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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, 1993
/ / 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 1-11450
SANTA FE ENERGY TRUST
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
TEXAS 76-6081498
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
TEXAS COMMERCE BANK
NATIONAL ASSOCIATION
CORPORATE TRUST DIVISION
600 TRAVIS, SUITE 1150
HOUSTON, TEXAS 77002
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (713) 216-5100
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
DEPOSITARY UNITS, EVIDENCED BY SECURE NEW YORK STOCK EXCHANGE
PRINCIPAL ENERGY RECEIPTS
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 6,300,000 Depositary Units in Santa Fe Energy
Trust held by non-affiliates of the registrant at the closing sales price on
March 25, 1994, of $19.75 was $124,425,000.
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 25, 1994, 6,300,000 Depositary Units in Santa Fe Energy 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 Trust Units and
Depositary Units------------------- 7
Description of the Treasury
Obligations------------------------ 15
Description of the Royalty
Properties------------------------- 15
Competition and Markets-------------- 25
Governmental Regulation-------------- 26
Item 2. Properties--------------------------- 28
Item 3. Legal Proceedings-------------------- 28
Item 4. Submission of Matters to a Vote of
Security Holders------------------- 28
PART II
Item 5. Market for the Registrant's Common
Equity and Related Holder
Matters---------------------------- 29
Item 6. Selected Financial Data-------------- 29
Item 7. Management's Discussion and Analysis 29
of Financial Condition and Results
of Operations---------------------- 32
Item 8. Financial Statements and
Supplementary Data----------------- 32
Item 9. Changes in and Disagreements with
Accountants on Accounting and
Financial Disclosure--------------- 32
PART III
Item 10. Directors and Executive Officers of 32
the Registrant---------------------
Item 11. Executive Compensation--------------- 32
Item 12. Security Ownership of Certain
Beneficial Owners and
Management------------------------- 32
Item 13. Certain Relationships and Related
Transactions----------------------- 32
PART IV
Item 14. Exhibits, Financial Statement
Schedules, and Reports on Form 8-K-- 33
SIGNATURES------------------------------------ 41
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PART I
ITEM 1. BUSINESS
DESCRIPTION OF THE TRUST
The Santa Fe Energy 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), 600 Travis, Suite 1150, Houston, Texas
77002. The telephone number of the Trust is (713) 216-5100.
The Trust was formed pursuant to an Organizational Trust Agreement dated as
of October 22, 1992. Effective November 19, 1992, the Organizational Trust
Agreement was amended and restated by the Trust Agreement of Santa Fe Energy
Trust between Santa Fe Energy Resources, Inc. (Santa Fe) and Texas Commerce Bank
National Association (the Trust Agreement). Under the terms of the Trust
Agreement, Santa Fe conveyed royalty interests in certain oil and gas properties
to the Trust. In exchange for the conveyance of such royalty interests, the
Trust issued 6,300,000 units of undivided beneficial interest (Trust Units). The
Trust Units and the Treasury Obligations (hereinafter defined) were deposited
with Texas Commerce Bank National Association, as depositary (the Depositary) in
exchange for 6,300,000 Depositary Units (hereinafter defined). Each Depositary
Unit consists of beneficial ownership of one Trust Unit and a $20 face amount
beneficial ownership interest in a $1,000 face amount zero coupon United States
Treasury obligation (Treasury Obligation) maturing on February 15, 2008
(Liquidation Date). The Depositary Units are evidenced by Secure Principal
Energy Receipts (SPERs), which are issued and transferable only in denominations
of 50 Depositary Units or an integral multiple thereof. The Depositary Units are
traded on the New York Stock Exchange under the symbol SFF.
The Trust Units and Treasury Obligations are held by the Depositary for the
holders of Depositary Units (Holders). The Treasury Obligations consist of a
portfolio of United States Treasury stripped interest coupons that mature on the
Liquidation Date in the aggregate face amount of $126,000,000, which amount
equals $20 multiplied by the aggregate number of Depositary Units issued and
outstanding. Since Depositary Units may be issued or transferred only in
denominations of 50 or integral multiples thereof, each holder of 50 Depositary
Units owns the entire beneficial interest in a discrete Treasury Obligation, in
a face amount of $1,000, the minimum denomination of such Treasury Obligations.
The Treasury Obligations do not pay current interest. See 'Description of Trust
Units and Depositary Units -- Federal Income Tax Matters'.
The Trust is a grantor trust formed by Santa Fe to hold royalty interests in
certain oil and gas properties owned by Santa Fe (the Royalty Properties). The
principal asset of the Trust consists of (i) two term royalty interests (the
Wasson ODC Royalty and the Wasson Willard Royalty-collectively, the Wasson
Royalties) conveyed to the Trust out of Santa Fe's royalty interests in two
production units (the Wasson ODC Unit and the Wasson Willard Unit) in the Wasson
Field, and (ii) a net profits royalty interest (the Net Profits Royalties)
conveyed to the Trust out of Santa Fe's royalty interests and working interests
in a diversified portfolio of oil and gas properties (the Net Profits
Properties) located in 12 states (collectively, the Royalty Interests).
The terms of the Trust Agreement provide, among other things, that: (1) the
Trust cannot acquire any asset other than the Royalty Interests or engage in any
business or investment activity of any kind whatsoever, except that cash being
held by the Trustee as a reserve for liabilities or for distribution at the next
distribution date will be placed in bank accounts or certificates; (2) the
Trustee can establish cash reserves and borrow funds to pay liabilities of the
Trust and can pledge assets of the Trust to secure payment of the borrowing; (3)
the Trustee will receive the payments attributable to the Royalty Interests and
pay all expenses, liabilities and obligations of the Trust; (4) the Trustee will
make quarterly distributions to Holders of cash available for distribution in
February, May, August and November of each year; (5) the Trustee is not required
to make business decisions affecting the Trust
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Units or the Trust assets, but under certain circumstances, the Trustee may
be required to approve or disapprove an extraordinary transaction affecting
the Trust and the Holders; and (6) the Trust will be liquidated on or prior
to the Liquidation Date. The discussion of terms of the Trust Agreement
contained herein is qualified in its entirety by reference to the Trust
Agreement itself, which is an exhibit to this Form 10-K and is available
upon request from the Trustee.
The Trustee is paid an annual fee of approximately $12,500. The Trust is
responsible for paying all legal, accounting, engineering and stock exchange
fees, printing costs and other administrative expenses incurred by or at the
direction of the Trustee. The total of all Trustee fees and Trust administrative
expenses is anticipated to aggregate approximately $250,000 per year, although
such costs could be greater or less depending on future events. The Trust paid
Santa Fe an annual fee of $200,000 in 1993. Such fee will increase by 3.5% per
year, payable quarterly, to reimburse Santa Fe for overhead expenses.
The Wasson Royalties were conveyed from Santa Fe to the Trust pursuant to a
single instrument of conveyance (the Wasson Conveyance). The Net Profits
Royalties were conveyed from Santa Fe to the Trust pursuant to separate,
substantially similar conveyances (the Net Profits Conveyances) except with
respect to the Net Profits Royalties in properties located within the State of
Louisiana and its related state waters. Due to the effect of certain Louisiana
laws governing the transfer of properties to trusts, the Louisiana Net Profits
Royalties were conveyed from Santa Fe to the Trust pursuant to a separate
conveyance in the form of a secured interest in proceeds of production from such
properties (the Louisiana Conveyance). The Louisiana Conveyance provides the
Trust with the economic equivalent of the Net Profits Royalties determined with
respect to the Net Profits Properties located in Louisiana. The Net Profits
Conveyances, Wasson Conveyance and Louisiana Conveyance are referred to
collectively as the Conveyances.
Santa Fe owns the Royalty Properties subject to and burdened by the Royalty
Interests. Santa Fe will receive all payments relating to the sale of production
from the Royalty Properties and will be required, pursuant to the Conveyances,
to pay to the Trust the portion thereof attributable to the Royalty Interests.
Under the Conveyances, the amounts payable with respect to the Royalty Interests
will be computed with respect to each calendar quarter, and such amounts will be
paid by Santa Fe to the Trust not later than 60 days after the end of each
calendar quarter. The amounts paid to the Trust will not include interest on any
amounts payable with respect to the Royalty Interests which are held by Santa Fe
prior to payment to the Trust. Santa Fe will be entitled to retain any amounts
attributable to the Royalty Properties which are not required to be paid to the
Trust with respect to the Royalty Interests.
The following descriptions of the Wasson Royalties and the Net Profits
Royalties, and the calculation of amounts payable to the Trust in respect
thereof, are subject to and qualified by the more detailed provisions of the
Conveyances included as exhibits to this Form 10-K and available upon request
from the Trustee.
THE WASSON ROYALTIES
THE WASSON ODC ROYALTY. The Wasson ODC Royalty was conveyed out of Santa
Fe's 12.3934% royalty interest in the Wasson ODC Unit and entitles the Trust to
receive quarterly royalty payments with respect to oil production from the
Wasson ODC Unit for each calendar quarter (or two-month period in the case of
the initial period ended December 31, 1992) during the period ending on December
31, 2007. The royalties payable with respect to the Wasson ODC Royalty for any
calendar quarter is determined by multiplying (a) the Average Per Barrel Price
(as defined below) received for such quarter with respect to oil production from
the Wasson ODC Unit by (b) the Royalty Production (as defined below) for such
quarter related to the Wasson ODC Royalty.
'Royalty Production' for the Wasson ODC Royalty is defined as 12.3934% of
the lesser of (i) the actual number of gross barrels of oil produced for such
quarter from the Wasson ODC Unit and (ii) the applicable maximum quarterly gross
production limitation set forth in the table below. The
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table also shows the maximum number of barrels of Royalty Production that may
be produced per quarter in respect of the Wasson ODC Royalty (12.3934% of the
quarterly gross production limitation).
<TABLE>
<CAPTION>
WASSON ODC ROYALTY WASSON ODC ROYALTY
CALENDAR QUARTERS QUARTERLY GROSS MAXIMUM NET
IN THE YEAR ENDING PRODUCTION QUARTERLY
DECEMBER 31, LIMITATION (MBBLS) PRODUCTION (MBBLS)
<S> <C> <C>
1994----------------------------- 418 51.8
1995----------------------------- 515 63.8
1996----------------------------- 521 64.6
1997----------------------------- 539 66.8
1998----------------------------- 532 65.9
1999----------------------------- 561 69.5
2000----------------------------- 522 64.7
2001----------------------------- 504 62.5
2002----------------------------- 530 65.7
2003----------------------------- 582 72.1
2004----------------------------- 604 74.9
2005----------------------------- 536 66.4
2006----------------------------- 502 62.2
2007----------------------------- 486 60.2
</TABLE>
The Wasson ODC Royalty will terminate on December 31, 2007. Thus, the
Trustee will make a final quarterly distribution from the Wasson ODC Royalty in
respect of the fourth quarter of 2007 on or about the Liquidation Date.
THE WASSON WILLARD ROYALTY. The Wasson Willard Royalty was conveyed out of
Santa Fe's 6.8355% royalty interest in the Wasson Willard Unit and entitles the
Trust to receive quarterly royalty payments with respect to oil production from
the Wasson Willard Unit for each calendar quarter (or two-month period in the
case of the initial period ended December 31, 1992) during the period ending on
December 31, 2003. The royalty payable for any calendar quarter is determined by
multiplying (a) the Average Per Barrel Price (as defined below) received for
such quarter with respect to oil production from the Wasson Willard Unit by (b)
the Royalty Production (as defined below) for such quarter related to the Wasson
Willard Royalty.
'Royalty Production' for the Wasson Willard Royalty is defined as 6.8355% of
the lesser of (i) the actual number of gross barrels of oil produced for such
quarter from the Wasson Willard Unit and (ii) thc applicable maximum quarterly
gross production limitation set forth in the table below. The table also shows
the maximum number of barrels of Royalty Production that may be produced per
quarter in respect of the Wasson Willard Royalty (6.8355% of the quarterly gross
production limitation).
<TABLE>
<CAPTION>
WASSON WILLARD WASSON WILLARD
CALENDAR QUARTERS ROYALTY QUARTERLY ROYALTY MAXIMUM
IN THE YEAR ENDING GROSS PRODUCTION NET QUARTERLY
DECEMBER 31, LIMITATION (MBBLS) PRODUCTION (MBBLS)
<S> <C> <C>
1994----------------------------- 514 35.1
1995----------------------------- 494 33.8
1996----------------------------- 474 32.4
1997----------------------------- 455 31.1
1998----------------------------- 437 29.9
1999----------------------------- 390 26.7
2000----------------------------- 323 22.1
2001----------------------------- 268 18.3
2002----------------------------- 222 15.2
2003----------------------------- 175 12.0
</TABLE>
AVERAGE PER BARREL PRICE. The 'Average Per Barrel Price' with respect to
the Wasson Royalties for any calendar quarter generally means (a) the aggregate
revenues received by Santa Fe for such quarter from the sale of oil production
from its royalty interest in the Wasson Field production unit
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to which the particular Wasson Royalty relates less certain actual costs for
such quarter which consist of post-production costs (including gathering,
transporting, separating, processing, treatment, storing and marketing charges),
costs of litigation concerning title to or operations of the Wasson Royalties,
severance taxes, ad valorem taxes, excise taxes (including windfall profits
taxes, if any), sales taxes and other similar taxes imposed upon the reserves
or upon production, delivery or sale of such production, costs of audits,
insurance premiums and amounts reserved for the foregoing, divided by (b) the
aggregate number of barrels produced for such quarter from its royalty interest
in the Wasson Field production unit to which the particular Wasson Royalty
relates.
THE NET PROFITS ROYALTIES
The Net Profits Royalties entitle the Trust to receive, on a quarterly
basis, 90% of the Net Proceeds (as defined in the Net Profits Conveyances) from
the sale of production from the Net Profits Properties. The Net Profits
Royalties are not limited in term, although under the Trust Agreement the
Trustee is directed to sell the Net Profits Royalties prior to the Liquidation
Date. The definitions, formulas, accounting procedures and other terms governing
the computation of Net Proceeds are detailed and extensive, and reference is
made to the Net Profits Conveyances and the Louisiana Conveyance for a more
detailed discussion of the computation thereof.
CALCULATION OF NET PROCEEDS. 'Net Proceeds' generally means, for any
calendar quarter, (a) with respect to Net Profits Properties that are conveyed
from working interests, the excess of Gross Proceeds (as defined below) over all
costs, expenses and liabilities incurred in connection with exploring,
prospecting and drilling for, operating, producing, selling and marketing oil
and gas, including, without limitation, all amounts paid as royalties,
overriding royalties, production payments or other burdens against production
pursuant to permitted encumbrances, delay rentals, payments in connection with
the drilling or deferring of drilling of any well in the vicinity, adjustment
payments to others in connection with contributions upon pooling, unitization or
communitization, rent for use of or damage to the surface, costs under any joint
operating unit or similar agreement, costs incurred with respect to reworking,
drilling, equipping, plugging back, completing and recompleting wells, making
production ready or available for market, constructing production and delivery
facilities, producing, transporting, compressing, dehydrating, separating,
treating, storing and marketing production, secondary or tertiary recovery or
other operations conducted for the purpose of enhancing production, litigation
concerning title to or operation of the working interests, renewals and
extensions of leases, and taxes, and (b) with respect to Net Profits Properties
that are conveyed from royalty interests, the excess of Gross Proceeds over all
costs, expenses and liabilities incurred in making production available or ready
for market, including, without limitation, costs paid for gathering,
transporting, compressing, dehydrating, separating, treating, storing and
marketing oil and gas, litigation concerning title to or operation of royalty
interests, taxes, costs of audits and insurance premiums.
'Gross Proceeds' generally means, for any calendar quarter, the amount of
cash received by Santa Fe during such quarter from the sales of oil and gas
produced from the Net Profits Properties excluding (a) all amounts attributable
to nonconsent operations conducted with respect to any working interest in which
Santa Fe or its assignee is a nonconsenting party and which is dedicated to the
recoupment or reimbursement of penalties, costs and expenses of the consenting
parties, (b) damages arising from any cause other than drainage or reservoir
injury, (c) rental for reservoir use, (d) payments in connection with the
drilling of any well on or in the vicinity of the Net Profits Properties and (e)
all amounts set aside as reserved amounts. Gross Proceeds will not include (x)
consideration for the transfer or sale of the Net Profits Properties (except as
provided below under 'Description of the Trust -- Support Payments') or (y) any
amount not received for oil and gas lost in the production or marketing thereof
or used by the owner of the Net Profits Properties in drilling, production and
plant operations. Gross Proceeds includes payments for future production to the
extent they are not subject to repayment in the event of insufficient subsequent
production.
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If a dispute arises as to the correct or lawful sales prices of any oil or
gas produced from any of the Net Profits Properties, then for purposes of
determining whether the amounts have been received by the owner of the Net
Profits Properties and therefore constitute Gross Proceeds (a) the amounts
withheld by a purchaser and deposited with an escrow agent shall not be
considered to be received by the owner of the Net Profits Properties until
actually collected, (b) amounts received by the owner of the Net Profits
Properties and promptly deposited with a non-affiliated escrow agent will not
be considered to have been received until disbursed to it by such escrow agent
and (c) amounts received by the owner of the Net Profits Properties and not
deposited with an escrow agent will be considered to have been received.
The Trust is not liable to the owners or operators of the Net Profits
Properties for any operating, capital or other costs or liabilities attributable
to the Net Profits Properties or oil and gas produced therefrom, and the Trustee
is not obligated to return any income received from the Net Profits Royalties.
Overpayments to the Trust will reduce future amounts payable.
The Net Profits Properties generally consist of mature producing properties
and Santa Fe does not anticipate substantial additional development costs during
the producing lives of these properties.
SUPPORT PAYMENTS
The Wasson Conveyance provides that the Trust is entitled to additional
quarterly royalty payments (Support Payments), subject to certain limitations
herein described, from an additional royalty out of Santa Fe's interests in the
Wasson ODC Unit during the period ending on December 31, 2002 (the Support
Period) in the event that the net cash available for distribution to Holders
from the Royalty Interests for any calendar quarter during the Support Period is
less than an amount sufficient to distribute to Holders a minimum supported
quarterly royalty per Depositary Unit equal to $0.40 per Depositary Unit (the
Minimum Quarterly Royalty). The distribution with respect to the fourth quarter
of 1993 (paid in the first quarter of 1994) included a Support Payment of
$362,000 (approximately $0.06 per Depositary Unit). This Support Payment was
required primarily due to lower realized oil prices and capital expenditures
incurred with respect to the Net Profits Properties, a substantial portion of
which related to the drilling of new wells. Based on current prices, it is
expected that the distribution with respect to the first quarter of 1994 (to be
paid in the second quarter of 1994) will include a Support Payment, the amount
of which has not been determined.
CALCULATION OF AMOUNT OF SUPPORT PAYMENT. Support Payments payable to the
Trust for any calendar quarter during the Support Period shall be equal to the
additional amount necessary to cause the Minimum Quarterly Royalty for such
quarter to be paid by the Trust in respect of all outstanding Trust Units;
provided, that the aggregate amount of Support Payments, net of any amounts
recouped by Santa Fe pursuant to reductions in the royalties payable with
respect to the Royalty Interests as described below, will be limited to $20
million (the Aggregate Support Payment Limitation Amount), as such amount may be
replenished upon recoupment of certain amounts as described in the following
paragraph.
REDUCTION OF ROYALTY INTERESTS. In the event Support Payments are paid to
the Trust for any quarter, the royalties payable with respect to the Wasson
Royalties will be reduced in future quarters (including quarters after the
Support Period but prior to the Liquidation Date) after the Trust has received
(or amounts are set aside for payment of) proceeds from all of the Royalty
Interests in amounts sufficient to pay 112.5% of the Minimum Quarterly Royalty
($0.45 per Depositary Unit) on all Trust Units outstanding at the end of such
quarter in order to permit Santa Fe to recoup the aggregate amount of the
Support Payments. Any such reduction in royalties payable with respect to the
Royalty Interests would be made first to the Wasson ODC Royalty and then, if
additional reductions are necessary, from the Wasson Willard Royalty. The effect
of such reductions in the royalties payable with respect to the Wasson Royalties
would be to eliminate distributions in excess
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of $0.45 per Depositary Unit until the Support Payments, if any, received by the
Trust have been recouped by Santa Fe through such reductions in the Wasson
Royalties.
PROPORTIONATE REDUCTION OF MINIMUM QUARTERLY ROYALTY AND AGGREGATE SUPPORT
PAYMENT LIMITATION AMOUNT UPON CERTAIN SALES. In the event that Santa Fe causes
the Trust to sell or release a portion of the Net Profits Royalties in
connection with the sale by Santa Fe of underlying Net Profits Properties, the
Minimum Quarterly Royalty and the Aggregate Support Payment Limitation Amount
will be adjusted proportionately downward to equal the product resulting from
multiplying each of the Minimum Quarterly Royalty and the Aggregate Support
Payment Limitation Amount by a fraction, the numerator of which will be the
Remaining Royalty Interests Amount (as defined below) and the denominator of
which will be the Existing Royalty Interests Amount (as defined below). For such
purposes, the 'Remaining Royalty Interests Amount' means, at any time, the
Existing Royalty Interests Amount (as defined below) less the present value of
the future net revenues attributable to the portion of the Net Profits Royalties
sold or released by the Trust, determined by reference to the reserve report for
the Royalty Properties prepared in accordance with guidelines of the Securities
and Exchange Commission (Commission) as of the December 31 immediately preceding
the date of the sale. The 'Existing Royalty Interests Amount' means, at any
time, the then present value of the future net revenues attributable to the
Royalty Interests (including the portion sold or released by the Trust),
determined by reference to the reserve report for the Royalty Properties
prepared in accordance with Commission guidelines as of the December 31
immediately preceding the date of the sale. Following any such sale of Net
Profits Royalties, the Trustee will notify the Holders of the adjusted Minimum
Quarterly Royalty and the adjusted Aggregate Support Payment Limitation Amount.
OTHER MATTERS
Payments to the Trust are attributable to the sale of depleting assets.
Thus, the reserves attributable to the Royalty Properties are expected to
decline over time. Based on the estimated production volumes in the Reserve
Report (hereinafter defined), on an equivalent basis the oil and gas production
from proved reserves attributable to the Royalty Interests in the year preceding
the Liquidation Date is expected to be approximately 25% of the initial
production rate attributable to the Royalty Properties.
Under the terms of the Conveyances, neither the Trustee, the Trust nor the
Holders will be able to influence or control the operation or future development
of the Royalty Properties. Santa Fe operates only a small number of the Royalty
Properties and is not expected to be able to significantly influence the
operations or future development of the Royalty Properties that are royalty
interests or that consist of relatively small working interests. Such operations
will generally be controlled by persons unaffiliated with the Trustee and Santa
Fe. Santa Fe, however, owns working interests in the Wasson ODC Unit and the
Wasson Willard Unit and may be able to exercise some influence, though not
control, over unit operations.
The tertiary recovery operations in the Wasson Field have required
substantial capital expenditures and will involve significant future capital
expenditures for CO2 acquisition, particularly in the Wasson Willard Unit. A
prolonged oil price downturn could cause the operators in the Wasson Field to
reassess the economic viability of capital intensive production operations
notwithstanding their substantial unrecovered investment. Such decisions will
not be in the control of either Santa Fe or the Trustee and could have the
effect of substantially reducing expected production from the Wasson Field.
The current operators of the Royalty Properties are under no obligation to
continue operating such properties, and neither the Trustee, the Holders nor
Santa Fe will be able to appoint or control the appointment of replacement
operators. The operators of the Net Profits Properties and any transferee have
the right to abandon any well or property on a Net Profits Property that is a
working interest, if, in their opinion, such well or property ceases to produce
or is not capable of producing in
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commercially paying quantities, and upon termination of any such lease that
portion of the Net Profits Royalties relating thereto will be extinguished.
The Trust Agreement provides that Santa Fe may sell the Royalty Properties,
subject to and burdened by the Royalty Interests, without the consent of the
Holders. In addition, Santa Fe may, without the consent of the Holders, require
the Trust to release up to $5 million of the Net Profit Royalties in any
12-month period (limited to $15 million in the aggregate for all sales prior to
January 1, 2002) in connection with a sale of the Net Profits Properties
provided that the Trust receives an amount equal to 90% of the net proceeds
received by Santa Fe with respect to the Net Profits Properties so sold and such
cash price represents the fair market value of such properties (which fair
market value for sales in excess of $500,000 will be determined by independent
appraisal). Such sales can be required of the Trust without regard to any dollar
limitation on and after December 31, 2005. Any net sales proceeds paid to the
Trust are distributable to Holders for the quarter in which such proceeds are
received. Pursuant to the Trust Agreement, the Trust may not sell the Wasson ODC
Royalty or the Wasson Willard Royalty without the consent of Santa Fe. Under the
Trust Agreement, Santa Fe has a right of first refusal to purchase any of the
Royalty Interests at fair market value, or if applicable the offered third-party
price, prior to the Liquidation Date.
The Trust has no employees. Administrative functions of the Trust are
performed by the Trustee.
DESCRIPTION OF THE TRUST UNITS AND DEPOSITARY UNITS
The following information is subject to the detailed provisions of the
Custodial Deposit Agreement entered into by Santa Fe, the Trustee, the
Depositary and all holders from time to time of SPERs (the Deposit Agreement),
which is an exhibit to this Form 10-K and is available upon request from the
Trustee.
The functions of the Depositary under the Deposit Agreement are custodial
and ministerial in nature and for the benefit of Holders. The Deposit Agreement
and the issuance of SPERs thereunder provide Holders an administratively
convenient form of holding an investment in the Trust and a Treasury Obligation.
Each Depositary Unit is evidenced by a SPER, which is issued by the Depositary
and transferable only in denominations of 50 Depositary Units or an integral
multiple thereof. Accordingly, each Holder of 50 Depositary Units owns a
beneficial interest in 50 Trust Units and the entire beneficial interest in a
discrete Treasury Obligation in a face amount of $1,000, or $20 per Depositary
Unit.
The deposited Trust Units and Treasury Obligations are held solely for the
benefit of the Holders and do not constitute assets of the Depositary or the
Trust. The Depositary has no power to assign, transfer, pledge or otherwise
dispose of any of the Trust Units or Treasury Obligations, except as described
under 'Possible Divestiture of Depositary Units and Trust Units'.
Generally, the Depositary Units are entitled to participate in distributions
with respect to the Trust Units and such distributions with respect to the
Treasury Obligations and the liquidation of the remaining assets of the Trust.
Upon the written request of a Holder for withdrawal of Trust Units and
Treasury Obligations evidenced by SPERs in denominations of 50 Depositary Units
or an integral multiple thereof from deposit and the surrender of such Holder's
SPER in compliance with the terms of the Deposit Agreement, the Holder
surrendering such Depositary Units will be entitled to receive the underlying
Trust Units, which will be uncertificated, and whole Treasury Obligation as
described herein. These withdrawn Trust Units will be evidenced on the books of
the Trustee by a transfer of such Trust Units from the name of the Depositary to
the name of the withdrawing Holder. Holders of withdrawn Trust Units will be
entitled to receive Trust distributions and periodic Trust information
(including tax information) directly from the Trustee. Due to the accreting
nature of the value of the zero coupon Treasury Obligations, the withdrawal and
sale of a Treasury Obligation underlying Depositary Units prior to its maturity
will result in the Holder receiving less than the face value for its Treasury
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Obligation investment. The amount a withdrawing Holder may receive from the sale
of a Treasury Obligation prior to its maturity will be affected by such factors
as then current interest rates and the small size of the Treasury Obligation
relative to typical trades in the secondary market for United States Treasury
obligations (which may result in a discount to quoted market values).
Pursuant to the Trust Agreement and the related transfer application,
withdrawn Trust Units are not transferable except by operation of law. A holder
of withdrawn Trust Units may, however, transfer such Trust Units in
denominations of 50 (or an integral multiple thereof) to the Depositary for
redeposit, together with Treasury Obligations in the face amount equal to $1,000
for each 50 Trust Units redeposited, in exchange for Depositary Units. Such
redeposit may be effected by delivering written notice of such transfer jointly
to the Depositary and the Trustee together with proper documentation necessary
to transfer the requisite Treasury Obligations into the name of the Depositary.
DISTRIBUTIONS
The Trustee determines for each calendar quarter during the term of the
Trust the amount of cash available for distribution to holders of Depositary
Units and the Trust Units evidenced thereby. Such amount (the Quarterly
Distribution Amount) is equal to the excess, if any, of the cash received by the
Trust from the Royalty Interests then held by the Trust during such quarter,
plus any other cash receipts of the Trust during such quarter, over the
liabilities of the Trust paid during such quarter, subject to adjustments for
changes made by the Trustee during such quarter in any cash reserves established
for the payments of contingent or future obligations of the Trust. Based on
industry practice and the payment procedures relating to the Net Profits
Royalties, cash received by the Trustee in a particular quarter from the Net
Profits Royalties generally represents proceeds from sales of production for the
three months ending two months prior to the end of such quarter with respect to
gas, and one month prior to the end of such quarter with respect to oil. For
example, the royalty income received by the Trust for the third calendar quarter
with respect to gas is attributable to production in the months of May, June and
July (for which Santa Fe would have received payment from the purchasers in
July, August and September, respectively). Since proceeds from the sale of
production from the Wasson Properties are received within one month of
production, payments in respect of the Wasson Royalties are made for production
from the calendar quarter to which the Quarterly Distribution Amount relates.
The Quarterly Distribution Amount for each quarter is payable to Holders of
Depositary Units of record on the 45th day following each calendar quarter (or
the next succeeding business day following such day if such day is not a
business day) or such later date as the Trustee determines is required to comply
with legal or stock exchange requirements (the Quarterly Record Date). The
Trustee distributes cash to the Holders within two months after the end of each
calendar quarter to each person who was a Holder of Depositary Units of record
on a Quarterly Record Date.
The net taxable income of the Trust for each calendar quarter will be
reported by the Trustee for tax purposes as belonging to the Holders of record
to whom the Quarterly Distribution Amount was or will be distributed. Because
the Trust will be classified for tax purposes as a 'grantor trust' (see 'Federal
Income Tax Matters'), the net taxable income will be realized by the Holders for
tax purposes in the calendar quarter received by the Trustee, rather than in the
quarter distributed by the Trustee. Taxable income of a Holder may differ from
the Quarterly Distribution Amount because the Wasson Royalties and Treasury
Obligations are treated as generating interest income for tax purposes. There
may also be minor variances because of the possibility that, for example, a
reserve will be established in one quarter that will not give rise to a tax
deduction until a subsequent quarter, an expenditure paid for in one quarter
will have to be amortized for tax purposes over several quarters, etc. See
'Federal Income Tax Matters.'
Each Holder of Depositary Units (including the underlying Trust Units) of
record as of the business day next preceding the Liquidation Date will be
entitled to receive a liquidating distribution equal to a pro rata portion of
the net proceeds from the sale of the Net Profits Royalties (to the extent
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not previously distributed) and a pro rata portion of the proceeds from the
matured Treasury Obligations.
POSSIBLE DIVESTITURE OF DEPOSITARY UNITS AND TRUST UNITS
The Trust Agreement imposes no restrictions based on nationality or other
status of holders of Trust Units. However, the Trust Agreement and the Deposit
Agreement provide that in the event of certain judicial or administrative
proceedings seeking the cancellation or forfeiture of any property in which the
Trust has an interest because of the nationality, citizenship, or any other
status, of any one or more holders of Trust Units including Holders of
Depositary Units, the Trustee will give written notice thereof to each holder
whose nationality, citizenship or other status is an issue in the proceeding,
which notice will constitute a demand that such holder dispose of his Depositary
Units or withdrawn Trust Units within 30 days. If any holder fails to dispose of
his Depositary Units or withdrawn Trust Units in accordance with such notice,
cash distributions on such units are subject to suspension. In the event a
holder fails to dispose of Depositary Units in accordance with such notice, the
Depositary may cancel such holder's Depositary Units and reissue them in the
name of the Trustee, whereupon the Trustee will use its reasonable efforts to
sell the Depositary Units and remit the net sale proceeds to such holder. In the
case of Trust Units withdrawn from deposit with the Depositary, the Trustee
shall redeem such Trust Units not divested in accordance with such notice, for a
cash price equal to the then-current market price of the Depositary Units less
the then-current, over-the-counter bid price of the related, withdrawn Treasury
Obligations. The redemption price will be paid out in quarterly installments
limited to the amount that otherwise would have been distributed in respect of
such redeemed Trust Units.
LIABILITY OF HOLDERS
The Trust is intended to be classified as an 'express trust' under Texas law
and thus subject to the Texas Trust Code. Under the Texas Trust Code, a trust
beneficiary will not be held personally liable for obligations incurred by the
Trust except in limited circumstances principally related to wrongful conduct by
the trust beneficiary. It is unclear whether the Trust constitutes an 'express
trust' under the Texas Trust Code. If the Trust were held not to be an express
trust, a Holder could be jointly and severally liable for any liability of the
Trust in the event that (i) the satisfaction of such liability was not by
contract limited to the assets of the Trust and (ii) the assets of the Trust
were insufficient to discharge such liability. Examples of such liability would
include liabilities arising under environmental laws and damages arising from
product liability and personal injury in connection with the Trust's business.
Each Holder should weigh this potential exposure in deciding whether to retain
or transfer his Trust Units.
LIQUIDATION OF THE TRUST
The Trust will be liquidated and the Net Profits Royalties will be sold on
or prior to the Liquidation Date. Holders of record as of the business day next
proceeding the Liquidation Date will be entitled to receive a terminating
distribution with respect to each Depositary Unit equal to a pro rata portion of
the net proceeds from the sale of the Net Profits Royalties (to the extent not
previously distributed) and a pro rata portion of the proceeds from the matured
Treasury Obligations. Under the Trust Agreement, Santa Fe has a right of first
refusal to purchase any of the Royalty Interests at fair market value, or if
applicable, the offered third-party price, prior to the Liquidation Date.
FEDERAL INCOME TAX MATTERS
This section is a summary of Federal income tax matters of general
application which addresses all material tax consequences of the ownership and
sale of Depositary Units. Except where indicated, the discussion below describes
general Federal income tax considerations applicable to individuals who are
citizens or residents of the United States. Accordingly, the following
discussion has limited application to domestic corporations and persons subject
to specialized Federal income tax treatment, such as tax-exempt entities,
regulated investment companies and insurance companies. The
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following discussion does not address tax consequences to foreign persons. It is
impractical to comment on all aspects of Federal, state, local and foreign laws
that may affect the tax consequences of the transactions contemplated hereby and
of an investment in Depositary Units as they relate to the particular
circumstances of every prospective Holder. EACH HOLDER SHOULD CONSULT HIS OWN
TAX ADVISOR WITH RESPECT TO HIS PARTICULAR CIRCUMSTANCES.
This summary is based on current provisions of the Internal Revenue Code of
1986, as amended (the Code), existing and proposed regulations thereunder and
current administrative rulings and court decisions, all of which are subject to
changes that may or may not be retroactively applied. Some of the applicable
provisions of the Code have not been interpreted by the courts or the Internal
Revenue Service (IRS).
No ruling has been or will be requested from the IRS with respect to any
matter affecting the Trust or Holders, and thus no assurance can be provided
that the statements set forth herein (which do not bind the IRS or the courts)
will not be challenged by the IRS or will be sustained by a court if so
challenged.
TREATMENT OF DEPOSITARY UNITS
A purchaser of a Depositary Unit will be treated, for Federal income tax
purposes, as purchasing directly an interest in the Treasury Obligations and a
Trust Unit. A purchaser will therefore be required to allocate the purchase
price of his Depositary Unit between the interest in the Treasury Obligations
and the Trust Unit in the proportion that the fair market value of each bears to
the fair market value of the Depositary Unit. Information regarding purchase
price allocations will be furnished to Holders by the Trustee.
CLASSIFICATION AND TAXATION OF THE TRUST
The Trust will be taxable as a grantor trust and not as an association
taxable as a corporation. As a grantor trust, the Trust will not be subject to
tax. For tax purposes, Holders will be considered to own and receive the Trust's
income and principal as though no trust were in existence. The Trust will file
an information return, reporting all items of income, credit or deduction which
must be included in the tax returns of Holders. If the Trust were determined to
be an association taxable as a corporation, it would be treated as a separate
entity subject to corporate tax on its taxable income, Holders would be treated
as shareholders, and distributions to Holders from the Trust would be treated as
nondeductible corporate distributions. Such distributions would be taxable to a
Holder, first, as dividends to the extent of the Holder's pro rata share of the
Trust's earnings and profits, then as a tax-free return of capital to the extent
of his basis in his Trust Units, and finally as capital gain to the extent of
any excess.
DIRECT TAXATION OF HOLDERS
Because the Trust will be treated as a grantor trust for Federal income tax
purposes, and a Holder will be treated, for Federal income tax purposes, as
owning a direct interest in the Treasury Obligations and the assets of the
Trust, each Holder will be taxed directly on his pro rata share of the income
attributable to the Treasury Obligations and the assets of the Trust and will be
entitled to claim his pro rata share of the deductions attributable to the Trust
(subject to certain limitations discussed below). Income and expenses
attributable to the assets of the Trust and the Treasury Obligations will be
taken into account by Holders consistent with their method of accounting and
without regard to the taxable year or accounting method employed by the Trust.
The Trust will make quarterly distributions to Holders of record on each
Quarterly Record Date. The terms of the Trust Agreement seek to assure to the
extent practicable that taxable income attributable to such distributions will
be reported by the Holder who receives such distributions, assuming that he is
the owner of record on the Quarterly Record Date. In certain circumstances,
however, a Holder will not receive the distribution attributable to such income.
For example, if the Trustee establishes a reserve or borrows money to satisfy
debts and liabilities of the Trust, income
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associated with the cash used to establish that reserve or to repay that loan
must be reported by the Holder, even though that cash is not distributed to him.
In addition, Holders will be required to recognize certain interest income
attributable to the Treasury Obligations with respect to which no current cash
distributions will be made.
The Trust intends to allocate income and deductions to Holders based on
record ownership at Quarterly Record Dates. It is unknown whether the IRS will
accept that allocation or will require income and deductions of the Trust to be
determined and allocated daily or require some method of daily proration, which
could result in an increase in the administrative expenses of the Trust.
TREATMENT OF TRUST UNITS
Because the Trust is treated as a grantor trust for tax purposes, each
Holder will be treated as purchasing directly an interest in the Royalty
Interests. The purchaser of a Depositary Unit will be required to allocate the
portion of his total purchase price allocated to the Trust Unit among the
Royalty Interests in the proportion that the fair market value of each of the
Royalty Interests bears to the total fair market value of all of the Royalty
Interests. For purposes of making this allocation, the Royalty Interests will
include the Wasson ODC Royalty, the Wasson Willard Royalty and the Net Profits
Royalties. Information regarding purchase price allocations will be furnished to
Holders by the Trustee.
INTEREST INCOME
Based on representations made by Santa Fe regarding the reserves burdened by
the Wasson Royalties and the expected life of the Wasson Royalties, the Wasson
Royalties will be treated as 'production payments' under Section 636(a) of the
Code. Thus, each Holder will be treated as making a mortgage loan on the Wasson
Properties to Santa Fe in an amount equal to the amount of the purchase price of
each Depositary Unit allocated to the Wasson Royalties. Because they are treated
as debt instruments for tax purposes, the Wasson Royalties will be subject to
the Original Issue Discount (OID) rules of Sections 1272 through 1275 of the
Code. Section 1272 generally requires the periodic inclusion of original issue
discount in income of the purchaser of a debt instrument. Section 1275 provides
special rules and authorizes the IRS to prescribe regulations modifying the
statutory provisions where, by reason of contingent payments, the tax treatment
provided under the statutory provisions does not carry out the purposes of such
provisions. The IRS has not yet issued either temporary or final regulations
dealing with contingent payments. Proposed regulations dealing with contingent
payments were issued in 1986 and modified in 1991 (the Proposed Regulations).
Under the Proposed Regulations, each payment (at the time the amount of such
payment becomes fixed) made to the Trust with respect to the Wasson Royalties
will be treated first as consisting of a payment of interest to the extent of
interest deemed accrued under the OID rules and the excess (if any) will be
treated as a payment of principal. The total amount treated as principal will be
limited to the amount of the purchase price of each Depositary Unit allocated to
the Wasson Royalties. For purposes of determining the amount of accrued
interest, the Proposed Regulations require the use of the Applicable Federal
Rate based on the due date of the final payment due under the terms of each of
the production payments, which for the Wasson Willard Royalty and the Wasson ODC
Royalty is December 31, 2003 and December 31, 2007, respectively.
Holders will also be required to recognize and report OID interest income
attributable to the Treasury Obligations. In general, the total amount of OID
interest income a Holder will be required to recognize will be calculated as the
difference between the amount of the purchase price of a Depositary Unit
allocated to the Treasury Obligations and the pro rata portion of the face
amount of such Treasury Obligations attributable to the Depositary Unit. The
amount of OID interest income so calculated will be included in income by a
Holder on the basis of a constant interest rate computation.
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ROYALTY INCOME AND DEPLETION
The income from the Net Profits Royalties will be royalty income subject to
an allowance for depletion. The depletion allowance must be computed separately
by each Holder for each oil or gas property (within the meaning of Code Section
614). The IRS presently takes the position that a net profits interest carved
out of multiple properties is a single property for depletion purposes.
Accordingly, the Trust intends to take the position that the Net Profits
Royalties are a single property for depletion purposes until such time as the
issue is resolved in some other manner.
The allowance for depletion with respect to a property is determined
annually and is the greater of cost depletion or, if allowable, percentage
depletion. Percentage depletion is generally available to 'independent
producers' (generally persons who are not substantial refiners or retailers of
oil or gas or their primary products) on the equivalent of 1,000 barrels of
production per day. Percentage depletion is a statutory allowance equal to 15%
of the gross income from production from a property subject to a net income
limitation which is 100% of the taxable income from the property, computed
without regard to depletion deductions and certain loss carrybacks. The
depletion deduction attributable to percentage depletion for a taxable year is
limited to 65% of the taxpayer's taxable income for the year before allowance of
'independent producers' percentage depletion and certain loss carrybacks. Unlike
cost depletion, percentage depletion is not limited to the adjusted tax basis of
the property, although it reduces such adjusted tax basis (but not below zero).
In computing cost depletion for each property for any year, the adjusted tax
basis of that property at the beginning of that year is divided by the estimated
total units (Bbls of oil or Mcf of gas) recoverable from that property to
determine the per-unit allowance for such property. The per-unit allowance is
then multiplied by the number of units produced and sold from that property
during the year. Cost depletion for a property cannot exceed the adjusted tax
basis of such property. Since the Trust will be taxed as a grantor trust, each
Holder will compute cost depletion using his basis in his Trust Units allocated
to the Net Profits Royalties. Information will be provided to each Holder
reflecting how that basis should be allocated among each property represented by
his Trust Units.
OTHER INCOME AND EXPENSES
It is anticipated that the Trust may generate some interest income on funds
held as a reserve or held until the next distribution date. Expenses of the
Trust will include administrative expenses of the Trustee. Under the Code,
certain miscellaneous itemized deductions of an individual taxpayer are
deductible only to the extent that in the aggregate they exceed 2% of the
taxpayer's adjusted gross income. Certain administrative expenses attributable
to the Trust Units may have to be aggregated with an individual Holder's other
miscellaneous itemized deductions to determine the excess over 2% of adjusted
gross income. It is anticipated that the amount of such expenses will not be
significant in relation to the Trust's income.
NON-PASSIVE ACTIVITY INCOME AND LOSS
The income and expenses of the Trust will not be taken into account in
computing the passive activity losses and income under Code Section 469 for a
Holder who acquires and holds Depositary Units as an investment.
UNRELATED BUSINESS TAXABLE INCOME
Certain organizations that are generally exempt from tax under Code Section
501 are subject to tax on certain types of business income defined in Code
Section 512 as unrelated business income. The income of the Trust will not be
unrelated business taxable income within the meaning of Code Section 512 so long
as the Trust Units are not 'debt-financed property' within the meaning of Code
Section 524(b). In general, a Trust Unit would be debt-financed if the Holder
incurs debt to acquire a Trust Unit or otherwise incurs or maintains a debt that
would not have been incurred or maintained if such Trust Unit had not been
acquired. Legislative proposals have been made from time to time
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which, if adopted, would result in the treatment of income attributable to the
Net Profits Royalties as unrelated business income.
SALE OF DEPOSITARY UNITS; DEPLETABLE BASIS
Generally, a Holder will realize gain or loss on the sale or exchange of his
Depositary Units measured by the difference between the amount realized on the
sale or exchange and his adjusted basis for such Depositary Units. Gain or loss
on the sale of Depositary Units by a Holder who is not a dealer with respect to
such Depositary Units and who has a holding period for the Depositary Units of
more than one year will be treated as long-term capital gain or loss except to
the extent of the depletion recapture amount. A Holder's basis in his Depositary
Units will be equal to the amount paid for such Depositary Units. Such basis
will be increased by the amount of any OID interest income recognized by the
Holder attributable to the Treasury Obligations. Such basis will be reduced by
deductions for depletion claimed by the Holder (but not below zero). In
addition, such basis will be reduced by the amount of any payments attributable
to the Wasson Royalties which are treated as payments of principal under the OID
rules. For Federal income tax purposes, the sale of a Depositary Unit will be
treated as a sale by the Holder of his interest in the Treasury Obligations and
the assets of the Trust. Thus, upon the sale of Depositary Units, a Holder must
treat as ordinary income his depletion recapture amount, which is an amount
equal to the lesser of (i) the gain on that sale attributable to disposition of
the Net Profits Royalties or (ii) the sum of the prior depletion deductions
taken with respect to the Net Profits Royalties (but not in excess of the
initial basis of such Depositary Units allocated to the Net Profits Royalties).
It is possible that the IRS would take the position that a portion of the sales
proceeds is ordinary income to the extent of any accrued income at the time of
sale allocable to the Depositary Units sold, but which is not distributed to the
selling Holder.
SALE OF NET PROFITS ROYALTIES
In certain circumstances, Santa Fe may cause the Trustee, without the
consent of the Holders, to release a portion of the Net Profits Royalties in
connection with a sale by Santa Fe of the underlying Net Profits Properties.
Additionally, the assets of the Trust, including the Net Profits Royalties, will
be sold by the Trustee prior to the Liquidation Date in anticipation of the
termination of the Trust. A sale by the Trust of Net Profits Royalties will be
treated for Federal income tax purposes as a sale of Net Profits Royalties by a
Holder. Thus, a Holder will recognize gain or loss on a sale of Net Profits
Royalties by the Trust. A portion of that income may be treated as ordinary
income to the extent of depletion recapture. See 'Sale of Depositary Units;
Depletable Basis,' above.
BACKUP WITHHOLDING
In general, distributions of Trust income will not be subject to 'backup
withholding' unless: (i) the Holder is an individual or other noncorporate
taxpayer and (ii) such Holder fails to comply with certain reporting procedures.
TAX SHELTER REGISTRATION
Code Section 6111 requires a tax shelter organizer to register a 'tax
shelter' with the IRS by the first day on which interests in the tax shelter are
offered for sale. The Trust is registered as a tax shelter with the IRS. The
Trust's tax shelter registration number is 92322000636.
A Holder who sells or otherwise transfers a Trust Unit in a subsequent
transaction must furnish the tax shelter registration number to the transferee.
The penalty for failure of the transferor of a Trust Unit to furnish such tax
shelter registration number to a transferee is $100 for each such failure.
Holders must disclose the tax shelter registration number of the Trust on Form
8271 to be attached to the tax return on which any deduction, loss, credit or
other benefit generated by the Trust is claimed or income of the Trust is
included. A Holder who fails to disclose the tax shelter registration number on
his return, without reasonable cause for such failure, will be subject to a $50
penalty for each such failure. (Any penalties discussed herein are not
deductible for income tax purposes.)
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ISSUANCE OF A TAX SHELTER REGISTRATION NUMBER DOES NOT INDICATE THAT AN
INVESTMENT IN DEPOSITARY UNITS OR TRUST UNITS OR THE CLAIMED TAX BENEFITS HAVE
BEEN REVIEWED, EXAMINED OR APPROVED BY THE IRS.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended (ERISA),
imposes certain requirements on pension, profit-sharing and other employee
benefit plans to which it applies (Plans), and contains standards on those
persons who are fiduciaries with respect to such Plans. In addition, under the
Code, there are similar requirements and standards which are applicable to
certain Plans and individual retirement accounts (whether or not subject to
ERISA) (collectively, together with Plans subject to ERISA, referred to herein
as Qualified Plans).
A fiduciary of a Qualified Plan should carefully consider fiduciary
standards under ERISA regarding the Plan's particular circumstances before
authorizing an investment in Trust Units. A fiduciary should first consider (i)
whether the investment satisfies the prudence requirements of Section
404(a)(1)(B) of ERISA, (ii) whether the investment satisfies the diversification
requirements of Section 404(a)(1)(C) of ERISA and (iii) whether the investment
is in accordance with the documents and instruments governing the Plan as
required by Section 404(a)(1)(D) of ERISA.
In order to avoid the application of certain penalties, a fiduciary must
also consider whether the acquisition of Trust Units and/or operation of the
Trust might result in direct or indirect nonexempt prohibited transactions under
Section 406 of ERISA and Code Section 4975. In determining whether there are
such prohibited transactions, a fiduciary must determine whether there are 'plan
assets' involved in the transaction. On November 13, 1986, the Department of
Labor published final regulations (the DOL Regulations) concerning whether or
not a Qualified Plan's assets (such as a Trust Unit) would be deemed to include
an interest in the underlying assets of an entity (such as the Trust) for
purposes of the reporting, disclosure and fiduciary responsibility provisions of
ERISA and analogous provisions of the Code, if the Plan acquires an 'equity
interest' in such entity. The DOL Regulations provide that the underlying assets
of an entity will not be considered 'plan assets' if the interests in the entity
are a publicly offered security. Trust Units are considered to be 'publicly
offered' for this purpose if they are part of a class of securities that is (i)
widely held (I.E., owned by more than 100 investors independent of the issuer
and each other), (ii) freely transferable, and (iii) registered under Section
12(b) or 12(g) of the Exchange Act. Although no assurances can be given, it is
believed that these requirements have been satisfied with respect to Trust
Units. Fiduciaries, however, will need to determine whether the acquisition of
Trust Units is a nonexempt prohibited transaction under the general requirements
of ERISA Section 406 and Code Section 4975.
Due to the complexity of the prohibited transaction rules and the penalties
imposed upon persons involved in prohibited transactions, it is important that
potential Qualified Plan investors consult with their counsel regarding the
consequences under ERISA and the Code of their acquisition and ownership of
Trust Units.
STATE TAX CONSIDERATIONS
The following is intended as a brief summary of certain information
regarding state income taxes and other state tax matters affecting individuals
who are Holders. Holders are urged to consult their own legal and tax advisors
with respect to these matters.
Prospective investors should consider state and local tax consequences of an
investment in Depositary Units. The Trust owns the Royalty Interests burdening
oil and gas properties located in Alabama, Arkansas, California, Colorado,
Kansas, Louisiana, Mississippi, New Mexico, North Dakota, Oklahoma, Texas and
Wyoming. Of these, all but Texas and Wyoming have income taxes applicable to
individuals. As stated, Texas currently has no income tax and the Reserve Report
reflects that more than 50% of the estimated future net cash inflows generated
by the Trust will be attributable to properties located in Texas. A Holder may
be required to file state income tax returns
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and/or to pay taxes in those states imposing income taxes and may be subject to
penalties for failure to comply with such requirements. Further, in some states
the Trust may be taxed as a separate entity.
The Depositary will provide information prepared by the Trustee concerning
the Depositary Units sufficient to identify the income from Depositary Units
that is allocable to each state. Holders of Depositary Units should consult
their own tax advisors to determine their income tax filing requirements with
respect to their share of income of the Trust allocable to states imposing an
income tax on such income.
The Trust Units represented by Depositary Units may constitute real property
or an interest in real property under the inheritance, estate and probate laws
of some or all of the states listed above. If the Depositary Units are held to
be real property or an interest in real property under the laws of a state in
which the Royalty Properties are located, the holders of Depositary Units may be
subject to devolution, probate and administration laws, and inheritance or
estate and similar taxes under the laws of such state.
DESCRIPTION OF THE TREASURY OBLIGATIONS
The Treasury Obligations consist of a portfolio of interest coupons stripped
from United States Treasury Bonds. All of the Treasury Obligations become due on
the Liquidation Date in the aggregate face amount of $126,000,000, which amount
equals $20 per outstanding Depositary Unit. The Treasury Obligations were
purchased on behalf of the Depositary at a deep discount from face value at a
price of $30.733 per hundred dollars, which was approximately the asked price on
the over-the-counter U.S. Treasury market for such obligations on November 12,
1992 (after adjustment for five-day settlement). The Treasury Obligations were
deposited with the Depositary on November 19, 1992 in connection with the
initial public offering of Depositary Units.
The Treasury Obligations were issued under the Separate Trading of
Registered Interest and Principal of Securities program of the U.S. Treasury,
which permits the trading of the Treasury Obligations in book-entry form. The
Treasury Obligations are held for the benefit of Holders in the name of the
Depositary in book-entry form with a Federal Reserve Bank subject to withdrawal
by a Holder. The deposited Treasury Obligations are not considered assets of the
Depositary or the Trust. In the unlikely event of default by the U.S. Treasury
in the payment of the Treasury Obligations when due, each Holder would have the
right to withdraw a deposited Treasury Obligation in a face amount of $1,000 for
each 50 Depositary Units and, as a real party in interest and as the owner of
the entire beneficial interest in discrete Treasury Obligations, proceed
directly and individually against the United States of America in whatever
manner he deems appropriate without any requirement to act in concert with the
Depositary, other Holders or any other person.
Santa Fe makes available quarterly to the Depositary for distribution to
Holders certain information regarding the Treasury Obligations including high,
low and recent asked prices quoted during each calendar quarter on the
over-the-counter United States Treasury market. The Treasury Obligations pay no
current interest.
DESCRIPTION OF THE ROYALTY PROPERTIES
THE WASSON PROPERTIES
The Wasson Royalties were conveyed to the trust out of Santa Fe's 12.3934%
royalty interest in the Wasson ODC Unit and its 6.8355% royalty interest in the
Wasson Willard Unit, located in the Wasson Field. Santa Fe also owns significant
working interests in each of these units. Santa Fe's production from the Wasson
Field commenced in 1939. A secondary waterflooding phase in the Wasson Field
began in the early 1960s. The Wasson Field has been significantly redeveloped
for tertiary recovery operations utilizing CO2 flooding, which commenced in
1984. Gross capital expenditures in excess of $600 million have been made by all
working interest owners in respect of these operations in the Wasson ODC Unit
and Wasson Willard Unit. Most of the capital expenditures for
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plant, facilities, wells and equipment necessary for such tertiary recovery
operations have been made, although significant ongoing capital expenditures for
CO 2 acquisition will be required to complete the flood of the Wasson Field,
particularly the Wasson Willard Unit. The Wasson Royalties are not subject to
development costs or operating costs (including CO2 acquisition costs).
The Wasson ODC Unit and the Wasson Willard Unit are production units formed
by the various interest owners in the Wasson Field to facilitate development and
production of certain geographically concentrated leases. The Wasson ODC Unit
covers approximately 7,840 acres with approximately 315 producing wells and is
operated by Amoco Production Company. The Wasson Willard Unit covers
approximately 13,520 acres with approximately 338 producing wells and is
operated by a subsidiary of Atlantic Richfield Company. Production attributable
to Santa Fe's royalty interests in the Wasson ODC Unit and Wasson Willard Unit
is marketed by Santa Fe and in some cases is sold at the wellhead at market
responsive prices that approximate spot oil prices for West Texas Sour crude,
and in other cases is sold at points within common carrier pipeline systems on
terms whereby Santa Fe pays the cost of transporting same to such points. Santa
Fe may sell its royalty interests in the Wasson Field subject to and burdened by
the Wasson Royalties, without the consent of the Trustee of the Trust or the
Holders. The Wasson Royalties may not be sold by the Trust without the consent
of Santa Fe.
THE NET PROFITS PROPERTIES
The Royalty Properties burdened by the Net Profits Royalties consist of
royalty and working interests in a diversified portfolio of producing properties
located in established oil and gas producing areas in 12 states. Over 90% of the
discounted present value of estimated future net revenues attributable to the
Net Profits Royalties is generated from Net Profits Properties located in Texas,
Oklahoma and Louisiana and related state waters. No single property or field
accounts for more than 7% of the estimated future net revenues attributable to
the Net Profits Royalties. The Net Profits Properties generally consist of
mature producing properties and Santa Fe does not anticipate substantial
additional development during the producing lives of these properties.
Production attributable to the Net Profits Properties is principally sold at
market responsive prices.
Santa Fe owns the Net Profits Properties subject to and burdened by the Net
Profits Royalties, and is entitled to proceeds attributable to its ownership
interest in excess of 90% of the Net Proceeds paid to the Trust. Santa Fe is
required to receive payments representing the sale of production from the Net
Profits Properties, deduct the costs described above and pay 90% of the net
amount to the Trust. Santa Fe may sell the Net Profits Properties subject to and
burdened by the Net Profits Royalties. In addition, Santa Fe may, subject to
certain limitations, cause the Trust to release portions of the Net Profits
Royalties in connection with the sale of the underlying Net Profits Properties.
Santa Fe estimates that as of December 31, 1993, the Net Profits Properties
covered approximately 246,000 gross acres (approximately 36,000 net to Santa
Fe). Productive well information generally is not made available by operators to
owners of royalties and overriding royalties. Accordingly, such information is
unavailable to Santa Fe for the Net Profits Properties.
TITLE TO PROPERTIES
The Wasson Properties have been owned by Santa Fe for over 40 years. The
Conveyances contain a warranty of title, limited to claims by, through or under
Santa Fe, and covering the Wasson Properties and certain of the Net Profits
Properties aggregating approximately 82% of the discounted present value of the
proved reserves attributable to the Royalty Interests according to the Reserve
Report. The Conveyances contain no title warranty with respect to the remaining
Net Profits Properties. As is customary in the oil and gas industry, Santa Fe or
the operator of its properties performs only a perfunctory title examination
when it acquires leases, except leases covering proved reserves. Generally,
prior to drilling a well, a more thorough title examination of the drill site
tract is conducted and curative work is performed with respect to significant
title defects, if any, before
16
<PAGE>
proceeding with operations. The Royalty Properties are typically subject, to one
degree or another, to one or more of the following: (i) royalties and other
burdens and obligations, expressed and implied, under oil and gas leases; (ii)
overriding royalties (such as the Royalty Interests) and other burdens created
by Santa Fe or its predecessors in title; (iii) a variety of contractual
obligations (including, in some cases, development obligations) arising under
operating agreements, farmout agreements, production sales contracts and other
agreements that may affect the properties or their titles; (iv) liens that arise
in the normal course of operations, such as those for unpaid taxes, statutory
liens securing unpaid suppliers and contractors and contractual liens under
operating agreements; (v) pooling, unitization and communitization agreements,
declarations and orders; and (vi) easements, restrictions, rights-of-way and
other matters that commonly affect property. To the extent that such burdens and
obligations affect Santa Fe's rights to production and production revenues from
the Royalty Properties, they have been taken into account in calculating the
Royalty Interests and in estimating the size and value of the Trust's reserves
attributable to the Royalty Interests.
It is not entirely clear that all of the Royalty Interests would be treated
as fully conveyed real or personal property interests under the laws of each of
the states in which the Royalty Properties are located. The Conveyances (other
than the Louisiana Conveyance) state that the Royalty Interests constitute real
property interests and Santa Fe has recorded the Conveyances (other than the
Louisiana Conveyance) in the appropriate real property records of the states in
which the Royalty Properties are located in accordance with local recordation
provisions. If during the term of the Trust, Santa Fe becomes involved as a
debtor in bankruptcy proceedings, it is not entirely clear that all of the
Royalty Interests would be treated as fully conveyed property interests under
the laws of each of the states in which the Royalty Properties are located. If
in such a proceeding a determination were made that a Royalty Interest (or a
portion thereof) did not constitute fully conveyed property interests under
applicable state law, the Conveyance related to such Royalty Interest (or a
portion thereof) could be subject to rejection as an executory contract (a term
used in the Federal Bankruptcy Code to refer to a contract under which the
obligations of both the debtor and the other party to the contract are so
unsatisfied that the failure of either to complete performance would constitute
a material breach excusing performance of the other) in a bankruptcy proceeding
involving Santa Fe. In such event, the Trust would be treated as an unsecured
creditor of Santa Fe with respect to such Royalty Interest in the pending
bankruptcy. Under Louisiana law, the Louisiana Conveyance constitutes personal
property that could be rejected as an executory contract in a bankruptcy
proceeding involving Santa Fe, although the mortgage on the Royalty Properties
that is burdened by the Louisiana Conveyance and which secures the Trust's
interests in such Royalty Properties should enhance the Trust's position in the
event of such a proceeding. No assurance can be given that the Royalty Interests
would not be subject to rejection in a bankruptcy proceeding as executory
contracts.
RESERVES
A study of the proved oil and gas reserves attributable to the Trust as of
December 31, 1993 has been made by Ryder Scott Company, independent petroleum
consultants. The following letter (Reserve Report) summarized such reserve
study. The Trust has not filed reserve estimates covering the Royalty Properties
with any other Federal authority or agency.
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(RYDER SCOTT LETTERHEAD)
February 1, 1994
Santa Fe Energy Resources, Inc.
1616 South Voss Road
Houston, Texas 77057-2696
Gentlemen:
Pursuant to your request, we present below our estimates of the net proved
reserves attributable to the interests of the Santa Fe Energy Trust (Trust) as
of December 31, 1993. The Trust is a grantor trust formed to hold interests in
certain domestic oil and gas properties owned by Santa Fe Energy Resources, Inc.
(Santa Fe). The interests conveyed to the Trust consist of royalty interests in
the Wasson Field, Texas (Wasson Royalties) and a net profits interest derived
from working and royalty interests in numerous other properties (Net Profits
Royalties). The properties included in the Trust are located in the states of
Alabama, Arkansas, California, Colorado, Kansas, Louisiana, Mississippi, New
Mexico, North Dakota, Oklahoma, Texas, Wyoming, and in state waters offshore
Louisiana and Texas.
The estimated reserve quantities and future income quantities presented in
this report are related to a large extent to hydrocarbon prices. Hydrocarbon
prices in effect as December 31, 1993 were used in the preparation of this
report as required by Securities and Exchange Commission (SEC) and Financial
Accounting Standards Bulletin No. 69 (FASB 69) guidelines; however, actual
future prices may vary significantly from December 31, 1993 prices for reasons
discussed in more detail in other sections of this report. Therefore, quantities
of reserves actually recovered and quantities of income actually received may
differ significantly from the estimated quantities presented in this report.
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1993
ESTIMATED PRESENT
FUTURE NET VALUE
LIQUIDS GAS CASH INFLOWS AT 10%
(MBbls) (MMCF) (M$) (M$)
<S> <C> <C> <C> <C>
Proved Net Developed and Undeveloped
Wasson ODC Royalty----------------- 5,535 0 58,681 33,198
Wasson Willard Royalty------------- 1,026 0 10,715 7,314
Net Profits Royalties-------------- 1,208 11,121 38,148 24,804
Totals----------------------- 7,769 11,121 107,544 65,316
Proved Net Developed
Wasson ODC Royalty----------------- 5,535 0 58,681 33,198
Wasson Willard Royalty------------- 1,026 0 10,715 7,314
Net Profits Royalties-------------- 1,204 10,900 37,618 24,438
Totals----------------------- 7,765 10,900 107,014 64,950
</TABLE>
The estimated proved reserves and income quantities for the Wasson Royalties
presented in this report are calculated by multiplying the net revenue interest
attributable to each of the Wasson Royalties by the total amount of oil
estimated to be economically recoverable from the respective productive units,
subject to production limitations applicable to the Wasson Royalties and an
additional royalty to provide Support Payments, which have been described to us
by Santa Fe.
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<PAGE>
Reserve quantities are calculated differently for the Net Profits Royalties
because such interests do not entitle the Trust to a specific quantity of oil or
gas but to 90 percent of the Net Proceeds derived therefrom. Accordingly, there
is no precise method of allocating estimates of the quantities of proved
reserves attributable to the Net Profits Royalties between the interest held by
the Trust and the interests to be retained by Santa Fe. For purposes of this
presentation, the proved reserves attributable to the Net Profits Royalties have
been proportionately reduced to reflect the future estimated costs and expenses
deducted in the calculation of Net Proceeds with respect to the Net Profits
Royalties. Accordingly, the reserves presented for the Net Profits Royalties
reflect quantities of oil and gas that are free of future costs or expenses
based on the price and cost assumptions utilized in this report. The allocation
of proved reserves of the Net Profits Properties between the Trust and Santa Fe
will vary in the future as relative estimates of future gross revenues and
future net incomes vary. Furthermore, Santa Fe requested that for purposes of
our report the Net Profits Royalties be calculated beyond the Liquidation Date
of December 31, 2007, even though by the terms of the Trust Agreement the Net
Profits Royalties will be sold by the Trustee on or about this date and a
liquidating distribution of the sales proceeds from such sale would be made to
holders of Trust Units.
The 'Liquid' reserves shown above are comprised of crude oil, condensate and
natural gas liquids. Natural gas liquids comprise 0.7 percent of the Trust's
developed liquid reserves and 0.7 percent of the Trust's developed and
undeveloped liquid reserves. All hydrocarbon liquid reserves are expressed in
standard 42 gallon barrels. All gas volumes are sales gas expressed in MMCF at
the pressure and temperature bases of the area where the gas reserves are
located. The estimated future net cash inflows are described later in this
report.
Santa Fe has indicated that the conveyance of the Wasson Royalties to the
Trust provides that the Trust will receive an additional royalty interest in the
Wasson ODC Unit which could be available for Support Payments. Payment of this
additional royalty is subject to numerous limitations which are detailed in the
Conveyance. The tables shown on Pages A-1 and A-4 include 1,890,522 barrels of
oil, $20,000,000 of estimated future net revenue, and $12,662,967 of discounted
estimated future net revenue attributable to an additional royalty in respect of
Support Payments which have been described to us by Santa Fe.
In accordance with information provided by Santa Fe, proved reserves and
revenues attributable to Santa Fe's remaining royalty interest in the Wasson ODC
Unit available for Support Payments, which includes the above mentioned reserves
and revenues, are presented below.
ESTIMATED
FUTURE NET
PROVED OIL ESTIMATED REVENUES
RESERVES FUTURE NET DISCOUNTED
(BBLS) REVENUES -- $ AT 10% -- $
3,272,552 $ 34,558,352 $ 23,815,495
The Support Payments are limited to $20,000,000 in the aggregate. As a
result, even though we have calculated total estimated future net revenues of
$34,558,352 available for Support Payments and $20,000,000 of such amount has
been included in our estimate of the future net cash inflow for the Wasson ODC
Royalty attributable to the Trust, no additional Support Payment would be
allowed due to the $20,000,000 limitation.
The proved reserves presented in this report comply with the Securities and
Exchange Commission's Regulation S-X Part 210.4-10 Sec. (a) as clarified by
subsequent Commission Staff Accounting Bulletins, and are based on the following
definitions and criteria:
Proved reserves of crude oil, condensate, natural gas, and natural gas
liquids are estimated quantities that geological and engineering data
demonstrate with reasonable certainty to be recoverable in the future from
known reservoirs under existing conditions. Reservoirs are considered proved
if economic producibility is supported by actual production or formation
RYDER SCOTT COMPANY PETROLEUM ENGINEERS
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<PAGE>
tests. In certain instances, proved reserves are assigned on the basis of a
combination of core analysis and other type logs which indicate the
reservoirs are analogous to reservoirs in the same field which are producing
or have demonstrated the ability to produce on a formation test. The area of
a reservoir considered proved includes (1) that portion delineated by
drilling and defined by fluid contacts, if any, and (2) the adjoining
portions not yet drilled that can be reasonably judged as economically
productive on the basis of available geological and engineering data. In the
absence of data on fluid contacts, the lowest known structural occurrence of
hydrocarbons controls the lower proved limit of the reservoir. Proved
reserves are estimates of hydrocarbons to be recovered from a given date
forward. They may be revised as hydrocarbons are produced and additional
data become available. Proved natural gas reserves are comprised of
nonassociated, associated, and dissolved gas. An appropriate reduction in
gas reserves has been made for the expected removal of natural gas liquids,
for lease and plant fuel and the exclusion of non-hydrocarbon gases if they
occur in significant quantities and are removed prior to sale. Reserves that
can be produced economically through the application of improved recovery
techniques are included in the proved classification when these
qualifications are met: (1) successful testing by a pilot project or the
operation of an installed program in the reservoir provides support for the
engineering analysis on which the project or program was based, and (2) it
is reasonably certain the project will proceed. Improved recovery includes
all methods for supplementing natural reservoir forces and energy, or
otherwise increasing ultimate recovery from a reservoir, including (1)
pressure maintenance, (2) cycling, and (3) secondary recovery in its
original sense. Improved recovery also includes the enhanced recovery
methods of thermal, chemical flooding, and the use of miscible and
immiscible displacement fluids. Estimates of proved reserves do not include
crude oil, natural gas, or natural gas liquids being held in underground
storage. Depending on the status of development, these proved reserves are
further subdivided into:
(i) 'developed reserves' which are those proved reserves reasonably
expected to be recovered through existing wells with existing equipment
and operating methods, including (a) 'developed producing reserves' which
are those proved developed reserves reasonably expected to be produced
from existing completion intervals now open for production in existing
wells, and (b) 'developed non-producing reserves' which are those proved
developed reserves which exit behind the casing of existing wells which
are reasonably expected to be produced through these wells in the
predictable future where the cost of making such hydrocarbons available
for production should be relatively small compared to the cost of a new
well; and
(ii) 'undeveloped reserves' which are those proved reserves
reasonably expected to be recovered from new wells on undrilled acreage,
from existing wells where a relatively large expenditure is required and
from acreage for which an application of fluid injection or other
improved recovery technique is contemplated where the technique has been
proved effective by actual tests in the area in the same reservoir.
Reserves from undrilled acreage are limited to those drilling units
offsetting productive units that are reasonably certain of production
when drilled. Proved reserves for other undrilled units are included only
where it can be demonstrated with reasonable certainty that there is
continuity of production from the existing productive formation.
Because of the direct relationship between quantities of proved undeveloped
reserves and development plans, we include in the proved undeveloped category
only reserves assigned to undeveloped locations that we have been assured will
definitely be drilled and reserves assigned to the undeveloped portions of
secondary or tertiary projects which we have been assured will definitely be
developed.
RYDER SCOTT COMPANY PETROLEUM ENGINEERS
20
<PAGE>
In accordance with the requirements of FASB 69, our estimates of future cash
inflows, future costs and future net cash inflows before income tax, as well as
our estimated reserve quantities, as of December 31, 1993 from this report
presented below.
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1993
NET PROFITS ROYALTIES
ROYALTY WORKING WASSON
INTERESTS INTERESTS TOTALS ROYALTIES TOTALS
<S> <C> <C> <C> <C> <C>
Total Proved
Future Cash Inflows (M$)----------- 15,718 22,430 38,148 75,455 113,603
Future Costs
Production (M$)------------------ 0 0 0 6,059 6,059
Development (M$)----------------- 0 0 0 0 0
Total Costs (M$)------------- 0 0 0 6,059 6,059
Future Net Cash Inflows Before
Income Tax (M$)------------------ 15,718 22,430 38,148 69,396 107,544
Present Value at 10% Before Income
Tax (M$)------------------------- 10,221 14,583 24,804 40,512 65,316
Proved Net Developed Reserves
Liquids -- (MBbls)----------------- 649 555 1,204 6,561 7,765
Gas (MMCF)------------------------- 3,711 7,189 10,900 0 10,900
Proved Net Undeveloped Reserves
Liquids (Mbbls)-------------------- 0 4 4 0 4
Gas (MMCF)------------------------- 0 221 221 0 221
Total Proved Net Reserves
Liquids (MBbls)-------------------- 649 559 1,208 6,561 7,769
Gas (MMCF)------------------------- 3,711 7,410 11,121 0 11,121
</TABLE>
In the case of the Wasson Royalties, the future cash inflows are gross
revenues after gathering and transportation costs where applicable, but before
any other deductions. The production costs are based on current data and include
production taxes and ad valorem taxes provided by Santa Fe.
In the case of the Net Profits Royalties, the future cash inflows are, as
described previously, after consideration of future costs or expenses based on
the price and cost assumptions utilized in this report. Therefore, the future
cash inflows are the same as the future net cash inflows. Included in these
future cash inflows is an estimated amount attributable to the sale of sulphur
in certain Gulf Coast properties.
Santa Fe furnished us gas prices in effect at December 31, 1993 and with its
forecasts of future gas prices which take into account Securities and Exchange
Commission guidelines, current market prices, regulations under the Natural Gas
Policy Act of 1978 and the Gas Decontrol Act of 1989, contract prices and fixed
and determinable price escalations where applicable. In accordance with
Securities and Exchange Commission guidelines, the future gas prices used in
this report make no allowances for future gas price increases which may occur as
a result of inflation nor do they account for seasonal variations in gas prices
which are likely to cause future yearly average gas prices to be somewhat lower
than December gas prices. In those cases where contract market-out has occurred,
the current market price was held constant to depletion of the reserves. In
those cases where market-out has not occurred, contract gas prices including
fixed and determinable escalations, exclusive of inflation adjustments, were
used until the contract expires and then reduced to the current market price for
similar gas in the area and held at this reduced price to depletion of the
reserves.
Santa Fe furnished us with liquid prices in effect at December 31, 1993 and
these prices were held constant to depletion of the properties. In accordance
with Securities and Exchange Commission
RYDER SCOTT COMPANY PETROLEUM ENGINEERS
21
<PAGE>
guidelines, changes in liquid prices subsequent to December 31, 1993 were not
considered in this report.
Operating costs for the leases and wells in this report were provided by
Santa Fe and include only those costs directly applicable to the leases or
wells. When applicable, the operating costs include a portion of general and
administrative costs allocated directly to the leases and wells under terms of
operating agreements. Development costs were furnished to us by Santa Fe and are
based on authorizations for expenditure for the proposed work or actual costs
for similar projects. The current operating and development costs were held
constant throughout the life of the properties. For properties located onshore,
this study does not consider the salvage value of the lease equipment or the
abandonment cost since both are relatively insignificant and tend to offset each
other. The estimated net cost of abandonment after salvage was considered for
offshore properties where abandonment costs net of salvage are significant. The
estimates of the offshore net abandonment costs furnished by Santa Fe were
accepted without independent verification.
No deduction was made for indirect costs such as general administration and
overhead expenses, loan repayments, interest expenses, and exploration and
development prepayments. No attempt has been made to quantify or otherwise
account for any accumulated gas production imbalances that may exist.
Our reserve estimates are based upon a study of the properties in which the
Trust has interests; however, we have not made any field examination of the
properties. No consideration was given in this report to potential environmental
liabilities which may exist nor were any costs included for potential liability
to restore and clean up damages, if any, caused by past operating practices.
Santa Fe informed us that it has furnished us all of the accounts, records,
geological and engineering data and reports and other data required for our
investigation. The ownership interests, terms of the Trust, prices, taxes, and
other factual data furnished to us in connection with our investigation were
accepted as represented. The estimates presented in this report are based on
data available through July, 1993.
The reserves included in this report are estimates only and should not be
construed as being exact quantities. They may or may not be actually recovered.
Estimates of proved reserves may increase or decrease as a result of future
operations of Santa Fe. Moreover, due to the nature of the Net Profits
Royalties, a change in the future costs, or prices, or capital expenditures
different from those projected herein may result in a change in the computed
reserves and the Net Proceeds to the Trust even if there are no revisions or
additions to the gross reserves attributed to the property.
The future production rates from properties now on production may be more or
less than estimated because of changes in market demand or allowables set by
regulatory bodies. In general, we estimate that gas production rates will
continue to be the same as the average rate for the latest available 12 months
of actual production until such time that the well or wells are incapable of
producing at this rate. The well or wells are then projected to decline at their
decreasing delivery capacity rate. Our general policy on estimates of future gas
production rates is adjusted when necessary to reflect actual gas market
conditions in specific cases. Properties which are not currently producing may
start producing earlier or later than anticipated in our estimates of their
future production rates.
The future prices received for the sale of the production may be higher or
lower than the prices used in this report as described above, and the operating
costs and other costs relating to such production may also increase or decrease
from existing levels; however, such possible changes in prices and costs were,
in accordance with rules adopted by the Securities and Exchange Commission,
omitted from consideration in preparing this report.
RYDER SCOTT COMPANY PETROLEUM ENGINEERS
22
<PAGE>
Neither Ryder Scott Company nor any of its employees has any interest in the
subject properties and neither the employment to make this study nor the
compensation is contingent on our estimates of reserves and future cash inflows
for the subject properties.
Very truly yours,
RYDER SCOTT COMPANY
PETROLEUM ENGINEERS
/s/ Fred W. Ziehe
Fred W. Ziehe, P.E.
Group Vice President
FWZ/db
RYDER SCOTT COMPANY PETROLEUM ENGINEERS
23
<PAGE>
The value of the Depositary Units and the Trust Units evidenced thereby are
substantially dependent upon the proved reserves and production levels
attributable to the Royalty Interests. There are many uncertainties inherent in
estimating quantities and values of proved reserves and in projecting future
rates of production and the timing of development expenditures. The reserve data
set forth herein, although prepared by independent engineers in a manner
customary in the industry, are estimates only, and actual quantities and values
of oil and gas are likely to differ from the estimated amounts set forth herein.
In addition, the discounted present values shown herein were prepared using
guidelines established by the Commission for disclosure of reserves and should
not be considered representative of the market value of such reserves or the
Depositary Units or the Trust Units evidenced thereby. A market value
determination would include many additional factors.
Distributions to Holders could be adversely affected if any of the hazards
typically associated with the development, production and transportation of oil
and gas were to occur, including personal injuries, property damage, damage to
productive formations or equipment and environmental damages. Uninsured costs
for damages from any of the foregoing will directly reduce payments to the Trust
from those Royalty Properties that are working interests, and will reduce
payments to the Trust from those Royalty Properties that are royalties and
overriding royalties to the extent such damages reduce the volumes of oil and
gas produced.
In contrast to the Net Profits Royalties, which have no contractually
imposed production limitations, the Wasson Royalties have been structured with
quarterly production limitations. Thus, the Trust and Holders will not receive
cash distributions from oil production from the two Wasson production units
burdened by the Wasson Royalties in excess of such amounts. While the Wasson ODC
Unit is expected to produce at levels substantially in excess of the applicable
production limitations, failure of actual production from either of the two
Wasson production units to meet or exceed the applicable quarterly production
limitations will reduce amounts payable in respect of the Wasson Royalties.
GAS PRODUCTION
At December 31, 1993, approximately 25 percent of the estimated future net
revenues from proved reserves of the Royalty Interests, on an equivalent basis,
was attributable to gas. Thus, the revenues of the Trust and the amount of cash
distributions to Holders will be dependent upon, among other things, the volume
of gas produced and the price at which such gas is sold. Since the early 1980s,
the available gas production capacity nationwide has exceeded the demand by
users of such gas, resulting in demand-related production curtailments. No
assurances can be made that curtailments will not continue to exist. In
addition, excess gas production capacity in the United States has generally
resulted in downward pressure on gas prices. The effect of any excess production
capacity which exists in the future cannot be predicted with certainty; however,
any such excess capacity may have a material adverse effect on Trust
distributions through its impact on prices and production volumes.
Due to the seasonal nature of demand for gas and its effect on sales prices
and production volumes, the amount of cash distributions by the Trust that is
attributable to gas production may vary substantially on a seasonal basis.
Generally, gas production volumes and prices tend to be higher during the first
and fourth quarters of the calendar year. Because of the lag between Santa Fe's
receipt of revenues related to the Net Profits Properties and the dates on which
distributions are made to Holders, however, any seasonality that affects
production and prices generally should be reflected in distributions to Holders
in later periods.
PROCEEDS, PRODUCTION AND AVERAGE PRICES
Reference is made to 'Results of Operations' under Item 7 of this Form 10-K.
ASSETS
Reference is made to Item 6 of this Form 10-K for information relating to
the assets of the Trust.
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<PAGE>
DEFINITIONS
As used herein, the following terms have the meanings indicated: 'Mcf' means
thousand cubic feet, 'MMcf' means million cubic feet, 'Bbl' means barrel
(approximately 42 U.S. gallons), and 'MBbl' means thousand barrels.
COMPETITION AND MARKETS
COMPETITION. The oil and gas industry is highly competitive in all of its
phases. Santa Fe and the other operators of the Royalty Properties will
encounter competition from major oil and gas companies, international energy
organizations, independent oil and gas concerns, and individual producers and
operators. Many of these competitors have greater financial and other resources
than Santa Fe and the other operators of the Royalty Properties. Competition may
also be presented by alternative fuel sources, including heating oil and other
fossil fuels.
MARKETS. Production attributable to Santa Fe's royalty interests in the
Wasson ODC Unit and the Wasson Willard Unit is marketed by Santa Fe and is in
some cases sold at the wellhead at market responsive prices that approximate
spot oil prices for West Texas sour crude, and in other cases is sold at points
within common carrier pipeline systems on terms whereby Santa Fe pays the cost
of transporting same to such points.
With respect to the Net Profits Properties, where such properties consist of
royalty interests, the operators of the properties will make all decisions
regarding the marketing and sale of oil and gas production. Although Santa Fe
generally has the right to market oil and gas produced from the Royalty
Properties that are working interests, Santa Fe generally relies on the
operators of the properties to market the production. The ability of the
operators to market the oil and gas produced from the Royalty Properties will
depend upon numerous factors beyond their control, including the extent of
domestic production and imports of oil and gas, the proximity of the gas
production to gas pipelines, the availability of capacity in such pipelines, the
demand for oil and gas by utilities and other end-users, the effects of
inclement weather, state and Federal regulation of oil and gas production and
Federal regulation of gas sold or transported in interstate commerce. There is
no assurance that such operators will be able to market all of the oil or gas
produced from the Royalty Properties or that favorable prices can be obtained
for the oil and gas produced.
The supply of gas capable of being produced in the United States has
exceeded demand in recent years as a result of decreased demand for gas in
response to economic factors, conservation, lower prices for alternative energy
sources and other factors. As a result of this excess supply of gas, gas
producers have experienced increased competitive pressure and significantly
lower prices. Many gas pipelines have reduced their takes from producers below
the amounts they were contractually obligated to take or pay at fixed prices in
excess of spot prices or have renegotiated their obligations to reflect more
market responsive terms. The decline in demand for gas has resulted in many
pipelines reducing or ceasing altogether their purchase of new gas.
Substantially all of the gas production from the Net Profits Properties is sold
at market responsive prices.
Demand for gas production has historically been seasonal in nature. Due to
unseasonably warm weather over the last several years, the demand for gas has
decreased, resulting in lower prices received by producers during the winter
months than in prior years. Consequently, on an energy equivalent basis, gas has
been sold at a discount to oil for the past several years. Such price
fluctuations will directly impact Trust distributions, estimates of Trust
reserves and estimated future net revenues from Trust reserves.
In view of the many uncertainties affecting the supply and demand for oil,
gas and refined petroleum products, Santa Fe is unable to make reliable
predictions of future oil and gas prices and demand or the overall effect they
will have on the Trust. Santa Fe does not believe that the loss of any of its
purchasers would have a material adverse effect on the Trust, since
substantially all of the oil and gas sales from the Royalty Properties are made
on the spot market at market responsive prices.
25
<PAGE>
GOVERNMENTAL REGULATION
OIL AND GAS REGULATION
The production, transportation and sale of oil and gas from the Royalty
Properties are subject to Federal and state governmental regulation, including
regulations concerning maximum allowable rates of production, regulation of
tariffs charged by pipelines, taxes, the prevention of waste, the conservation
of oil and gas, pollution controls and various other matters. The United States
has governmental power to permit increases in the amount of oil imported from
other countries and to impose pollution control measures.
FEDERAL REGULATION OF GAS. The Net Profits Properties are subject to the
jurisdiction of the Federal Energy Regulatory Commission (FERC) and the
Department of Energy with respect to various aspects of oil and gas operations
including marketing and production of oil and gas. The Natural Gas Act and the
Natural Gas Policy Act of 1978 (Policy Act) mandate Federal regulation of
interstate transportation of gas and of wellhead pricing of certain domestic
gas, depending on the category of the gas and the nature of the sale. In July
1989, however, Congress enacted the Natural Gas Wellhead Decontrol Act of 1989
that eliminated wellhead price controls on all domestic gas effective January 1,
1993.
In 1992, FERC issued Orders Nos. 636 and 636-A which generally opened access
to interstate pipelines by requiring the operators of such pipelines to unbundle
their transportation services which historically were combined with their sales
services and allow customers to choose and pay for only the services they
require, regardless of whether the customer purchases gas from such pipelines or
from other suppliers. The orders also require upstream pipelines to permit
downstream pipelines to assign upstream capacity to their shippers, and place
analogous, unbundled access requirements on the downstream pipelines. Although
these regulations should generally facilitate the transportation of gas produced
from the Net Profits Properties and the direct access to end user markets, the
impact of FERC Order Nos. 636 and 636-A on marketing production from the Net
Profits Properties cannot be predicted at this time. A number of parties which
are aggrieved by the FERC's Order No. 636 program have filed petitions for
review of these orders which are now pending in various U.S. Courts of Appeal.
Numerous questions have been raised concerning the interpretation and
implementation of several significant provisions of the Natural Gas Act and the
Policy Act (collectively, Acts), and of the regulations and policies promulgated
by FERC thereunder. A number of lawsuits and administrative proceedings have
been instituted which challenge the validity of regulations implementing the
Acts. In addition, FERC currently has under consideration various policies and
proposals in addition to those discussed above that may affect the marketing of
gas under new and existing contracts. Accordingly, Santa Fe is unable to
estimate the full impact that the Acts and the regulations issued thereunder by
FERC may have on the Net Profits Properties.
LEGISLATIVE PROPOSALS. In the past, Congress has been very active in the
area of gas regulation. Recently enacted legislation repeals incremental pricing
requirements and gas use restraints previously applicable. There are other
legislative proposals pending in the Federal and state legislatures which, if
enacted, would significantly affect the petroleum industry. At the present time,
it is impossible to predict what proposals, if any, might actually be enacted by
Congress or the various state legislatures and what effect, if any, such
proposals might have on the Royalty Properties and the Trust.
STATE REGULATION. Many state jurisdictions have at times imposed
limitations on the production of gas by restricting the rate of flow for gas
wells below their actual capacity to produce and by imposing acreage limitations
for the drilling of a well. States may also impose additional regulation of
these matters. Most states regulate the production and sale of oil and gas,
including requirements for obtaining drilling permits, the method of developing
new fields, provisions for the unitization or pooling of oil and gas properties,
the spacing, operation, plugging and abandonment of wells and the
26
<PAGE>
prevention of waste of oil and gas resources. The rate of production may be
regulated and the maximum daily production allowable from oil and gas wells may
be established on a market demand or conservation basis or both.
ENVIRONMENTAL REGULATION
GENERAL. Activities on the Royalty Properties are subject to existing
Federal, state and local laws and regulations governing environmental quality
and pollution control. It is anticipated that, absent the occurrence of an
extraordinary event, compliance with existing Federal, state and local laws,
rules and regulations regulating the discharge of materials into the environment
or otherwise relating to the protection of the environment will not have a
material effect upon the Trust. Santa Fe cannot predict what effect additional
regulation or legislation, enforcement policies thereunder, and claims for
damages to property, employees, other persons and the environment resulting from
operations on the Royalty Properties could have on the Trust.
SOLID AND HAZARDOUS WASTE. The Royalty Properties include numerous
properties that have produced oil and gas for many years and that have been
owned by Santa Fe for only a relatively short time. Although, to Santa Fe's
knowledge, the operators have utilized operating and disposal practices that
were standard in the industry at the time, hydrocarbons or other solid wastes
may have been disposed or released on or under the Royalty Properties by the
current or previous operator. State and Federal laws applicable to oil and gas
wastes and properties have become increasingly more stringent. Under these new
laws, Santa Fe or an operator of the Royalty Properties could be required to
remove or remediate previously disposed wastes or property contamination
(including groundwater contamination) or to perform remedial plugging operations
to prevent future contamination.
The operators of the Royalty Properties may generate wastes that are subject
to the Federal Resource Conservation and Recovery Act and comparable state
statutes. The Environmental Protection Agency (EPA) has limited the disposal
options for certain hazardous wastes and is considering the adoption of more
stringent disposal standards for nonhazardous wastes. Furthermore, it is
anticipated that additional wastes (which could include certain wastes generated
by oil and gas operations) will be designated as 'hazardous wastes', which are
subject to more rigorous and costly disposal requirements.
SUPERFUND. The Comprehensive Environmental Response, Compensation and
Liability Act (CERCLA), also known as the 'superfund' law, imposes liability,
without regard to fault or the legality of the original conduct, on certain
classes of persons that contributed to the release of a 'hazardous substance'
into the environment. These persons include the owner and operator of a site and
companies that disposed or arranged for the disposal of the hazardous substance
found at a site. CERCLA also authorizes the EPA and, in some cases, third
parties to take actions in response to threats to the public health or the
environment and to seek to recover from the responsible classes of persons the
costs of such action. In the course of their operations, the operators of the
Royalty Properties have generated and will generate wastes that may fall within
CERCLA's definition of 'hazardous substances.' Santa Fe or the operators of the
Royalty Properties may be responsible under CERCLA for all or part of the costs
to clean up sites at which such wastes have been disposed.
AIR EMISSIONS. The operators of the Royalty Properties are subject to
Federal, state and local regulations concerning the control of emissions from
sources of air pollution. Administrative enforcement actions for failure to
comply strictly with air regulations or permits are generally resolved by
payment of a monetary penalty and correction of any identified deficiencies.
Alternatively, regulatory agencies could require the operators to forego
construction or operation of certain air pollution emission sources.
OSHA. The operators of the Royalty Properties are subject to the
requirements of the Federal Occupational Safety and Health Act (OSHA) and
comparable state statutes. The OSHA hazard communication standard, the EPA
community right-to-know regulations under Title III of the Federal Superfund
Amendment and Reauthorization Act and similar state statutes require an
27
<PAGE>
operator to organize information about hazardous materials used or produced in
its operations. Certain of this information must be provided to employees, state
and local government authorities and local citizens.
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
year ended December 31, 1993.
28
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED HOLDER MATTERS.
The Depositary Units are traded on the New York Stock Exchange -- ticker
symbol SFF. The high and low closing sales prices and distributions for the
quarter ended December 31, 1992 and each quarter in the year ended December 31,
1993 were as follows (in dollars):
CLOSING SALES PRICES
DISTRIBUTION
LOW HIGH PAID
1992
Fourth Quarter (beginning November 13) 17.875 19.875 --
1993
First Quarter---------------------- 18.00 19.75 0.30753
Second Quarter--------------------- 19.375 20.875 0.46660
Third Quarter---------------------- 19.625 22.00 0.49485
Fourth Quarter--------------------- 19.625 23.625 0.44218
At March 25, 1994, the 6,300,000 Depositary Units outstanding were held by
480 Holders of record.
ITEM 6. SELECTED FINANCIAL DATA.
1993 1992
(THOUSANDS OF DOLLARS,
EXCEPT AS NOTED)
Period Ended December 31:
Distributable Cash----------------- 10,781 --
Distributable Cash per Trust Unit
(in dollars)--------------------- 1.71116 --
At December 31:
Investment in Royalty Interests,
net------------------------------ 77,356 87,276
Trust Corpus----------------------- 77,301 87,277
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
GENERAL; LIQUIDITY AND CAPITAL RESOURCES
The Trust is a passive entity with the Trustee's primary responsibility
being the collection and distribution of proceeds from the Wasson Royalties and
the Net Profits Royalties and the payment of Trust liabilities and expenses (see
Note 1 to the financial statements of the Trust).
The Trust's results of operations are dependent upon the difference between
the prices received for oil and gas and the costs of producing such resources.
Since, on an equivalent basis, approximately eighty percent of the Trust's
proved reserves are crude oil, even relatively modest changes in crude oil
prices may significantly affect the Trust's revenues and results of operations.
Crude oil prices are subject to significant changes in response to fluctuations
in the world supply, economic conditions in the United States and elsewhere, the
world political situation as it affects OPEC, the Middle East (including the
current embargo of Iraqi crude oil from worldwide markets) and other producing
countries, the actions of OPEC and governmental regulation. In addition, a
substantial portion of the Trust's revenues come from properties which produce
sour (i.e. high sulfur content) crude oil which sells at prices lower than
sweeter (i.e. low sulfur) crude oils. The sales price of crude oil dropped
significantly in the fourth quarter of 1993, as reflected in the average prices
with respect to the royalty payment received in the first quarter of 1994 (see
Results of Operations). For factors affecting the sale of natural gas see Item
1. Business--Gas Production.
29
<PAGE>
Cash proceeds from the Royalty Properties in the first quarter of 1994
included a Support Payment of $362,000, primarily due to lower realized oil
prices and capital expenditures incurred with respect to certain Royalty
Properties, a substantial portion of which relates to the drilling of new wells.
Based on current prices, it is expected that cash proceeds from the Royalty
Properties in the second quarter of 1994, which relates to operations of the
Royalty Properties in the first quarter of 1994, will include a Support
Payment, the amount of which has not been determined.
In addition to costs and expenses related to the Royalty Properties, Trust
administrative expenses are estimated to be approximately $450,000 annually,
including approximately $250,000 for legal, accounting, engineering, trustee and
other administrative fees and a $200,000 annual fee to Santa Fe, which will
increase by 3.5 percent per year. In addition, Santa Fe paid approximately
$379,000 in Trust formation costs of which $271,000 was recovered in 1993 and
$108,000 was recovered in the first quarter of 1994.
30
<PAGE>
RESULTS OF OPERATIONS
The following table reflects pertinent information with respect to the cash
proceeds from the Royalty Properties and the net distributable cash of the Trust
for the year 1993 and the first quarter of 1994 (in thousands of dollars, except
as noted):
<TABLE>
<CAPTION>
1993 1994
FIRST SECOND THIRD FOURTH FIRST
QUARTER QUARTER QUARTER QUARTER YEAR QUARTER(A)
<S> <C> <C> <C> <C> <C> <C>
VOLUMES AND PRICES
Oil Volumes (Bbls)
Wasson ODC Royalty--------------- 8,400 41,600 41,600 41,600 133,200 67,576
Wasson Willard Royalty----------- 23,357 35,500 35,500 35,500 129,857 35,500
Net Profits Royalties------------ 52,855 76,106 92,332 84,635 305,928 79,472
Gas Volumes (Mcf)
Net Profits Royalties------------ 588,011 804,261 752,541 827,369 2,972,182 713,628
Oil Average Prices ($/Bbl)
Wasson ODC Royalty--------------- 17.83 17.62 17.39 15.35 16.85 13.94
Wasson Willard Royalty----------- 17.83 17.59 17.35 15.34 16.95 14.23
Net Profits Royalties------------ 19.82 17.30 16.74 15.28 17.01 14.18
Gas Average Prices ($/Mcf)
Net Profits Royalties------------ 1.77 2.00 1.98 1.92 1.93 1.93
CASH PROCEEDS AND
DISTRIBUTABLE CASH
Wasson ODC Royalty
Sales---------------------------- 150 733 724 638 2,245 942
Expenses------------------------- (70) (126) (126) (121) (443) (119)
80 607 598 517 1,802 823
Wasson Willard Royalty
Sales---------------------------- 416 625 616 544 2,201 505
Expenses------------------------- (59) (89) (88) (84) (320) (83)
357 536 528 460 1,881 422
Net Profits Royalties
Sales---------------------------- 2,089 2,925 3,037 2,887 10,938 2,509
Expenses------------------------- (556) (953) (822) (930) (3,261) (1,021)
1,533 1,972 2,215 1,957 7,677 1,488
Total Royalties-------------------- 1,970 3,115 3,341 2,934 11,360 2,733
Administrative Fee to
Santa Fe------------------------- (33) (50) (50) (50) (183) (50)
Trust Formation Costs-------------- -- (75) (98) (98) (271) (108)
Cash Advance From Santa Fe--------- -- -- 25 30 55 --
Repayment of Cash Advance from
Santa Fe------------------------- -- -- -- -- -- (55)
Cash Withheld for Trust
Expenses------------------------- -- (50) (100) (30) (180) --
Distributable Cash----------------- 1,937 2,940 3,118 2,786 10,781 2,520
Distributable Cash Per Trust Unit
(in dollars)--------------------- 0.30753 0.46660 0.49485 0.44218 1.71116 0.40000
(a) Includes a Support Payment of $362,000, or $0.0575 per Trust Unit. The
Support Payment was required primarily due to lower realized oil prices and
capital expenditures incurred with respect to certain Royalty Properties, a
substantial portion of which relates to the drilling of new wells.
</TABLE>
31
<PAGE>
Volumes with respect to the Wasson ODC Royalty and the Wasson Willard
Royalty increased in periods subsequent to the first quarter of 1993 because (i)
the first quarter of 1993 represented the initial quarter of operations of the
Trust and included only two months of operations with respect to such royalties
and (ii) there was an increase in the maximum net quarterly production in
accordance with the royalty conveyance beginning in the second quarter of 1993.
Volumes increased from the first quarter of 1993 with respect to the Net Profits
Royalties generally reflecting that the first quarter of 1993 included only two
months of operations with respect to such properties.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
PAGE IN
THIS
FORM 10-K
Audited Financial Statements
Report of Independent Accountants-------------------- 34
Statement of Cash Proceeds and
Distributable Cash for the Year
Ended December 31, 1993---------------------------- 35
Statement of Assets, Liabilities
and Trust Corpus as of December
31, 1993 and 1992---------------------------------- 35
Statement of Changes in Trust
Corpus for the Year Ended
December 31, 1993 and the
Period from Inception (October
22, 1992) to December 31, 1992--------------------- 36
Notes to Financial Statements------------------------ 37
Unaudited Financial Information
Supplemental Information to the
Financial Statements------------------------------- 39
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 Holders
of a majority of the Trust Units then outstanding at a meeting of the Holders 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.
Not Applicable.
(b) Security Ownership of Management.
Not applicable.
(c) Changes in Control.
The 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.
Marc J. Shapiro, a director of Santa Fe, is Chairman and Chief Executive
Officer of the Trustee. The Trustee is the Agent and a principal lender to Santa
Fe under an Amended and Restated Revolving Credit Agreement (the Credit
Agreement). As of March 31, 1994 approximately $70 million was outstanding under
the Credit Agreement. In the opinion of Santa Fe, the terms of the Credit
Agreement and the fees and interest rates thereunder are within the range of
normal and customary bank credit transactions involving energy borrowers of
similar size and credit.
32
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(A)(1) FINANCIAL STATEMENTS
The following financial statements are included in this Annual Report on
Form 10-K on the pages as indicated:
PAGE IN
THIS
FORM 10-K
Report of Independent Accountants--------------------------- 34
Statement of Cash Proceeds and
Distributable Cash for the Year
Ended December 31, 1993----------------------------------- 35
Statement of Assets, Liabilities and
Trust Corpus as of December 31,
1993 and 1992--------------------------------------------- 35
Statement of Changes in Trust Corpus
for the Year Ended December 31,
1993 and the Period from Inception
(October 22, 1992) to December 31, 1992------------------ 36
Notes to Financial Statements------------------------------ 37
(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.)
SEC FILE OR
REGISTRATION EXHIBIT
NUMBER NUMBER
3(a)* Form of Trust Agreement of Santa Fe
Energy Trust------------------------- 33-51760 3.1
4(a)* Form of Custodial Deposit
Agreement---------------------------- 33-51760 4.2
4(b)* Form of Secure Principal Energy
Receipt (included as
Exhibit A to Exhibit 4(a))----------- 33-51760 4.1
10(a)* Form of Net Profits Conveyance
(Multi-State)------------------------ 33-51760 10.1
10(b)* Form of Wasson Conveyance------------ 33-51760 10.2
10(c)* Form of Louisiana Mortgage----------- 33-51760 10.3
(B) REPORTS ON FORM 8-K
No reports on Form 8-K were filed with the Securities and Exchange
Commission during the year ended December 31, 1993.
33
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Unitholders and Trustee
of the Santa Fe Energy Trust
We have audited the financial statements listed in the index appearing under
Item 14(a)(1) on page 33. 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 the
Trustee, as well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
As described in Note 2, these financial statements have been prepared on the
basis of cash receipts and disbursements, which is a comprehensive basis of
accounting other than generally accepted accounting principles.
In our opinion, the financial statements audited by us present fairly, in
all material respects, the financial position of the Santa Fe Energy Trust at
December 31, 1993 and 1992, the cash proceeds and distributable cash for the
year ended December 31, 1993 and the changes in trust corpus for the year ended
December 31, 1993 and the period from inception (October 22, 1992) to December
31, 1992, on the basis of accounting described in Note 2.
PRICE WATERHOUSE
Houston, Texas
March 25, 1994
34
<PAGE>
SANTA FE ENERGY TRUST
STATEMENT OF CASH PROCEEDS AND DISTRIBUTABLE CASH
(DOLLARS IN THOUSANDS, EXCEPT AS NOTED)
YEAR ENDED
DECEMBER 31, 1993
Royalty Income
ODC Royalty---------------------- $ 1,802
Willard Royalty------------------ 1,881
Net Profits Royalty-------------- 7,677
Total Royalties---------------------- 11,360
Administrative Fee to Santa Fe------- (183)
Trust Formation Costs---------------- (271)
Advance from Santa Fe Energy
Resources, Inc.-------------------- 55
Cash Withheld for Trust Expenses----- (180)
Distributable Cash------------------- $ 10,781
Distributable Cash per Trust Unit (in
dollars)--------------------------- $ 1.71116
Trust Units Outstanding
(thousands)-------------------------- 6,300
STATEMENT OF ASSETS, LIABILITIES AND TRUST CORPUS
(DOLLARS IN THOUSANDS)
ASSETS
DECEMBER 31, DECEMBER 31,
1993 1992
Current Assets
Cash----------------------------- $ -- $ 1
Investment in Royalty Interests, at
cost------------------------------- 87,276 87,276
Less: Accumulated Amortization------- (9,920) --
77,356 87,276
$ 77,356 $ 87,277
LIABILITIES AND TRUST CORPUS
Advance from Santa Fe Energy
Resources, Inc.-------------------- $ 55 $ --
Trust Corpus (6,300,000 Trust Units
issued and outstanding)------------ 77,301 87,277
$ 77,356 $ 87,277
The accompanying notes are an integral part of these financial statements.
35
<PAGE>
SANTA FE ENERGY TRUST
STATEMENT OF CHANGES IN TRUST CORPUS
(IN THOUSANDS OF DOLLARS)
Balance at Inception (October 22, 1992)------ $ 1
Issuance of Trust Units for Royalty
Interests-------------------------------- 87,276
Balance at December 31, 1992----------------- 87,277
Cash Proceeds------------------------------ 10,906
Cash Distributions------------------------- (10,781)
Trust Expenses----------------------------- (181)
Amortization of Royalty Interests---------- (9,920)
Balance at December 31, 1993----------------- $ 77,301
The accompanying notes are an integral part of these financial statements.
36
<PAGE>
SANTA FE ENERGY TRUST
NOTES TO FINANCIAL STATEMENTS
(1) THE TRUST
Santa Fe Energy Trust (the 'Trust') was formed on October 22, 1992, with
Texas Commerce Bank National Association as trustee (the 'Trustee'), to acquire
and hold certain royalty interests (the 'Royalty Interests') in certain
properties (the 'Royalty Properties') conveyed to the Trust by Santa Fe Energy
Resources, Inc. ('Santa Fe'). The Royalty Interests consist of two term royalty
interests in two production units in the Wasson field in west Texas (the 'Wasson
Royalties') and a net profits royalty interest in certain royalty and working
interests in a diversified portfolio of properties located in twelve states (the
'Net Profits Royalties'). The Royalty Interests are passive in nature and the
Trustee has no control over or responsibility relating to the operation of the
Royalty Properties. The Trust will be liquidated on February 15, 2008 (the
'Liquidation Date').
In November 1992, 5,725,000 Depositary Units, each consisting of beneficial
ownership of one unit of undivided beneficial interest in the Trust ('Trust
Units') and a $20 face amount beneficial ownership interest in a $1,000 face
amount zero coupon United States Treasury obligation maturing on or about
February 15, 2008, were sold in a public offering for $20 per Depositary Unit. A
total of $114.5 million was recieved from public investors, of which $38.7
million was used to purchase the Treasury obligations and $5.7 million was used
to pay underwriting commissions and discounts. Santa Fe received the remaining
$70.1 million and 575,000 Depositary Units. In the first quarter of 1994 Santa
Fe sold in a public offering the 575,000 Depositary Units which it held.
The trust agreement under which the Trust was formed (the 'Trust Agreement')
provides, among other things, that:
* the Trustee shall not engage in any business or commercial activity
or acquire any asset other than the Royalty Interests initially
conveyed to the Trust;
* the Trustee may not sell all or any portion of the Wasson Royalties
or substantially all of the Net Profits Royalties without the prior
consent of Santa Fe;
* Santa Fe may sell the Royalty Properties, subject to and burdened
by the Royalty Interests, without consent of the holders of the
Trust Units; following any such transfer, the Royalty Properties
will continue to be burdened by the Royalty Interests and after any
such transfer the royalty payment attributable to the transferred
property will be calculated separately and paid by the transferee;
* the Trustee may establish a cash reserve for the payment of any
liability which is contingent, uncertain in amount or that is not
currently due and payable;
* the Trustee is authorized to borrow funds required to pay
liabilities of the Trust, provided that such borrowings are repaid
in full prior to further distributions to the holders of the Trust
Units;
* the Trustee will make quarterly cash distributions to the holders
of the Trust Units.
(2) BASIS OF ACCOUNTING
The financial statements of the Trust are prepared on the cash basis of
accounting for revenues and expenses. Royalty income is recorded when received
(generally during the quarter following the end of the quarter in which the
income from the Royalty Properties is received by Santa Fe) and is net of any
cash basis exploration and development expenditures. Expenses of the Trust,
which will include accounting, engineering, legal, and other professional fees,
Trustee fees, an administrative fee paid to Santa Fe and out-of-pocket expenses,
are recognized when paid. Under generally accepted accounting principles,
revenues and expenses would be recognized on an accrual basis. Amortization of
the Trust's investment in Royalty Interests is recorded using the
unit-of-production method in the period in which the cash is received with
respect to such production. No royalty income was received and no Trust expenses
were paid during the period from inception (October 22, 1992) through December
31, 1992 (see Note 4).
37
<PAGE>
SANTA FE ENERGY TRUST
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The conveyance of the Royalty Interests to the Trust was accounted for as a
purchase transaction. The $87,276,000 reflected in the Statement of Assets and
Trust Corpus as Investment in Royalty Interests represents 6,300,000 Trust Units
valued at $20 per unit less the $38,724,000 paid for the Treasury obligations.
The carrying value of the Trust's investment in the Royalty Interests is not
necessarily indicative of the fair value of such Royalty Interests.
The Trust is a grantor trust and as such is not subject to income taxes and
accordingly no recognition has been given to income taxes in the Trust's
financial statements. The tax consequences of owning Trust Units are included in
the income tax returns of the individual Trust Unit holders.
During 1993 net cash proceeds (before deducting Trust expenses) exceeded
cash distributions by $125,000. In order to pay current Trust expenses Santa Fe
advanced the Trust $55,000, which amount was due to Santa Fe at December 31,
1993.
(3) THE ROYALTY INTERESTS
The Wasson Royalties consist of interests conveyed out of Santa Fe's royalty
interest in the Wasson ODC Unit (the 'ODC Royalty') and the Wasson Willard Unit
(the 'Willard Royalty'). The ODC Royalty entitles the Trust to receive quarterly
royalty payments with respect to 12.3934% of the actual gross oil production
from the Wasson ODC Unit, subject to certain quarterly limitations set forth in
the conveyance agreement, for the period from November 1, 1992 to December 31,
2007. The Willard Royalty entitles the Trust to receive quarterly royalty
payments with respect to 6.8355% of the actual gross oil production from the
Wasson Willard Unit, subject to certain quarterly limitations set forth in the
conveyance agreement, for the period from November 1, 1992 to December 31, 2003.
The Net Profits Royalties entitle the Trust to receive, on a quarterly
basis, 90% of the net proceeds, as defined in the conveyance agreement, from the
sale of production from the properties subject to the conveyance agreement. The
Net Profits Royalties are not limited in term, although the Trustee is required
to sell such royalties prior to the Liquidation Date.
For any calendar quarter ending on or prior to December 31, 2002, the Trust
will receive additional royalty payments ('Support Payments') to the extent it
needs such payments to distribute $0.40 per Trust Unit per quarter (two-thirds
of such amount for the period ended December 31, 1992). Such Support Payments
are limited to Santa Fe's remaining royalty interest in the Wasson ODC Unit. If
such Support Payments are received, certain proceeds otherwise payable to the
Trust in subsequent quarters may be reduced to recoup the amount of such Support
Payments. The aggregate of the Support Payments, net of any amounts recouped,
will be limited to $20,000,000 on a revolving basis. The royalty payment
received by the Trust in the first quarter of 1994 included a Support Payment of
$362,000, or $0.0575 per Trust Unit.
(4) DISTRIBUTIONS TO TRUST UNIT HOLDERS
The Trust has received royalty payments and made distributions as follows
(in thousands of dollars, except as noted):
ROYALTY DISTRIBUTIONS
PAYMENT PER TRUST UNIT
RECEIVED AMOUNT (IN DOLLARS)
1993
First quarter-------------------- 1,937 1,937 0.30753
Second quarter------------------- 2,990 2,940 0.46660
Third quarter-------------------- 3,193 3,118 0.49485
Fourth quarter------------------- 2,786 2,786 0.44218
Total year------------------- 10,906 10,781 1.71116
1994
First quarter (a)---------------- 2,575 2,520 0.40000
(a) Includes a Support Payment of $362,000, or $0.0575 per Trust Unit.
38
<PAGE>
SUPPLEMENTAL INFORMATION TO FINANCIAL STATEMENTS (UNAUDITED)
OIL AND GAS RESERVES
The following table sets forth the Royalty Interests' proved oil and gas
reserves (all located in the United States) at December 31, 1993 and 1992
prepared by Ryder Scott Company, independent petroleum consultants. Proved
reserve quantities for each of the Wasson Royalties are calculated by
multiplying the net revenue interest attributable to each of the Wasson
Royalties in effect for a given year by the total amount of oil estimated to be
economically recoverable from the respective production units (subject to
limitation by applicable maximum quarterly production amounts). Reserve
quantities are calculated differently for the Net Profits Royalties because such
interests do not entitle the Trust to a specific quantity of oil or gas but to
the Net Proceeds derived therefrom. Proved reserves attributable to the Net
Profits Royalties are calculated by deducting from estimated quantities of oil
and gas reserves an amount of oil and gas sufficient, if sold at the prices used
in preparing the reserve estimates for the Net Profits Royalties, to pay the
future estimated costs and expenses deducted in the calculation of Net Proceeds
with respect to the Net Profits Royalties. Accordingly, the reserves presented
for the Net Profits Royalties reflect quantities of oil and gas that are free of
future costs or expenses if the price and cost assumptions set forth in the
applicable reserve report occur.
CRUDE OIL AND NATURAL GAS
LIQUIDS (MBBLS) (MMCF)
Proved reserves at December 31,
1992------------------------------- 7,258 12,638
Revisions to previous
estimates---------------------- 1,169 1,351
Extensions, discoveries and other
additions 9 230
Production----------------------- (667) (3,098)
Proved reserves at December 31,
1993------------------------------- 7,769 11,121
Proved developed reserves at December 31,
1992----------------------------- 7,169 12,500
1993----------------------------- 7,765 10,900
Proved reserves are estimated quantities of crude oil and natural gas which
geological and engineering data indicate with reasonable certainty to be
recoverable in future years from known reservoirs under existing economic and
operating conditions. Proved developed reserves are proved reserves which can be
expected to be recovered through existing wells with existing equipment and
operating methods.
ESTIMATED PRESENT VALUE OF FUTURE NET CASH FLOWS
Estimated future net cash flows from the Royalty Interests' proved oil and
gas reserves at December 31, 1993 and 1992 are presented in the following table
(in thousands of dollars):
DECEMBER 31,
1993 1992
Net future cash flows---------------- 107,544 138,005
Discount at 10% for timing of cash
flows-------------------------------- (42,228) (59,503)
Present value of future net cash
flows for proved reserves------------ 65,316 78,502
39
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The following table sets forth the changes in the present value of estimated
future net cash flows from proved reserves during the year ended December 31,
1993 (in thousands of dollars):
Balance at December 31, 1992-------------------------- 78,502
Royalties, net of related property taxes (a)------ (12,123)
Extensions, discoveries and other additions------- 733
Net changes in prices and costs------------------- (19,307)
Changes in estimated volumes---------------------- 9,866
Interest factor -- accretion of discount---------- 7,645
(13,186)
Balance at December 31, 1993-------------------------- 65,316
(a) Relates to the operations of the Royalty Properties for the year ended
December 31, 1993, the proceeds from which were received by the Trust during
the second, third and fourth quarters of 1993 and the first quarter of 1994.
Estimated future cash flows represent an estimate of future net revenues
from the production of proved reserves using estimated sales prices and
estimates of the production costs, ad valorem and production taxes, and future
development costs necessary to produce such reserves. No deduction has been made
for depletion, depreciation or any indirect costs such as professional and
administrative fees.
The sales prices used in the calculation of estimated future net cash flows
are based on the prices in effect at year end. Such prices have been held
constant except for known and determinable escalations.
Operating costs and ad valorem and production taxes are estimated based on
current costs with respect to producing oil and gas properties. Future
development costs are based on the best estimate of such costs assuming current
economic and operating conditions.
The information presented with respect to estimated future net revenues and
cash flows and the present value thereof is not intended to represent the fair
value of oil and gas reserves. Actual future sales prices and production and
development costs may vary significantly from those in effect at December 31,
1993 and 1992 and actual future production may not occur in the periods or
amounts projected. This information is presented to allow a reasonable
comparison of reserve values prepared using standardized measurement criteria
and should be used only for that purpose.
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SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR L5(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 ON THIS 30TH DAY OF
MARCH, 1994.
SANTA FE ENERGY TRUST
By TEXAS COMMERCE BANK NATIONAL
ASSOCIATION, TRUSTEE
By /s/ RICHARD L. MELTON
RICHARD L. MELTON
EXECUTIVE VICE PRESIDENT
& TRUST OFFICER
The Registrant, Santa Fe Energy Trust, has no principal executive officer,
principal financial officer, controller or principal accounting officer, board
of directors or persons performing similar functions. Accordingly, no additional
signatures are available and none have been provided.
41
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THIS ANNUAL REPORT ON FORM 10-K WAS DISTRIBUTED TO HOLDERS AS AN ANNUAL
REPORT. ADDITIONAL COPIES OF THIS ANNUAL REPORT WILL BE PROVIDED, WITHOUT
CHARGE, AND COPIES OF EXHIBITS HERETO WILL BE PROVIDED, UPON PAYMENT OF A
REASONABLE FEE, UPON WRITTEN REQUEST FROM ANY HOLDER TO:
Santa Fe Energy Trust
Texas Commerce Bank National Association, Trustee
Attention: David Snyder, Corporate Trust Department
P.O. Box 4717
Houston, Texas 77210-4717
INDEPENDENT ACCOUNTANTS COUNSEL TRANSFER AGENT AND REGISTRAR
Price Waterhouse Baker & Botts, L.L.P. Texas Commerce Bank, N.A.
Houston, Texas Houston, Texas Houston, Texas
SANTA FE ENERGY TRUST
P.O. Box 4717
Houston, Texas 77210-4717
