<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 1996
------------------
or
[ ] Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from to
------- -------
Commission File Number: 1-11608
WILLIAMS COAL SEAM GAS ROYALTY TRUST
(Exact name of registrant as specified in its charter)
Delaware 75-6437433
(State or other jurisdiction (I.R.S. Employer
of incorporation or Identification No.)
organization)
Trust Division
NationsBank of Texas, N.A.
NationsBank Plaza
901 Main Street
12th Floor
Dallas, Texas 75202
(Address of principal executive offices)
(Zip code)
(214) 508-2364
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes x No
----- -----
Number of units of beneficial interest outstanding at November 1, 1996:
9,700,000.
<PAGE>
PART I - FINANCIAL INFORMATION
------------------------------
Item 1. Financial Statements.
The financial statements included herein have been prepared by NationsBank
of Texas, N.A., as Trustee (the "Trustee") of Williams Coal Seam Gas Royalty
Trust (the "Trust"), pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in annual financial statements have been condensed or omitted pursuant
to such rules and regulations, although the Trustee believes that the
disclosures are adequate to make the information presented not misleading. It
is suggested that these condensed financial statements be read in conjunction
with the financial statements and notes thereto incorporated by reference in the
Trust's Annual Report on Form 10-K for the year ended December 31, 1995. The
December 31, 1995 balance sheet is derived from the audited balance sheet of
that date. In the opinion of the Trustee, all adjustments, consisting only of
normal recurring adjustments, necessary to present fairly the assets,
liabilities and trust corpus of the Trust as of September 30, 1996, the
distributable income for the three-month and nine-month periods ended September
30, 1996 and 1995, and the changes in trust corpus for the nine-month periods
ended September 30, 1996 and 1995, have been included. The distributable income
for such interim periods is not necessarily indicative of the distributable
income for the full year.
The financial statements as of September 30, 1996 and for the three-month
and nine-month periods ended September 30, 1996 and 1995 included herein have
been reviewed by Ernst & Young LLP, independent public accountants, as stated in
their report appearing herein.
2
<PAGE>
Independent Accountants' Review Report
NationsBank of Texas, N.A.,
as Trustee of Williams Coal Seam Gas Royalty Trust
We have reviewed the accompanying condensed statement of assets, liabilities and
trust corpus of the Williams Coal Seam Gas Royalty Trust as of September 30,
1996, and the related condensed statements of distributable income for the
three-month and nine-month periods ended September 30, 1996 and 1995 and the
statements of changes in trust corpus for the nine month periods ended September
30, 1996 and 1995. These financial statements are the responsibility of the
Trustee.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data, and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted
in accordance with generally accepted auditing standards, which will be
performed for the full year with the objective of expressing an opinion
regarding the financial statements taken as a whole. Accordingly, we do not
express such an opinion.
As described in Note 2 to the financial statements, these financial statements
have been prepared on a modified cash basis of accounting, which is a
comprehensive basis of accounting other than generally accepted accounting
principles.
Based on our reviews, we are not aware of any material modifications that should
be made to the accompanying condensed financial statements referred to above for
them to be in conformity with the basis of accounting described in Note 2.
We have previously audited, in accordance with generally accepted auditing
standards, the statement of assets, liabilities and trust corpus of the Williams
Coal Seam Gas Royalty Trust as of December 31, 1995, and the related statements
of distributable income and changes in trust corpus for the year then ended (not
presented herein) and in our report dated March 22, 1996, we expressed an
unqualified opinion on those financial statements. In our opinion, the
information set forth in the accompanying condensed statement of assets,
liabilities and trust corpus as of December 31, 1995, is fairly stated, in all
material respects, in relation to the statement of assets, liabilities and trust
corpus from which it has been derived.
Ernst & Young LLP
Tulsa, Oklahoma
November 8, 1996
3
<PAGE>
WILLIAMS COAL SEAM GAS ROYALTY TRUST
CONDENSED STATEMENTS OF ASSETS, LIABILITIES AND TRUST CORPUS (UNAUDITED)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
September 30, December 31,
ASSETS 1996 1995
- ------------------------------- ------------- ------------
<S> <C> <C>
Current Assets -
cash and cash equivalents $ 31,757 $ 29,134
Royalty interests in oil
and gas properties
(less accumulated
amortization of
$65,945,007 at
September 30, 1996
and $55,843,204 at
December 31, 1995) 72,621,656 82,723,459
----------- -----------
TOTAL ASSETS $72,653,413 $82,752,593
=========== ===========
LIABILITIES AND TRUST CORPUS
- -------------------------------
Current Liabilities -
trust expenses payable $ 77,067 $ 56,839
Trust corpus -
9,700,000 units of
beneficial interest
authorized and
outstanding 72,576,346 82,695,754
----------- -----------
TOTAL LIABILITIES
AND TRUST CORPUS $72,653,413 $82,752,593
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements. See
accountants' review report.
- -------------------------------------------------------------------------------
4
<PAGE>
WILLIAMS COAL SEAM GAS ROYALTY TRUST
CONDENSED STATEMENTS OF DISTRIBUTABLE INCOME (UNAUDITED)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
September 30, 1996 September 30, 1995
------------------- -------------------
<S> <C> <C>
Royalty income $5,654,462 $7,088,165
Interest income 18,829 23,595
---------- ----------
5,673,291 7,111,760
General and administrative
expenses (113,519) (92,132)
---------- ----------
Distributable income $5,559,772 $7,019,628
========== ==========
Distributable income
per unit
(9,700,000 units) $ .57 $ .72
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements. See
accountants' review report.
- -------------------------------------------------------------------------------
5
<PAGE>
WILLIAMS COAL SEAM GAS ROYALTY TRUST
CONDENSED STATEMENTS OF DISTRIBUTABLE INCOME (UNAUDITED)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS
ENDED ENDED
September 30, 1996 September 30, 1995
------------------- -------------------
<S> <C> <C>
Royalty income $17,001,496 $19,668,350
Interest income 59,678 65,987
----------- -----------
17,061,174 19,734,337
General and administrative
expenses (492,606) (450,993)
----------- -----------
Distributable income $16,568,568 $19,283,344
=========== ===========
Distributable income
per unit
(9,700,000 units) $ 1.71 $ 1.99
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements. See
accountants' review report.
- -------------------------------------------------------------------------------
6
<PAGE>
WILLIAMS COAL SEAM GAS ROYALTY TRUST
CONDENSED STATEMENTS OF CHANGES IN TRUST CORPUS (UNAUDITED)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS
ENDED ENDED
September 30, 1996 September 30, 1995
------------------- -------------------
<S> <C> <C>
Trust corpus, $ 82,695,754 $ 99,881,511
beginning of period
Amortization of royalty
interests (10,101,803) (12,670,054)
Distributable income 16,568,568 19,283,344
Distributions to unitholders (16,586,174) (19,365,214)
------------ ------------
Trust corpus, end
of period $72,576,346 $87,129,587
=========== ===========
Distributions per unit
(9,700,000 units) $1.71 $ 2.00
===== ======
</TABLE>
The accompanying notes are an integral part of these financial statements. See
accountants' review report.
- -------------------------------------------------------------------------------
7
<PAGE>
WILLIAMS COAL SEAM GAS ROYALTY TRUST
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
- -------------------------------------------------------------------------------
1. TRUST ORGANIZATION AND PROVISIONS
Williams Coal Seam Gas Royalty Trust (the "Trust") was formed as a Delaware
business trust pursuant to the terms of the Trust Agreement of Williams Coal
Seam Gas Royalty Trust (as amended, the "Trust Agreement") entered into
effective as of December 1, 1992 by and among Williams Production Company, a
Delaware corporation ("WPC"), as trustor, The Williams Companies, Inc., a
Delaware corporation ("Williams"), and NationsBank of Texas, N.A., a national
banking association (the "Trustee"), and Chemical Bank Delaware, a Delaware
banking corporation (the "Delaware Trustee"), as trustees. The trustees are
independent financial institutions.
The Trust was formed to acquire and hold certain net profits interests (the
"Royalty Interests") in proved natural gas properties located in the San Juan
Basin of New Mexico and Colorado (the "Underlying Properties") owned by WPC.
The Trust was initially created effective as of December 1, 1992 with a $100
contribution by WPC. On January 21, 1993, the Royalty Interests were conveyed
to the Trust by WPC pursuant to the Net Profits Conveyance (the "Conveyance")
dated effective as of October 1, 1992 by and among WPC, Williams, the Trustee
and the Delaware Trustee, in consideration for all the 9,700,000 authorized
units of beneficial interest in the Trust ("Units"). WPC transferred its Units
by dividend to its parent, Williams, which sold an aggregate of 5,980,000 Units
to the public through various underwriters in January and February 1993 (the
"Public Offering"). During the second quarter of 1995 Williams transferred its
Units to Williams Holdings of Delaware, Inc. (WHD), a separate holding company
for Williams' non regulated businesses. Substantially all of the production
attributable to the Underlying Properties is from the Fruitland coal formation
and constitutes "coal seam" gas that entitles the owners of such production,
provided certain requirements are met, to tax credits for Federal income tax
purposes pursuant to Section 29 of the Internal Revenue Code of 1986, as
amended.
The Trustee has the power to collect and distribute the proceeds received by
the Trust and to pay Trust liabilities and expenses. The Delaware Trustee has
only such powers as are set forth in the Trust Agreement and is not empowered to
otherwise manage or take part in the business of the Trust. The Royalty
Interests are passive in nature and neither the Delaware Trustee nor the Trustee
has any control over or any responsibility relating to the operation of the
Underlying Properties.
The Trust will terminate no later than December 31, 2012, subject to earlier
termination under certain circumstances described in the Trust Agreement (the
"Termination Date"). Cancellation of the Trust will occur on or following the
Termination Date when all Trust assets have been sold and the net proceeds
thereof distributed to Unitholders.
The only assets of the Trust, other than cash and cash equivalents being
held for the payment of expenses and liabilities and for distribution to
Unitholders, are the Royalty Interests.
8
<PAGE>
The Royalty Interests consist primarily of a net profits interest (the "NPI") in
the Underlying Properties. The NPI generally entitles the Trust to receive 81
percent of the NPI Net Proceeds, as defined below, attributable to (i) gas
produced and sold from WPC's net revenue interests (working interests less lease
burdens) in the properties in which WPC has a working interest (the "WI
Properties") and (ii) the revenue stream received by WPC attributable to its 35
percent net profits interest in 5,348 gross acres in La Plata County, Colorado
(the "Farmout Properties"). The Royalty Interests also include a 20 percent
interest in WPC's Infill Net Proceeds, as defined below, from the sale of
production if well spacing rules are effectively modified and additional wells
are drilled on producing drilling blocks on the WI Properties (the "Infill
Wells") during the term of the Trust. No Infill Wells have been drilled on the
WI Properties to date. "NPI Net Proceeds" consists generally of the revenue
stream received by WPC from its 35 percent net profits interest in the Farmout
Properties, plus the aggregate proceeds attributable to WPC's net revenue
interest, based on the price paid at or in the vicinity of the wellhead (the
"Wellhead"), of gas produced from the WI Properties, less WPC's share of certain
taxes and costs. "Infill Net Proceeds" consists generally of the aggregate
proceeds, based on the price at the Wellhead, of gas produced from WPC's net
revenue interest in any Infill Wells less certain taxes and costs. The complete
definitions of NPI Net Proceeds and Infill Net Proceeds are set forth in the
Conveyance.
2. BASIS OF ACCOUNTING
The financial statements of the Trust are prepared on a modified cash basis
and are not intended to present financial position and results of operations in
conformity with generally accepted accounting principles ("GAAP"). Preparation
of the Trust's financial statements on such basis includes the following:
Revenues are recognized in the period in which amounts are received by the
Trust. General and administrative expenses are recognized on an accrual
basis.
Amortization of the Royalty Interests is calculated on a unit-of-production
basis and charged directly to trust corpus.
Distributions to Unitholders are recorded when declared by the Trustee (see
Note 4).
The financial statements of the Trust differ from financial statements
prepared in accordance with GAAP because royalty income is not accrued in the
period of production and amortization of the Royalty Interests is not charged
against operating results.
Williams sold an aggregate of 5,980,000 Units of the Trust's authorized
9,700,000 Units in the Public Offering at the offering price of $20 per Unit,
retaining 3,720,000 Units. Subsequently, Williams sold an additional 151,209
Units for $23.50 per Unit. Accordingly, the condensed statements of assets,
liabilities and trust corpus reflect the sale of these Units at the respective
sale prices thereof, as well as the remaining 3,568,791 Units at Williams'
historical cost. During the second quarter of 1995 Williams transferred its
Units to WHD, a separate holding company for Williams' non regulated businesses.
If WHD, in the future, should sell all or a portion of its retained Units, at
that time, the carrying value on the Trust's statements
9
<PAGE>
of assets, liabilities and trust corpus would again be adjusted from WHD's
historical cost to the subsequent sale price with respect to the Units sold.
3. FEDERAL INCOME TAXES
The Trust is a grantor trust for Federal income tax purposes. As a grantor
trust, the Trust will not be required to pay Federal or state income taxes.
Accordingly, no provision for income taxes has been made in these financial
statements.
Because the Trust will be treated as a grantor trust, and because a
Unitholder will be treated as directly owning an interest in the Royalty
Interests, each Unitholder will be taxed directly on his per Unit pro rata share
of income attributable to the Royalty Interests consistent with the Unitholder's
method of accounting and without regard to the taxable year or accounting method
employed by the Trust.
Production from coal seam gas wells drilled after December 31, 1979 and
prior to January 1, 1993, qualifies for the Federal income tax credit for
producing nonconventional fuels under Section 29 of the Internal Revenue Code.
This tax credit is calculated annually based on each year's qualified production
through the year 2002. Such credit, based on the Unitholder's pro rata share of
qualifying production, may not reduce his regular tax liability (after the
foreign tax credit and certain other non-refundable credits) below his
alternative minimum tax. Any part of the Section 29 credit not allowed for the
tax year solely because of this limitation is subject to certain carryover
provisions. Each Unitholder should consult his tax advisor regarding Trust tax
compliance matters.
4. DISTRIBUTIONS TO UNITHOLDERS
The Trustee determines for each quarter the amount of cash available for
distribution to Unitholders. Such amount (the "Quarterly Distribution Amount")
is an amount equal to the excess, if any, of the cash received by the Trust, on
or prior to the last day of the month following the end of each calendar quarter
from the Royalty Interests, plus, with certain exceptions, any other cash
receipts of the Trust during such quarter, over the liabilities of the Trust
paid during such quarter, subject to adjustments for changes made by the Trustee
during such quarter in any cash reserves established for the payment of
contingent or future obligations of the Trust.
The Quarterly Distribution Amount for each quarter is payable to Unitholders
of record on the 45th day following the end of such calendar quarter unless such
day is not a business day in which case the record date is the next business day
thereafter. The Trustee distributes the Quarterly Distribution Amount within 60
days after the end of each calendar quarter to each person who was a Unitholder
of record on the associated record date, together with interest estimated to be
earned on such amount from the date of receipt thereof by the Trustee to the
payment date.
In addition to the regular quarterly distributions, under certain
circumstances specified in the Trust Agreement (such as upon a purchase price
adjustment, if any, or pursuant to the sale of a Royalty Interest), the Trust
would make a special distribution (a "Special Distribution
10
<PAGE>
Amount"). A Special Distribution Amount would be made when amounts received by
the Trust under such circumstances aggregated in excess of $9,000,000. The
record date for a Special Distribution Amount will be the 15th day following
receipt of amounts aggregating a Special Distribution Amount by the Trust
(unless such day is not a business day in which case the record date will be the
next business day thereafter) unless such day is within 10 days of the record
date for a Quarterly Distribution Amount in which case the record date will be
the date as is established for the next Quarterly Distribution Amount.
Distribution to Unitholders of a Special Distribution Amount will be made no
later than 15 days after the Special Distribution Amount record date.
5. SUBSEQUENT EVENTS
Subsequent to September 30, 1996, the Trust declared the following
distribution:
<TABLE>
<CAPTION>
Quarterly
Record Payment Distribution
Date Date per Unit
- --------------------------- ----------- ------------
<S> <C> <C>
November 14 November 29 $.535875
</TABLE>
The distribution per unit decreased from $.657528 for the first quarter of
1996 to $.535875 for the fourth quarter of 1996. Both the distribution and
production decreases were due to declines in the Trust's percentage ownership of
particular wells as a result of federal unit acreage expansion, as well as
increases in working interest royalty expenses and production taxes. Expansions
of federal unit acreage can either increase or decrease the Trust's ownership of
particular wells resulting in potential adjustments of production for prior
periods and associated distributions to unitholders can either increase or
decrease. Federal unit acreage expansions are determined by the commercial
value of the property as valued by the operator and approved by the U.S. Bureau
of Land and Mines (BLM). Williams Production Company does not operate any wells
in these federal acreage units.
6. CONTINGENCIES
Under the terms of the gas purchase contract entered into by WPC and WFS Gas
Resources Company ("WFSGR"), an affiliate of WPC, as amended (the "Gas Purchase
Contract"), additional revenues may be paid to the Trust to meet the minimum gas
price provision of 97 percent of $1.75 per MMBtu (the "Minimum Purchase Price").
This additional revenue is subject to recoupment by the purchaser from future
revenues received from production commencing January 1, 1994 when the applicable
index price exceeds the Minimum Purchase Price as long as the Minimum Purchase
Price commitment is in effect. The primary term of the Gas Purchase Contract
runs to December 31, 1997 at which time the WPC affiliate may elect to
discontinue paying the Minimum Purchase Price by giving notice of its election
to pay solely on an index price.
The applicable index price was below the Minimum Purchase Price in July and
September of 1996 and has been below the Minimum Purchase Price each month since
April 1994, except for August 1996. Pursuant to the terms of the Gas Purchase
Contract, WPC established a price
11
<PAGE>
credit account. WPC estimates that, as of September 30, 1996, WFSGR had
aggregate price credits in the price credit account of approximately $28.7
million (after recoupment of price credits referred to in the succeeding
paragraph) of which the Trust's 81 percent interest was approximately WPC $23.2
million. The applicable index price was also below the Minimum Purchase Price
in October 1996.
The entitlement of WFSGR to recoup the price credits means that if and when
the applicable Blanco Hub Spot Price rises above $1.75 per MMBtu, future royalty
income paid to the Trust would be reduced until such time as such price credits
have been fully recouped. Corresponding cash distributions to Unitholders would
also be reduced.
7. POSSIBLE NPI PERCENTAGE CHANGE
The NPI generally entitles the Trust to receive 81 percent of the NPI Net
Proceeds. However, at the point that cumulative production from the Underlying
Properties exceeds 178.5 Bcf of gas and the internal rate of return of the
"after tax cash flow per Trust Unit" (as defined in the Conveyance) is from 12
to 14 percent, the percentage of NPI Net Proceeds payable in respect of the NPI
would be reduced to 60 percent. At such time, if any, that the internal rate of
return exceeds 14 percent, the percentage of NPI Net Proceeds payable in respect
of the NPI would be reduced to 40 percent. The cumulative production since
October 1, 1992, has been 121.3 Bcf. The internal rate of return is not
currently projected to be 12 percent or higher until after 1998.
Item 2. Trustee's Discussion and Analysis of Financial Condition
and Results of Operations.
The Trust makes quarterly cash distributions to holders of units of
beneficial interest ("Units") in the Trust ("Unitholders"). The only assets of
the Trust, other than cash and cash equivalents being held for the payment of
expenses and liabilities and for distribution to Unitholders, are net profits
interests (the "Royalty Interests") in certain proved coal seam gas properties
located in the San Juan Basin of New Mexico and Colorado (the "Underlying
Properties"). The Royalty Interests owned by the Trust burden the Underlying
Properties, which are owned by Williams Production Company ("WPC") and not the
Trust.
Distributable income of the Trust consists of the excess of royalty income
plus interest income over the general and administrative expenses of the Trust.
Upon receipt by the Trust, royalty income is invested in short-term investments
in accordance with the Trust Agreement (as defined in Note 1 to the financial
statements of the Trust appearing elsewhere in this Form 10-Q ("Note 1")) until
its subsequent distribution to Unitholders.
The amount of distributable income of the Trust for any quarter may differ
from the amount of cash available for distribution to Unitholders in such
quarter due to differences in the treatment of the expenses of the Trust in the
determination of those amounts. The financial statements of the Trust are
prepared on a modified cash basis pursuant to which the expenses of the Trust
are recognized when incurred. Consequently, the reported distributable income
of the Trust for any quarter is determined by deducting from the income received
by the Trust the amount of expenses incurred by the Trust during such quarter.
The amount of cash available
12
<PAGE>
for distribution to Unitholders, however, is determined in accordance with the
provisions of the Trust Agreement and reflects the deduction from the income
actually received by the Trust of the amount of expenses actually paid by the
Trust and adjustments for changes in reserves for unpaid liabilities. See Note
4 to the financial statements of the Trust appearing elsewhere in this Form 10-Q
for additional information regarding the determination of the amount of cash
available for distribution to Unitholders.
Three Months and Nine Months Ended September 30, 1996 Compared to Three Months
- ------------------------------------------------------------------------------
and Nine Months Ended September 30, 1995
- ----------------------------------------
For the quarter ended September 30, 1996, royalty income received by the
Trust amounted to $5,654,462 as compared to $7,088,165 received for the same
quarter in 1995. For the nine months ended September 30, 1996, royalty income
received by the Trust amounted to $17,001,496 as compared to $19,668,350
received for the same period in 1995. The decrease in royalty income is
primarily due to adjustments resulting from expansion of federal units within
the Underlying Properties, as well as increases in working interest royalty
expenses and production taxes. Production related to the royalty income
received by the Trust in the third quarter of 1996 was 7,906,484 MMBtu as
compared to 8,380,829 MMBtu for the same quarter in 1995. Interest income for
the quarter ended September 30, 1996 was $18,829 compared to $23,595 for the
same quarter in 1995. Interest income for the nine months ended September 30,
1996 was $59,678 compared to $65,987 for the same period in 1995. This decrease
was primarily due to a decrease in the amount of funds available for investment.
General and administrative expenses during the third quarter of 1996 amounted to
$115,519 compared to $92,132 for the same quarter in 1995. This increase was
primarily due to timing of payments of printing costs in the third quarter of
1996. General and administrative expenses during the nine months ended
September 30, 1996 amounted to $492,606 compared to $450,993 for the same period
in 1995. The higher general and administrative expenses during the first nine
months of 1996 compared to the same period in 1995 are primarily attributable to
higher professional service fees.
Distributable income for the quarter ended September 30, 1996 was
$5,559,772 or $.57 per Unit compared to $7,019,628 or $.72 per Unit for the
third quarter of 1995. This decrease was the result of adjustments resulting
from expansion of federal units within the Underlying Properties, as well as
increases in working interest royalty expenses and production taxes.
Distributable income for the nine months ended September 30, 1996 was
$16,568,568 or $1.71 per Unit compared to $19,283,344 or $1.99 per Unit for the
same period in 1995. A distribution of $.564256 per Unit was made on August 29,
1996 to Unitholders of record on August 14, 1996.
Because the Trust incurs administrative expenses throughout a quarter but
receives its royalty income only once in a quarter, the Trustee established in
the first quarter of 1993 a cash reserve for the payment of expenses and
liabilities of the Trust. The Trustee thereafter has adjusted the amount of
such reserve in certain quarters as required for the payment of the Trust's
expenses and liabilities, in accordance with the provisions of the Trust
Agreement. The Trustee anticipates that it will maintain for the foreseeable
future a cash reserve which will fluctuate as expenses are paid and royalty
income is received.
13
<PAGE>
Royalty income to the Trust is attributable to the sale of depleting
assets. All of the Underlying Properties burdened by the Royalty Interests
consist of producing properties. Accordingly, the proved reserves attributable
to WPC's interest in the Underlying Properties are expected to decline
substantially during the term of the Trust and a portion of each cash
distribution made by the Trust will, therefore, be analogous to a return of
capital. Accordingly, cash yields attributable to the Units are expected to
decline over the term of the Trust.
Royalty income received by the Trust in a given calendar quarter will
generally reflect the sum of (i) proceeds from the sale of gas produced from the
WI Properties during the preceding calendar quarter, plus (ii) cash received by
WPC with respect to the Farmout Properties either (a) during the preceding
calendar quarter or (b) if received in sufficient time to be paid to the Trust,
in the month immediately following such calendar quarter. Accordingly, the
royalty income included in distributable income for the quarter ended September
30, 1996 was based on production volumes and natural gas prices for the period
April through June 1996, as shown in the table below. Due to delays associated
with the receipt of income related to the Farmout Properties, the Trust's
royalty income for the 1996 third quarter reflects estimated production volumes
from the Farmout Properties for the months of March 1996 through May 1996, as
shown in the table below. The production volumes included in the table below
are for production attributable to the Underlying Properties, and not for
production attributable to the Trust's Royalty Interests and are net of the
amount of production attributable to WPC's royalty obligations to third parties,
which is determined by contractual arrangement with such parties.
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
June 30, 1996 June 30, 1995
-------------- --------------
<S> <C> <C>
Production (MMBtu) (1)
WI Properties 6,291,977 (2) 6,812,028 (4)
Farmout Properties 1,614,507 (3) 1,568,801 (5)
Blanco Hub Spot Price
($/MMBtu) (6) $ 1.14 $ 1.23
Net Wellhead Price
WI Properties ($/MMBtu) (6) $ 1.10 $ 1.20
</TABLE>
_______________________
(1) Million British Thermal Units.
(2) Includes prior period adjustments of 96,820 MMBtu.
(3) Reflects estimated volumes for March 1996 through May 1996.
(4) Includes prior period adjustments of 823,164 MMBtu.
(5) Reflects March 1995 through May 1995 (estimates).
(6) Simple average of the months included in the period presented.
Production from the WI Properties is generally sold pursuant to a gas
purchase contract between WPC and WFS Gas Resources Company ("WFSGR") (as
successor in interest to Williams Gas Marketing Company). The gas purchase
contract provides certain protections for WFSGR in the form of price credits
(for production purchased by WFSGR on or after
14
<PAGE>
January 1, 1994) and for Unitholders when the applicable Blanco Hub Spot Price
falls below $1.75 per MMBtu and provides certain benefits for WFSGR when the
Blanco Hub Spot Price exceeds $2.00 per MMBtu. The gas purchase contract also
provides that the price paid for gas by WFSGR is reduced by the amount of
gathering, processing and certain other costs paid by WFSGR.
The Blanco Hub Spot Price was below $1.75 per MMBtu in July and September
of 1996. However, pursuant to the terms of the gas purchase contract, WFSGR
continued to purchase gas produced from the WI Properties at the $1.70 minimum
purchase price, less certain gathering, processing and delivery costs paid by
WFSGR, established by the gas purchase contract; and WFSGR received a price
credit from WPC for each MMBtu of natural gas so purchased by WFSGR equal to the
difference between the $1.70 minimum purchase price and the applicable index
price (which price is equal to 97 percent of the applicable Blanco Hub Spot
Price). WPC estimates that, as of September 30, 1996, WFSGR had aggregate price
credits of approximately $28.7 million (after recoupment of price credits) of
which the Trust's 81 percent interest was approximately $23.2 million. The
Blanco Hub Spot Price was also below $1.75 per MMBtu in October 1996.
The entitlement of WFSGR to recoup the price credits means that if and when
the applicable Blanco Hub Spot Price rises above $1.75 per MMBtu, future royalty
income paid to the Trust would be reduced until such time as such price credits
have been fully recouped. Corresponding cash distributions to Unitholders would
also be reduced.
The information in this Form 10-Q concerning production and prices relating
to the Underlying Properties is based on information prepared and furnished by
WPC to the Trustee. The Trustee has no control over and no responsibility
relating to the operation of the Underlying Properties.
This report on Form 10-Q includes "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. All statements other
than statements of historical fact included in this Form 10-Q, including,
without limitation, statements contained in this "Trustee's Discussion and
Analysis of Financial Condition and Results of Operations" regarding the Trust's
financial position and industry conditions, are forward-looking statements.
Although the Trustee believes that the expectations reflected in such forward-
looking statements are reasonable, it can give no assurance that such
expectations will prove to have been correct.
PART II - OTHER INFORMATION
---------------------------
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibit No. Description
----------- -----------
27 Financial Data Schedule
(b) No reports on Form 8-K were filed during the quarter for which this
report is filed.
15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WILLIAMS COAL SEAM GAS ROYALTY TRUST
By: NATIONSBANK OF TEXAS, N.A., Trustee
By: /s/ Ron Hooper
---------------------------------------
Ron Hooper
Vice President and Administrator
(The Trust has no directors or executive officers.)
Date: November 13, 1996
68800 07339 CORP 135718
16
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<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JUL-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 31,757
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 31,757
<PP&E> 138,566,663
<DEPRECIATION> 65,945,007
<TOTAL-ASSETS> 72,653,413
<CURRENT-LIABILITIES> 77,067
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 72,576,346
<TOTAL-LIABILITY-AND-EQUITY> 72,653,413
<SALES> 5,654,462
<TOTAL-REVENUES> 5,673,291
<CGS> 0
<TOTAL-COSTS> 113,519
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 5,559,772
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,559,772
<EPS-PRIMARY> .57
<EPS-DILUTED> 0
</TABLE>
