunction with the forward-looking statements included in this Form 10-K. All
subsequent written and oral forward-looking statements attributable to the Trust
or persons acting on its behalf are expressly qualified in their entirety by the
Cautionary Statements.
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PART I
ITEM 1. BUSINESS.
DESCRIPTION OF THE TRUST
The Mesa Royalty Trust (the "Trust"), created under the laws of the State
of Texas, maintains its offices at the office of the Trustee, Texas Commerce
Bank National Association (the "Trustee"), 712 Main Street, Houston, Texas
77002. The telephone number of the Trust is (713) 216-6369.
The Trust was created on November 1, 1979 when Mesa Petroleum Co. conveyed
to the Trust a 90% net profits overriding royalty interest (the "Royalty") in
certain producing oil and gas properties located in the Hugoton field of Kansas,
the San Juan Basin field of New Mexico and Colorado, and the Yellow Creek field
of Wyoming (collectively, the "Royalty Properties"). Mesa Petroleum Co. was
the predecessor to Mesa Limited Partnership ("MLP") which was the predecessor
to MESA Inc. On April 30, 1991, MLP sold its interests in the Royalty Properties
located in the San Juan Basin field to Conoco Inc. ("Conoco"), a wholly-owned
subsidiary of E. I. duPont de Nemours & Company. Conoco sold the portion of its
interests in the San Juan Basin Royalty Properties located in Colorado to
MarkWest Energy Partners, Ltd. (effective January 1, 1993) and Red Willow
Production Company (effective April 1, 1992). On October 26, 1994, MarkWest
Energy Partners, Ltd. sold substantially all of its interest in the Colorado San
Juan Basin Royalty Properties to Amoco Production Company ("Amoco"), a
subsidiary of Amoco Corp. The Hugoton Royalty Properties are owned and operated
by Mesa Operating Co., a subsidiary of MESA Inc. The San Juan Basin Royalty
Properties located in New Mexico are operated by Conoco. The San Juan Basin
Royalty Properties located in Colorado are operated by Amoco. As used in this
report, the term "Mesa" generally refers to the operator of the Hugoton
Royalty Properties, Conoco refers to the operator of the New Mexico San Juan
Basin Royalty Properties and Amoco refers to the operator of the Colorado San
Juan Basin Royalty Properties, unless otherwise indicated. The terms "working
interest owner" and "working interest owners" generally refer to the
operators of the Royalty Properties as described above, unless the context in
which such terms are used indicates otherwise.
The terms of the Mesa Royalty Trust Indenture (the "Trust Indenture")
provide, among other things, that: (1) the Trust cannot engage in any business
or investment activity or purchase any assets; (2) the Royalty can be sold in
part or in total for cash upon approval of the unitholders; (3) the Trustee can
establish cash reserves and borrow funds to pay liabilities of the Trust and can
pledge the assets of the Trust to secure payment of the borrowings; (4) in
January, April, July and October of each year the Trustee will make quarterly
distributions of cash available for distribution to the unitholders; and (5) the
Trust will terminate upon the first to occur of the following events: (i) at
such time as the Trust's royalty income for each of two successive years is less
than $250,000 per year or (ii) a vote of the unitholders in favor of
termination. Royalty income of the Trust was $7,669,020 and $5,941,088 for the
years 1996 and 1995, respectively. Upon termination of the Trust, the Trustee
will sell for cash all the assets held in the Trust estate and make a final
distribution to unitholders of any funds remaining after all Trust liabilities
have been satisfied. The brief summary set forth above is qualified in its
entirety by reference to the Trust Indenture itself, which is an exhibit to this
Form 10-K and is available upon request from the Trustee.
Under the instrument conveying the Royalty to the Trust (the
"Conveyance"), the Trust is entitled to a percentage of the Net Proceeds, as
hereinafter defined, realized from the minerals as, if and when produced from
the Royalty Properties. See "Description of Royalty Properties." The
Conveyance provides for a monthly computation of Net Proceeds. "Net Proceeds"
means the excess of Gross Proceeds, as hereinafter defined, received by the
working interest owners during a particular period over operating and capital
costs for such period. "Gross Proceeds" means the amount received by the
working interest owners from the sale of minerals covered by the Royalty,
subject to certain adjustments. Operating costs means, generally, costs incurred
on an accrual basis by the working interest owners in operating the Royalty
Properties, including capital and non-capital costs. If operating
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and capital costs exceed Gross Proceeds for any month, the excess plus interest
thereon at 120% of the prime rate of Bank of America is recovered out of future
Gross Proceeds prior to the making of further payment to the Trust. The Trust,
however, is generally not liable for any operating costs or other costs or
liabilities attributable to the Royalty Properties or minerals produced
therefrom. The Trust is not obligated to return any royalty income received in
any period. The working interest owners are required to maintain books and
records sufficient to determine the amounts payable under the Royalty.
Additionally, in the event of a controversy between a working interest owner and
any purchaser as to the correct sales price for any production, amounts received
by such working interest owner and promptly deposited by it with an escrow agent
are not considered to have been received by such working interest owner and
therefore are not subject to being payable with respect to the Royalty until the
controversy is resolved; but all amounts thereafter paid to such working
interest owner by the escrow agent will be considered amounts received from the
sale of production. Similarly, operating costs include any amounts a working
interest owner is required to pay whether as a refund, interest or penalty to
any purchaser because the amount initially received by such working interest
owner as the sales price was in excess of that permitted by the terms of any
applicable contract, statute, regulation, order, decree or other obligation.
Within thirty days following the close of each calendar quarter, the working
interest owners are required to deliver to the Trustee a statement of the
computation of Net Proceeds attributable to such quarter.
The Royalty Properties are required to be operated by the working interest
owners in accordance with reasonable and prudent business judgment and good oil
and gas field practices. Each working interest owner has the right to abandon
any well or lease if, in its opinion, such well or lease ceases to produce or is
not capable of producing oil, gas or other minerals in commercial quantities.
Each working interest owner markets the production on terms deemed by it to be
the best reasonably obtainable in the circumstances. See "Contracts." The
Trustee has no power or authority to exercise any control over the operation of
the Royalty Properties or the marketing of production therefrom.
In 1985 the Trust Indenture was amended at a special meeting of
unitholders. The effect of the amendment was an overall reduction of
approximately 89% in the size of the Trust, distributable income and related
Trust reserves, effective April 1, 1985. See Note 2 in the Notes to Financial
Statements under Item 8 of this Form 10-K.
The Trust has no employees. Administrative functions of the Trust are
performed by the Trustee.
DESCRIPTION OF THE UNITS
Each unit is evidenced by a transferable certificate issued by the Trustee.
Each unit ranks equally for purposes of distributions and has one vote on any
matter submitted to unitholders. A total of 1,863,590 units were outstanding at
March 20, 1997.
DISTRIBUTIONS
The Trustee determines for each month the amount of cash available for
distribution for such month. Such amount (the "Monthly Distribution Amount")
consists of the cash received from the Royalty during such month less the
obligations of the Trust paid during such month, adjusted for changes made by
the Trustee during such month in any cash reserves established for the payment
of contingent or future obligations of the Trust. The Monthly Distribution
Amount for each month is payable to unitholders of record on the monthly record
date (the "Monthly Record Date") which is the close of business on the last
business day of such month or such other date as the Trustee determines is
required to comply with legal or stock exchange requirements. However, to reduce
the administrative expenses of the Trust, under the Trust Indenture the Trustee
does not distribute cash monthly, but rather, during January, April, July and
October of each year distributes to each person who was a unitholder of record
on one or more of the immediately preceding three Monthly Record Dates, the
Monthly Distribution Amount for the month or months that he was a unitholder of
record, together with interest earned on such Monthly Distribution Amount from
the Monthly Record Date to the
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payment date. Under the terms of the Trust Indenture, interest is earned at a
rate of 1-1/2% below the prime rate charged by Texas Commerce Bank National
Association or the interest rate which Texas Commerce Bank National Association
pays in the normal course of business on amounts placed with it, whichever is
greater.
LIABILITY OF UNITHOLDERS
As regards the unitholders, the Trustee is fully liable if the Trustee
incurs any liability without ensuring that such liability will be satisfiable
only out of the Trust assets (regardless of whether the assets are adequate to
satisfy the liability) and in no event out of amounts distributed to, or other
assets owned by, unitholders. However, under Texas law, it is unclear whether a
unitholder would be jointly and severally liable for any liability of the Trust
in the event that all of the following conditions were to occur: (a) the
satisfaction of such liability was not by contract limited to the assets of the
Trust, (b) the assets of the Trust were insufficient to discharge such liability
and (c) the assets of the Trustee were insufficient to discharge such liability.
Although each unitholder should weigh this potential exposure in deciding
whether to retain or transfer his units, the Trustee is of the opinion that
because of the substantial value and passive nature of the Trust assets, the
restrictions on the power of the Trustee to incur liabilities and the required
financial net worth of any trustee, the imposition of any liability on a
unitholder is extremely unlikely.
FEDERAL INCOME TAX MATTERS
In a technical advice memorandum dated February 26, 1982, the National
Office of the Internal Revenue Service ("IRS") advised the Dallas District
Director that the Trust is classifiable as a grantor trust and not as an
association taxable as a corporation.
INCOME AND DEPLETION
Royalty income, net of depletion and severance taxes, is treated as
portfolio income, and under the Revenue Act of 1987, subject to certain
exceptions and transitional rules, royalty income cannot be offset by losses
from passive businesses. Additionally, interest income is portfolio income.
Administrative expense is an investment expense.
Generally, prior to the Revenue Reconciliation Act of 1990, the transferee
of an oil and gas property could not claim percentage depletion with respect to
production from such property if it was "proved" at the time of the transfer.
This rule is not applicable in the case of transfers of properties after October
11, 1990. Thus, eligible unitholders that acquired units after that date are
entitled to claim an allowance for percentage depletion with respect to royalty
income attributable to such units to the extent that such allowance exceeds cost
depletion as computed for the relevant period.
SECTION 29 CREDIT
The Trust receives royalty payments attributable to coal seam gas
production from the Fruitland Coal Formation properties. Thus, unitholders are
potentially eligible to claim their share of the tax credit attributable to this
qualifying production. Each unitholder should consult his tax advisor regarding
the limitations and requirements for claiming this tax credit.
BACKUP WITHHOLDING
Distributions from the Trust are generally subject to backup withholding at
a rate of 31% of such distributions. Backup withholding will not normally apply
to distributions to a unitholder, however, unless such unitholder fails to
properly provide to the Trust his taxpayer identification number ("TIN") or
the IRS notifies the Trust that the TIN provided by such unitholder is
incorrect.
SALE OF UNITS
Generally, except for recapture items, the sale, exchange or other
disposition of a unit will result in capital gain or loss measured by the
difference between the basis in the unit and the amount realized. Such gain or
loss would be capital gain or loss if such unit was held by the unitholder as a
capital asset,
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and classified as either long-term or short-term depending on the holding period
of the unit. Presently, long term treatment applies for units held more than one
year. Effective for property placed in service after December 31, 1986, the
amount of gain, if any, realized upon the disposition of oil and gas property is
treated as ordinary income to the extent of the intangible drilling and
development costs incurred with respect to the property and depletion claimed
with respect to such property to the extent it reduced the taxpayer's basis in
the property. Under this provision, depletion attributable to a unit acquired
after 1986 will be subject to recapture as ordinary income upon disposition of
the unit or upon disposition of the oil and gas property to which the depletion
is attributable. The balance of any gain or any loss will be capital gain or
loss, if such unit was held by the unitholder as a capital asset.
FOREIGN UNITHOLDERS
In general, a unitholder who is a nonresident alien individual or which is
a foreign corporation (collectively "Foreign Taxpayer") will be subject to tax
on the gross income produced by the Royalty at a rate equal to 30% (or lower
treaty rate, if applicable). This tax will be withheld by the Trustee and
remitted directly to the United States Treasury. A Foreign Taxpayer may elect to
treat the income from the Royalty as effectively connected with the conduct of a
United States trade or business under section 871 or section 882 of the Internal
Revenue Code of 1986, as amended (the "Code") (or pursuant to any similar
provisions of applicable treaties). Upon making this election such unitholder is
entitled to claim all deductions with respect to such income, but he must file a
United States federal income tax return to claim such deductions. This election
once made is irrevocable (unless an applicable treaty allows the election to be
made annually).
Section 897 of the Code and the Treasury Regulations thereunder treat the
publicly traded Trust as if it were a United States real property holding
corporation. Accordingly, Foreign unitholders owning greater than 5% of the
outstanding units are subject to United States federal income tax on the gain on
the disposition of their units. Foreign unitholders owning less than 5% of the
outstanding units are not subject to United States federal income tax on the
gain on the disposition of their units.
Federal income taxation of a Foreign Taxpayer is a highly complex matter
which may be affected by many other considerations. Therefore, each Foreign
Taxpayer should consult with his own tax adviser as to the advisability of his
ownership of units.
DESCRIPTION OF ROYALTY PROPERTIES
PRODUCING ACREAGE AND WELLS AS OF DECEMBER 31, 1996
<TABLE>
<CAPTION>
PRODUCING GAS
PRODUCING ACRES(1) WELLS(1)(2)
-------------------- ----------------
GROSS NET GROSS NET
------- ------- ----- -----
<S> <C> <C> <C> <C>
Hugoton Area (Kansas)(3).......................... 103,364 103,114 465 464.1
San Juan Basin (Northwestern New Mexico and
Southwestern Colorado).......................... 40,716 31,328 371 189.7
------- ------- ----- -----
Total.................................. 144,080 134,442 836 653.8
======= ======= ===== =====
</TABLE>
- ------------
(1) The Trust does not have a working interest in the producing acres and
producing gas wells. The gross and net amounts in the table above represent
gross and net amounts attributable to the working interest owners and are
the basis for the Gross Proceeds amounts discussed under "Description of
the Trust".
(2) One or more completions in the same bore hole are counted as one well. Where
multiple well bores are in a single production unit, the unit is counted as
one well.
(3) Includes 151 gross and net infill gas wells.
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HUGOTON
The principal property interest conveyed to the Trust accounts for
approximately 65% of the Trust's reserves and was carved out of Mesa's working
interest in 104,437 net producing acres in the Hugoton field. The life of the
field is expected to extend beyond the year 2020.
The gas produced from the Hugoton properties is available for sale on the
spot market. See "Contracts". Since the Hugoton field gas is sold in the
intrastate and interstate markets, it is subject to state and federal laws and
regulations. The Kansas Corporation Commission (the "KCC") is the state
regulatory agency responsible for setting field market demand (gas allowables),
prorating production between wells and other related matters. Hugoton field gas
is also subject to the rules and regulations of the Federal Energy Regulatory
Commission (the "FERC"). See "Regulation and Prices".
SAN JUAN BASIN
The Trust's interest in the San Juan Basin was conveyed from Mesa's working
interest in 31,328 net producing acres in northwestern New Mexico and
southwestern Colorado. The San Juan Basin-New Mexico reserves represent
approximately 35% of the Trust's reserves. Substantially all of the natural gas
produced from the San Juan Basin is currently being sold on the spot market.
Mesa completed the sale of its underlying interest in the San Juan Basin Royalty
Properties to Conoco on April 30, 1991. Conoco subsequently sold its underlying
interest in the Colorado portion of the San Juan Basin Royalty Properties to
MarkWest Energy Partners, Ltd. (effective January 1, 1993) and Red Willow
Production Company (effective April 1, 1992). On October 26, 1994, MarkWest
Energy Partners, Ltd. sold substantially all of its interest in the Colorado San
Juan Basin Royalty Properties to Amoco. See "Description of the Trust". The
San Juan Basin Royalty Properties located in Colorado account for less than 5%
of the Trust's reserves.
SAN JUAN BASIN FRUITLAND COAL DRILLING
In April 1990, the working interest owner began drilling for coalbed
methane gas in the Fruitland Coal formation of the San Juan Basin. The Fruitland
Coal formation has been identified as one of the most prolific sources of U.S.
coalbed methane reserves. The Trust owns an interest in 26,700 gross acres and
25,400 net acres with Fruitland Coal potential. The working interest owner has
advised the Trust that, as of December 31, 1996, the working interest owner had
drilled on Trust properties 50 (29.3 net) Fruitland Coal wells, all of which are
operated by the working interest owner. Of such wells, 42 (24.6 net) have been
successfully completed, of which 37 (21.7 net) are currently producing at a
combined rate of 73.4 (39.8 net) MMcf per day.
The gas that is currently being produced from these wells is being sold on
the spot market, although the working interest owner has advised the Trust that
it will also consider selling some of the gas produced from these wells pursuant
to longer term contracts at spot market prices.
Aggregate drilling and completion costs for the entire Fruitland Coal
development program were approximately $18.4 million. The Trust's share of the
total expenditures was approximately $2.4 million. The Trust's share of the cost
of drilling and completing the Fruitland Coal wells was subject to recovery by
the working interest owner on a state-by-state basis before distributions were
made from the San Juan Basin Royalty. In December 1992, after recovery by the
working interest owner of the costs of the Fruitland Coal drilling in New
Mexico, distributions from the New Mexico portion of the San Juan Basin Royalty
resumed. No distributions related to the Colorado portion of the San Juan Basin
Royalty have been made since 1990, as the costs of the Fruitland Coal drilling
in Colorado have not yet been recovered. The San Juan Basin development drilling
program had no effect on Royalty income or distributions relating to the Hugoton
Royalty.
Conoco has informed the Trust that it believes the production from the
Fruitland Coal formation will generally qualify for the tax credits provided
under Section 29 of the Code. See "Description of the Units -- Federal Income
Tax Matters -- Section 29 Credit."
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RESERVES
The proved oil and gas reserves attributable to the Hugoton Royalty as of
December 31, 1996 have been derived by MESA Inc. based upon a reserve study made
by Williamson Petroleum Consultants, Inc. of the combined MESA Inc. and Trust
interests in certain producing oil and gas properties in the Hugoton field of
Kansas. The following letter relating to the "Reserves and Revenue as of
December 31, 1996 From Certain Properties Owned by Mesa Royalty Trust" (the
"Hugoton Reserve Report") summarizes such reserve study, and references to the
reserves of the Trust and the future net revenue and present worth attributable
to the Trust interest in the Hugoton Reserve Report refer to the Trust's
interest in the Hugoton Royalty Properties. The Hugoton Reserve Report reflects
estimated reserve quantities and future net revenue in a manner which is based
upon month of production without regard to time of receipt by the Trust and
which differs from the manner in which the Trust recognizes and accounts for its
royalty income.
A study of the proved oil and gas reserves attributable to the New Mexico
portion of the San Juan Basin Royalty as of December 31, 1996 has been made by
Conoco, the working interest owner of such properties. The Conoco Reserve Report
(together with the Mesa Reserve Report, the "Reserve Reports") on page 15
regarding such properties reflects estimated reserve quantities.
Proved oil and gas reserves attributable to the Colorado portion of the San
Juan Basin Royalty have been omitted from the Trust's reserve disclosures
included in this Form 10-K, as they represent less than 5% of the Trust's total
reserves and future net revenues.
For further information regarding the Net Overriding Royalty Interest, the
Basis of Accounting for the Trust, and Reserves, see Notes 2, 3 and 6,
respectively, in the Notes to Financial Statements under Item 8 of this Form
10-K.
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MESA INC.
SUMMARY REPORT
DATED
MARCH 26, 1997
ON
RESERVES AND REVENUE
AS OF
DECEMBER 31, 1996
FROM CERTAIN PROPERTIES
OWNED BY
MESA ROYALTY TRUST
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March 26, 1997
MESA Royalty Trust
Texas Commerce Bank
National Association (as Trustee)
P. O. Box 2558
Houston TX 77252
Ladies and Gentlemen:
Pursuant to your request, we have prepared estimates, as of December 31,
1996, of the extent and value of the proved natural gas liquids, natural gas and
helium reserves of certain properties owned by the Mesa Royalty Trust,
hereinafter referred to as the "Trust". The interest appraised consists of a
10.29282 percent net royalty interest in certain properties administered by Mesa
Operating Co. hereinafter referred to as "MESA". These properties are located in
the Kansas Hugoton and Panoma-Council Grove fields in Kansas. MESA is 100
percent owned by MESA Inc., the successor to Mesa Limited Partnership.
The reserve estimates are based on a detailed study of the Trust's
properties. The method or combination of methods used in the study of each
reservoir was tempered by experience in the area, consideration of the state of
development of the reservoir, and the quality and completeness of basic data.
Reserves in this report are expressed as gross reserves and net reserves.
Gross reserves are defined as the total estimated petroleum hydrocarbons
remaining to be produced from the properties after December 31, 1996. Net
reserves are defined as that portion of the gross reserves attributable to the
interest owned by the Trust after deducting royalties and other interests owned
by others.
Values shown herein are expressed in terms of future gross revenue, future
net revenue and present worth. Future gross revenue is that revenue which will
accrue to the appraised interests from the production and sale of the estimated
net reserves. Future net revenue is calculated by deducting estimated production
taxes, ad valorem taxes, operating expenses and capital costs for the future
gross revenue. Future income tax expenses were not taken into account in the
preparation of these estimates. Present worth is defined as future net revenue
discounted at a specified arbitrary discount rate compounded monthly over the
expected period of realization. In this report, present worth values using a
discount rate of 10 percent are reported.
Reserves and revenue values shown in this report were estimated from
projections of reserves and revenue attributable to the combined MESA and Trust
interests (Combined Interest) in these properties. To calculate the net profits,
the future net revenue for the aggregate of the Combined Interest in the subject
properties was reduced by an overhead charge and by the deficit balance as
described below if any. In addition, because the net profits interest does not
participate
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MESA Royalty Trust
March 26, 1997
Page 2
in plant and gathering expenses, a portion of the net revenue attributable to
the plant interests was excluded from this calculation; the excluded portion is
35 percent of the plant revenue less 100 percent of the plant and gathering
expenses. These calculations were made annually in aggregate for the Trust
properties. When the adjusted net revenue resulting from this calculation was
greater than zero, it was multiplied by the factor of 10.29282 percent to arrive
at the future net revenue of the Trust; if the adjusted revenue for the period
was negative, the trust revenue was set to zero and interest was charged on the
deficit balance. The beginning deficit balance, as of December 31, 1996 was
zero, and no deficit is estimated for the life of the properties.
Reserves attributable to the Trust interest were estimated by allocating
to the Trust a portion of the estimated combined net reserves of the properties
based on future revenue. Because the reserve volumes attributable to the Trust
are estimated using an allocation of reserves based on estimates of future
revenue, a change in prices or costs will result in changes in the estimated
reserves. Therefore, the reserves estimated will vary if different future price
and cost assumptions are used.
Estimates of reserves and future net revenue should be regarded only as
estimates that may change as further production history and additional
information become available. Not only are such reserve and revenue estimates
based on that information which is currently available, but such estimates are
also subject to the uncertainties inherent in the application of judgmental
factors in interpreting such information.
The development status shown herein represents the status applicable on
December 31, 1996. In our preparation of the study, data available from wells
drilled on the appraised properties through December 31, 1996 were used in
estimating gross ultimate recovery. Gross production estimated to December 31,
1996, was deducted from gross ultimate recovery to arrive at the estimates of
gross reserves as of December 31, 1996. In these fields, this required that the
production rates be estimated for up to two months since production data for
certain properties were available only through October 1996.
Petroleum reserves included in this report are classified as proved and
are judged to be economically producible in future years from known reservoirs
under existing economic and operating conditions and assuming continuation of
current regulatory practices using conventional production methods and
equipment. In the analysis, reserves were estimated only to the limit of
economic rates of production under existing economic and operating conditions
using prices and costs as of the date the estimate is made, including
consideration of changes in existing prices provided only by contractual
arrangements but not including escalations based upon future conditions. The
petroleum reserves are classified as follows:
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MESA Royalty Trust
March 26, 1997
Page 3
- PROVED -- Reserves that have been proved to a high degree of
certainty by analysis of the producing history of a reservoir and/or
by volumetric analysis of adequate geological and engineering data.
Commercial productivity has been established by actual production,
successful testing, or in certain cases by favorable core analysis
and electrical-log interpretation when the producing characteristics
of the formation are known from nearby fields. Volumetrically, the
structure, areal extent, volume, and characteristics of the
reservoir are well defined by a reasonable interpretation of
adequate subsurface well control and by known continuity of
hydrocarbon-saturated material above known fluid contacts, if any,
or above the lowest known structural occurrence of hydrocarbons.
- DEVELOPED -- Reserves that are recoverable from existing wells with
current operating methods and expenses.
Developed reserves include both producing and nonproducing
reserves. Estimates of producing reserves assume recovery by
existing wells producing from present completion intervals with
normal operating methods and expenses. Developed nonproducing
reserves are in reservoirs behind the casing or at minor depths
below the producing zone and are considered proved by production
from other wells in the field, by successful drill-stem tests, or by
core analysis from the particular zones. Nonproducing reserves
require only moderate expense to be brought into production.
- UNDEVELOPED -- Reserves that are recoverable from additional
wells yet to be drilled.
Undeveloped reserves are those considered proved for
production by reasonable geological interpretation of adequate
subsurface control in reservoirs that are producing or proved by
other wells but are not recoverable from existing wells. This
classification of reserves requires drilling of additional wells,
major deepening of existing wells, or installation of enhanced
recovery or other facilities.
Reserves recoverable by enhanced recovery methods, such as injection of
external fluids to provide energy not inherent in the reservoirs, may be
classified as proved developed or proved undeveloped reserves depending upon the
extent to which such enhanced recovery methods are in operation. These reserves
are considered to be proved only in cases where a successful fluid-injection
program is in operation, a pilot program indicates successful fluid injection,
or information is available concerning the successful application of such
methods in the same reservoir and it is reasonably certain that the program will
be implemented.
Helium reserves were classified using the same standards as those
described in the foregoing definitions of petroleum reserves. Because it is
mixed in and produced with the natural gas reserves, the term gas as used herein
applies to both gases, where appropriate, and the term natural gas is used to
refer to hydrocarbon gas.
10
<PAGE>
MESA Royalty Trust
March 26, 1997
Page 4
Estimates of the net proved reserves attributable to the Trust, as of
December 31, 1996, are as follows:
TOTAL PROVED RESERVES:
Natural Gas (Mcf)............................... 25,162,775
Helium (Mcf).................................... 79,516
Natural Gas Liquids (bbl)....................... 1,197,781
PROVED DEVELOPED RESERVES:
Natural Gas (Mcf)............................... 25,162,775
Helium (Mcf).................................... 79,516
Natural Gas Liquids (bbl)....................... 1,197,781
Proved natural gas liquids reserves and helium reserves are included
herein for the Satanta plant, which was completed and placed on stream in the
Hugoton field in Kansas during late 1993.
Future oil and gas producing rates estimated for this report are based on
production rates considering the most recent figures available or, in certain
cases, are based on estimates. The rates used for future production are within
the capacity of the well or reservoir to produce.
The KCC held hearings from August 1992 to September 1993 to consider
changes to the methods in which fieldwide allowables are allocated among
individual wells within the Hugoton field. Specifically, the KCC considered
proposals from various producers to amend calculations of well deliverability,
the allocation of allowables for infilled units, and the make up of underages
from prior periods. On February 2, 1994, the KCC issued an order, effective as
of April 1, 1994, establishing new field rules which modify the formulas and
calculations used to allocate allowables among wells in the field. The standard
pressure used in each well's calculated deliverability was reduced by 35%,
greatly benefitting MESA Inc. high deliverability wells. Also, the new rules
assign a 30% greater allowable to 640-acre units with infill wells than similar
units without infill wells. Essentially all of MESA Inc. Hugoton infill wells
have been drilled, resulting in an increase to MESA Inc. in assigned allowables
beginning in April, 1994. The new field rules also allow Hugoton producers to
make up pre-1994 canceled underages over a 10-year period.
MESA Inc. is continuing to upgrade the well-gathering system, which
improves deliverability of the wells. This increase in deliverability and the
associated costs have been incorporated in the estimates included herein.
Gas volumes shown herein are expressed at standard conditions of 60
degrees Fahrenheit and at 14.65 pounds per square inch absolute. Gross volumes
are reported as wet gas and the net volumes are reported as salable gas;
however, neither the gross nor net volumes were reduced for plant fuel usage,
which is estimated to be 9.2 billion cubic feet of gross wet gas. The value of
this fuel is deducted as part of the plant operating costs.
11
<PAGE>
MESA Royalty Trust
March 26, 1997
Page 5
Revenue values in this report were estimated using current prices and
costs. Future prices were estimated using guidelines established by the
Securities and Exchange Commission and the Financial Accounting Standards Board.
The assumptions used for estimating future prices and costs are as
follows:
- NATURAL GAS PRICES -- Gas prices were held constant for the life of
the properties.
- NATURAL GAS LIQUIDS AND HELIUM PRICES -- Natural gas liquids and
helium prices were held constant for the life of the properties.
- OPERATING AND CAPITAL COSTS -- Estimates of operating costs based on
current costs were used for the life of the properties with no
increases in the future based on inflation. Future capital
expenditures were estimated using 1996 values and were not adjusted
for inflation.
A summary of estimated revenue and costs attributable to the Combined
Interest in proved reserves and the future net revenue and present worth
attributable to the Trust interest, as of December 31, 1996 is as follows:
COMBINED INTEREST:
Future Gross Revenue ($) ......................... 1,693,029,783
Production Taxes ($) ............................. (66,255,763)
Ad Valorem Taxes ($) ............................. (75,915,457)
Operating Costs ($) .............................. (116,055,039)
Capital Costs ($) ................................ (15,666,378)
--------------
Future Net Revenue ($)1 .......................... 1,419,137,146
Net Revenue Attributable to Plant Interests ($) . (170,219,740)
Overhead ($) ..................................... (136,562,025)
Deficit Balance and Interest on Deficit ($) ...... 0
--------------
Revenue Subject to Net Profits Interest ($)1 ..... 1,112,355,381
TRUST INTEREST:
Future Net Revenue ($)1 .......................... 114,557,031
Present Worth at 10 Percent ($)1 ................. 53,162,762
1Future income tax expenses were not taken into account in the
preparation of these estimates. Approximately 3 percent of the
present worth is estimated to come from helium sales.
12
<PAGE>
MESA Royalty Trust
March 26, 1997
Page 6
In our opinion, the information relating to estimated proved reserves,
estimated future net revenue from proved reserves, and present worth of
estimated future net revenue from proved reserves of natural gas liquids, and
gas contained in this report has been prepared in accordance with Paragraphs
10-13, 15 and 30(a)-(b) of Statement of Financial Accounting Standards No. 69
(November 1982) of the Financial Accounting Standards Board and Rules
4-10(a)(1)-(13) of Regulation S-X and Rule 302(b) of Regulation S-K of the
Securities and Exchange Commission; provided, however, (i) future income tax
expenses have not been taken into account in estimating the future net revenue
and present worth values set forth herein and (ii) minor amounts of revenue from
helium produced with the natural gas are included herein.
To the extent the above enumerated rules, regulations, and statements
require determinations of an accounting or legal nature or information beyond
the scope of our report, we are necessarily unable to express an opinion as to
whether the above-described information is in accordance therewith or sufficient
therefor.
Submitted,
/s/ DENNIS E. FAGERSTONE
--------------------
Dennis E. Fagerstone
13
<PAGE>
CONOCO INC.
LETTER REPORT
DATED
MARCH 25, 1997
ON
RESERVES AND REVENUE
AS OF
DECEMBER 31, 1996
FROM
CERTAIN PROPERTIES
OWNED BY
MESA ROYALTY TRUST
14
<PAGE>
[CONOCO LOGO]
- --------------------------------------------------------------------------------
CONOCO INC.
P.O. Box 2197
Houston, TX 77252
March 25, 1997
Mesa Royalty Trust
Texas Commerce Bank
National Association (As Trustee)
600 Travis Street
Texas Commerce Tower
Suite 1150
Houston, Texas 77002
Re: MESA ROYALTY TRUST RESERVES AS OF DECEMBER 31, 1996
SAN JUAN BASIN PROPERTIES, NEW MEXICO
Gentlemen:
Pursuant to your request, estimates have been prepared as of December 31, 1996
of the extent and value of proved natural gas, condensate, and natural gas
liquid reserves of certain properties owned by the Mesa Royalty Trust,
hereinafter referred to as "MRT". The MRT interest appraised consists of a
10.29282 percent net royalty interest in certain San Juan Basin properties
administered by Conoco.
Reserves in this report are expressed as Conoco net reserves and MRT net
reserves. Conoco net reserves are defined as Conoco's net share of estimated
petroleum hydrocarbons remaining to be produced from the properties after
December 31, 1996. MRT net reserves are defined as that portion of the Conoco
net reserves attributable to the interest owned by MRT.
Values shown herein are expressed in terms of future revenue, future cash flow,
and present worth. Future revenue is that revenue which will accrue from
production and sale of the estimated net reserves. Future cash flow is
calculated by deducting estimated production and ad valorem taxes, operating and
transportation expenses, capital costs, and abandonment costs from the future
revenue. Federal income taxes are not taken into account in the preparation of
these estimates. Present worth is defined as future cash flow discounted at a
specified discount rate compounded monthly over the expected period of
realization. A discount rate of 10 percent is used in this report.
Reserves attributable to the MRT interest are calculated by allocating to MRT a
portion of the Conoco net reserves based on future cash flow. Because reserve
volumes are estimated using future cash flow, a change in prices or costs will
result in changes of reserves. Therefore, the MRT net reserves will vary if
different price and cost assumptions are used.
15
<PAGE>
Petroleum reserves included in this report are classified as proved and judged
to be economically producible in future years from known reservoirs under
existing economic and operating conditions. Total proved reserves are the sum of
developed and undeveloped reserves. Proved developed reserves are those
recoverable from existing wells with current operating methods and expenses, and
thus require little or no capital expenditure to produce. Proved undeveloped
reserves are those which require major capital expenditures for new wells and/or
facilities. Estimates of the MRT net reserves as of December 31, 1996 are
tabulated below.
===========================================================================
DEVELOPED + UNDEVELOPED Conventional Fruitland Total
MRT NET PROVED RESERVES Reservoirs Coal Reservoirs All Reservoirs
SAN JUAN BASIN 12/31/96 12/31/96 12/31/96
===========================================================================
Natural Gas, MMcf 10,736 2,916 13,652
- ---------------------------------------------------------------------------
Condensate, Mbbl 42 0 42
- ---------------------------------------------------------------------------
Natural Gas Liquids, Mbbl 617 16 633
===========================================================================
===========================================================================
DEVELOPED ONLY Conventional Fruitland Total
MRT NET PROVED RESERVES Reservoirs Coal Reservoirs All Reservoirs
SAN JUAN BASIN 12/31/96 12/31/96 12/31/96
===========================================================================
Natural Gas, MMcf 10,092 2,916 13,008
- ---------------------------------------------------------------------------
Condensate, Mbbl 39 0 39
- ---------------------------------------------------------------------------
Natural Gas Liquids, Mbbl 580 16 596
===========================================================================
Some tabulated totals may not agree due to rounding.
The above values for year end 1996 reflect natural gas shrinkage of 7.6 percent
for conventional and Fruitland Coal reservoirs due to processing and plant fuel
use, and an average net back to producing properties of 61 percent of recovered
natural gas liquids.
Product prices and operating costs used for year end 1996 are tabulated below.
Prices and operating costs are held constant over the life of the properties.
==========================================
PRODUCT PRICES 12/31/96
==========================================
Natural Gas, $ / Mcf 3.13
- ------------------------------------------
Condensate, $ / bbl 24.71
- ------------------------------------------
Natural Gas Liquids, $ / bbl 21.60
==========================================
16
<PAGE>
================================================
OPERATING COSTS 12/31/96
================================================
Conventional Reservoirs, $/well/year 15,600
- ------------------------------------------------
Fruitland Coal Reservoirs, $/well/year 28,000
================================================
Revenue and cash flow values in this report are based on product prices for San
Juan Basin effective in December 1996. The gas price excludes a transportation
expense of $0.55/Mcf. The price also excludes combined production and ad valorem
tax rates of 10.7 percent and 9.6 percent of revenue for conventional and
Fruitland Coal gas, respectively. These taxes and transportation expenses are
also excluded from the annual per well operating costs tabulated above.
A summary of estimated future revenue, taxes, costs, cash flow, and present
worth attributable to Conoco net reserves as of December 31, 1996 is tabulated
below. Capital costs are associated with projects required to produce
undeveloped reserves and maintain existing production of developed reserves. All
costs are year end 1996 estimates and not adjusted for inflation. Cash flow and
present worth are reported on a before federal income tax (BFIT) basis.
===========================================================================
CONOCO NET INTEREST Conventional Fruitland Total
SAN JUAN BASIN Reservoirs Coal Reservoirs All Reservoirs
12/31/96 12/31/96 12/31/96
===========================================================================
Future Revenue, M$ 835,151 175,079 1,010,230
- ---------------------------------------------------------------------------
Production and Ad Valorem 89,361 16,808 106,169
Taxes, M$
- ---------------------------------------------------------------------------
Operating and Transportation 261,280 44,600 305,880
Costs, M$
- ---------------------------------------------------------------------------
Abandonment Costs, M$ 1,407 140 1,547
- ---------------------------------------------------------------------------
Capital Costs, M$ 16,948 21,500 38,448
- ---------------------------------------------------------------------------
Future BFIT Cash Flow, M$ 466,155 92,031 558,186
- ---------------------------------------------------------------------------
Deficit Balance, M$ 0 0 0
- ---------------------------------------------------------------------------
Future BFIT Cash Flow Subject 466,155 92,031 558,186
to MRT Interest, M$
- ---------------------------------------------------------------------------
Present Worth @ 10%, M$ 207,762 67,243 275,005
===========================================================================
Some tabulated totals may not agree due to rounding.
17
<PAGE>
A summary of estimated future cash flow and present worth attributable to the
MRT interest as of December 31, 1996 is tabulated below.
===========================================================================
MRT INTEREST (10.29282%) Conventional Fruitland Total
SAN JUAN BASIN Reservoirs Coal Reservoirs All Reservoirs
12/31/96 12/31/96 12/31/96
===========================================================================
Future BFIT Cash Flow, M$ 47,980 9,473 57,453
- ---------------------------------------------------------------------------
Present Worth @ 10%, M$ 21,385 6,921 28,306
===========================================================================
Some tabulated totals may not agree due to rounding.
The information relating to estimated proved reserves (natural gas, condensate,
natural gas liquids), estimated future revenue from proved reserves, and present
worth of cash flow contained in this report has been prepared in accordance with
regulations of the Financial Accounting Standards Board and Securities and
Exchange Commission.
Conoco Inc.
Reservoir Engineering and Reserves Tracking
Reservoir Technology Center
18
<PAGE>
There are numerous uncertainties inherent in estimating quantities of
proved reserves and in projecting the future rates of production and timing of
development expenditures, including many factors beyond the control of the
producer. The preceding reserve data in the Reserve Reports represent estimates
only and should not be construed as being exact. Reserve assessment is a
subjective process of estimating the recovery from underground accumulations of
gas and oil that cannot be measured in an exact way, and estimates of other
persons might differ materially from those of MESA Inc. and Conoco. Accordingly,
reserve estimates are often different from the quantities of hydrocarbons that
are ultimately recovered.
While estimates of reserves attributable to the Royalty are shown in order
to comply with requirements of the SEC, there is no precise method of allocating
estimates of physical quantities of reserves between the working interest owners
and the Trust, since the Royalty is not a working interest and the Trust does
not own and is not entitled to receive any specific volume of reserves from the
Royalty. Reserve quantities in the previously mentioned reserve studies have
been allocated based on the method referenced in the Reserve Reports. The
quantities of reserves attributable to the Trust will be affected by future
changes in various economic factors utilized in estimating future gross and net
revenues from the Royalty Properties. Therefore, the estimates of reserves set
forth in the Reserve Reports are to a large extent hypothetical and differ in
significant respects from estimates of reserves attributable to a working
interest.
Moreover, the discounted present values in the Reserve Reports should not
be construed as the current market value of the estimated gas and oil reserves
attributable to the Royalty Properties or the costs that would be incurred to
obtain equivalent reserves, since a market value determination would include
many additional factors. In accordance with applicable regulations of the SEC,
estimated future net revenues were based, generally, on current prices and
costs, whereas actual future prices and costs may be materially greater or less.
The estimates in the Reserve Reports use market prices as of the end of the
year. These prices (having a weighted average of $3.29 per Mcf for Hugoton
properties and $3.13 per Mcf for San Juan Basin properties as of December 31,
1996) were held constant over the estimated life of the Royalty Properties. Such
prices were influenced by seasonal demand for natural gas and may not be the
most appropriate or representative prices to use for estimating future revenues
or related reserve data. The average price of natural gas from the Royalty
Properties during 1996 was $1.83 per Mcf, representing a combination of contract
prices and spot market prices.
The future net revenues shown by the Reserve Reports have not been reduced
for costs and expenses of the Trust, which are expected to approximate $70,000
annually. The costs and expenses of the Trust may increase in future years,
depending on the amount of Royalty income, increases in accounting, engineering,
legal and other professional fees and other factors.
The working interest owners have advised the Trustee that there have been
no events subsequent to December 31, 1996 that have caused a significant change
in the estimated proved reserves referred to in the Reserve Reports.
INCOME, PRODUCTION AND AVERAGE PRICES
Reference is made to "Summary of Royalty Income, Production and Average
Prices" under Item 7 of this Form 10-K for information concerning income,
production and prices with respect to the Royalty.
ASSETS
Reference is made to Item 6 of this Form 10-K for information concerning
the Trust's assets.
19
<PAGE>
CONTRACTS
HUGOTON FIELD
Natural gas and natural gas liquids produced by Mesa from the Hugoton field
and attributable to the Royalty accounted for approximately 80% of the Royalty
income of the Trust during 1996.
Mesa has advised the Trust that since June 1, 1995 natural gas produced
from the Hugoton field has generally been sold under short-term and multi-month
contracts at market clearing prices to multiple purchasers including Western
Resources, Inc. ("WRI"), Westar Gas Marketing, Inc., Missouri Gas Energy and
Noram Energy Services, Inc. During the first quarter of 1996, Mesa sold gas from
the Hugoton field under a five month contract with WRI providing for WRI to
purchase up to 25 MMcf per day of gas at market clearing prices determined
monthly based on third party published index prices, plus five cents per MMbtu.
Mesa has advised the Trust that it expects to continue to market gas production
from the Hugoton field under short-term and multi-month contracts. Overall
market prices received for natural gas from the Hugoton Royalty Properties were
higher in 1996 compared to 1995.
In June 1994, Mesa entered into a Gas Transportation Agreement with WRI
(the "Gas Transportation Agreement") for a primary term of five years
commencing June 1, 1995 and ending June 1, 2000, but which may be continued in
effect year-to-year thereafter. Pursuant to the Gas Transportation Agreement,
WRI has agreed to compress and transport up to 160 MMcf per day of gas and
redeliver such gas to Mesa at the inlet of Mesa's Satanta Plant. Mesa has agreed
to pay WRI a fee of $0.06 per Mcf escalating 4% annually as of June 1, 1996.
Allowable rates of production in the Hugoton field are set by the KCC based
on the level of market demand. The Hugoton field allowable for the period
October 1, 1996 through March 31, 1997, was 232 billion cubic feet of gas,
compared with 242 billion cubic feet of gas during the same period last year.
SAN JUAN BASIN
Natural gas produced from the San Juan Basin field and attributable to the
Royalty accounted for approximately 13% of the Royalty income of the Trust
during 1996. The majority of gas produced from the San Juan Basin is now being
sold on the spot market.
MARKET FOR NATURAL GAS
The amount of cash distributions by the Trust is dependent on, among other
things, the sales prices for natural gas produced from the Royalty Properties
and the quantities of gas sold. The natural gas industry in the United States
during the past decade has been affected generally by a surplus in natural gas
deliverability compared to demand. Demand for gas declined during this period
due to a number of factors including the implementation of energy conservation
programs, a shift in economic activity away from energy intensive industries and
competition from alternative fuel sources such as residual fuel oil, coal and
nuclear energy. The surplus of natural gas deliverability caused a significant
deterioration in gas prices. The annual average wellhead price for natural gas
peaked in 1984 at $2.66 per Mcf, declined to $1.64 per Mcf in 1991 and improved
to $2.04 per Mcf in 1993 but declined again to $1.57 per Mcf in 1995, according
to the Natural Gas Monthly published by the Energy Information Administration of
the Department of Energy. However, the estimated annual average wellhead price
for natural gas in 1996 increased to approximately $2.12 (based on the first
eleven months of 1996). In addition, spot domestic natural gas prices have
generally increased in early 1997 and currently are higher than gas prices in
early 1996.
Due to the seasonal nature of demand for natural gas and its effects on
sales prices and production volumes, the amounts of cash distributions by the
Trust may vary substantially on a seasonal basis. Generally, production volumes
and prices are higher during the first and fourth quarters of each calendar year
due primarily to peak demand in these periods. Because of the time lag between
the date on which the working interest owners receive payment for production
from the Royalty Properties and
20
<PAGE>
the date on which distributions are made to unitholders, the seasonality that
generally affects production volumes and prices is generally reflected in
distributions to unitholders in later periods.
COMPETITION
The production and sale of gas in the Hugoton field and San Juan Basin
areas is highly competitive, and the working interest owners' competitors in
these areas include the major oil and gas companies, independent oil and gas
concerns, and individual producers and operators. There are numerous producers
in the Hugoton field and the San Juan Basin. The working interest owners have
advised the Trust that they believe that their competitive position in their
respective areas is affected by price, contract terms and quality of service.
Mesa has also advised the Trust that it believes that its competitive position
in the Hugoton field is enhanced by virtue of its substantial holdings and
ownership and control of its wells, gathering systems and processing plant.
Market conditions in the San Juan Basin are negatively affected by the fact that
most of the gas produced from such area is transported on one of only two major
pipelines and the transportation of such gas is generally controlled by a small
number of distribution companies.
REGULATION AND PRICES
GENERAL
The production and sale of natural gas from the Royalty Properties are
affected from time to time in varying degrees by political developments and
federal, state and local laws and regulations. In particular, oil and gas
production operations and economics are, or in the past have been, affected by
price controls, taxes, conservation, safety, environmental and other laws
relating to the petroleum industry, by changes in such laws and by constantly
changing administrative regulations.
FERC REGULATION
The FERC has recently required interstate pipeline companies to
"unbundle" their services. To the extent a pipeline company or its sales
affiliate makes gas sales as a merchant in the future, it does so pursuant to
private contracts in direct competition with all other sellers, such as the
Working Interest Owners. In recent years, the FERC also has pursued a number of
other policy initiatives which could significantly affect the marketing of
natural gas. Several of these initiatives are intended to enhance competition in
natural gas markets, although some, such as "spin-downs," may have the adverse
effect of increasing the cost of doing business on some in the industry. As to
all of these recent FERC initiatives, the Working Interest Owners have advised
the Trust that the on-going, or, in some instances, preliminary evolving nature
of these regulatory initiatives makes it impossible at this time to predict
their ultimate impact on the business of the Working Interest Owners.
STATE AND OTHER REGULATION
All of the jurisdictions in which the Trust has an interest in producing
oil and gas properties have statutory provisions regulating the production and
sale of crude oil and natural gas. The regulations often require permits for the
drilling of wells but extend also to the spacing of wells, the prevention of
waste of oil and gas resources, the rate of production, prevention and clean-up
of pollution and other matters. See "Contracts -- Hugoton Field" for a
discussion of Mesa's allowables in the Hugoton Royalty Properties.
State regulation of gathering facilities generally includes various safety,
environmental, and in some circumstances, non-discriminatory take requirements,
but does not generally entail rate regulation. Natural gas gathering has
received greater regulatory scrutiny at both the state and federal levels as the
pipeline restructuring under Order 636 continues. For example, Oklahoma recently
enacted a prohibition against discriminatory gathering rates, and certain Texas
and Kansas regulatory officials have expressed interest in evaluating similar
rules in their respective states.
21
<PAGE>
ENVIRONMENTAL MATTERS
The Working Interest Owners' operations are subject to numerous federal,
state and local laws and regulations controlling the discharge of materials into
the environment or otherwise relating to the protection of the environment,
including the Comprehensive Environmental Response, Compensation and Liability
Act ("CERCLA" or "Superfund"), the Solid Waste Disposal Act, the Clean Air
Act, and the Federal Water Pollution Control Act. These laws and regulations,
including their state counterparts, can impose liability upon the lessee under a
lease for the cost of cleanup of discharged materials resulting from a lessee's
operations or can subject the lessee to liability for damages to natural
resources. Violations of environmental laws, regulations, or permits can result
in civil and criminal penalties as well as potential injunctions curtailing
operations in affected areas and restrictions on the injection of liquids into
the subsurface that may contaminate groundwater. The Working Interest Owners
have advised the Trust that they maintain insurance for costs of cleanup
operations, but they are not fully insured against all such risks. A serious
release of regulated materials could result in the DOI requiring lessees under
federal leases to suspend or cease operations in the affected area. In addition,
the recent trend toward stricter standards and regulations in environmental
legislation is likely to continue. For example, from time to time legislation
has been proposed in Congress that would reclassify certain oil and gas
production wastes as "hazardous wastes" which would subject the handling,
disposal and cleanup of these wastes to more stringent requirements and result
in increased operating costs for the Royalty Properties, as well as the oil and
gas industry in general. State initiatives to further regulate the disposal of
oil and gas wastes are also pending in certain states, and these initiatives
could have a similar impact on the Royalty Properties.
The Working Interest Owners have advised the Trust that they are not
involved in any administrative or judicial proceedings relating to the Royalty
Properties arising under federal, state or local environmental protection laws
and regulations or which would have a material adverse effect on the Working
Interest Owners' financial position or results of operations.
ITEM 2. PROPERTIES.
Reference is made to Item 1 of this Form 10-K.
ITEM 3. LEGAL PROCEEDINGS.
There are no pending legal proceedings to which the Trust is a party.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no matters submitted to a vote of security holders during the
fourth quarter of 1996.
22
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED UNITHOLDER
MATTERS.
The units of beneficial interest of the Trust are traded on the New York
Stock Exchange -- ticker symbol MTR. The high and low sales prices and
distributions per unit for each quarter in the two years ended December 31,
1996, were as follows:
<TABLE>
<CAPTION>
1996 1995
----------------------------------- -----------------------------------
QUARTER HIGH LOW DISTRIBUTION HIGH LOW DISTRIBUTION
- ------------------------------ --------- --------- ------------ --------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
First......................... $ 40.63 $ 38.75 $ 1.0574 $ 43.50 $ 40.50 $ 1.1372
Second........................ $ 44.50 $ 39.25 $ .8073 $ 41.00 $ 39.75 $ .9870
Third......................... $ 48.50 $ 44.00 $ .9890 $ 42.50 $ 38.50 $ .7109
Fourth........................ $ 47.00 $ 45.50 $ .8379 $ 41.00 $ 38.00 $ .5842
</TABLE>
At March 20, 1997, the 1,863,590 units outstanding were held by 1,763
unitholders of record.
ITEM 6. SELECTED FINANCIAL DATA.
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Royalty income....................... $ 7,669,020 $ 5,941,088 $ 6,927,776 $ 5,866,029 $ 3,124,236
Distributable income................. $ 7,689,372 $ 5,957,482 $ 6,967,277 $ 5,876,975 $ 3,021,875
Distributable income per unit........ $ 4.1261 $ 3.1967 $ 3.7386 $ 3.1536 $ 1.6215
Total assets at year end............. $ 18,975,935 $ 20,715,506 $ 23,240,108 $ 25,432,085 $ 27,318,675
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
LIQUIDITY AND CAPITAL RESOURCES
As discussed under "Description of the Trust" in Item 1 of this Form
10-K, the Trust's source of cash is the Royalty income received from its share
of the net proceeds from the Royalty Properties. Reference is made to Note 6 in
the Notes to Financial Statements under Item 8 of this Form 10-K for a
discussion of estimated future Royalty income attributable to the Royalty.
In accordance with the provisions of the Conveyance, generally all revenues
received by the Trust, net of Trust administrative expenses and the amount of
established reserves, are distributed currently to the Unitholders.
FINANCIAL REVIEW
YEARS 1996 AND 1995
The Trust's Royalty income was $7,669,020 in 1996, an increase of
approximately 29%, as compared to $5,941,088 in 1995, primarily as a result of
higher natural gas production and prices.
Royalty income from the Hugoton Royalty Properties was $6,157,832 in 1996,
an increase of approximately 36%, as compared to $4,517,569 in 1995, primarily
as a result of increased natural gas production and prices.
The average price received for natural gas and natural gas liquids from the
Hugoton Royalty Properties was $2.02 per Mcf and $13.28 per barrel,
respectively, in 1996 as compared to $1.48 per Mcf and $10.72 per barrel,
respectively, in 1995. Net production attributable to the Hugoton Royalty was
2,006,444 Mcf of natural gas and 159,004 barrels of natural gas liquids in 1996
as compared with 1,882,578 Mcf of natural gas and 161,820 barrels of natural gas
liquids in 1995.
Royalty income from the San Juan Basin Royalty Properties is calculated and
paid to the Trust on a state-by-state basis. Royalty income from the San Juan
Basin Royalty Properties located in the state of New Mexico was $1,511,188 in
1996 as compared to $1,423,519 in 1995. The increase in royalty
23
<PAGE>
income was due primarily to higher prices, offset in part by lower natural gas
production. No Royalty income was received from Amoco with respect to the San
Juan Basin Royalty Properties located in the state of Colorado in 1996 or 1995,
as costs associated with the development drilling program from Royalty
Properties in that state have not been fully recovered.
The average price received for natural gas and natural gas liquids, oil and
condensate from the San Juan Basin Royalty Properties was $1.33 per Mcf and
$13.97 per barrel, respectively, in 1996 compared with $1.19 per Mcf and $11.12
per barrel, respectively, in 1995. Net production attributable to the San Juan
Basin Royalty was 749,222 Mcf of natural gas and 36,852 barrels of natural gas
liquids, oil and condensate in 1996 as compared to 911,312 Mcf of natural gas
and 30,225 barrels of natural gas liquids, oil and condensate in 1995.
As more fully discussed in Note 6 of the Notes to Financial Statements
contained in Item 8 of this Form 10-K, production attributable to the Trust's
interest in the Royalty Properties is calculated based on Royalty income
received from the applicable working interest owner by the Trust.
Conoco has informed the Trust that it believes the production from the
Fruitland Coal formation will generally qualify for the tax credits provided
under Section 29 of the Code. See "Description of the Units -- Federal Income
Tax Matters -- Section 29 Credit" under Item 1 of this Form 10-K.
YEARS 1995 AND 1994
The Trust's Royalty income was $5,941,088 in 1995, a decrease of
approximately 14%, as compared to $6,927,776 in 1994, primarily as a result of
lower natural gas production and prices.
Royalty income from the Hugoton Royalty Properties was $4,517,569 in 1995,
a decrease of approximately 8%, as compared to $4,930,497 in 1994, primarily as
a result of decreased natural gas production and prices.
The average price received for natural gas and natural gas liquids from the
Hugoton Royalty Properties was $1.48 per Mcf and $10.72 per barrel,
respectively, in 1995 as compared to $1.68 per Mcf and $9.86 per barrel,
respectively, in 1994. Net production attributable to the Hugoton Royalty was
1,882,578 Mcf of natural gas and 161,820 barrels of natural gas liquids in 1995
as compared with 1,994,048 Mcf of natural gas and 154,545 barrels of natural gas
liquids in 1994.
Royalty income from the San Juan Basin Royalty Properties located in the
state of New Mexico was $1,423,519 in 1995 as compared to $1,997,279 in 1994 due
primarily to lower natural gas production and prices. No Royalty income was
received from MarkWest or Amoco with respect to the San Juan Basin Royalty
Properties located in the state of Colorado in 1995 or 1994.
The average price received for natural gas and natural gas liquids, oil and
condensate from the San Juan Basin Royalty Properties was $1.19 per Mcf and
$11.12 per barrel, respectively, in 1995 compared with $1.68 per Mcf and $11.44
per barrel, respectively, in 1994. Net production attributable to the San Juan
Basin Royalty was 911,312 Mcf of natural gas and 30,225 barrels of natural gas
liquids, oil and condensate in 1995 as compared to 968,501 Mcf of natural gas
and 32,360 barrels of natural gas liquids, oil and condensate in 1994.
24
<PAGE>
SUMMARY OF ROYALTY INCOME, PRODUCTION AND AVERAGE PRICES (UNAUDITED)
<TABLE>
<CAPTION>
SAN JUAN BASIN TOTAL
HUGOTON ------------------------------ -----------
------------------------- OIL,
NATURAL CONDENSATE
GAS AND NATURAL
NATURAL GAS LIQUIDS(2) NATURAL GAS GAS LIQUIDS(2) NATURAL GAS
----------- ---------- ----------- --------------- -----------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1996:
The Trust's proportionate share of --
Gross proceeds........................... $5,274,074 $2,122,924 $3,292,237 $ 666,111 $8,566,311
Less the Trust's proportionate share of --
Capital costs recovered(1)............... (13,075) -- (296,530) -- (309,605)
Operating costs.......................... (1,214,307) (11,784) (1,981,941) (151,389) (3,196,248)
Interest on cost carryforward............ -- -- (17,300) -- (17,300)
----------- ---------- ----------- --------------- -----------
Royalty income............................. $4,046,692 $2,111,140 $ 996,466 $ 514,722 $5,043,158
=========== ========== =========== =============== ===========
Average sales price........................ $ 2.02 $ 13.28 $ 1.33 $ 13.97 $ 1.83
=========== ========== =========== =============== ===========
Net production volumes attributable (Mcf) (Bbls) (Mcf) (Bbls) (Mcf)
to the Royalty paid...................... 2,006,444 159,004 749,222 36,852 2,755,666
=========== ========== =========== =============== ===========
Year ended December 31, 1995:
The Trust's proportionate share of --
Gross proceeds........................... $3,957,402 $1,747,635 $2,590,105 $ 494,985 $6,547,507
Less the Trust's proportionate share of --
Capital costs recovered(1)............... (22,092) -- (104,517) -- (126,609)
Operating costs.......................... (1,152,500) (12,876) (1,363,758) (158,768) (2,516,258)
Interest on cost carryforward............ -- -- (34,528) -- (34,528)
----------- ---------- ----------- --------------- -----------
Royalty income............................. $2,782,810 $1,734,759 $1,087,302 $ 336,217 $3,870,112
=========== ========== =========== =============== ===========
Average sales price........................ $ 1.48 $ 10.72 $ 1.19 $ 11.12 $ 1.39
=========== ========== =========== =============== ===========
Net production volumes attributable (Mcf) (Bbls) (Mcf) (Bbls) (Mcf)
to the Royalty paid....................... 1,882,578 161,820 911,312 30,225 2,793,890
=========== ========== =========== =============== ===========
Year ended December 31, 1994:
The Trust's proportionate share of --
Gross proceeds........................... $4,472,631 $1,532,589 $3,766,012 $ 543,810 $8,238,643
Less the Trust's proportionate share of --
Capital costs recovered(1)............... (23,072) -- (299,728) -- (322,800)
Operating costs.......................... (1,042,164) (9,487) (1,808,935) (173,613) (2,851,099)
Interest on cost carryforward............ -- -- (30,267) -- (30,267)
----------- ---------- ----------- --------------- -----------
Royalty income............................. $3,407,395 $1,523,102 $1,627,082 $ 370,197 $5,034,477
=========== ========== =========== =============== ===========
Average sales price........................ $ 1.68 $ 9.86 $ 1.68 $ 11.44 $ 1.68
=========== ========== =========== =============== ===========
Net production volumes attributable (Mcf) (Bbls) (Mcf) (Bbls) (Mcf)
to the Royalty paid....................... 1,994,048 154,545 968,501 32,360 2,962,549
=========== ========== =========== =============== ===========
</TABLE>
TOTAL
-----------
OIL,
CONDENSATE
AND NATURAL
GAS LIQUIDS
-----------
Year ended December 31, 1996:
The Trust's proportionate share of --
Gross proceeds........................... $2,789,035
Less the Trust's proportionate share of --
Capital costs recovered(1)............... --
Operating costs.......................... (163,173)
Interest on cost carryforward............ --
------------
Royalty income............................. $2,625,862
============
Average sales price........................ $ 13.41
============
Net production volumes attributable (Bbls)
to the Royalty paid...................... 195,856
============
Year ended December 31, 1995:
The Trust's proportionate share of --
Gross proceeds........................... $2,242,620
Less the Trust's proportionate share of --
Capital costs recovered(1)............... --
Operating costs.......................... (171,644)
Interest on cost carryforward............ --
------------
Royalty income............................. $2,070,976
============
Average sales price........................ $ 10.78
============
Net production volumes attributable (Bbls)
to the Royalty paid....................... 192,045
============
Year ended December 31, 1994:
The Trust's proportionate share of --
Gross proceeds........................... $2,076,399
Less the Trust's proportionate share of --
Capital costs recovered(1)............... --
Operating costs.......................... (183,100)
Interest on cost carryforward............ --
------------
Royalty income............................. $1,893,299
============
Average sales price........................ $ 10.24
============
Net production volumes attributable (Bbls)
to the Royalty paid....................... 186,905
============
For a discussion of the method used to compute the net production volumes
in the table above, see Note 6 in the Notes to Financial Statements.
- ------------
(1) Capital costs recovered represents capital costs incurred during the current
or prior periods to the extent that such costs have been recovered by the
applicable working interest owners from current period gross proceeds. Cost
carryforward represents capital costs incurred during the current or prior
periods which will be recovered from future period Gross Proceeds. The cost
carryforward resulting from the Fruitland Coal drilling program was
$456,198, $501,345 and $436,854 at December 31, 1996, 1995 and 1994,
respectively. The cost carryforwards at December 31, 1996, 1995 and 1994
relate solely to the San Juan Basin Colorado properties. See "Description
of Royalty Properties -- San Juan Basin Fruitland Coal Drilling" for
additional information regarding the Fruitland Coal drilling program.
(2) Gross proceeds attributable to natural gas liquids for the Hugoton and San
Juan Basin properties are net of a volumetric in kind processing fee
retained by Mesa and Conoco, respectively.
25
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
MESA ROYALTY TRUST
STATEMENTS OF DISTRIBUTABLE INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
----------------------------------------------------
1996 1995 1994
---------------- ---------------- ----------------
<S> <C> <C> <C>
Royalty income.............................................. $ 7,669,020 $ 5,941,088 $ 6,927,776
Interest income............................................. 90,384 72,258 62,717
General and administrative expenses......................... (70,032) (55,864) (23,216)
---------------- ---------------- ----------------
Distributable income........................................ $ 7,689,372 $ 5,957,482 $ 6,967,277
================ ================ ================
Distributable income per unit............................... $ 4.1261 $ 3.1967 $ 3.7386
================ ================ ================
</TABLE>
STATEMENTS OF ASSETS, LIABILITIES AND TRUST CORPUS
<TABLE>
<CAPTION>
DECEMBER 31
----------------------------------
1996 1995
---------------- ----------------
ASSETS
<S> <C> <C>
Cash and short-term investments............................................... $ 1,542,261 $ 1,075,495
Interest receivable........................................................... 19,137 13,172
Net overriding royalty interests in oil and gas properties.................... 42,498,034 42,498,034
Less: accumulated amortization........................................... (25,083,497) (22,871,195)
---------------- ----------------
Total assets.................................................................. $ 18,975,935 $ 20,715,506
================ ================
LIABILITIES AND TRUST CORPUS
Distributions payable......................................................... $ 1,561,398 $ 1,088,667
Trust corpus (1,863,590 units of beneficial
interest authorized and outstanding)........................................ 17,414,537 19,626,839
---------------- ----------------
Total liabilities and trust corpus............................................ $ 18,975,935 $ 20,715,506
================ ================
</TABLE>
STATEMENTS OF CHANGES IN TRUST CORPUS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
----------------------------------------------------
1996 1995 1994
---------------- ---------------- ----------------
<S> <C> <C> <C>
Trust corpus, beginning of year............................. $ 19,626,839 $ 21,982,041 $ 24,250,937
Distributable income................................... 7,689,372 5,957,482 6,967,277
Distributions to unitholders........................... (7,689,372) (5,957,482) (6,967,277)
Amortization of net overriding royalty interests....... (2,212,302) (2,355,202) (2,268,896)
---------------- ---------------- ----------------
Trust corpus, end of year................................... $ 17,414,537 $ 19,626,839 $ 21,982,041
================ ================ ================
</TABLE>
The accompanying notes are an integral part of these financial statements.
26
<PAGE>
MESA ROYALTY TRUST
NOTES TO FINANCIAL STATEMENTS
(1) TRUST ORGANIZATION AND PROVISIONS
The Mesa Royalty Trust (the "Trust") was created on November 1, 1979. On
that date, Mesa Petroleum Co., predecessor to Mesa Limited Partnership which was
the predecessor to MESA Inc., conveyed to the Trust a 90% net overriding royalty
interest (the "Royalty") in certain producing oil and gas properties located
in the Hugoton field of Kansas, the San Juan Basin field of New Mexico and
Colorado and the Yellow Creek field of Wyoming (the "Royalty Properties").
Texas Commerce Bank National Association (the "Trustee") is trustee for
the Trust. The terms of the Mesa Royalty Trust Indenture (the "Trust
Indenture") provide, among other things, that:
(a) the Trust cannot engage in any business or investment activity or
purchase any assets;
(b) the Royalty can be sold in part or in total for cash upon approval
of the unitholders;
(c) the Trustee can establish cash reserves and borrow funds to pay
liabilities of the Trust and can pledge the assets of the Trust to
secure payment of the borrowings;
(d) the Trustee will make cash distributions to the unitholders in
January, April, July and October each year as discussed more fully in
Note 4; and
(e) the Trust will terminate upon the first to occur of the following
events: (i) at such time as the Trust's royalty income for each of two
successive years is less than $250,000 per year or (ii) a vote by the
unitholders in favor of termination. Royalty income of the Trust was
$7,669,020 and $5,941,088 for the years 1996 and 1995, respectively.
Upon termination of the Trust, the Trustee will sell for cash all the
assets held in the Trust estate and make a final distribution to
unitholders of any funds remaining after all Trust liabilities have been
satisfied.
(f) MESA Inc., Conoco Inc. and Amoco (collectively the "Working
Interest Owners") will reimburse the Trust for 59.34%, 27.45% and
1.77%, respectively, for general and administrative expenses of the
Trust.
(2) NET OVERRIDING ROYALTY INTEREST
In accordance with the instruments conveying the Royalty, the Working
Interest Owners will calculate and pay the Trust each month an amount equal to
90% of the net proceeds for the preceding month. The Trust Indenture was amended
in 1985, the effect of which was an overall reduction of approximately 88.56% in
the size of the Trust; therefore, the Trust is now entitled to receive 90% of
11.44% of the net proceeds for the preceding month. Generally, net proceeds
means the excess of the amounts received by the Working Interest Owners from
sales of oil and gas from the Royalty Properties over the operating and capital
costs incurred.
The initial carrying value of the Royalty represented the net book value
assigned by Mesa to the Royalty Properties at the date of transfer to the Trust.
Amortization of the Royalty is computed on a unit-of-production basis and is
charged directly to trust corpus since such amount does not affect distributable
income.
(3) BASIS OF ACCOUNTING
The financial statements of the Trust are prepared on the following basis:
(a) Royalty income recorded for a month is the amount computed and paid
by the Working Interest Owners to the Trustee for such month rather than
either the value of a portion of the oil and gas produced by the Working
Interest Owners for such month or the amount subsequently determined to
be the Trust's proportionate share of the net proceeds for such month;
(b) Interest income, interest receivable and distributions payable to
unitholders include interest to be earned on short-term investments from
the financial statement date through the next date of distribution; and
(c) Trust general and administrative expenses, net of reimbursements,
are recorded in the month they accrue.
27
<PAGE>
MESA ROYALTY TRUST
NOTES TO FINANCIAL STATEMENTS--CONTINUED
This basis for reporting distributable income is considered to be the most
meaningful because distributions to the unitholders for a month are based on net
cash receipts for such month. However, these statements differ from financial
statements prepared in accordance with generally accepted accounting principles
because, under such principles, royalty income for a month would be based on net
proceeds from production for such month without regard to when calculated or
received and interest income for a month would be calculated only through the
end of such month.
(4) DISTRIBUTIONS TO UNITHOLDERS
Under the terms of the Trust Indenture, the Trustee must distribute to the
unitholders all cash receipts, after paying liabilities and providing for cash
reserves as determined necessary by the Trustee. The amounts distributed are
determined on a monthly basis and are payable to unitholders of record as of the
last business day of each month. However, cash distributions are made quarterly
in January, April, July and October, and include interest earned from the
monthly record dates to the date of the distribution.
(5) FEDERAL INCOME TAXES
The Trustee reports on the basis that the Trust is a grantor trust. Based
on its previous audit policy, the Internal Revenue Service (the "IRS") is
expected to concur with such action. No IRS ruling has been received or
requested with respect to the Trust, however, and no court case has been decided
involving identical facts and circumstances. It is possible, therefore, that the
IRS would assert upon audit that the Trust is taxable as a corporation and that
a court might agree with such assertion.
As a grantor trust, the Trust will incur no federal income tax liability.
In addition, it will incur little or no federal income tax liability if it is
held to be a non-grantor trust. If the Trust were held to be taxable as a
corporation, it would have to pay tax on its net taxable income at the corporate
rate.
(6) SUPPLEMENTAL RESERVE INFORMATION (UNAUDITED)
Estimates of the proved oil and gas reserves attributable to the Hugoton
Royalty Properties as of December 31, 1996 have been derived by MESA Inc. based
upon a reserve study made by independent petroleum engineers of the combined
MESA Inc. and Trust interests in certain producing oil and gas properties in the
Hugoton field of Kansas. Estimates of proved oil and gas reserves attributable
to the Hugoton Royalty Properties as of December 31, 1995 and 1994 are based on
reserve reports prepared by MESA Inc. The estimates were prepared in accordance
with guidelines established by the Securities and Exchange Commission (the
"SEC"). Accordingly, the estimates were based on existing economic and operating
conditions. The reserve volumes and revenue values for the Trust interest were
estimated by allocating to the Trust a portion of the estimated combined net
reserve volumes of the Hugoton Royalty Properties based on future net revenue.
Production volumes are allocated based on royalty income. Because the net
reserve volumes attributable to the Trust interest are estimated using an
allocation of reserve volumes based on estimates of future net revenue, a change
in prices or costs will result in changes in the estimated net reserve volumes.
Therefore, the estimated net reserve volumes attributable to the Trust interest
will vary if different future price and cost assumptions are used. Only costs
necessary to develop and produce existing proved reserve volumes were assumed in
the allocation of reserve volumes to the Royalty.
Estimates of proved oil and gas reserves attributable to the New Mexico
portion of the San Juan Basin Royalty Properties are based on a reserve report
prepared by Conoco Inc. These estimates were prepared in accordance with SEC
regulations and on a basis generally consistent with those used to derive the
oil and gas reserves attributable to the Hugoton Royalty Properties.
Estimates of proved oil and gas reserves attributable to the Colorado
portion of the San Juan Basin Royalty Properties have been omitted from the
Trust's reserve disclosures, as they represent less than 5% of the Trust's total
reserves and future net revenues.
Future prices for natural gas were based on prices in effect as of each
year end and existing contract terms. Prices being received as of each year end
were used for sales of oil, condensate and
28
<PAGE>
MESA ROYALTY TRUST
NOTES TO FINANCIAL STATEMENTS--CONTINUED
natural gas liquids. Operating costs, production and ad valorem taxes and future
development and abandonment costs were based on current costs as of each year
end, with no escalation.
There are numerous uncertainties inherent in estimating the quantities and
value of proved reserves and in projecting the future rates of production and
timing of expenditures. The reserve data below represent estimates only and
should not be construed as being exact. Moreover, the discounted values should
not be construed as representative of the current market value of the Royalty. A
market value determination would include many additional factors including: (i)
anticipated future oil and gas prices; (ii) the effect of federal income taxes,
if any, on the future royalties; (iii) an allowance for return on investment;
(iv) the effect of governmental legislation; (v) the value of additional
reserves, not considered proved at present, which may be recovered as a result
of further exploration and development activities; and (vi) other business
risks.
Estimates of reserve volumes attributable to the Royalty are shown in order
to comply with requirements of the SEC. There is no precise method of allocating
estimates of physical quantities of reserve volumes between the Working Interest
Owners and the Trust, since the Royalty is not a working interest and the Trust
does not own and is not entitled to receive any specific volume of reserves from
the Royalty. The quantities of reserves attributable to the Trust have been and
will be affected by changes in various economic factors utilized in estimating
net revenues from the Royalty Properties. Therefore, the estimates of reserve
volumes set forth below are to a large extent hypothetical and differ in
significant respects from estimates of reserves attributable to a working
interest.
The following schedules set forth (i) the estimated net quantities of
proved and proved developed oil, condensate and natural gas liquids and natural
gas reserves attributable to the Royalty, and (ii) the standardized measure of
the discounted future royalty income attributable to the Royalty and the nature
of changes in such standardized measure between years. These schedules are
prepared on the accrual basis, which is the basis on which the Working Interest
Owners maintain their production records and is different from the basis on
which the Royalty is computed.
ESTIMATED QUANTITIES OF PROVED AND PROVED DEVELOPED RESERVES (UNAUDITED)
OIL,
CONDENSATE
AND
NATURAL GAS
LIQUIDS NATURAL GAS
------------ -----------
(BBLS) (MCF)
Proved Reserves:
December 31, 1993........................... 1,344,585 41,319,169
Revisions to previous estimates.......... 454,487 10,719,834
Production............................... (186,905) (2,962,549)
------------ -----------
December 31, 1994........................... 1,612,167 49,076,454
Revisions to previous estimates.......... 614,672 (2,766,523)
Production............................... (192,045) (2,793,890)
------------ -----------
December 31, 1995........................... 2,034,794 43,516,041
Revisions to previous estimates.......... 33,843 (1,945,600)
Production............................... (195,856) (2,755,666)
------------ -----------
December 31, 1996........................... 1,872,781 38,814,775
============ ===========
Proved Developed Reserves:
December 31, 1994........................... 1,586,767 48,685,654
============ ===========
December 31, 1995........................... 2,013,794 43,163,041
============ ===========
December 31, 1996........................... 1,832,781 38,170,775
============ ===========
(FOOTNOTES ON FOLLOWING PAGE)
29
<PAGE>
MESA ROYALTY TRUST
NOTES TO FINANCIAL STATEMENTS--CONTINUED
- ------------
o The estimated quantities of proved reserves for oil, condensate and natural
gas liquids include oil and condensate reserves at December 31 of the
respective years as follows: 1996, 42,000 Bbls; 1995, 26,000 Bbls; 1994,
30,800 Bbls.
o The Hugoton Royalty represents 64%, 83% and 74% of the estimated proved oil,
condensate and natural gas liquids reserves and 65%, 80% and 82% of the
estimated proved natural gas reserves as of December 31 of 1996, 1995 and
1994, respectively.
STANDARDIZED MEASURE OF FUTURE ROYALTY INCOME FROM PROVED OIL
AND GAS RESERVES, DISCOUNTED AT 10% PER ANNUM (UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------
1996 1995
------------ -----------
(IN THOUSANDS)
<S> <C> <C>
The Trust's proportionate share of future gross proceeds............................. $ 278,242 $ 180,123
Less the Trust's proportionate share of --
Future operating costs............................................................. (100,567) (79,551)
Future capital costs............................................................... (5,729) (2,278)
------------ -----------
Future royalty income................................................................ 171,946 98,294
Discount at 10% per annum............................................................ (90,477) (54,922)
------------ -----------
Standardized measure of future royalty income from
proved oil and gas reserves........................................................ $ 81,469 $ 43,372
============ ===========
</TABLE>
CHANGES IN THE STANDARDIZED MEASURE OF FUTURE ROYALTY INCOME
FROM PROVED OIL AND GAS RESERVES, DISCOUNTED AT 10% PER ANNUM (UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------------
1996 1995 1994
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Standardized measure at beginning of year.................................. $ 43,372 $ 46,324 $ 53,094
--------- --------- ---------
Revisions of previous estimates and net changes in prices................ 41,429 (1,643) (5,151)
Royalty income........................................................... (7,669) (5,941) (6,928)
Accretion of discount.................................................... 4,337 4,632 5,309
--------- --------- ---------
Net changes in standardized measure...................................... 38,097 (2,952) (6,770)
--------- --------- ---------
Standardized measure at end of year........................................ $ 81,469 $ 43,372 $ 46,324
========= ========= =========
</TABLE>
- ------------
o The Hugoton Royalty represents approximately 65% and 81% of the standardized
measure of future royalty income for 1996 and 1995, respectively.
o Natural gas prices have declined significantly since December 31, 1996.
Accordingly, the standardized measure of future royalty income from proved
oil and gas reserves would be reduced if it was calculated in the first
quarter of 1997.
30
<PAGE>
MESA ROYALTY TRUST
NOTES TO FINANCIAL STATEMENTS--CONTINUED
(7) SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
SUMMARIZED QUARTERLY RESULTS
THREE MONTHS ENDED
------------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
1996:
Royalty income..................................... $ 1,954,563 $ 2,303,749 $1,862,495 $ 1,548,213
Distributable income............................... $ 1,966,631 $ 2,318,691 $1,842,649 $ 1,561,401
Distributable income per unit...................... $ 1.0553 $ 1.2442 $ .9887 $ .8379
1995:
Royalty income..................................... $ 2,102,914 $ 1,442,140 $1,315,134 $ 1,080,900
Distributable income............................... $ 2,119,343 $ 1,424,631 $1,324,841 $ 1,088,667
Distributable income per unit...................... $ 1.1372 $ .7645 $ .7109 $ .5841
</TABLE>
31
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO TEXAS COMMERCE BANK NATIONAL ASSOCIATION (TRUSTEE)
AND THE UNITHOLDERS OF THE MESA ROYALTY TRUST:
We have audited the accompanying statements of assets, liabilities and
trust corpus of the Mesa Royalty Trust as of December 31, 1996 and 1995, and the
related statements of distributable income and changes in trust corpus for each
of the three years in the period ended December 31, 1996. These financial
statements are the responsibility of the Trustee. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
These financial statements were prepared on the basis of accounting
described in Note 3, which is a comprehensive basis of accounting other than
generally accepted accounting principles.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the assets, liabilities and trust corpus of the Mesa
Royalty Trust as of December 31, 1996 and 1995, and its distributable income and
changes in trust corpus for each of the three years in the period ended December
31, 1996, on the basis of accounting described in Note 3.
/s/ ARTHUR ANDERSEN LLP
-------------------
Arthur Andersen LLP
Houston, Texas
March 26, 1997
32
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
There are no directors or executive officers of the Registrant. The Trustee
is a corporate trustee which may be removed by the affirmative vote of the
majority at a meeting of the holders of units of beneficial interest of the
Trust at which a quorum is present.
ITEM 11. EXECUTIVE COMPENSATION.
Not applicable.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
(A) SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS.
The following information has been taken from filings with the Securities
and Exchange Commission on Forms 13D and 13G and Form 4.
<TABLE>
<CAPTION>
AMOUNT
AND NATURE PERCENT
TITLE OF CLASS OF NAME AND ADDRESS OF BENEFICIAL OF
VOTING SECURITIES OF BENEFICIAL OWNER OWNERSHIP(1) CLASS
- ----------------------------------------- ----------------------------------------- ------------- -------
<S> <C> <C> <C>
Units of Beneficial Interest............. Alpine Capital, L.P. 669,516(2) 35.93%
201 Main Street, Suite 3100
Fort Worth, Texas 76102
Units of Beneficial Interest............. Beck, Mack & Oliver LLC 302,190(3) 16.21%
330 Madison Avenue
New York, NY 10017
</TABLE>
- ------------
(1) Under applicable regulations of the Securities and Exchange Commission,
securities are deemed to be "beneficially" owned by a person who directly
or indirectly holds or shares voting power or investment power with respect
thereto.
(2) Information obtained from Schedule 13D Amendment No. 9 dated July 22, 1996
of Alpine Capital, L.P. ("Alpine"), Robert W. Bruce III, Algenpar, Inc.,
J. Taylor Crandall, The Anne T. Bass and Robert M. Bass Foundation, Anne T.
Bass and Robert M. Bass, and from Form 4's filed by Alpine, Mr. Bruce,
Algenpar, Inc. and Mr. Crandall on February 11, 1997. Alpine directly owns
and has sole voting and dispositive power with respect to all of such units.
Such number of units does not include 49,784 units (which constitutes
approximately 2.7% of the 1,863,590 units outstanding) directly owned by The
Anne T. Bass and Robert M. Bass Foundation (the "Foundation"). Mr. Bruce,
by virtue of his position as a general partner of Alpine and as a principal
of The Robert Bruce Management Co. Inc., which has shared dispositive power
with respect to the 49,784 units owned by the Foundation, may be deemed to
be a beneficial owner of the 669,516 units owned by Alpine and the 49,784
units owned by the Foundation. Mr. Crandall, by virtue of his position as
President and sole stockholder of Algenpar, Inc., which is a general partner
of Alpine, and as a director of the Foundation, may also be deemed to be a
beneficial owner of the 669,516 units owned by Alpine and the 49,784 units
owned by the Foundation.
(3) Information obtained from Schedule 13G dated January 21, 1997 of Beck, Mack
& Oliver LLC ("BMO"). BMO has shared dispositive power with respect to all
of such units. All of such units are owned by the investment advisory
clients of BMO.
(B) SECURITY OWNERSHIP OF MANAGEMENT. Not applicable.
33
<PAGE>
(C) CHANGES IN CONTROL. Registrant knows of no arrangements, including the
pledge of securities of the Registrant, the operation of which may at a
subsequent date result in a change in control of the Registrant.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Not applicable.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(A)(1) FINANCIAL STATEMENTS
The following financial statements are set forth under Part II, Item 8 of
this Annual Report on Form 10-K on the pages indicated.
<TABLE>
<CAPTION>
PAGE IN THIS
FORM 10-K
<S> <C>
Statements of Distributable Income................................................................... 26
Statements of Assets, Liabilities and Trust Corpus................................................... 26
Statements of Changes in Trust Corpus................................................................ 26
Notes to Financial Statements........................................................................ 27
Report of Independent Public Accountants............................................................. 32
</TABLE>
(A)(2) SCHEDULES
Schedules have been omitted because they are not required, not applicable
or the information required has been included elsewhere herein.
(A)(3) EXHIBITS
(Asterisk indicates exhibit previously filed with the Securities and
Exchange Commission and incorporated herein by reference.)
<TABLE>
<CAPTION>
SEC FILE
OR
REGISTRATION EXHIBIT
NUMBER NUMBER
------------ -------
<S> <C> <C> <C>
4(a) * Mesa Royalty Trust Indenture between Mesa Petroleum Co. and Texas
Commerce Bank National Association, as Trustee, dated November 1,
1979............................................................... 2-65217 1(a)
4(b) * Overriding Royalty Conveyance between Mesa Petroleum Co. and Texas
Commerce Bank, as Trustee, dated November 1, 1979.................. 2-65217 1(b)
4(c) * First Amendment to the Mesa Royalty Trust Indenture dated as of
March 14, 1985 (Exhibit 4(c) to Form 10-K for year ended December
31, 1984 of Mesa Royalty Trust).................................... 1-7884 4(c)
4(d) * Form of Assignment of Overriding Royalty Interest, effective April
1, 1985, from Texas Commerce Bank National Association, as Trustee,
to MTR Holding Co. (Exhibit 4(d) to Form 10-K for year ended
December 31, 1984 of Mesa Royalty Trust)........................... 1-7884 4(d)
4(e) * Purchase and Sale Agreement, dated March 25, 1991, by and among
Mesa Limited Partnership, Mesa Operating Limited Partnership and
Conoco, as amended on April 30, 1991 (Exhibit 4(e) to Form 10-K for
year ended December 31, 1991 of Mesa Royalty Trust)................ 1-7884 4(e)
27 Financial Data Schedule
</TABLE>
(B) REPORTS ON FORM 8-K.
No reports on Form 8-K were filed with the Securities and Exchange
Commission by the Trust during the fourth quarter of 1996.
34
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
MESA ROYALTY TRUST
By TEXAS COMMERCE BANK NATIONAL
ASSOCIATION, TRUSTEE
By /s/ PETE FOSTER
----------------------------
Pete Foster
Senior Vice President
& Trust Officer
March 27, 1997
The Registrant, Mesa Royalty Trust, has no principal executive officer,
principal financial officer, board of directors or persons performing similar
functions. Accordingly, no additional signatures are available and none have
been provided.
35
<PAGE>
EXHIBIT INDEX
(Asterisk indicates exhibit previously filed with the Securities and
Exchange Commission and incorporated herein by reference.)
<TABLE>
<CAPTION>
SEC FILE
OR
EXHIBIT REGISTRATION EXHIBIT
NUMBER NUMBER NUMBER
<S> <C> <C> <C>
4(a) * Mesa Royalty Trust Indenture between Mesa Petroleum Co. and Texas
Commerce Bank National Association, as Trustee, dated November 1,
1979............................................................... 2-65217 1(a)
4(b) * Overriding Royalty Conveyance between Mesa Petroleum Co. and Texas
Commerce Bank, as Trustee, dated November 1, 1979.................. 2-65217 1(b)
4(c) * First Amendment to the Mesa Royalty Trust Indenture dated as of
March 14, 1985 (Exhibit 4(c) to Form 10-K for year ended December
31, 1984 of Mesa Royalty Trust).................................... 1-7884 4(c)
4(d) * Form of Assignment of Overriding Royalty Interest, effective April
1, 1985, from Texas Commerce Bank National Association, as Trustee,
to MTR Holding Co. (Exhibit 4(d) to Form 10-K for year ended
December 31, 1984 of Mesa Royalty Trust)........................... 1-7884 4(d)
4(e) * Purchase and Sale Agreement, dated March 25, 1991, by and among
Mesa Limited Partnership, Mesa Operating Limited Partnership and
Conoco, as amended on April 30, 1991 (Exhibit 4(e) to Form 10-K for
year ended December 31, 1991 of Mesa Royalty Trust)................ 1-7884 4(e)
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM MESA ROYALTY TRUST AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 1,542,261
<SECURITIES> 0
<RECEIVABLES> 19,137
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,561,398
<PP&E> 42,498,034
<DEPRECIATION> 25,083,497
<TOTAL-ASSETS> 18,975,935
<CURRENT-LIABILITIES> 1,561,398
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 17,414,537
<TOTAL-LIABILITY-AND-EQUITY> 18,975,935
<SALES> 7,669,020
<TOTAL-REVENUES> 7,759,404
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 70,032
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 7,689,372
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,689,372
<EPS-PRIMARY> 4.126
<EPS-DILUTED> 4.126
</TABLE>
