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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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(Mark One) FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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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 of (I.R.S. employer
incorporation or organization) identification number)
TRUST DIVISION 75202
NATIONSBANK OF TEXAS, N.A. (Zip Code)
NATIONSBANK PLAZA
901 MAIN STREET, 17TH FLOOR
DALLAS, TEXAS
(Address of principal executive offices)
Registrant's telephone number, including area code:
(214) 508-2364
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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Units of Beneficial Interest New York Stock Exchange, Inc.
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
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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 the 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]
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At March 18, 1997, there were 9,700,000 units of beneficial interest
outstanding and the aggregate market value of such units (based on the closing
sale price on the New York Stock Exchange) held by non-affiliates of the
registrant was approximately $110,400,000.
DOCUMENTS INCORPORATED BY REFERENCE
Listed below are documents parts of which are incorporated herein by
reference and the part of this report into which the document is incorporated:
1996 Annual Report to Unitholders -- Part II.
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TABLE OF CONTENTS
PAGE
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PART I
Item 1. Business.......................................................... 1
Glossary.......................................................... 1
Description of the Trust.......................................... 5
Creation and Organization of the Trust......................... 5
Assets of the Trust............................................ 6
Liabilities of the Trust....................................... 6
Duties and Limited Powers of the Trustee....................... 6
Liabilities of the Delaware Trustee and the Trustee............ 7
Termination and Liquidation of the Trust....................... 7
Description of Units.............................................. 8
Distributions and Income Computations.......................... 8
Transfer of Royalty Interests.................................. 9
Possible Divestiture of Units.................................. 10
Periodic Reports to Unitholders................................ 10
Voting Rights of Unitholders................................... 10
Liability of Unitholders....................................... 11
Transfer Agent................................................. 11
Federal Income Taxation........................................... 12
Summary of Certain Federal Income Tax Consequences............. 12
ERISA Considerations.............................................. 17
State Tax Considerations.......................................... 17
Regulation and Prices............................................. 17
Regulation of Natural Gas...................................... 17
Environmental Regulation....................................... 18
Competition, Markets and Prices................................ 19
Item 2. Properties........................................................ 20
The Royalty Interests.......................................... 20
The Underlying Properties................................... 20
The NPI..................................................... 23
Reserve Report.............................................. 24
Historical Gas Sales Prices and Production.................. 26
Purchase Price Adjustments.................................. 26
NPI Percentage Changes...................................... 26
Gas Purchase Contract....................................... 27
Gas Gathering Contract...................................... 29
Federal and Indian Lands.................................... 30
Sale and Abandonment of Underlying Properties............... 31
The Infill NPI.............................................. 31
Williams' Performance Assurances............................ 31
Title to Properties......................................... 32
Methane Contamination Litigation............................ 34
Item 3. Legal Proceedings................................................. 34
Item 4. Submission of Matters to a Vote of Security Holders............... 35
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters........................................................... 35
Item 6. Selected Financial Data........................................... 35
(i)
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PAGE
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Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................. 35
Item 8. Financial Statements and Supplementary Data....................... 35
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.............................................. 35
PART III
Item 10. Directors and Executive Officers of the Registrant................ 35
Item 11. Executive Compensation............................................ 36
Item 12. Security Ownership of Certain Beneficial Owners and Management.... 36
Williams' Ownership of Units................................... 36
Item 13. Certain Relationships and Related Transactions.................... 37
Administrative Services Agreement.............................. 37
Potential Conflicts of Interest................................ 37
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K... 38
(ii)
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PART I
ITEM 1. BUSINESS.
The following is a glossary of certain defined terms used in this Annual
Report on Form 10-K.
GLOSSARY
"Administrative Services Agreement" means the Administrative Services
Agreement, dated effective December 1, 1992, between Williams and the Trust, a
copy of which is filed as an exhibit to this Form 10-K.
"Aftertax Cash Flow per Unit" means the sum of the following amounts that a
hypothetical purchaser of a Unit in the Public Offering would have received or
been allocated if such Unit were held through the date of such determination:
(a) total cash distributions per Unit plus (b) total tax credits available per
Unit under Section 29 of the IRC less (c) the net taxes payable per Unit
(assuming a Federal income tax rate of 31 percent, which at the time of the
formation of the Trust was the highest Federal income tax rate applicable to
individuals).
"Bcf" means billion cubic feet of natural gas. Natural gas volumes are
stated herein at the legal pressure base of 14.73 pounds per square inch
absolute at 60 degrees Fahrenheit.
"Blanco Hub Spot Price" means the posted index price of spot gas delivered to
pipelines per MMBtu (dry basis) as published in the first issue of the month
during which gas is delivered or such determination is made, as the case may be,
in Inside FERC's Gas Market Report for "El Paso Natural Gas Company, San Juan,"
or in the event a Blanco Hub posted index price is at some time in the future
reported by Inside FERC's Gas Market Report, then the Blanco Hub posted index
price will be substituted in place of the "El Paso Natural Gas Company, San
Juan" posted index price.
"Btu" means British Thermal Unit, the common unit of gross heating value
measurement.
"Citibank's Base Rate" means a fluctuating interest rate per annum
(compounded quarterly) as shall be in effect from time to time which rate per
annum shall at all times be equal to the rate of interest announced publicly by
Citibank, N.A. in New York, New York, from time to time, as its base rate.
"Comparison Reserve Report" means the Reserve Report, dated February 23,
1994, on the estimated reserves attributable to the Royalty Interests as of
December 31, 1993 (but using October 1, 1992 Reserve Report pricing), prepared
by Miller and Lents, Ltd., independent petroleum engineers, a copy of which is
filed as an exhibit to this Form 10-K.
"Confirmation Agreement" means the Confirmation Agreement dated effective as
of May 1, 1995 by and among WPC, Williams and the Trust, a copy of which is
filed as an exhibit to this Form 10-K.
"Conveyance" means the Net Profits Conveyance dated effective as of October
1, 1992, by and among Williams, WPC, the Trustee and the Delaware Trustee, a
copy of which is filed as an exhibit to this Form 10-K.
"December 31, 1993 Reserve Report" means the Reserve Report, dated February
23, 1994, on the estimated reserves, estimated future net revenues and the
discounted estimated future net revenues attributable to the Royalty Interests
and the Underlying Properties as of December 31, 1993, prepared by Miller and
Lents, Ltd., independent petroleum engineers, a copy of which is filed as an
exhibit to this Form 10-K.
"December 31, 1994 Reserve Report" means the Reserve Report, dated February
28, 1995, on the estimated reserves, estimated future net revenues and the
discounted estimated future net revenues attributable to the Royalty
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Interests and the Underlying Properties as of December 31, 1994, prepared by
Miller and Lents, Ltd., independent petroleum engineers, a copy of which is
filed as an exhibit to this Form 10-K.
"December 31, 1995 Reserve Report" means the Reserve Report, dated March 8,
1996, on the estimated reserves, estimated future net revenues and the
discounted estimated future net revenues attributable to the Royalty Interests
and the Underlying Properties as of December 31, 1995, prepared by Miller and
Lents, Ltd., independent petroleum engineers, a copy of which is filed as an
exhibit to this Form 10-K.
"December 31, 1996 Reserve Report" means the Reserve Report, dated March 17,
1997, on the estimated reserves, estimated future net revenues and the
discounted estimated future net revenues attributable to the Royalty Interests
and the Underlying Properties as of December 31, 1996, prepared by Miller and
Lents, Ltd., independent petroleum engineers, a copy of which is filed as an
exhibit to this Form 10-K.
"Delaware Code" means the Delaware Business Trust Act, Title 12, Chapter 38
of the Delaware Code, Sections 3801 et seq.
"Delaware Trustee" means Chemical Bank Delaware, in its capacity as a trustee
of the Trust.
"Enhanced recovery or similar operations" means operations conducted for the
purpose of maintaining, sustaining or enhancing production from the Underlying
Properties. These operations may include additional compression, the injection
of carbon dioxide or other gases or hydraulic fracturing.
"Farmout Properties" means the 5,348 gross acres in La Plata County, Colorado
on which WPC owns a 35 percent net profits interest, also referred to as the
PLA-9 Properties.
"Gas Gathering Contract" means the Gas Gathering and Treating Agreement,
dated October 1, 1992, as amended, between WFS Gas Resources Company (as
successor in interest to WGM) and WFS, a copy of which is filed as an exhibit to
this Form 10-K.
"Gas Purchase Contract" means the Gas Purchase Agreement, dated October 1,
1992, as amended, between WFS Resources (as successor in interest to WGM) and
WPC, a copy of which is filed as an exhibit to this Form 10-K.
"Grantor trust" means a trust as to which the grantor, or his successor, has
retained an interest in the income from the trust.
"Gross acres" means the total number of surface acres of land.
"Gross wells" means the total whole number of gas wells.
"Index Price" means 97 percent of the Blanco Hub Spot Price as of the date
the determination is made.
"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
possible Infill Wells less (a) WPC's working interest share of property and
production taxes on such Infill Wells; (b) WPC's working interest share of
operating costs on such Infill Wells; (c) WPC's working interest share of
capital costs on such Infill Wells, including costs of drilling and completing
such Infill Wells and the costs of associated surface facilities; and (d)
interest on the unrecovered portion, if any, of the foregoing costs at
Citibank's Base Rate.
"Infill NPI" refers to one of the net profits interests conveyed to the
Trust, consisting of a 20 percent interest in WPC's Infill Net Proceeds.
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"Infill Wells" means any possible additional well drilled on a producing
drilling block when well spacing rules are effectively modified from the
existing 320 acre spacing.
"IRC" means the Internal Revenue Code of 1986, as amended.
"IRR" means the annual discount rate (compounded quarterly) that equates the
present value of the Aftertax Cash Flow per Unit to the initial price to the
public of the Units in the Public Offering (which was $20.00 per Unit).
"Mcf" means thousand cubic feet of natural gas.
"Minimum Purchase Price" means 97 percent of $1.75 per MMBtu (dry basis).
"MMBtu" means million Btu.
"MMcf" means million cubic feet of natural gas.
"Net profits interest" generally refers to a real property interest entitling
the owner to receive a specified percentage of the net proceeds from the sale of
production attributable to the properties burdened thereby, the amount of which
is based on a revenue formula specified in such net profits interest.
"NPI" refers to one of the net profits interests conveyed to the Trust,
generally entitling the Trust to receive 81 percent of the NPI Net Proceeds
attributable to (i) WPC's net revenue interest (working interest less lease
burdens) in the WI Properties and (ii) the revenue stream received by WPC
attributable to its 35 percent net profits interest in the Farmout Properties.
The NPI is subject to reduction as described under "Item 2 -- The Royalty
Interests -- NPI Percentage Changes."
"NPI Net Proceeds" consists generally of the aggregate proceeds attributable
to (i) WPC's net revenue interest based on the sale at the Wellhead of gas
produced from the WI Properties and (ii) the revenue stream received by WPC from
its 35 percent net profits interest in the Farmout Properties, less (a) WPC's
working interest share of property and production taxes on the WI Properties;
(b) WPC's working interest share of actual operating costs on the WI Properties
to the extent in excess of those agreed to be paid by WPC as described herein;
(c) WPC's working interest share of capital costs on the WI Properties to the
extent in excess of those agreed to be paid by WPC as described herein; and (d)
interest on the unrecovered portion, if any, of the foregoing costs at
Citibank's Base Rate.
"Net wells" and "net acres" are calculated by multiplying gross wells or
gross acres by the interest in such wells or acres.
"October 1, 1992 Reserve Report" means the Reserve Report, dated November 21,
1992, on the estimated reserves, estimated future net revenues and the
discounted estimated future net revenues attributable to the Royalty Interests
and the Underlying Properties as of October 1, 1992, prepared by Miller and
Lents, Ltd., independent petroleum engineers, a copy of which is filed as an
exhibit to this Form 10-K.
"Price Credit" means the credit received by WFS Resources from WPC for each
MMBtu of natural gas purchased by WFS Resources when the Index Price is less
than the Minimum Purchase Price on or after January 1, 1994, equal to the
difference between the Minimum Purchase Price and the Index Price.
"Price Credit Account" means the account established by WPC containing the
accrued and unrecouped amount of any Price Credits.
"Price Differential" means 50 percent of the excess of the Index Price over
$1.94 per MMBtu.
"Prior Reserve Reports" means, collectively, the December 31, 1993 Reserve
Report, December 31, 1994 Reserve Report and December 31, 1995 Reserve Report.
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"Public Offering" has the meaning assigned to such term herein under "Item 1
- -- Description of the Trust -- Creation and Organization of the Trust."
"Public Offering Prospectus" has the meaning assigned to such term herein
defined under "Item 1 - Federal Income Taxation."
"Royalty Interests" means the NPI and Infill NPI conveyed to the Trust.
"Trust" means Williams Coal Seam Gas Royalty Trust, a Delaware business trust
formed pursuant to the Trust Agreement.
"Trust Agreement" means the Trust Agreement, dated as of December 1, 1992,
among Williams, WPC, as grantor, Chemical Bank Delaware, as the Delaware
Trustee, and NationsBank of Texas, N.A., as the Trustee, as amended by the First
Amendment thereto effective as of December 15, 1992 and by the Second Amendment
thereto effective as of January 12, 1993, a copy of each of which is filed as an
exhibit to this Form 10-K.
"Trustee" means NationsBank of Texas, N.A., in its capacity as a trustee of
the Trust.
"Underlying Properties" means the net revenue interests (working interests
less lease burdens) and net profits interests of WPC in certain proved
properties in the Fruitland coal formation in the San Juan Basin of New Mexico
and Colorado as specified in the Conveyance.
"Units" means the 9,700,000 units of beneficial interest issued by, and
evidencing the entire beneficial interest in, the Trust.
"Wellhead" means at or in the vicinity of the wellhead of gas produced.
"WFS" means Williams Field Services Company, a wholly-owned subsidiary of
Williams Energy Group (a wholly-owned subsidiary of Williams).
"WFS Resources" means WFS Gas Resources Company, a Delaware corporation and a
wholly-owned subsidiary of WPC and Williams.
"WGM" means Williams Gas Marketing Company, formerly a wholly-owned
subsidiary of Williams Field Services Group, Inc. (a wholly-owned subsidiary of
Williams) which has been merged into another affiliate of Williams Field
Services Group, Inc.
"WGM Payment Obligations" has the meaning assigned to such term under "Item 2
- -- The Royalty Interests -- Williams' Performance Assurances."
"WHD" means Williams Holdings of Delaware, Inc., a wholly-owned subsidiary of
Williams.
"Williams" means The Williams Companies, Inc.
"WI Properties" means the net revenue interests (working interests less lease
burdens) of WPC in the Underlying Properties including WPC's interests in 12
Federal producing units in New Mexico.
"Working interest" generally refers to a real property interest entitling the
owner to receive a specified percentage of the proceeds from the sale of oil and
gas production or a percentage of such production, but requiring the owner of
such working interest to bear the costs to explore for, develop and produce such
oil and gas.
"WPC" means Williams Production Company, a wholly-owned indirect subsidiary
of Williams.
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"WPC Payment Obligations" has the meaning assigned to such term under "Item 2
- -- The Royalty Interests -- Williams' Performance Assurances."
DESCRIPTION OF THE TRUST
Williams Coal Seam Gas Royalty Trust (the "Trust") was formed as a Delaware
business trust under the Delaware Business Trust Act, Title 12, Chapter 38 of
the Delaware Code, Sections 3801 et seq. (the "Delaware Code"). The following
information is subject to the detailed provisions of (i) 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 Chemical Bank Delaware, a Delaware
banking corporation (the "Delaware Trustee"), and NationsBank of Texas, N.A., a
national banking association (the "Trustee"), as trustees, and (ii) the Net
Profits Conveyance (the "Conveyance") dated effective as of October 1, 1992 by
and among WPC, Williams, the Trustee and the Delaware Trustee. Copies of the
Trust Agreement and of the Conveyance are filed as exhibits to this Form 10-K.
The provisions governing the Trust are complex and extensive and no attempt has
been made below to describe or reference all of such provisions. The following
is a general description of the basic framework of the Trust and a summary of
the material terms of the Trust Agreement, and detailed provisions concerning
the Trust may be found in the Trust Agreement.
CREATION AND ORGANIZATION OF THE TRUST
All of the authorized units of beneficial interest in the Trust ("Units")
were issued to WPC on January 21, 1993. On that date, WPC transferred its Units
to its parent, Williams, by dividend. Williams, in turn, sold, by means of a
prospectus dated January 13, 1993, 5,200,000 Units on January 21, 1993, and an
additional 780,000 Units on February 16, 1993, to the public through various
underwriters (the "Public Offering"). In the second quarter of 1993, Williams
sold an additional 151,209 Units. 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.
The Trust has been formed under Delaware law pursuant to the terms of the
Trust Agreement 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"). The Royalty Interests
were conveyed to the Trust on January 21, 1993 pursuant to the Conveyance for
the benefit of the Unitholders. The Trustee has powers to collect and
distribute proceeds received by the Trust and to pay Trust liabilities and
expenses. The Delaware Trustee has only such powers as are set forth in the
Trust Agreement 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. Except for the
commitment by WPC to pay the costs incurred to place into production certain
proved nonproducing wells, neither WPC nor the operators of the Underlying
Properties has any contractual commitments to the Trust to further develop the
Underlying Properties, to remain as operator with respect to any of the leases
on the Underlying Properties or to maintain their ownership interest in any of
the properties. However, WPC retained an interest in each of the Underlying
Properties immediately after conveyance of the Royalty Interests to the Trust.
WPC may sell the Underlying Properties subject to and burdened by the Royalty
Interests. For a description of the Underlying Properties and other information
relating to such properties, see "Item 2 -- The Royalty Interests."
The Delaware Trustee and the Trustee may resign at any time or be removed
with or without cause by a vote of not less than a majority of the outstanding
Units. Any successor trustee must be a bank or trust company meeting certain
requirements including having capital, surplus and undivided profits of at least
$20,000,000, in the case of the Delaware Trustee, and $100,000,000, in the case
of the Trustee.
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ASSETS OF THE TRUST
The only assets of the Trust, other than cash and temporary investments being
held for the payment of expenses and liabilities and for distribution to
Unitholders, are the Royalty Interests. The Royalty Interests consist 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 on 5,348
gross acres in La Plata County, Colorado (the "Farmout Properties"). The
Royalty Interests also include a 20 percent interest in the Infill Net Proceeds,
as defined below (the "Infill NPI"), 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. "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 on 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. See "Item 2 -- The Royalty
Interests" for more information.
LIABILITIES OF THE TRUST
Because of the passive nature of the Trust assets and the restrictions on the
power of the Trustee to incur obligations, the only liabilities the Trust
generally incurs are those for routine administrative expenses, such as the
trustee's fees and accounting, engineering, legal and other professional fees
and the administrative services fee paid to Williams. However, if a court were
to hold that the Trust is taxable as a corporation, then the Trust would incur
substantial Federal income tax liabilities. See "-- Federal Income Taxation."
DUTIES AND LIMITED POWERS OF THE TRUSTEE
Under the Trust Agreement, the Trustee receives the payments attributable to
the Royalty Interests and pays all expenses, liabilities and obligations of the
Trust. With respect to any liability that is contingent or uncertain in amount
or that otherwise is not currently due and payable, the Trustee has the
discretion to establish a cash reserve for the payment of such liability. The
Trustee is also entitled to cause the Trust to borrow money to pay expenses,
liabilities and obligations that cannot be paid out of cash held by the Trust.
Any such borrowings may be from any source, including from the entity serving as
Trustee or Delaware Trustee, provided that the entity serving as Trustee or
Delaware Trustee shall not be obligated to lend to the Trust. To secure payment
of any such indebtedness (including any indebtedness to the entity serving as
Trustee or Delaware Trustee), the Trustee is authorized to (i) mortgage and
otherwise encumber the entire Trust estate or any portion thereof; (ii) carve
out and convey production payments; (iii) include all terms, powers, remedies,
covenants and provisions it deems necessary or advisable, including confession
of judgment and the power of sale with or without judicial proceedings; and (iv)
provide for the exercise of those and other remedies available to a secured
lender in the event of a default on such loan. The terms of such indebtedness
and security interest, if funds were loaned by the entity serving as Trustee or
Delaware Trustee, must be similar to the terms which such entity would grant to
a similarly situated commercial customer with whom it did not have a fiduciary
relationship, and such entity shall be entitled to enforce its rights with
respect to any such indebtedness and security interest as if it were not then
serving as trustee.
The Trustee is authorized and directed to sell and convey the Royalty
Interests without Unitholder approval in certain instances as described in the
Trust Agreement, including (i) upon termination of the Trust, (ii) commencing
January 1, 2003, if a portion of the NPI ceases to produce or is not capable of
producing in commercially paying quantities (see "Item 2 -- The Royalty
Interests -- Sale and Abandonment of Underlying Properties") and (iii) in
connection with payment of a purchase price adjustment for uncompleted wells or
successful Southern Ute Indian claims (see "Item 2 -- The Royalty Interests --
Purchase Price Adjustments" and "-- Title to Properties"). The Trustee is
empowered by the Trust Agreement to employ consultants and agents (including WPC
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and Williams) and to make payments of all fees for services or expenses out of
the assets of the Trust. The Trust has no employees. The administrative
functions of the Trust are performed by the Trustee.
The Trust Agreement authorizes the Trustee to take such action as in its
judgment is necessary or advisable to achieve the purposes of the Trust. The
Trustee is authorized to agree to modifications of the terms of the Conveyance
and to settle disputes with respect thereto, so long as such modifications or
settlements do not result in treatment of the Trust as an association taxable as
a corporation for Federal income tax purposes and such modifications or
settlements do not alter the nature of the Royalty Interests as a right to
receive a share of the proceeds of production from the Underlying Properties
which, with respect to the Trust, are free of any operating rights, expense or
cost. The Trust Agreement provides that cash being held by the Trustee as a
reserve for liabilities or for distribution at the next distribution date will
be placed in demand accounts, U.S. government obligations, repurchase agreements
secured by such obligations, or certificates of deposit, but the Trustee is
otherwise prohibited from acquiring any asset other than the Royalty Interests
or engaging in any business or investment activity of any kind whatsoever. The
Trustee may deposit funds awaiting distribution in an account with the Trustee
or Delaware Trustee provided the interest paid equals the amount paid by the
Trustee or Delaware Trustee on similar deposits.
LIABILITIES OF THE DELAWARE TRUSTEE AND THE TRUSTEE
Each of the Delaware Trustee and the Trustee may act in its discretion and
shall be personally or individually liable only for fraud or acts or omissions
in bad faith or which constitute gross negligence and will not be otherwise
liable for any act or omission of any agent or employee unless such trustee has
acted in bad faith or with gross negligence in the selection and retention of
such agent or employee. Each of the Delaware Trustee and the Trustee will be
indemnified from the Trust assets for any liability, expense, claim, damage or
other loss incurred in performing its duties, unless resulting from gross
negligence, fraud or bad faith (the Delaware Trustee or the Trustee will be
indemnified from the Trust assets against its own negligence which does not
constitute gross negligence), and will have a first lien upon the assets of the
Trust as security for such indemnification and for reimbursements and
compensation to which it is entitled. WPC and Williams have agreed to indemnify
each of the Delaware Trustee and the Trustee against certain environmental and
securities laws liabilities, respectively, provided that the Trustee and
Delaware Trustee are generally required to first be indemnified from Trust
assets before seeking indemnification from WPC or Williams. Neither the
Delaware Trustee nor the Trustee shall be entitled to indemnification from
Unitholders (except in connection with lost or destroyed Unit certificates).
TERMINATION AND LIQUIDATION OF THE TRUST
The Trust will not terminate prior to January 1, 2003, except upon the
affirmative vote of the holders of not less than 75 percent of the outstanding
Units to liquidate the Trust. Thereafter, the Trust will terminate upon the
first to occur of (i) an affirmative vote of the holders of not less than a
majority of the outstanding Units to liquidate the Trust; (ii) such time as the
ratio of the cash amounts received by the Trust from the Royalty Interests
(excluding deductions for capital expenditures for enhanced recovery or similar
operations on the WI Properties) to administrative costs of the Trust is less
than 1.2 to 1.0 for three consecutive calendar quarters; (iii) such time as the
Royalty Interests held by the Trust have been sold by the Trust; (iv) March 1 of
any calendar year if, based on a reserve report as of December 31 of the prior
year, it is determined that, as of such date, the net present value (discounted
at 10 percent) of the estimated future net revenues (calculated in accordance
with criteria established by the Securities and Exchange Commission (the
"Commission") but using the average monthly Blanco Hub Spot Price (as defined;
see "Item 2 -- The Royalty Interests -- Gas Purchase Contract")) of proved
reserves attributable to the Royalty Interests is equal to or less than $30
million; and (v) December 31, 2012 (the date of any such occurrence is referred
to herein as the "Termination Date"). Following termination, the Trustee and
the Delaware Trustee will continue to act as trustees of the Trust until all
remaining Trust assets have been sold and the net proceeds from such sales
distributed to Unitholders.
Upon the termination of the Trust, the Trustee will use best efforts (as
defined in the Trust Agreement) to sell any remaining Royalty Interests for cash
pursuant to the procedures described herein. The Trustee will retain an
investment banking firm (the "Advisor") on behalf of the Trust who will assist
the Trustee in selling the remaining
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Royalty Interests then owned by the Trust. WPC has the right, but not the
obligation, to purchase all remaining Royalty Interests following termination of
the Trust as described in the following paragraph.
WPC may, within 60 days following the Termination Date, make a cash offer to
purchase all of the remaining Royalty Interests then held by the Trust. In the
event such an offer is made by WPC, the Trustee will decide, based on the
recommendation of the Advisor, to either (i) accept such offer (in which case no
sale to WPC will be made unless a fairness opinion is given by the Advisor that
the purchase price is fair to the Trust and Unitholders) or (ii) defer action on
the offer for approximately 60 days and seek to locate other buyers for the
remaining Royalty Interests. If the Trustee defers action on WPC's offer, the
offer will be deemed withdrawn and the Trustee will then use best efforts (as
defined in the Trust Agreement), assisted by the Advisor, to locate other buyers
for the Royalty Interests. At the end of a 120-day period following the
Termination Date, the Trustee is required to notify WPC of the highest of any
other offers, acceptable to the Trustee (which must be an all cash offer),
received during such period (the "Highest Offer Price"). WPC then has the right
(whether or not it made an initial offer), but not the obligation, to purchase
all remaining Royalty Interests for a cash purchase price computed as follows:
(i) if the Highest Offer Price is more than 105 percent of WPC's original offer
(or if WPC did not make an initial offer), the purchase price will be 105
percent of the Highest Offer Price, or (ii) if the Highest Offer Price is equal
to or less than 105 percent of WPC's original offer, the purchase price will be
equal to the Highest Offer Price. If no other acceptable offers are received
for all remaining Royalty Interests, the Trustee may request WPC to submit
another offer for consideration by the Trustee and may accept or reject such
offer.
If a sale of the Royalty Interests is made or a definitive contract for sale
of the Royalty Interests is entered into within a 150-day period following the
Termination Date, the buyer of the Royalty Interests, and not the Trust or
Unitholders, will be entitled to all proceeds of production attributable to the
Royalty Interests following the Termination Date.
In the event that WPC does not purchase the Royalty Interests, the Trustee
may accept any offer for all or any part of the Royalty Interests as it deems to
be in the best interests of the Trust and Unitholders and may continue, for up
to one calendar year after the Termination Date, to attempt to locate a buyer or
buyers of the remaining Royalty Interests in order to sell such interests in an
orderly fashion. If any Royalty Interests have not been sold or a definitive
agreement for sale has not been entered into by the end of such calendar year,
the Trustee is required to sell the remaining Royalty Interests at public
auction, which sale may be to WPC or any of its affiliates.
WPC's purchase rights, as described, may be exercised by WPC and each of its
successors in interest and assigns. WPC's purchase rights are fully assignable
by WPC to any person. The costs of liquidation, including the fees and expenses
of the Advisor, and the Trustee's liquidation fee will be paid by the Trust.
DESCRIPTION OF UNITS
Each Unit represents an equal undivided share of beneficial interest in the
Trust and is evidenced by a transferable certificate issued by the Trustee.
Each Unit entitles its holder to the same rights as the holder of any other
Unit, and the Trust has no other authorized or outstanding class of equity
security. At March 15, 1997, there were 9,700,000 Units outstanding. The Trust
may not issue additional Units.
DISTRIBUTIONS AND INCOME COMPUTATIONS
The Trustee determines for each quarter the amount of cash available for
distribution to Unitholders. Such amount (the "Quarterly Distribution Amount")
is 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 ending
prior to the dissolution of the Trust from the Royalty Interests then held by
the Trust, plus, with certain exceptions, any other cash receipts of the Trust
during such quarter (which might include purchase price adjustments paid by WPC
and sales proceeds not sufficient in amount to qualify for special distribution
as described in the next paragraph, and interest), over the
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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. Based on the
payment procedures relating to the Royalty Interests, cash received by the
Trustee in a particular quarter from the Royalty Interests generally represents
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. 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 expected to be earned on such
Quarterly Distribution Amount from the date of receipt thereof by the Trustee to
the payment date.
WPC may be required to pay to the Trust amounts as an adjustment to the
original purchase price paid for Units. See "Item 2 -- The Royalty Interests --
Title to Properties -- Southern Ute Litigation." In addition, the Royalty
Interests may be sold under certain circumstances and will be sold following
termination of the Trust. Any purchase price adjustments and the proceeds from
sales of the Royalty Interests, less liabilities and expenses of the Trust and
amounts used for cash reserves, will be distributed, together with any interest
expected to be earned thereon, to Unitholders of record on the record date
established for such distribution. A special distribution will be made of
undistributed sales proceeds, purchase price adjustments and other amounts
received by the Trust aggregating in excess of $9,000,000 (a "Special
Distribution Amount"). 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 will be made no later than 15
days after the Special Distribution Amount record date.
The terms of the Trust Agreement seek to assure to the extent practicable
that gross income attributable to cash being distributed will be reported by the
Unitholder who receives such distributions assuming that such Unitholder is the
owner of record on the applicable record date. In certain circumstances,
however, a Unitholder will not receive the cash giving rise to such income. For
example, the Trustee maintains a cash reserve, and is authorized to borrow money
under certain conditions, in order to pay or provide for the payment of Trust
liabilities. Income associated with the cash used to increase that reserve or
to repay any such borrowings must be reported by the Unitholder, even though
that cash is not distributed to him. Likewise, if a portion of a cash
distribution is attributable to a reduction in the cash reserve maintained by
the Trustee, such cash is treated as a reduction to the Unitholder's basis in
his Units and is not treated as taxable income to such Unitholder (assuming such
Unitholder's basis exceeds the amount of the distribution of cash reserve).
TRANSFER OF ROYALTY INTERESTS
WPC is required to pay to the Trust, as a purchase price adjustment, certain
amounts in the event WPC is prohibited from producing or receiving proceeds from
coal seam gas from certain Underlying Properties because of Southern Ute Indian
claims. In such event, the affected Royalty Interests will be released by the
Trust or reconveyed, as the case may be, to WPC or its assigns. WPC or its
assigns may also, at any time after January 1, 2003, purchase for cash all
Royalty Interests attributable to Underlying Properties which are uneconomical
to operate. See "Item 2 -- The Royalty Interests -- Title to Properties" and "-
- - Sale and Abandonment of Underlying Properties." Upon termination of the
Trust, any remaining Royalty Interests will be sold by the Trust and any such
sales may, and under certain circumstances will, be made to WPC or Williams or
their respective successors or assigns. See "-- Description of the Trust --
Termination and Liquidation of the Trust."
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POSSIBLE DIVESTITURE OF UNITS
The Trust Agreement imposes no restrictions based on nationality or other
status of Unitholders. However, the Trust Agreement provides 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, or asserting the
invalidity of or otherwise challenging any portion of the Royalty Interests,
because of the nationality, citizenship or any other status, of any one or more
Unitholders, the Trustee will give written notice thereof to each Unitholder
whose nationality, citizenship or other status is an issue in the proceeding,
which notice will constitute a demand that such Unitholder dispose of his Units
within 30 days. If any Unitholder fails to dispose of his Units in accordance
with such notice, the Trustee shall have the right to cancel all outstanding
certificates issued in the name of such Unitholder, transfer all Units held by
such Unitholder to the Trustee and sell such Units (including by private sale).
The proceeds of such sale (net of sales expenses), pending delivery of
certificates representing the Units, will be held by the Trustee in a non-
interest bearing account for the benefit of the Unitholder and paid to the
Unitholder upon surrender of such certificates. Cash distributions payable to
such Unitholder will also be held in a non-interest bearing account pending
disposition by the Unitholder of the Units or cancellation of certificates
representing the Units by the Trustee.
PERIODIC REPORTS TO UNITHOLDERS
Within 60 days following the end of each of the first three calendar quarters
of each calendar year, the Trustee mails to each party who was a Unitholder of
record (i) on the quarterly record date for such quarter or (ii) on a Special
Distribution Amount record date occurring during such quarter (if any), a report
which shows in reasonable detail the assets and liabilities and receipts and
disbursements of the Trust for such quarter. Unitholders are also furnished
with comparable quarterly information with respect to the Underlying Properties.
Within 120 days following the end of each fiscal year or such shorter period of
time as may be required by the rules of the New York Stock Exchange, the Trustee
mails to Unitholders of record as of a date to be selected by the Trustee an
annual report containing audited financial statements relating to the Trust and
the Underlying Properties.
The Trustee files such returns for Federal income tax purposes as it is
advised are required to comply with applicable law. The Trustee mails to each
party who was a Unitholder of record (i) on the quarterly record date for such
quarter or (ii) on a Special Distribution Amount record date occurring during
such quarter (if any), a report which shows in reasonable detail the information
necessary to permit each Unitholder to make all calculations reasonably
necessary for tax purposes. The Trustee treats all income, credits and
deductions recognized during each quarter as having been recognized by holders
of record on the quarterly record date established for the distribution unless
otherwise advised by counsel. Available year-end tax information permitting
each Unitholder to make all calculations reasonably necessary for tax purposes
is distributed by the Trustee to Unitholders no later than March 15 of the
following year.
Each Unitholder and his duly authorized agents and attorneys have the right
during reasonable business hours to examine and inspect records of the Trust and
the Trustee.
VOTING RIGHTS OF UNITHOLDERS
Unitholders have only such voting rights as are provided in the Trust
Agreement and such rights are more limited than those of stockholders of most
corporations. Unitholder approval is, however, required to terminate the Trust
before January 1, 2003 and to appoint a successor Trustee or Delaware Trustee.
Also, Unitholder approval is required to amend the Trust Agreement (except for
changing the name of the Trust and except to correct or cure ambiguities in the
Trust Agreement which do not adversely affect Unitholders) and to adopt any
amendment to the gas gathering contract relating to production from the
Underlying Properties (the "Gas Gathering Contract") entered into between
Williams Field Services Company (a subsidiary of Williams Energy Group, "WFS")
and WFS Gas Resources Company (a subsidiary of WPC, "WFS Resources") as
successor in interest to Williams Gas Marketing Company (a former subsidiary of
Williams Field Services Group, Inc., which has been merged into another
affiliate of Williams Field Services Group, Inc. "WGM") or to the gas purchase
contract relating to production from the Underlying Properties (the "Gas
Purchase Contract") entered into between WPC and WFS
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Resources (as successor in interest to WGM), if such amendment would materially
adversely affect revenues of the Trust. Unitholders may also remove the Trustee
or Delaware Trustee. Unitholders are not entitled to any rights of appraisal or
similar rights in connection with the termination of the Trust.
The Trust Agreement may be amended, the Delaware Trustee and the Trustee may
be removed and, after December 31, 2002, the Trust may be terminated by a vote
of holders of a majority of the outstanding Units, but no provision of the Trust
Agreement may be amended that would (i) increase the power of the Delaware
Trustee or the Trustee to engage in business or investment activities, or (ii)
alter the rights of the Unitholders as among themselves. Prior to January 1,
2003, the Trust may be terminated only upon the affirmative vote of the holders
of not less than 75 percent of the outstanding Units. All other actions may be
approved by a majority vote of the Units represented at a meeting at which a
quorum, constituting a majority of the outstanding Units, is present or
represented (except that amendment of required voting percentages requires
approval of at least 80 percent of the outstanding Units). The parties to the
Trust Agreement may, without approval of the Unitholders, from time to time,
supplement or amend the Trust Agreement in order to cure any ambiguity or to
correct or supplement any defective or inconsistent provisions, provided such
supplement or amendment is not adverse to the interest of the Unitholders. In
addition, Williams may direct the Trustee to change the name of the Trust which
change shall not require approval of the Unitholders.
Meetings of Unitholders may be called by the Trustee or by Unitholders owning
not less than 10 percent in number of the outstanding Units. All such meetings
shall be held in Dallas, Texas, and written notice of every such meeting setting
forth a time and place of the meeting and the matters proposed to be acted upon
shall be given not more than 60 nor less than 20 days before such meeting. Each
Unitholder shall be entitled to one vote for each Unit owned by such holder.
LIABILITY OF UNITHOLDERS
Consistent with Delaware law, the Trust Agreement provides that the
Unitholders will have the same limitation on personal liability as is accorded
under the laws of such state to stockholders of a corporation for profit. No
assurance can be given, however, that the courts in jurisdictions outside of
Delaware will give effect to such limitation.
TRANSFER AGENT
The Trustee has appointed Chemical Shareholder Services Group, Inc. transfer
agent and registrar for the Units (the "Transfer Agent").
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FEDERAL INCOME TAXATION
THE TAX CONSEQUENCES TO A UNITHOLDER OF THE OWNERSHIP AND SALE OF UNITS WILL
DEPEND IN PART ON THE UNITHOLDER'S TAX CIRCUMSTANCES. EACH UNITHOLDER SHOULD
THEREFORE CONSULT THE UNITHOLDER'S TAX ADVISOR ABOUT THE FEDERAL, STATE AND
LOCAL TAX CONSEQUENCES TO THE UNITHOLDER OF THE OWNERSHIP OF UNITS.
The sections entitled "Federal Income Tax Consequences" and "Risk Factors --
Tax Considerations" appearing in the Prospectus (the "Public Offering
Prospectus") dated January 13, 1993, which constitutes a part of the
Registration Statement on Form S-3 of Williams (Registration No. 33-53662) filed
in connection with the registration of the Units under the Securities Act of
1933 for offer and sale in the Public Offering, set forth, respectively, a
summary of Federal income tax matters of general application that addresses all
material tax consequences of the ownership and sale of the Units acquired in the
Public Offering and a discussion of certain risk factors associated with matters
of Federal income taxation as applied to the Trust and such Unitholders. A copy
of such sections of the Public Offering Prospectus is filed as an exhibit to
this Form 10-K.
In connection with the registration of the Units for offer and sale in the
Public Offering, Williams and the underwriters of the Units received certain
opinions of counsel to Williams (upon which the Trustee and the Delaware Trustee
were entitled to rely), including, without limitation, opinions as to the
material Federal income tax consequences of the ownership and sale of the Units
acquired in the Public Offering. The opinions of counsel to Williams as to such
Federal income tax consequences were based on provisions of the Internal Revenue
Code of 1986, as amended (the "IRC"), as of January 21, 1993, the date of the
closing of the Public Offering, existing and proposed regulations thereunder and
administrative rulings and court decisions as of January 21, 1993, all of which
are subject to changes that may or may not be retroactively applied. Some of
the applicable provisions of the IRC have not been interpreted by the courts or
the Internal Revenue Service ("IRS"). In addition, such opinions of counsel to
Williams were based on various representations as to factual matters made by
Williams and WPC in connection with the Public Offering. As is typically the
case, these opinions were limited in their application to certain investors
purchasing Units in the Public Offering and, as a result, provide no assurance
to investors purchasing Units following the Public Offering.
Neither counsel to the Trust, the Trustee nor the Delaware Trustee,
respectively, has rendered any opinions with respect to any tax matters
associated with the Trust or the Units.
No ruling was requested by Williams, as the sponsor of the Trust, from the
IRS with respect to any matter affecting the Trust or Unitholders. No assurance
can be provided that the opinions of counsel to Williams (which do not bind the
IRS) will not be challenged by the IRS or will be sustained by a court if so
challenged.
SUMMARY OF CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following summary of certain Federal income tax consequences of
acquiring, owning and disposing of Units is based on the opinions of counsel to
Williams on Federal income tax matters, which are set forth in the Public
Offering Prospectus, and is qualified in its entirety by express reference to
the sections of the Public Offering Prospectus identified in the first paragraph
of this "Federal Income Taxation" section. Although the Trust believes that the
following summary contains a description of all of the material matters
discussed in the opinions referenced above, the summary is not exhaustive and
many other provisions of the Federal tax laws may affect individual Unitholders.
Furthermore, the summary does not purport to be complete or to address the tax
issues potentially affecting Unitholders acquiring Units other than by purchase
through the Public Offering. Each Unitholder should consult the Unitholder's
tax advisor with respect to the effects of the Unitholder's ownership of Units
on the Unitholder's personal tax situation.
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Classification and Taxation
of the Trust............. The Trust will be treated as a grantor trust and not
as an association taxable as a corporation. As a
grantor trust, the Trust will not be subject to
Federal income tax. There can be no assurance that
the IRS will not challenge this treatment. The tax
treatment of the Trust and Unitholders could be
materially different if the IRS were to
successfully challenge this treatment.
Taxation of Unitholders.... Each Unitholder will be taxed directly on his
proportionate share of income, deductions and
credits of the Trust attributable to the Royalty
Interests consistent with such Unitholder's
taxable year and method of accounting, and without
regard to the taxable year or method of accounting
employed by the Trust.
Income and Deductions...... The income of the Trust consists primarily of a
specified share of the proceeds from the sale of
coal seam gas produced from the Underlying
Properties. During 1996, the Trust earned interest
income on funds held for distribution and made
adjustments to the cash reserve maintained for the
payment of contingent or future obligations of the
Trust. The deductions of the Trust consist of
severance taxes and administrative expenses. In
addition, each Unitholder is entitled to depletion
deductions. See "Unitholder's Depletion Allowance"
below.
Limits on Deductions
and Credits.............. Generally, a taxpayer is entitled to claim
deductions and tax credits generated by an
investment only if the investment has economic
substance. The application of this principle in
the context of the production and sale of
nonconventional fuels (like coal seam gas) which
generate the Section 29 tax credit is uncertain
because such application has not been addressed
either by a court or the IRS. An investment has
economic substance if the investor can demonstrate
that there is a reasonable possibility of deriving
an economic profit from the investment in excess
of a de minimis amount, apart from tax benefits.
In many cases, economic profit has been computed
by comparing the taxpayer's total cash investment
to the total cash reasonably expected to be
received by the taxpayer as a result of the
investment. At the time of the Public Offering,
Williams, after consultation with its counsel,
expressed its belief only in connection with the
Public Offering that the purchaser of a Unit in
the Public Offering, who did not borrow funds in
order to purchase his Unit, had a reasonable
possibility of deriving an economic profit in
excess of a de minimis amount apart from tax
benefits associated with ownership of the Unit. No
assurance is given either by the Trustee or
counsel to the Trustee to a purchaser of Units in
or following the Public Offering as to whether
(and to what extent) such purchaser will be
entitled to claim deductions and the Section 29
tax credit generated with respect to such Units.
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Section 29 Tax Credits..... Unitholders will be entitled, provided certain
requirements are met, to claim tax credits
pursuant to Section 29 of the IRC with respect to
sales of coal seam gas production attributable to
the NPI, the gross income from which is included
in their taxable income. The Section 29 tax credit
provides to a taxpayer a dollar-for-dollar
reduction in his regular Federal income tax
liability, and, therefore, generally provides to
him a greater benefit than a deduction which
merely reduces the amount of his taxable income.
The Section 29 tax credit applies to coal seam gas
produced and sold prior to January 1, 2003 from
qualifying wells. For a Unitholder who owned the
same Units of record on all four quarterly record
dates during 1996, the available Section 29 tax
credit is approximately $2.366527 per Unit, based
on the first estimate of the GNP implicit price
deflator published by the Bureau of Economic
Analysis.
The availability of Section 29 tax credits is
dependent upon meeting a number of requirements,
many of which are factual in nature. Williams
represented only in connection with the Public
Offering that those factual requirements were met
and Williams expressed its belief in connection
with the Public Offering that substantially all of
the production attributable to the NPI from the
coal seam gas wells identified in the October 1,
1992 Reserve Report (defined herein) qualified for
Section 29 tax credits. At the time of the Public
Offering, counsel to Williams opined as to those
requirements which are statutory or legal in
nature. If any of the factual requirements are
not met, or the opinion not followed, some or all
of the expected Section 29 tax credits may not be
available.
If any portion of the NPI is treated as a
production payment because the NPI is reduced due
to WPC's retained interest, no Section 29 tax
credit will be available to a Unitholder with
respect to production attributable to that
portion. In addition, if the production units or
participating areas are expanded to include
additional production which does not qualify for
the Section 29 tax credit, the amount of Section
29 tax credits available to a Unitholder will be
reduced even though his share of production does
not diminish. Neither WPC nor the Trust can
control whether a production unit or participating
area is expanded.
No Section 29 tax credits will be available under
current law to a Unitholder with respect to
production attributable to the Infill NPI even if
an Infill Well recovers a portion of the reserves
that prior to the drilling and completion of an
Infill Well were recoverable from a well burdened
by the NPI that qualified for Section 29 tax
credits.
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Limits on Unitholder's Use
of Credits............... In any year, a Unitholder is permitted to reduce his
regular Federal income tax liability by the
Section 29 tax credits allocated to such
Unitholder for such year on a dollar-for-dollar
basis, but only to the extent such Unitholder's
regular tax liability exceeds his alternative
minimum tax liability (with certain adjustments).
Any amount of Section 29 tax credit in excess of a
Unitholder's total regular Federal income tax
liability for a year is permanently lost. Section
29 tax credits cannot be used to reduce a
Unitholder's liability for any alternative minimum
tax for any taxable year but can be carried
forward to reduce his regular tax liability in a
subsequent year (subject to the applicable rules
governing such carryforward(s)).
Quarterly Allocations...... Under the IRC, a Unitholder is entitled to Section
29 tax credits only to the extent that he is an
owner of the economic interest at the time the
coal seam gas is produced. The Trustee allocates
the income received by the Trust for a quarter,
and the Section 29 tax credit allocable to such
income, to Unitholders of record on the quarterly
record date for such quarter. Such an allocation
may be challenged by the IRS, but any challenge is
likely to have a material adverse effect only if
successful and only for Unitholders who do not own
Units for a full quarter for each record date,
particularly Unitholders who acquire Units shortly
before a record date and sell shortly after a
record date.
Unitholder's Depletion
Allowance................ Each Unitholder is entitled to amortize the cost of
the Units through cost depletion over the life of
the NPI (or if greater, through percentage
depletion equal to 15 percent of gross income). If
any portion of the NPI is treated as a production
payment or is not treated as an economic interest,
however, a Unitholder will not be entitled to
depletion in respect of such portion.
Non-Passive Activity Income,
Credits and Loss......... The income, credits and expenses of the Trust will
not be taken into account in computing the passive
activity losses and income under Section 469 of
the IRC for a Unitholder who acquires and holds
Units as an investment and did not acquire them in
the ordinary course of a trade or business.
Section 29 tax credits generated by an investment
in Units, therefore, can be utilized to offset
regular tax liability on income from any source,
whether active or passive, subject to other
limitations discussed herein or arising from the
individual tax circumstances of each Unitholder.
See "Limits on Unitholder's Use of Credits" above.
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Unitholder Reporting
Information.............. The Trustee furnishes to Unitholders tax information
concerning royalty income, depletion and the
Section 29 tax credits on an annual basis. Year-
end tax information is furnished to Unitholders no
later than March 15 of the following year. See the
second paragraph under "Description of Units --
Periodic Reports to Unitholders."
Tax Shelter Registration... The Trust is registered as a "tax shelter" and its
tax shelter registration number is 92-364000072.
Issuance of a tax shelter registration number does
not indicate that the investment in Units or the
claimed tax benefits have been reviewed, examined
or approved by the IRS.
Substantial Understatement
Penalty.................. Section 6662 of the IRC imposes a penalty in certain
circumstances for a substantial understatement of
taxes if a taxpayer's tax liability is understated
by more than the greater of (a) 10 percent of the
taxes required to be shown on the return and (b)
$5,000 ($10,000 for most corporations). The
penalty (which is not deductible) is 20 percent of
the understatement.
Except in the case of understatements attributable
to "tax shelter" items, which are subject to
special rules discussed below, an item of
understatement will not give rise to the penalty
if: (i) there is or was "substantial authority"
for the taxpayer's treatment of the item or (ii)
all the facts relevant to the tax treatment of the
item are adequately disclosed on the return or on
a statement attached to the return and there is a
reasonable basis for the tax treatment of such
item. In the case of Units, an individual
Unitholder may make adequate disclosure with
respect to particular tax items if certain
conditions are met. Special rules enacted in
December 1994 could affect the application of
these provisions with regard to a corporation
acquiring Units after December 8, 1994, to the
extent such provisions were found to apply to the
ownership of Units.
In the case of understatements attributable to "tax
shelter" items, the substantial understatement
penalty may be avoided only if the taxpayer
establishes that, in addition to having
substantial authority for his position, he
reasonably believed that the treatment claimed was
more likely than not the proper treatment of the
item. A "tax shelter" item is one that arises
from a form of investment if its principal purpose
was the avoidance or evasion of Federal income
tax. Regulations promulgated by the IRS indicate
that an entity or person has a principal purpose
of avoidance or evasion of Federal income tax if
that purpose "exceeds any other purpose." No
assurance is given either by the Trustee or
counsel to the Trustee as to the possible
application of this penalty, in part because such
application depends largely upon the individual
circumstances under which the Units were acquired.
As a result, purchasers of Units in and after the
Public Offering should consult with their personal
tax advisors.
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ERISA CONSIDERATIONS
The section entitled "ERISA Considerations" appearing in the Public Offering
Prospectus sets forth certain information regarding the applicability of the
Employee Retirement Income Security Act of 1974, as amended, and the IRC to
pension, profit-sharing and other employee benefit plans, and is incorporated
herein by reference.
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 IRC of their acquisition and ownership of
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
Unitholders. Unitholders are urged to consult their own legal and tax advisors
with respect to these matters.
Unitholders should consider state and local tax consequences of holding
Units. The Trust owns Royalty Interests burdening gas properties located in New
Mexico and Colorado. Both New Mexico and Colorado have income taxes applicable
to individuals. A Unitholder is generally required to file state income tax
returns and/or pay taxes in those states and may be subject to penalties for
failure to comply with such requirements. In addition, these states may require
the Trust to withhold tax from distributions to Unitholders to the extent such
distributions are attributable to income from properties located in such states.
The Trustee will provide information concerning the Units sufficient to
identify the income from Units that is allocable to each state. Unitholders
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 has been structured to cause the Units to be treated for certain
state law purposes essentially the same as other securities, that is, as
interests in intangible personal property rather than as interests in real
property. If the Units are held to be real property or an interest in real
property under the laws of either or both of such states, a Unitholder, even if
not a resident of such state, could be subject to devolution, probate and
administration laws, and inheritance or estate and similar taxes, under the laws
of such state.
REGULATION AND PRICES
REGULATION OF NATURAL GAS
The production, transportation and sale of natural gas from the Underlying
Properties are subject to Federal and state governmental regulation, including
regulation of tariffs charged by pipelines, taxes, the prevention of waste, the
conservation of gas, pollution controls and various other matters. The United
States has governmental power to impose pollution control measures.
Federal Regulation of Gas. The Underlying Properties are subject to the
jurisdiction of the Federal Energy Regulatory Commission ("FERC") and the
Department of Energy ("DOE") with respect to various aspects of gas operations
including marketing and production of gas. As a result of the Natural Gas
Policy Act of 1978 ("NGPA") and the Natural Gas Wellhead Decontrol Act of 1989
("NGWDA"), as of January 1, 1993, the wellhead price for natural gas is no
longer subject to federal regulation. All sales of natural gas produced from
the Underlying Properties are considered under NGPA and NGWDA to be sold at the
wellhead (as opposed to downstream sales or resales) for purposes of pricing and
therefore are not subject to federal regulation.
17
<PAGE>
The transportation of natural gas in interstate commerce is subject to
federal regulation by FERC under the Natural Gas Act ("NGA") and the NGPA. FERC
has initiated a number of regulatory policy initiatives that may affect the
transportation of natural gas from the wellhead to the market and thus may
affect the marketing of natural gas. Such initiatives include regulations which
are intended to further open access to interstate pipelines by requiring such
pipelines to unbundle their transportation services from sales services and
allow customers to choose and pay for only the services they require, regardless
of whether the customer purchases natural gas from such pipelines or from other
suppliers. Although these regulations should generally facilitate the
transportation of natural gas produced from the Underlying Properties to natural
gas markets, the impact of these regulations on marketing production from the
Underlying Properties cannot be predicted at this time, and such impacts could
be significant.
Legislative Proposals. In the past, Congress has been very active in the
area of gas regulation. Legislation enacted in recent years repeals incremental
pricing requirements and gas use restraints previously applicable. 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 Underlying 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 of gas, including requirements for
obtaining drilling permits, the method of developing new fields, provisions for
the unitization or pooling of gas properties, the spacing, operation, plugging
and abandonment of wells and the prevention of waste of gas resources. The rate
of production may be regulated and the maximum daily production allowable from
gas wells may be established on a market demand or conservation basis or both.
Several states have in recent years enacted or proposed regulations intended
to revise significantly current systems of prorationing gas production. The
modified rules may decrease the total amount of gas produced in New Mexico or
Colorado, and could result in an increase in market prices for gas. The
foregoing developments have fostered debate regarding the purpose and effect of
the new prorationing rules, with opponents of such rules arguing that the
primary purpose thereof is to increase gas prices by withholding supplies from
the market. The Trustee cannot predict what effect, if any, proration rules
will have on the availability of or prices for the Underlying Properties' gas
supplies.
ENVIRONMENTAL REGULATION
General. Activities on the Underlying Properties are subject to existing
Federal, state and local laws (including case law), rules and regulations
governing health, safety, environmental quality and pollution control. It is
anticipated that, absent the occurrence of an extraordinary circumstance or
event, compliance with existing Federal, state and local laws, rules and
regulations regulating health, safety, the release of materials into the
environment or otherwise relating to the protection of the environment will not
have a material adverse effect upon the Trust or Unitholders. The Trustee
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 Underlying
Properties could have on the Trust or Unitholders. However, pursuant to the
terms of the Conveyance, any costs or expenses incurred by WPC in connection
with environmental liabilities arising out of or relating to activities
occurring on, in or in connection with, or conditions existing on or under, the
Underlying Properties before October 1, 1992, will be borne by WPC and not the
Trust and will not be deducted in calculating NPI Net Proceeds or Infill Net
Proceeds. Any environmental costs or expenses that are attributable to WPC's
working interest share of the WI Properties that do not fall within the
preceding sentence will be paid by WPC but will be deducted in calculating NPI
Net Proceeds or Infill Net Proceeds, as the case may be, and will, therefore,
reduce amounts payable to the Trust. Environmental costs or expenses that are
attributable to the Farmout Properties that arise after October 1, 1992 could
reduce the revenue paid to WPC and, therefore, the amount of NPI Net Proceeds.
18
<PAGE>
Solid and Hazardous Waste. The Underlying Properties are carved out of WPC's
interests in certain properties that have produced gas from other formations for
many years. WPC has acted as operator for only a small number of the coal seam
gas wells, and for a relatively short period of time. Williams and WPC have
advised the Trustee that to their knowledge, although WPC and the other
operators have utilized operating and disposal practices that were standard in
the industry at the time, hydrocarbons or other solid or hazardous wastes may
have been disposed or released on or under the Underlying Properties by the
current or previous operators. Federal, state and local laws applicable to gas-
related wastes and properties have become increasingly more stringent. Under
these laws, WPC or an operator of the Underlying 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 operations of the Underlying Properties may generate wastes that are
subject to the Federal Resource Conservation and Recovery Act ("RCRA") and
comparable state statutes. The Environmental Protection Agency (the "EPA") has
limited the disposal options for certain hazardous wastes and may adopt more
stringent disposal standards for nonhazardous wastes.
Superfund. The Comprehensive Environmental Response, Compensation and
Liability Act ("CERCLA"), also known as the "superfund" law, imposes liability,
regardless of 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 current or previous owner and the
current or previous 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, private parties to take actions in
response to threats to the public health or the environment and to seek recovery
from such responsible classes of persons of the costs of such action. In the
course of their operations, the operators of the Underlying Properties have
generated and will generate wastes that may fall within CERCLA's definition of
"hazardous substances." WPC or an operator of the Underlying Properties may be
responsible under CERCLA for all or part of the costs to clean up sites at which
such substances have been disposed.
Air Emissions. The operations of the Underlying Properties are subject to
Federal, state and local regulations concerning the control of emissions from
sources of air contaminants. 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.
Regulatory agencies could require the operators to forego or modify construction
or operation of certain air emission sources.
OSHA/Right-to-know. The operations of the Underlying 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 that
information be organized and maintained about hazardous materials used or
produced in the operations. Certain of this information must be provided to
employees, state and local government authorities and citizens.
COMPETITION, MARKETS AND PRICES
The revenues of the Trust and the amount of cash distributions to Unitholders
depend upon, among other things, the effect of competition and other factors in
the market for natural gas. The gas industry is highly competitive in all of
its phases. WPC encounters competition from major oil and gas companies,
independent oil and gas concerns, and individual producers and operators. Many
of these competitors have greater financial and other resources than WPC.
Competition is also presented by alternative fuel sources, including heating oil
and other fossil fuels.
Demand for natural gas has decreased in recent years in response to economic
factors, conservation, lower prices for alternative energy sources, unseasonably
warm weather, and other factors. Decreased demand has resulted in curtailments
of natural gas production. No assurances can be made that such curtailments
will not continue. In addition, excess natural gas production capacity in the
United States has generally resulted in increased
19
<PAGE>
competitive pressure and significantly lower natural 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 distributions from the Trust through its impact on prices and volumes.
See "Item 2 -- The Royalty Interests -- Historical Gas Sales Prices and
Production."
Demand for natural gas production has historically been seasonal in nature
and prices for gas fluctuate accordingly. Consequently, the amount of cash
distributions by the Trust 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 the
receipt of revenues related to the Underlying Properties and the dates on which
distributions are made to Unitholders, however, any seasonality that affects
production and prices generally should be reflected in distributions that are
made to Unitholders in later periods. See "-- Description of Units --
Distributions and Income Computations."
Prices for natural gas are subject to wide fluctuations in response to
relatively minor changes in supply, market uncertainty and a variety of
additional factors that are beyond the control of the Trust, Williams and WPC.
These factors include political conditions in the Middle East, the price and
quantity of imported oil and gas, the level of consumer product demand, the
severity of weather conditions, government regulations, the price and
availability of alternative fuels and overall economic conditions. In view of
the many uncertainties affecting the supply and demand for natural gas and
natural gas prices, the Trust and Williams are unable to make reliable
predictions of future gas prices, production, or demand or the overall effect
they will have on the Trust.
ITEM 2. PROPERTIES.
THE ROYALTY INTERESTS
The Royalty Interests conveyed to the Trust consist of net profits interests
in the Underlying Properties. The Royalty Interests were conveyed to the Trust
by means of a single instrument of conveyance. The Conveyance was recorded in
the appropriate real property records in each county in New Mexico and Colorado
where the Underlying Properties are located so as to give notice of the Royalty
Interests to creditors and transferees, who would take an interest in the
Underlying Properties subject to the Royalty Interests. The Conveyance was
intended to convey the Royalty Interests as real property interests under
applicable state law.
Williams, through WPC, owns the Underlying Properties subject to and burdened
by the Royalty Interests conveyed to the Trust pursuant to the Conveyance. WPC
receives all payments relating to the Underlying Properties and is required,
pursuant to the Conveyance, to pay to the Trust the portion thereof attributable
to the Royalty Interests. Under the Conveyance, the amounts payable with
respect to the Royalty Interests are computed with respect to each calendar
quarter ending prior to termination of the Trust, and such amounts are to be
paid to the Trust not later than the last day of the calendar month next
following the end of each calendar quarter. The amount paid to the Trust does
not include interest on any amounts payable with respect to the Royalty
Interests which are held by WPC prior to payment to the Trust. WPC is entitled
to retain any amounts attributable to the Underlying Properties which are not
required to be paid to the Trust with respect to the Royalty Interests.
The following description contains a summary of the material terms of the
Conveyance and is subject to and qualified by the more detailed provisions of
the Conveyance, a copy of which is filed as an exhibit to this Form 10-K.
THE UNDERLYING PROPERTIES
The Royalty Interests were conveyed by WPC to the Trust from its net revenue
interest (working interest less lease burdens) in the WI Properties and its net
profits interest in the Farmout Properties. Substantially all of the production
from the Underlying Properties is from the Fruitland coal formation in the San
Juan Basin. The San Juan Basin (the "Basin"), one of the largest gas producing
basins in the United States, encompasses approximately 12,000 square miles in
northwest New Mexico and southwest Colorado, just east of the common corner of
the states
20
<PAGE>
of Utah, Arizona, New Mexico and Colorado known as the Four Corners. It covers
parts of La Plata and Archuleta counties in Colorado, as well as parts of San
Juan, Rio Arriba, McKinley and Sandoval counties in New Mexico. The Basin has
been an active area for coal seam gas development with the Fruitland coal
formation.
Williams acquired the Underlying Properties in 1983 through the acquisition
of Northwest Pipeline Corporation ("Northwest"), and such Underlying Properties
were transferred to WPC on December 31, 1990. Northwest originally owned
working interests which were burdened by overriding royalty interests in the
Underlying Properties. The overriding royalty interests resulted in excessive
burdens and Northwest negotiated settlements with the owners of the overriding
royalty interests. Pursuant to one of these settlements, Northwest and Amoco
Production Company ("Amoco") entered into a joint venture under which Northwest
agreed to assign to Amoco certain oil and gas properties in two exploratory
areas, one of which (the PLA-9 properties) comprises the Farmout Properties. In
consideration for such assignment, Northwest received an overriding royalty
interest in the Farmout Properties. Northwest's rights under the joint venture
agreement were subsequently assigned to WPC, which elected, effective as of
October 1, 1992, to convert the overriding royalty interest in the Farmout
Properties to a 35 percent net profits interest.
Development of the Fruitland coal formation acreage has resulted in the
drilling of 586 gross coal seam gas wells in the Underlying Properties, 21 of
which are in the Farmout Properties. WPC owns mineral rights in the Fruitland
coal formation under 214 oil and gas leases. Under the terms of these leases,
WPC has the right to extract oil and gas from the lease properties. WPC holds
either a record title interest, operating right interest or net profits interest
in the leases. Record title and operating right interests are commonly referred
to as working interests. The Underlying Properties constitute substantially all
of WPC's proved reserves in the Fruitland coal formation. WPC does not operate
any of the coal seam gas wells on the Underlying Properties.
Unitized Areas. Approximately 90 percent of the Fruitland coal formation
proved developed coal seam gas wells on the WI Properties are located within the
boundaries of New Mexico Federal Units. Pursuant to the Federal Mineral Leasing
Act of 1920, as amended, and applicable state regulations, owners of oil and gas
leases in New Mexico created large unitized areas consisting of several
contiguous sections for the orderly development and conservation of oil and gas
reserves. The WI Properties participate in production from the 12 unitized
areas in New Mexico referred to in the following table (the "Federal Units").
Operation and development of the Federal Units is governed by unit agreements
and unit operating agreements (collectively, the "Unit Agreement"). Under the
Unit Agreement and applicable government regulations, the Federal Unit operators
request regulatory approval from the New Mexico Commission of Public Lands, the
New Mexico Oil Conservation Commission and the Bureau of Land Management to
establish or expand participating areas which produce oil and gas in paying
quantities from designated formations. The interests of participants in a
participating area are based on the surface acreage included in the
participating area. Under the terms of the Unit Agreements, the operators,
selected by a vote of the respective working interest owners, perform all
operating functions.
In all of the Federal Units, participating areas have been formed for the
Fruitland coal formation. After the wells capable of producing gas in paying
quantities from the Fruitland coal formation are drilled on the undeveloped
drill blocks included within a Federal Unit, such wells are added to the
participating area if approved in accordance with the appropriate Unit
Agreement. A delay of at least 18-36 months is usually incurred after a well is
completed and producing before it is added to a participating area. As
participating areas are created and expanded, such modification (which will be
effective retroactively to the date production commenced from the wells causing
such expansion) results in a participant owning undivided interests in all of
the producing wells within the participating area. Therefore, WPC's working
interest and net revenue interest in the wells in a Federal Unit or
participating area may be modified retroactively, which could affect
significantly the amount of NPI Net Proceeds with respect to production from
October 1, 1992. An expansion of several participating areas resulted in
increased revenues to the Trust in 1995. If any well(s) that produced or may
have produced marketable quantities of coal seam gas prior to 1980 is included
in or added to a participating area in which the WI Properties participate, the
Conveyance provides that such well(s) will be treated as, and the Trust will
own, a separate net profits interest in such well(s) (the "Pre-80 Production
NPI"). The net proceeds for such Pre-80 Production NPI would be calculated in a
manner similar to the calculation of Infill Net Proceeds, and the Trust's share
of such net proceeds will be 81 percent,
21
<PAGE>
subject to possible decrease upon the same terms as the NPI. If a participating
area expansion includes production from wells that do not qualify for Section 29
tax credits, the tax credit available to Unitholders in respect of production
attributable to the NPI from such Federal Unit could be reduced. See "Item 1 --
Federal Income Taxation."
The following table reflects certain information from the Reserve Report as
of December 31, 1996 prepared by Miller and Lents, Ltd. dated March 17, 1997
(the "December 31, 1996 Reserve Report") regarding the Federal Units in which
the WI Properties participate. At December 31, 1996, the WI Properties covered
565 gross (69 net) coal seam gas wells with working interests ranging from 5.9
percent to 100 percent, with an average working interest of approximately 12.3
percent. The Royalty Interests participate in each Federal Unit and
participating area in which the WI Properties participate based on the acreage
containing wells with proved reserves on December 31, 1996.
<TABLE>
<CAPTION>
UNDERLYING PROPERTIES
---------------------------
ESTIMATED
DISCOUNTED
FUTURE NET
NET PROVED REVENUES
RESERVES (DISCOUNTED
FEDERAL UNIT FEDERAL UNIT OPERATOR (BCF) AT 10%)
- ------------- --------------------- -------- --------------
(IN THOUSANDS)
<S> <C> <C> <C>
San Juan 30-5 Phillips Petroleum Company 27.3 $13,773
San Juan 30-6 Meridian Oil Inc. 24.9 13,401
San Juan 29-6 Phillips Petroleum Company 24.3 13,091
San Juan 32-8 Phillips Petroleum Company 23.4 12,055
San Juan 31-6 Phillips Petroleum Company 12.1 5,845
San Juan 29-7 Meridian Oil Inc. 8.2 4,363
San Juan 32-9 Meridian Oil Inc. 6.9 3,095
San Juan 32-7 Phillips Petroleum Company 5.9 2,748
Northeast Blanco Blackwood & Nichols Co., Ltd. 2.2 1,186
San Juan 29-5 Phillips Petroleum Company 1.1 559
Huerfano Meridian Oil Inc. 0.5 115
San Juan 28-6 Meridian Oil Inc. 0.1 13
</TABLE>
Meridian Oil Inc. is a subsidiary of Burlington Resources Inc. and Blackwood
& Nichols Co., Ltd. is a subsidiary of Devon Energy Corporation.
22
<PAGE>
Well Count and Acreage Summary. The following table shows as of December 31,
1994, 1995 and 1996, the gross and net wells and acreage by proved producing and
nonproducing categories for the WI Properties.
<TABLE>
<CAPTION>
NUMBER OF
WELLS ACRES
---------------- ----------------
GROSS NET GROSS NET
----- --------- -------- ------
<S> <C> <C> <C> <C>
December 31,
- ------------
1994
Producing..... 488 65 150,988 20,681
Nonproducing.. 0 0 0 0
--- -- ------- ------
Total....... 488 65 150,988 20,681
=== == ======= ======
1995
Producing..... 521 70 150,988 20,681
Nonproducing.. 0 0 0 0
--- -- ------- ------
Total....... 521 70 150,988 20,681
=== == ======= ======
1996
Producing..... 565 69 150,988 20,681
Nonproducing.. 0 0 0 0
--- -- ------- ------
Total....... 565 69 150,988 20,681
=== == ======= ======
</TABLE>
Of the total gross wells described above at December 31, 1996, 540 gross
wells are located in unitized areas. In addition to the above, the Farmout
Properties have 21 gross wells.
Properties Outside Unitized Areas. The WI Properties also include interests
held by WPC in 25 proved developed Fruitland formation coal seam gas wells held
in areas outside of Federal Units that are not reflected in the foregoing table.
As of December 31, 1996, WPC's working interest and net revenue interests in
these wells averaged 8.9 percent and 7.3 percent, respectively.
The Farmout Properties consist of a 35 percent net profits interest on a
property farmed out to Amoco in La Plata County, Colorado. Such properties are
not within any Federal Unit boundary. The Farmout Properties are owned, and
most of the wells thereon are operated, by Amoco. Neither Williams, WPC, the
Delaware Trustee, the Trustee nor the Unitholders are able to influence or
control the operation or future development of the Farmout Properties. WPC has
advised the Trustee that it believes that a majority of the production from the
Farmout Properties is sold by Amoco under short-term marketing arrangements at
spot market prices and qualifies for the Section 29 tax credit. No assurance
can be given, however, that Amoco will not in the future subject production from
the Farmout Properties to long-term sales contracts at non-market responsive
prices. A portion of the production from the Farmout Properties is gathered by
WFS pursuant to a gathering contract at rates and subject to other terms that
were negotiated on an arms-length basis. As of December 31, 1996, 21 gross
wells had been drilled on the Farmout Properties. For a further description of
the Farmout Properties, see "-- The NPI."
THE NPI
The NPI generally entitles the Trust to receive 81 percent of the NPI Net
Proceeds, subject to possible decrease as described under "-- NPI Percentage
Changes." NPI Net Proceeds consists generally of the aggregate proceeds
attributable to (i) WPC's net revenue interest based on the sale at the Wellhead
of gas produced from the WI Properties and (ii) the revenue stream received by
WPC from its 35 percent net profits interest in the Farmout Properties, less (a)
WPC's working interest share of property and production taxes on the WI
Properties; (b) WPC's working interest share of actual operating costs on the WI
Properties to the extent in excess of those agreed to be paid by WPC as
described herein; (c) WPC's working interest share of capital costs on the WI
Properties to the
23
<PAGE>
extent in excess of those agreed to be paid by WPC as described herein; and (d)
interest on the unrecovered portion, if any, of the foregoing costs at
Citibank's Base Rate.
Most of the wells reflected in the December 31, 1996 Reserve Report were
drilled prior to 1994. Significant additional capital expenditures were not
incurred during the early years of the production lives of such wells, and it is
not anticipated that further significant capital expenditures will be incurred.
Consequently, the December 31, 1996 Reserve Report was prepared on the basis
that there will be no capital expenditures borne by the Royalty Interests.
Nevertheless, the operators and working interest owners of the wells could elect
at any time to implement measures to increase the producible reserves. These
measures, if implemented, could involve additional compression or enhanced or
secondary recovery operations requiring substantial capital expenditures which
would be proportionately borne by the Royalty Interests.
Exhibit B to the Conveyance reflects estimated annual operating expenses for
wells on the WI Properties. No operating expenses in respect of the WI
Properties will be deducted in calculating NPI Net Proceeds except when the
actual cumulative operating expenses attributable to WPC's working interests in
the WI Properties exceed the estimated cumulative operating expenses reflected
in Exhibit B to the Conveyance as of the close of a calendar quarter (less the
estimated operating costs in such Exhibit that are allocable to two wells that
were repurchased effective as of January 1, 1994 by WPC as a purchase price
adjustment or to any wells that are reconveyed to WPC as uneconomic). The
amount by which such actual cumulative operating expenses exceed estimated
cumulative operating expenses reflected in such Exhibit will be deducted in
calculating NPI Net Proceeds and, therefore, will reduce the amounts payable to
the Trust.
If, during any period, costs and expenses deductible in calculating the NPI
Net Proceeds exceed gross proceeds, neither the Trust nor Unitholders will be
liable for such excess, but the Trust will receive no payments for distribution
to Unitholders with respect to the NPI until future gross proceeds exceed future
costs and expenses plus the cumulative excess of such costs and expenses plus
interest thereon at Citibank's Base Rate. However, if the excess costs are the
result of capital costs incurred for enhanced recovery or similar operations on
the WI Properties, the Trust will receive no less than 20 percent of the NPI Net
Proceeds (calculated before such capital costs are deducted) until such excess
costs plus interest thereon at Citibank's Base Rate are recovered by WPC unless
such capital costs are $3,000,000 or more, in which event the Trust will only
receive payments equal to the administrative costs of the Trust until such
unrecovered costs plus interest thereon at Citibank's Base Rate are less than
$3,000,000.
The calculation of NPI Net Proceeds includes amounts received by WPC in
respect of its 35 percent net profits interest in the Farmout Properties. WPC's
net profits interest in the Farmout Properties is calculated on a total
operations basis and is defined as lease revenues less burdens, operating
expenses (including overhead as defined in the applicable operating agreement)
and all taxes related to the value of reserves, production, property and
equipment (e.g., severance and ad valorem taxes).
WPC has advised the Trustee that the majority of the coal seam gas from the
Farmout Properties is sold by Amoco under short-term marketing arrangements at
spot market prices and the remainder is marketed by the other operators of the
wells in the Farmout Properties. Neither the Gas Purchase Contract nor the Gas
Gathering Contract covers the volumes produced from the Farmout Properties.
RESERVE REPORT
The following table summarizes net proved reserves estimated as of December
31, 1996, and certain related information for the Royalty Interests and
Underlying Properties from the December 31, 1996 Reserve Report prepared by
Miller and Lents, Ltd., independent petroleum engineers. Summaries of the
December 31, 1996 Reserve Report and the Prior Reserve Reports are filed as
exhibits to this Form 10-K and incorporated herein by reference. See Note 9 of
the Notes to Financial Statements incorporated by reference in Item 8 hereof for
additional information regarding the net proved reserves of the Trust.
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<PAGE>
A net profits interest does not entitle the Trust to a specific quantity of
gas but to a portion of the net proceeds derived therefrom. Ordinarily and in
the case of the Farmout Properties, proved reserves attributable to a net
profits interest are calculated by deducting an amount of gas sufficient, if
sold at the prices used in preparing the reserve estimates for such net profits
interest, to pay the future estimated costs and expenses deducted in the
calculation of the net proceeds of such interest. Because WPC has agreed to pay
certain operating and capital costs with respect to the WI Properties, no amount
of gas in respect of such costs has been deducted from the amount of reserves
attributable to the WI Properties in determining the amount of reserves
attributable to the Royalty Interests. Accordingly, the reserves presented for
the Royalty Interests reflect quantities of gas that are free of future costs
and expenses (other than production, severance and ad valorem taxes in respect
of the WI Properties) if the price and cost assumptions set forth in the
December 31, 1996 Reserve Report occur. The December 31, 1996 Reserve Report
was prepared in accordance with criteria established by the Commission and,
accordingly, is based upon a contractual price for gas for December 1996, of
$1.75 per MMBtu. The December 31, 1996 Reserve Report is also based on the
percentage share of NPI Net Proceeds payable to the Trust remaining at 81
percent.
<TABLE>
<CAPTION>
ROYALTY UNDERLYING
INTERESTS PROPERTIES
--------- ----------
<S> <C> <C>
Net Proved Gas Reserves (Bcf)(a)(b)........................ 149.4 184.4
Estimated Future Net Revenues (in millions)(c)............. $188.4 $208.4
Discounted Estimated Future Net Revenues (in millions)(c).. $124.5 $140.3
</TABLE>
- -----------------------
(a) Although the prices utilized in preparing the estimates in this table are in
accordance with criteria established by the Commission, such prices were
influenced by seasonal demand for natural gas and other factors and may not
be the most representative prices for estimating future net revenues or
related reserve data.
(b) The gas reserves were estimated by Miller and Lents, Ltd. by applying
decline curve analyses utilizing type curves for the various areas in the
Basin. The bases for the consideration of type curves are the production
histories, the water and gas production rates and the initial reservoir
pressures of the wells in the separate areas.
(c) Estimated future net revenues are defined as the total revenues attributable
to the Underlying Properties and Royalty Interests less royalties, severance
and ad valorem taxes, operating costs and future capital expenditures in
excess of estimated amounts to be paid by WPC. Overhead costs (beyond the
standard overhead charges for the nonoperated properties) have not been
included, nor have the effects of depreciation, depletion and Federal income
tax. Estimated future net revenues and discounted estimated future net
revenues are not intended and should not be interpreted as representing the
fair market value for the estimated reserves.
Based upon the production estimates used in the December 31, 1996 Reserve
Report for the January 1, 1997 through December 31, 2002 period, and assuming
constant future Section 29 tax credits at the estimated 1996 rate of $1.016 per
MMBtu, the estimated total future tax credits available from the production and
sale of the net proved reserves from the Royalty Interests would be
approximately $82 million, having a discounted present value (assuming a 10
percent discount rate) of approximately $65 million.
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 petroleum engineers in a manner customary in the industry, are
estimates only, and actual quantities and values of natural gas are likely to
differ from the estimated amounts set forth herein. In addition, the reserve
estimates for the Royalty Interests will be affected by future changes in sales
prices for natural gas produced and costs that are deducted in calculating NPI
Net Proceeds and Infill Net Proceeds. Further, 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 Units. A market value determination would include
many additional factors.
Information concerning historical changes in net proved reserves attributable
to the Underlying Properties, and the calculation of the standardized measure of
discounted future net revenues related thereto, are contained in Note 5
(Supplemental Oil and Gas Reserve Information (Unaudited)) to the Statement of
Revenues and Direct
25
<PAGE>
Operating Expenses for the Underlying Properties contained in the Trust's annual
report to Unitholders for the year ended December 31, 1996. Williams has not
filed reserve estimates covering the Underlying Properties with any Federal
authority or agency other than the Commission.
HISTORICAL GAS SALES PRICES AND PRODUCTION
The following table sets forth the actual net production volumes from the WI
Properties, weighted average lifting costs and information regarding historical
gas sales prices for each of the years ended December 31, 1994, 1995 and 1996:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
Production from the WI Properties (MMcf).................. 20,528 29,050 23,196
Weighted average lifting costs (dollars per Mcf).......... $ 0.09 $ 0.07 $ .08
Weighted average sales price of gas produced from the WI
Properties (dollars per Mcf)............................. $ 1.11 $ 1.10 $ .96
Average Blanco Hub Spot Price (dollars per MMBtu)......... $ 1.63 $ 1.18 $ 1.65
</TABLE>
The published Blanco Hub Spot Price for December 1996 was $3.55 per MMBtu.
Information regarding average wellhead sales prices for production from the
Farmout Properties is not available to WPC, although WPC has advised the Trustee
that it believes production from such properties is currently sold by Amoco
under short-term marketing arrangements at spot market prices.
PURCHASE PRICE ADJUSTMENTS
For a description of a potential purchase price adjustment provision, see
"-- Title to Properties -- Southern Ute Litigation."
NPI PERCENTAGE CHANGES
Possible Reduction. If there has been production since October 1, 1992 of
approximately 178.5 Bcf of gas in respect of the Underlying Properties, the
percentage of NPI Net Proceeds payable in respect of the NPI will be reduced
with respect to any additional production from the Underlying Properties if the
internal rate of return of the "Aftertax Cash Flow per Unit" (as defined below)
exceeds certain specified levels. For purposes hereof, "Aftertax Cash Flow per
Unit" is equal to the sum of the following amounts that a hypothetical purchaser
of a Unit in the Public Offering would have received or been allocated if such
Unit were held through the date of such determination: (a) total cash
distributions per Unit plus (b) total tax credits available per Unit under
Section 29 of the IRC less (c) the net taxes payable per Unit (assuming a
Federal income tax rate of 31 percent, which at the time of the formation of the
Trust was the highest Federal income tax rate applicable to individuals).
Internal rate of return ("IRR") is the annual discount rate (compounded
quarterly) that equates the present value of the Aftertax Cash Flow per Unit to
the initial price to the public of the Units in the Public Offering (which was
$20.00 per Unit). Set forth below is a table that reflects the IRR and the
corresponding percentage of NPI Net Proceeds represented by the NPI and the
retained interest of WPC in the NPI Net Proceeds:
<TABLE>
<CAPTION>
NPI WPC'S RETAINED
PERCENTAGE OF PERCENTAGE OF
NPI NET NPI NET
PROCEEDS PROCEEDS
-------------- ---------------
<S> <C> <C>
Internal Rate of Return:
Less than 12%.......... 81% 19%
12% to 14%............. 60 40
More than 14%.......... 40 60
</TABLE>
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<PAGE>
To the extent that WPC pays to the Trust, as a purchase price adjustment, any
amounts in connection with the litigation described under "-- Title to
Properties -- Southern Ute Litigation," the Underlying Properties reserve
threshold specified above (approximately 178.5 Bcf) will be reduced by the
reserves estimated in the October 1, 1992 Reserve Report and attributable to the
Underlying Properties burdened by Royalty Interests in respect of which such
payments are made.
Through December 31, 1996 cumulative production since October 1, 1992 was
122.9 Bcf. Using the definitions described above, which do not include any
terminal value, the internal rate of return is not currently projected by WFS to
be 12 percent or higher until after 1998.
GAS PURCHASE CONTRACT
In accordance with a Confirmation Agreement dated as of May 1, 1995 by and
among WPC, Williams and the Trust (the "Confirmation Agreement"), effective May
1, 1995, WGM assigned to WFS Resources all of its right, title, interest, duties
and obligations under the Gas Purchase Contract, and WFS Resources assumed all
of WGM's right, title, interest, duties and obligations thereunder. In
connection with the Confirmation Agreement, the Trustee received an opinion of
counsel to Williams that the Confirmation Agreement need not be submitted for
approval by vote of the Unitholders.
A copy of the Confirmation Agreement is filed as an exhibit to this Form 10-
K. The following summary of the material provisions of the Confirmation
Agreement is qualified in its entirety by reference to the terms of such
agreement as set forth in such exhibit.
Under the terms of the Gas Purchase Contract, WFS Resources purchases the
natural gas produced by WPC from the WI Properties (except for certain small
volumes) at the Wellhead. The Gas Purchase Contract commenced October 1, 1992
and expires on the termination of the Trust. For the five-year period ending
December 31, 1997 (the "Primary Term"), the monthly price to be paid by WFS
Resources for natural gas purchased pursuant to the Gas Purchase Contract shall
be (a) the $1.70 Minimum Purchase Price, less (b) any costs paid by WFS
Resources to gather, treat and process the gas and deliver it to specified
delivery points and plus (c) under certain circumstances, additional amounts
determined as described below:
(i) If the Index Price in any month during the Primary Term is greater
than $1.94 per MMBtu, then WFS Resources will pay WPC an amount for gas
purchased equal to $1.94 per MMBtu, less the costs paid by WFS Resources to
gather and process such gas and deliver it to specified delivery points, plus
50 percent of the excess of the Index Price over $1.94 per MMBtu (the "Price
Differential"), provided WFS Resources has no accrued Price Credits (defined
below) in the Price Credit Account (defined below). If WFS Resources has
accrued Price Credits in the Price Credit Account, then WFS Resources will be
entitled to reduce the amount in excess of the Minimum Purchase Price (before
deducting gathering and processing costs and costs to deliver the gas to
specified delivery points) that otherwise would be payable by any accrued and
unrecouped Price Credits in the Price Credit Account, and WFS Resources will
not be obligated to pay WPC any amounts in excess of the Minimum Purchase
Price until such time as all accrued Price Credits have been recouped and a
zero balance exists in the Price Credit Account.
(ii) If the Index Price in any month during the Primary Term is greater
than the Minimum Purchase Price but less than or equal to $1.94 per MMBtu,
then WFS Resources will pay WPC an amount for each MMBtu purchased equal to
the Index Price less the costs paid by WFS Resources to gather and process
such gas and deliver it to specified delivery points, provided WFS Resources
has no accrued Price Credits in the Price Credit Account. If WFS Resources
has accrued and unrecouped Price Credits in the Price Credit Account, then
WFS Resources will be entitled to reduce the amount in excess of the Minimum
Purchase Price (before deducting gathering and processing costs and costs to
deliver the gas to specified delivery points) that otherwise would be payable
by any accrued and unrecouped Price Credits in the Price Credit Account, and
WFS Resources will not be obligated to pay WPC any amounts in excess of the
Minimum Purchase Price until such time as all accrued Price Credits have been
recouped and a zero balance exists in the Price Credit Account.
27
<PAGE>
(iii) If the Index Price in any month during the Primary Term (or thereafter
as long as WFS Resources elects to continue paying the Minimum Purchase
Price) is less than the Minimum Purchase Price, then WFS Resources will pay
for each MMBtu of gas purchased the Minimum Purchase Price less the costs
paid by WFS Resources to gather and process such gas and deliver it to
specified delivery points, and if such month commences on or after January 1,
1994, WFS Resources will receive a credit (the "Price Credit") from WPC for
each MMBtu of natural gas so purchased by WFS Resources equal to the
difference between the Minimum Purchase Price and the Index Price. WPC is
required to establish and maintain an account (the "Price Credit Account")
containing the accrued and unrecouped amount of such Price Credits. No Price
Credits were accrued in respect of production purchased by WFS Resources
prior to January 1, 1994.
The Index Price was below the Minimum Purchase Price in each month from April
1994 through October 1996. WPC estimates that, as of December 31, 1996, WFS
Resources had aggregate Price Credits in the Price Credit Account of
approximately $25.1 million of which the Trust's 81 percent interest was
approximately $20.3 million.
This entitlement to recoup the Price Credits means that if and when the Index
Price is above the Minimum Purchase Price, future royalty income paid to the
Trust would be reduced until such time as such Price Credits have been fully
recouped. Corresponding cash distributions to Unitholders would also be
reduced.
After the Primary Term, WFS Resources will have an annual option (which
option can be exercised only once during the term of the Gas Purchase Contract)
to discontinue paying the Minimum Purchase Price by giving notice of its
election to pay solely the Index Price (less the costs paid by WFS Resources to
gather, treat and process such gas and deliver it to specified delivery points).
If WFS Resources so elects to discontinue paying the Minimum Purchase Price, WFS
Resources will no longer be entitled to retain the Price Differential when the
Index Price exceeds $1.94 per MMBtu and any accrued and unrecouped Price Credits
will be extinguished. Since there is no published price in the Basin for
wellhead deliveries, the wellhead price in the Gas Purchase Contract is
determined by utilizing a published price which is inclusive of gathering,
treating and processing costs. As used herein, "Index Price" means 97 percent
of the Blanco Hub Spot Price. The Blanco Hub Spot Price is a posted index price
per MMBtu (dry basis) published bi-monthly in Inside FERC's Gas Market Report
for "El Paso Natural Gas Company, San Juan." In the event a Blanco Hub posted
index price is at some time in the future reported by Inside FERC's Gas Market
Report, then the Blanco Hub posted index price will be substituted for the "El
Paso/San Juan" posted index price. The Gas Purchase Contract provides for an
alternative indexing mechanism in the event the Inside FERC's Gas Market Report
indexes are modified or discontinued. All prices used as index prices are
delivered prices at the specified point of delivery and are, therefore, before
deducting gathering and/or transportation charges, taxes, treating costs or
other costs payable prior to the delivery points. During periods when there is
a Price Differential, WFS Resources will absorb a portion of the gathering
charges based on a formula specified in the Gas Purchase Contract.
A small volume of gas produced from the WI Properties (less than 5 percent)
is sold by the operators of certain wells under gas purchase contracts with
other buyers.
The prices paid to WPC pursuant to the Gas Purchase Contract are prices
payable for the value of gas purchased for production at the Wellhead. Title to
the gas purchased pursuant to the Gas Purchase Contract passes to WFS Resources
at the Wellhead. WFS Resources is responsible for gathering, treating,
processing and marketing all gas purchased pursuant to the Gas Purchase
Contract. Approximately 90 percent of the production from the WI Properties is
gathered by WFS on behalf of WFS Resources. The balance of the production is
gathered on behalf of WFS Resources by third parties. See "-- Gas Gathering
Contract." The price paid to WPC pursuant to the Gas Purchase Contract is after
deducting the costs incurred by WFS Resources to gather, treat and process such
gas (including costs incurred by WFS Resources under the Gas Gathering
Contract). Payments to WPC for gas purchased pursuant to the Gas Purchase
Contract are made by WFS Resources on or before the last day of the first
calendar month next following the end of each calendar quarter.
NPI Net Proceeds and Infill Net Proceeds are calculated on an entitlements or
entitled volume basis, whereby the aggregate proceeds from the sale of gas under
applicable gas sales contracts (excluding production from the
28
<PAGE>
Farmout Properties) are determined by WPC as if WPC had produced and sold its
working interest share of production from the WI Properties, even if the actual
volumes delivered to and sold by WPC are different than the entitlement volumes.
The effect of such an "entitlements basis" calculation is that NPI Net Proceeds
or Infill Net Proceeds and, therefore, the amount thereof paid to the Trust, may
include amounts in respect of production not taken by WPC because of a so-called
imbalance (that is, where a working interest owner is delivered more or less
than the actual share of production to which it is entitled).
The Gas Purchase Contract may not be amended in a manner that would
materially adversely affect the revenues to the Trust without the approval of
the holders of a majority of the Units present or represented at a meeting of
Unitholders at which a quorum (consisting of a majority of the outstanding
Units) is present or represented. As noted elsewhere herein, the Units held by
Williams immediately after the Public Offering may not be voted on any such
amendment nor will such Units be counted for quorum purposes. A copy of the Gas
Purchase Contract is filed as an exhibit to this Form 10-K. The foregoing
summary of the material provisions of the Gas Purchase Contract is qualified in
its entirety by reference to the terms of such agreement as set forth in such
exhibit.
GAS GATHERING CONTRACT
In accordance with the Confirmation Agreement, effective May 1, 1995, WGM
assigned to WFS Resources all of its right, title, interest, duties and
obligations under the Gas Gathering Contract, and WFS Resources assumed all of
WGM's right, title, interest, duties and obligations thereunder.
The Gas Gathering Contract, which will be in effect until December 31, 2022,
subject to annual extensions thereafter, covers approximately 90 percent of the
production from the WI Properties and commits WFS on behalf of WFS Resources to
gather such production (except production from 19 wells in the San Juan 29-7
unit as described below), at rates starting at $.35 per Mcf (plus a fuel
reimbursement estimated to be 6.2 percent to 7.3 percent of gathered volumes on
a Btu equivalent basis, and subject to increase if the CO content of the gas
exceeds 10 percent) and adjusted annually based on average annual price
comparisons determined on the basis of the Blanco Hub Spot Price, provided that
the gathering rate will be no less than $.35 per Mcf increased or decreased on
the basis of an increase or decrease in a published index measuring the gross
domestic product. A significant portion of the gas to be gathered pursuant to
the Gas Gathering Contract must first be gathered from the wellhead to a Federal
Unit central delivery point by Burlington Resources Gathering Inc.
("Burlington"). WFS Resources has been assigned a one-year gathering contract
(with a monthly evergreen provision) whereby Burlington provides interruptible
gathering service at the price of $.06 per Mcf which escalates annually at 3
percent, plus actual fuel used (historically averaging approximately .5
percent). It is anticipated that WFS Resources will be able to extend the term
of this agreement.
The remainder of the production on the WI Properties is not physically
connected to the WFS system and is not covered by the Gas Gathering Contract.
This gas is gathered either by Burlington or El Paso Field Services ("EFS") for
delivery at the Blanco Hub or by Northwest for delivery at the outlet of the
Ignacio Plant in La Plata County, Colorado. WPC has existing long-term
gathering agreements with EFS and short-term gathering agreements with
Burlington with rates and terms generally comparable to the Gas Gathering
Contract.
The Gas Gathering Contract may not be amended in a manner that would
materially adversely affect the revenues to the Trust without the approval of
the holders of a majority of the Units present or represented at a meeting of
Unitholders at which a quorum (consisting of a majority of the outstanding
Units) is present or represented. As noted elsewhere herein, the Units held by
Williams immediately after the Public Offering may not be voted on any such
amendment nor will such Units be counted for quorum purposes.
The Gas Gathering Contract was twice amended each effective as of October 1,
1993 with respect to 19 wells located in the San Juan 29-7 unit. WFS is
obligated to gather production from such wells at a rate of $.36 per Mcf (plus a
fuel reimbursement of 5.5 percent of the Mcfs received at the Wellhead Receipt
Points (as defined)), fixed for a 10 year term. In connection with these
amendments to the Gas Gathering Contract, the Trustee received an opinion of
counsel to Williams that such amendments need not be submitted for approval by
vote of the Unitholders.
29
<PAGE>
The Gas Gathering Contract is proposed to be amended effective as of January
1, 1997, for the purpose of increasing the field rights held by the Trust on the
Manzanares gathering system. The increase would accommodate incremental gas flow
that will occur due to WFS's expansion and enhancement of gathering facilities.
A copy of the Gas Gathering Contract is filed as an exhibit to this Form 10-
K. The foregoing summary of the material provisions of the Gas Gathering
Contract is qualified in its entirety by reference to the terms of such
agreement as set forth in such exhibit.
FEDERAL AND INDIAN LANDS
Approximately 80 percent of the Underlying Properties are burdened by royalty
interests held by the Federal government or the Southern Ute Indian Tribe.
Royalty payments due to the U.S. Government for gas produced from Federal and
Indian lands included in the Underlying Properties must be calculated in
conformance with its interpretation of regulations issued by the Minerals
Management Service ("MMS"), a subagency of the U.S. Department of the Interior
which administers and receives revenues from Federal and Indian royalties on
behalf of the U.S. Government and as agent for the Indian tribes. The MMS
regulations cover both valuation standards which establish the basis for placing
a value on production and cost allowances which define those post-production
costs that are deductible by the lessee.
Where gas is sold by a lessee to a marketing affiliate such as WFS Resources,
the MMS regulations essentially ignore the lessee-affiliate transaction and
consider the arm's-length sale by the affiliate as the point of valuation for
royalty purposes. Accordingly, WPC is required to calculate royalty payments
based on the price WFS Resources receives when it markets the gas production
("Resale Price"), notwithstanding the price payable by WFS Resources to WPC
pursuant to the Gas Purchase Contract. With respect to the Farmout Properties,
Amoco pays royalties based on the price it receives for production from such
properties as long as the gas is purchased by nonaffiliates. The NPI Net
Proceeds, a portion of which is payable to the Trust, reflects the deduction of
all royalty and overriding royalty burdens. The ratio of royalties paid on
Federal and Indian lands to the NPI Net Proceeds increases as the Resale Price
exceeds the price under the Gas Purchase Contract.
The MMS regulations permit a lessee to deduct from its gross proceeds its
reasonable actual costs of transportation and processing to transport the gas
from the lease to the point of sale in calculating the market value of its
production. Although WFS Resources deducts the gathering charges paid by it to
WFS, Burlington, EFS and Northwest in calculating the wellhead price it pays to
WPC, the MMS could disallow the deduction of some portion of the gathering
charges after review of such charges on audit of WPC's royalty as discussed
below. If some portion of the gathering charges is disallowed, the MMS will
likely demand additional royalties plus interest on the amount of the
underpayment.
The Trustee has been advised by WPC that the MMS has from time to time
considered the inclusion of the value of the Section 29 tax credits attributable
to coal seam gas production in the calculation of gross proceeds for purposes of
calculating the royalty that is payable to the MMS. On August 30, 1993, the
U.S. Office of the Inspector General (the "OIG") issued an audit report stating
that Section 29 tax credits should be included in the calculation of gross
proceeds and recommending that the MMS pursue collection of additional royalties
with respect to past and future production. On December 8, 1993, however, the
Office of the Solicitor of the U.S. Department of the Interior gave its opinion
to the MMS that the report of the OIG was incorrect and that Section 29 tax
credits are not part of gross proceeds for the purpose of federal royalty
calculations. WPC believes that any such inclusion of the value of Section 29
tax credits for purposes of calculating royalty payments required to be made on
Federal and Indian lands would be inappropriate since all mineral interest
owners, including royalty owners, are entitled to Section 29 tax credits for
their proportionate share of qualifying coal seam gas production. WPC has
advised the Trustee that it would vigorously oppose any attempt by the MMS to
require the inclusion of the value of Section 29 tax credits in the calculation
of gross proceeds. However, if regulations providing for the inclusion of such
value were adopted and upheld, royalty payments would be increased which would
decrease NPI Net Proceeds and, therefore, the amounts payable to the Trust. The
reduction in amounts payable to the Trust would cause a corresponding reduction
in associated Section 29 tax credits available to Unitholders.
30
<PAGE>
The MMS generally audits royalty payments within a six-year period. Although
WPC calculates royalty payments in accordance with its interpretation of the
then applicable MMS regulations, WPC does not know whether the royalty payments
made to the U.S. Government are totally in conformance with MMS standards until
the payments are audited. If an MMS audit, or any other audit by a Federal or
state body, results in additional royalty charges, together with interest,
relating to production from and after October 1, 1992 in respect of the
Underlying Properties, such charges and interest will be deducted in calculating
NPI Net Proceeds for the quarter in which the charges are billed and in each
quarter thereafter until the full amount of the additional royalty charges and
interest have been recovered.
SALE AND ABANDONMENT OF UNDERLYING PROPERTIES
WPC (and any transferees) have the right to abandon any well or working
interest included in the Underlying Properties if, in its opinion, such well or
property ceases to produce or is not capable of producing in commercially paying
quantities. Since WPC does not operate any of the wells on the Underlying
Properties, WPC does not normally control the timing of plugging and abandoning
wells. The Conveyance provides that WPC's working interest share of the costs
of plugging and abandoning uneconomic wells will be deducted in calculating NPI
Net Proceeds.
WPC may sell the Underlying Properties, subject to and burdened by the
Royalty Interests, without the consent of the Unitholders. Under the Trust
Agreement, WPC has certain rights (but not the obligation) to purchase the
Royalty Interests upon termination of the Trust. See "Item 1 -- Description of
the Trust -- Termination and Liquidation of the Trust."
WPC has retained the right to repurchase from the Trust, commencing January
1, 2003, any portion of the NPI conveyed to the Trust if WPC's interest in the
Underlying Properties burdened by such portion of the NPI ceases to produce or
is not capable of producing in commercially paying quantities (ignoring for
purposes of such determination the NPI and the Infill NPI). The purchase price
payable by WPC will be the fair market value at the date of repurchase of the
portion of the NPI or Infill NPI so purchased, as established on the basis of an
appraisal provided by an independent expert.
THE INFILL NPI
The Royalty Interests include the Infill NPI, a net profits interest on any
Infill Wells completed on the WI Properties. No Infill Wells have been drilled
and none will be drilled unless the well spacing limitations for coal seam gas
wells in the Basin are reduced. If such changes occur and Infill Wells are
drilled, the Infill NPI will entitle the Trust to receive 20 percent of the
Infill Net Proceeds. No reserves have been attributed to any Infill Wells in
the December 31, 1996 Reserve Report or the Prior Reserve Reports.
WILLIAMS' PERFORMANCE ASSURANCES
Pursuant to the Conveyance, Williams has agreed to pay each of the following
to the extent not paid by WPC when due and payable: (i) any purchase price
adjustment which WPC is required under the Conveyance to pay to purchase any
proved developed nonproducing wells which are not completed and producing by
December 31, 1993; (ii) any purchase price adjustment which WPC is required
under the Conveyance to pay in the event the Southern Ute Indian Tribe is
successful in showing that WPC has no right to produce or receive proceeds from
the Fruitland coal formation and any loss, charge or liability which WPC is
required under the Conveyance to pay if the Trust is named as a defendant in the
pending Southern Ute Indian Tribe litigation; (iii) all liabilities and
operating and capital expenses which WPC is required under the Conveyance to pay
as owner of the Underlying Properties, including without limitation, WPC's
obligation to pay operating expenses with respect of the WI Properties up to the
cumulative amounts specified in Exhibit B to the Conveyance and the capital
costs incurred in respect of the WI Properties to the extent specified in the
Conveyance, including amounts which WPC is obligated to pay with respect to
environmental liabilities; (iv) all NPI Net Proceeds, Infill Net Proceeds and
other amounts which WPC is obligated to pay to the Trust under the Conveyance,
including amounts which WPC is obligated to pay with respect to environmental
liability; and (v) any proceeds from a sale of any remaining Royalty Interests
that WPC may elect
31
<PAGE>
to purchase upon termination of the Trust ((i) through (v) collectively, the
"WPC Payment Obligations"). Williams has also agreed, to the extent not paid by
WFS Resources when due and payable, to pay all amounts which WFS Resources is
required to pay to WPC in respect of production attributable to the Royalty
Interests pursuant to the terms of the Gas Purchase Contract between WPC and WFS
Resources (the "WFS Resources Payment Obligations"). In the Confirmation
Agreement, Williams expressly confirmed that its agreement to cause the WFS
Resources Payment Obligations to be paid in full when due shall continue in full
force and effect notwithstanding the assignments by WGM of the Gas Purchase
Contract and the Gas Gathering Contract.
In the event and to the extent that WPC does not pay any of the WPC Payment
Obligations in full when due and, in the event and to the extent that WFS
Resources does not pay any of the WFS Resources Payment Obligations in full when
due, the Trustee (but not Unitholders) is entitled, following notice to Williams
and demand for payment by the Trustee and after a 10-day cure period, to enforce
payment by Williams. Williams' assurance obligations terminate upon the earlier
of (i) dissolution of the Trust, (ii) with respect to the WPC Payment
Obligations, upon sale or other transfer by WPC of all or substantially all of
the Underlying Properties, (iii) with respect to the WPC Payment Obligations,
upon one or more sales or other transfers of a majority or more of Williams'
ownership interests in WPC and (iv) with respect to the WFS Resources Payment
Obligations, upon one or more sales or other transfers of a majority or more of
Williams' ownership interests in WFS Resources; provided that, with respect to
(ii), (iii) and (iv) above, only if the transferee has, at the time of transfer,
a rating assigned to outstanding unsecured long-term debt from Moody's Investor
Services of at least Baa3 or from Standard & Poor's Corporation of at least BBB-
(or an equivalent rating from at least one nationally-recognized statistical
rating organization), or such transferee is approved by holders of a majority of
outstanding Units, and in any case, the transferee unconditionally agrees in
writing, to assume and be bound by Williams' remaining assurance obligations.
TITLE TO PROPERTIES
Williams has advised the Trustee that it believes that WPC's title to the
Underlying Properties, and the Trust's title to the Royalty Interests, are good
and defensible in accordance with standards generally accepted in the gas
industry, subject to such exceptions which, in the opinion of Williams, are not
so material as to detract substantially from the use or value of such Underlying
Properties or Royalty Interests. For a description of a lawsuit challenging
WPC's right to produce coal seam gas from certain properties, see "Southern Ute
Litigation" below. As is customary in the gas industry, only a perfunctory
title examination is performed as a lease is acquired, 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 proceeding with
operations. However, WPC (or its predecessor) has owned the leases covering the
Underlying Properties since 1974, and conventional gas has been produced from
formations other than the Fruitland formation covered by all of the leases since
the 1950s. Under these circumstances, WPC conducted an internal review of its
title records prior to the drilling of the coal seam gas wells within the 12
Federal Units, but did not conduct title examinations. In addition to its
internal review, WPC, when requested by the operator, participated in title
examinations prior to the drilling of a few coal seam gas wells located outside
the Federal Units.
The Underlying Properties are typically subject, in one degree or another, to
one or more of the following: (i) royalties and other burdens and obligations,
expressed and implied, under gas leases; (ii) overriding royalties and other
burdens created by WPC 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 WPC's rights to production
and the value of production from the Underlying Properties, they have been taken
into account in calculating the Trust's interests and in estimating the size and
value of the reserves attributable to the Royalty Interests. Except as noted
below, Williams believes that the burdens and obligations affecting the
Underlying Properties and Royalty Interests are conventional in the industry for
similar properties, do not, in the aggregate, materially interfere with the use
of the Underlying Properties and will not materially and adversely affect the
value of the Royalty Interests.
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<PAGE>
Although the matter is not entirely free from doubt, Williams has advised the
Trustee that it believes (based upon the opinions of local counsel to WPC with
respect to matters of Colorado law and New Mexico law) that the Royalty
Interests should constitute real property interests under applicable state law.
Consistent therewith, the Conveyance states that the Royalty Interests
constitute real property interests and it was recorded in the appropriate real
property records of Colorado and New Mexico, the states in which the Underlying
Properties are located in accordance with local recordation provisions. If,
during the term of the Trust, WPC becomes involved as a debtor in bankruptcy
proceedings, it is not entirely clear that all of the Royalty Interests would be
treated as real property interests under the laws of Colorado and New Mexico.
If in such a proceeding a determination were made that the Royalty Interests
constitute real property interests, the Royalty Interests should be unaffected
in any material respect by such bankruptcy proceeding. If in such a proceeding
a determination were made that a Royalty Interest constitutes an executory
contract (a term used, but not defined, in the United States Bankruptcy Code to
refer to a contract under which the obligations of both the debtor and the other
party to such contract are so unsatisfied that the failure of either to complete
performance would constitute a material breach excusing performance by the
other) and not a real property interest under applicable state law, and if such
contract were not to be assumed in a bankruptcy proceeding involving WPC, the
Trust would be treated as an unsecured creditor of WPC with respect to such
Royalty Interest in the pending bankruptcy. Although no assurance is given,
Williams has advised the Trustee that it does not believe that the Royalty
Interests should be subject to rejection in a bankruptcy proceeding as executory
contracts.
Southern Ute Litigation. On December 31, 1991, the Southern Ute Indian Tribe
(the "Tribe") filed a lawsuit in the United States District Court for the
District of Colorado (the "Court") against WPC and other major gas producers in
the San Juan Basin area. In its complaint, the Tribe alleges that certain coal
strata and constituents within that strata were reserved by the United States,
then granted to the Tribe for the Tribe's perpetual benefit and ownership. The
Tribe alleges that the current extraction of coal seam gas and other substances
from the coal strata is and has been done without the Tribe's permission. The
Tribe is seeking a declaration that it owns a beneficial interest in the coal
seam gas and other constituents and their extraction without Tribal consent is
an unlawful trespass; and that the United States Department of the Interior and
its officials have breached their fiduciary duty to the Tribe by failing to
protect the Tribe from the unauthorized extraction of substances found within
the coal strata.
The Tribe seeks compensation from the producers and the oil and gas estate
owners (such as WPC or Amoco as owner of the Farmout Properties) for the value
of extracted substances allegedly wrongfully taken from the Tribe. The Tribe
seeks an order transferring to the Tribe ownership of all equipment and
facilities installed by, or on behalf of, those defendants and utilized in the
extraction of coalbed methane and other substances located within the coal
strata. Under certain circumstances, such as the willful disregard of the
Tribe's ownership interests, the Tribe requests that the extraction facilities
be transferred to the Tribe without deducting production revenue or other
compensation to the defendant. Additionally, the Tribe seeks to recover
severance taxes related to the production of the coal seam gas.
The pending litigation involves approximately 1,745 gross acres comprising a
portion of the Farmout Properties. Two Tribe leases covering approximately
3,600 gross acres included in the Farmout Properties are not covered by the
pending litigation, but could be the subject of future litigation.
WPC, together with the other defendants named in the lawsuit, is vigorously
defending the lawsuit. On September 13, 1994, the Court issued a memorandum
opinion and order in the litigation granting the motion for summary judgment
filed by the defendant class on the question of ownership of the coal seam gas.
The Court ruled that the U.S. Congress did not reserve the coal seam gas in the
Coal Lands Acts of 1909 and 1910, and denied the Tribe's claim of equitable
ownership of the coal seam gas. The Tribe has appealed the order to the U.S.
Court of Appeals for the Tenth Circuit. WPC has agreed to indemnify the Trust
from and against any loss, charge or liability as may arise in respect of the
Underlying Properties or the Royalty Interests, in connection with the defense
of such lawsuit and all legal costs the Trust might incur if the Trust is named
as a defendant in such litigation. WPC's indemnity with respect to the Farmout
Properties is limited to its retained interest share of any settlement costs
that may reduce the revenue stream it receives from its 35 percent net profits
interest in the Farmout
33
<PAGE>
Properties. If the Tribe is successful in showing that WPC has no right to
produce or receive proceeds from the Fruitland coal formation, WPC has agreed to
pay to the Trust, in addition to the indemnification described above, for
distribution to then current Unitholders as a return of a portion of the
original purchase price paid for the Units in the Public Offering, an amount
equal to (a) the product of (i) $1.47 per Mcf times (ii) the estimated reserves
in the October 1, 1992 Reserve Report attributable to the interest of the Trust
in the Farmout Properties subject to such dispute, less (b) the aggregate cash
distributions paid by the Trust prior to the date of such determination and less
(c) the tax benefits, if any, available to the Unitholders and attributable to
the portion of the interest of the Trust in the Farmout Properties so purchased.
Southern Ute Proposed Mineral Assignment Ordinance. As currently proposed,
the 1992 Southern Ute Tribal Proposed Mineral Assignment Ordinance (the
"Proposed Ordinance") could apply to the conveyance to the Trust of the Farmout
Properties involving Tribal mineral interests. Although the Proposed Ordinance
does not specifically reference a net profits interest, it is possible that the
Tribe would consider the conveyance of the NPI to the extent burdening Tribal
mineral interests as being covered by the Proposed Ordinance and requiring the
approval of the Chairman of the Tribe. If the Proposed Ordinance is applicable,
the conveyance of the NPI would not be approved if the Tribe determined that
such creation would not be in the best interests of the Tribe and, absent such
Tribal approval, the NPI would be invalid. In addition, a knowing violation
could result in removal of the offending party from the reservation and that
party's forfeiture of any Tribal mineral interests located on the reservation.
Under the Proposed Ordinance, a mineral interest owner is limited to seeking
declaratory relief in Tribal Court.
Additionally, under the Proposed Ordinance, the Tribe would have a right of
first refusal to acquire the NPI associated with Tribal leases. The Tribe would
have 120 days after the submission of a completed assignment of a Tribal Mineral
Interest Form to exercise the right to acquire said interest for the same terms
and conditions as are disclosed by the filing.
It is unknown if the Proposed Ordinance will be enacted at all, enacted in
its current form or enacted in an altered form. Therefore, the potential effect
of the Proposed Ordinance cannot be assessed at this time.
METHANE CONTAMINATION LITIGATION
In January 1994, an amended class action complaint was filed in State
District Court in La Plata County, Colorado, seeking damages arising out of
alleged methane contamination of water, air and soil resources by the drilling
and production activities of seven operators, including an affiliate of WPC.
This class action complaint was thereafter dismissed, and approximately 40
separate complaints were filed by various plaintiffs in the U.S. District Court
in Colorado containing comparable allegations. The plaintiffs maintain that
drilling in the Fruitland coal formation has caused methane and other substances
to migrate through conventional gas wellbores and natural fractures and faults
to their water sources. The plaintiffs are seeking both compensatory and
punitive damages, injunctive relief, a remediation program and an air and
medical monitoring program.
The U.S. District Court has stayed all of the cases in which WPC's affiliate
is a party until the plaintiffs exhaust all remedies available through the
Southern Ute Tribal Court.
The wells identified by the plaintiffs in the pending litigation do not
include any wells on the Underlying Properties. However, wells on the
Underlying Properties could be added to the pending litigation or made the
subject of future methane contamination litigation. The seven operators are
vigorously defending the pending litigation.
ITEM 3. LEGAL PROCEEDINGS.
See "Item 2 -- The Royalty Interests -- Title to Properties -- Southern Ute
Litigation" for a description of certain litigation to which WPC is a party.
Subject to the preceding sentence, there are no material pending proceedings to
which the Trust is a party or of which any of its property is the subject.
34
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Certain information with respect to the Units of the Trust and the market
therefor is set forth on the inside front cover of the Trust's Annual Report to
Unitholders for the year ended December 31, 1996 under the section entitled
"Units of Beneficial Interest" and is incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA.
Selected financial data of the Trust is set forth on the inside front cover
of the Trust's Annual Report to Unitholders for the year ended December 31, 1996
under "Selected Financial Data" and is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The "Trustee's Discussion and Analysis" of financial condition and results of
operations appearing on pages 2 and 3 of the Trust's Annual Report to
Unitholders for the year ended December 31, 1996 is incorporated herein by
reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements of the Trust and the notes thereto, together with
the report thereon of Ernst & Young LLP, independent auditors, dated March 21,
1997, appearing on pages 4 through 12 of the Trust's Annual Report to
Unitholders for the year ended December 31, 1996 are incorporated herein by
reference.
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.
The Trust has no directors or executive officers. Each of the Trustee and
the Delaware Trustee is a corporate trustee that may be removed as trustee under
the Trust Agreement, with or without cause, at a meeting duly called and held by
the affirmative vote of Unitholders of not less than a majority of all the Units
then outstanding. Any such removal of the Delaware Trustee shall be effective
only at such time as a successor Delaware Trustee fulfilling the requirements of
Section 3807(a) of the Delaware Code has been appointed and has accepted such
appointment, and any such removal of the Trustee shall be effective only at such
time as a successor Trustee has been appointed and has accepted such
appointment.
35
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION.
The following is a description of certain fees and expenses anticipated to be
paid or borne by the Trust, including fees expected to be paid to Williams, the
Trustee, the Delaware Trustee, the Transfer Agent, or their affiliates.
Ongoing Administrative Expenses. The Trust is responsible for paying all
legal, accounting, engineering and stock exchange fees, printing costs and other
administrative and out-of-pocket expenses incurred by or at the direction of the
Trustee or Delaware Trustee and the out-of-pocket expenses of the Transfer
Agent.
Compensation of the Trustee, Delaware Trustee and Transfer Agent. The Trust
Agreement provides for compensation to the Trustee and the Delaware Trustee for
administrative services, out of the Trust assets. The Trustee is paid a 1996
base amount of $36,448, plus an hourly charge for services in excess of a
combined total of 300 hours annually at the Trustee's then standard rate. The
Delaware Trustee is paid a fixed annual amount which was initially set at
$5,000. The Trustee and the Delaware Trustee received total compensation for
1996 of $36,448 and $6,912, respectively. The base amount of the Trustee's fee
and the amount of the Delaware Trustee's fee for administrative services
escalate at the rate of 3 percent per year. The Trustee and the Delaware
Trustee are each entitled to reimbursement for out-of-pocket expenses. Upon
termination of the Trust, the Trustee will receive, in addition to its out-of-
pocket expenses, a termination fee in the amount of $8,000.
The Transfer Agent receives a transfer agency fee of $ 5.50 annually per
account (minimum of $15,000 annually), subject to change each December, based
upon the change in the Producers' Price Index as published by the Department of
Labor, Bureau of Labor Statistics, plus $1.00 for each certificate issued in
excess of 10,000 annually. The total fees paid by the Trust to the Transfer
Agent in 1996 were $20,268.
Fees to Williams. Williams will receive, throughout the term of the Trust,
an administrative services fee for accounting, bookkeeping and informational
services relating to the Royalty Interests as described below in "Item 13 --
Administrative Services Agreement."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
(a) Security Ownership of Certain Beneficial Owners. The following table
sets forth as of March 18, 1997 information with respect to the only Unitholder
who was known to the Trustee to be a beneficial owner of more than 5 percent of
the outstanding Units.
<TABLE>
<CAPTION>
NAME AND ADDRESS NUMBER OF UNITS PERCENT
OF BENEFICIAL OWNER BENEFICIALLY OWNED OF CLASS
------------------- ------------------ ---------
<S> <C> <C>
Williams Holdings of Delaware, Inc... 3,568,791 36.8%
One Williams Center
Tulsa, Oklahoma 74172
</TABLE>
WILLIAMS' OWNERSHIP OF UNITS
Except as noted below, Williams (or its affiliate) has the same voting rights
under the Trust Agreement as other Unitholders. Accordingly, so long as
Williams (or its affiliate) continues to own 36.8 percent of the Units, on any
matters brought to a vote of Unitholders requiring the approval of the holders
of a majority of Units present or represented at a meeting where a majority of
outstanding Units are represented, Williams will likely be able to control the
vote with respect to such matters if not less than the 14 percent of additional
Units necessary for quorum purposes are represented at such meeting. With
respect to the vote on any amendment to the Gas Purchase Contract or the Gas
Gathering Contract, the Units held by Williams (or its affiliate) immediately
after the Public Offering may not be voted nor will such Units be counted for
purposes of determining if a quorum is present so long as such Units continue to
be held by Williams (or its affiliate). This voting limitation will not be
applicable to Units Williams (or its affiliate) may acquire, if any, after the
date of the Public Offering.
36
<PAGE>
In addition, as noted below, certain potential conflicts of interest exist
between Williams and its subsidiaries and the interests of the Trust and the
Unitholders (see "Item 13 -- Potential Conflicts of Interest"). To the extent
that any matters are brought to a vote of Unitholders where the interests of
Williams conflict, or potentially conflict, with the interests of the Trust or
Unitholders, Williams (or its affiliate) can be expected to vote in its own
self-interest and under certain circumstances as noted above, may have
sufficient votes to control the outcome.
(b) Security Ownership of Management. The Trust has no directors or
executive officers. As of March 18, 1997, NationsBank of Texas, N.A., the
Trustee, held an aggregate of 1,000 Units in various fiduciary capacities, with
no investment or voting powers. As of March 18, 1997, Chemical Bank Delaware,
the Delaware Trustee, did not beneficially own any Units.
(c) Changes in Control. Subject to the discussion above in this Item 12
under "Williams' Ownership of Units," the Trustee knows of no arrangements the
operation of which may at a subsequent date result in a change in control of the
Trust.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
ADMINISTRATIVE SERVICES AGREEMENT
Pursuant to the Trust Agreement, Williams and the Trust entered into an
Administrative Services Agreement effective December 1, 1992. A copy of the
Administrative Services Agreement is filed as an exhibit to this Form 10-K.
The Administrative Services Agreement obligates the Trust to pay to Williams
each quarter an administrative services fee for accounting, bookkeeping and
informational services relating to the Royalty Interests. The administrative
services fee was $51,500 per calendar quarter commencing October 1, 1993,
through and including the quarter ended September 30, 1994, and increases 3
percent each October 1. Accordingly, the total of the administrative services
fees paid by the Trust to Williams in 1996 was $220,183.
POTENTIAL CONFLICTS OF INTEREST
The interests of Williams and its subsidiaries and the interests of the Trust
and the Unitholders with respect to the Underlying Properties could at times be
different. As a working interest owner in the WI Properties, WPC could have
interests that conflict with the interests of the Trust and Unitholders. For
example, such conflicts could be due to a number of factors including, but not
limited to, future budgetary considerations and the absence of any contractual
obligation on the part of WPC to spend for development of the WI Properties,
except as noted herein. Such decisions may have the effect of changing the
amount or timing of future distributions to Unitholders. WPC's interests may
also conflict with those of the Trust and Unitholders in situations involving
the sale or abandonment of Underlying Properties. WPC has the right at any time
to sell any of the Underlying Properties subject to the Royalty Interests and
under certain circumstances may abandon any of the WI Properties. Such sales or
abandonment may not be in the best interest of the Trust. In addition, WFS
Resources has the right, exercisable in its sole discretion, at any time after
December 31, 1997 to terminate its Minimum Purchase Price commitment under the
Gas Purchase Contract. Williams' interests could conflict with those of the
Trust and Unitholders to the extent the interests of WFS Resources, under the
Gas Purchase Contract, or WFS and WFS Resources, under the Gas Gathering
Contract, differ from the interests of the Trust and the Unitholders. Except
for amendments to the Gas Gathering Contract or Gas Purchase Contract that must
be approved by the vote of a majority of the Unitholders present at a meeting at
which a quorum is present if such amendment would materially adversely affect
Trust revenues, no mechanism or procedure has been included to resolve potential
conflicts of interest between the Trust and Williams, WPC or their affiliates.
37
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents are filed as a part of this report:
1. Financial Statements (incorporated by reference in Item 8. of this report)
<TABLE>
<CAPTION>
PAGE IN 1996
ANNUAL REPORT
TO UNITHOLDERS
(INCORPORATED
BY REFERENCE)
---------------
<S> <C>
Report of Independent Auditors 4
Statements of Assets, Liabilities and Trust Corpus as of
December 31, 1996 and 1995 5
Statements of Distributable Income for the years ended
December 31, 1996, 1995 and 1994 5
Statements of Changes in Trust Corpus for the
years ended December 31, 1996, 1995 and 1994 5
Notes to Financial Statements 6
</TABLE>
2. Financial Statement Schedules
Financial statement schedules are omitted because of the absence of
conditions under which they are required or because the required information is
included in the financial statements and notes thereto.
3. Exhibits
EXHIBIT
NUMBER EXHIBIT
------- -------
3.1 -- Certificate of Trust of Williams Coal Seam Gas Royalty Trust
(filed as Exhibit 3.1 to the Registrant's Form 10-K for the
year ended December 31, 1992 and incorporated herein by
reference).
4.1 -- Trust Agreement of Williams Coal Seam Gas Royalty Trust
effective as of December 1, 1992, by and among Williams
Production Company, The Williams Companies, Inc. and Chemical
Bank Delaware and NationsBank of Texas, N.A., as trustees
(filed as Exhibit 4.1 to the Registrant's Form 10-K for the
year ended December 31, 1992 and incorporated herein by
reference).
4.2 -- First Amendment to the Trust Agreement of Williams Coal Seam
Gas Royalty Trust effective as of December 15, 1992, by and
among Williams Production Company, The Williams Companies,
Inc., Chemical Bank Delaware and NationsBank of Texas, N.A.
(filed as Exhibit 4.2 to the Registrant's Form 10-K for the
year ended December 31, 1992 and incorporated herein by
reference).
4.3 -- Second Amendment to the Trust Agreement of Williams Coal Seam
Gas Royalty Trust effective as of January 12, 1993, by and
among Williams Production Company, The Williams Companies,
Inc., Chemical Bank Delaware and NationsBank of Texas, N.A.
(filed as Exhibit 4.3 to the Registrant's Form 10-K for the
year ended December 31, 1992 and incorporated herein by
reference).
38
<PAGE>
EXHIBIT
NUMBER EXHIBIT
------- -------
4.4 -- Net Profits Conveyance effective as of October 1, 1992, by
and among Williams Production Company, The Williams Companies,
Inc., and NationsBank of Texas, N.A. and Chemical Bank Delaware
(filed as Exhibit 4.4 to the Registrant's Form 10-K for the
year ended December 31, 1992 and incorporated herein by
reference).
10.1 -- Administrative Services Agreement effective December 1, 1992,
by and between The Williams Companies, Inc. and Williams Coal
Seam Gas Royalty Trust (filed as Exhibit 10.1 to the
Registrant's Form 10-K for the year ended December 31, 1992 and
incorporated herein by reference).
10.2 -- Gas Purchase Agreement dated October 1, 1992, by and between
Williams Gas Marketing Company and Williams Production Company
(filed as Exhibit 10.2 to the Registrant's Form 10-K for the
year ended December 31, 1992 and incorporated herein by
reference).
10.3 -- First Amendment to the Gas Purchase Agreement effective
January 12, 1993, by and between Williams Gas Marketing Company
and Williams Production Company (filed as Exhibit 10.3 to the
Registrant's Form 10-K for the year ended December 31, 1992 and
incorporated herein by reference).
10.4 -- Gas Gathering and Treating Agreement effective October 1,
1992, by and between Williams Field Services Company and
Williams Gas Marketing Company (filed as Exhibit 10.4 to the
Registrant's Form 10-K for the year ended December 31, 1992 and
incorporated herein by reference).
10.5 -- First Amendment to the Gas Gathering and Treating Agreement
effective as of January 12, 1993, by and between Williams Field
Services Company and Williams Gas Marketing Company (filed as
Exhibit 10.5 to the Registrant's Form 10-K for the year ended
December 31, 1992 and incorporated herein by reference).
10.6 -- Amendment #2 to the Gas Gathering and Treating Agreement
dated as of October 1, 1993, by and between Williams Field
Services Company and Williams Gas Marketing Company (filed as
Exhibit 10.6 to the Registrant's Form 10-K for the year ended
December 31, 1993 and incorporated herein by reference).
10.7 -- Amendment #3 to the Gas Gathering and Treating Agreement
dated as of October 1, 1993, by and between Williams Field
Services Company and Williams Gas Marketing Company (filed as
Exhibit 10.7 to the Registrant's Form 10-K for the year ended
December 31, 1993 and incorporated herein by reference).
10.8 -- Confirmation Agreement effective as of May 1, 1995 by and
among Williams Production Company, The Williams Companies, Inc.
and Williams Coal Seam Gas Royalty Trust (filed as Exhibit 10.1
to the Registrant's Form 10-Q for the quarter ended June 30,
1995 and incorporated herein by reference).
13.1 -- 1996 Annual Report to Unitholders.
39
<PAGE>
EXHIBIT
NUMBER EXHIBIT
------- -------
23.1 -- Consent of Miller and Lents, Ltd.
23.2 -- Consent of Ernst & Young LLP.
27.1 -- Financial Data Schedule.
99.1 -- The information under the section captioned "Tax
Considerations" on pages 20-21, and the information under the
sections captioned "Federal Income Tax Consequences" and "ERISA
Considerations" on pages 45-52 of the Prospectus dated January
13, 1993, which constitutes a part of the Registration
Statement on Form S-3 of The Williams Companies, Inc.
(Registration No. 33-53662) (filed as Exhibit 28.1 to the
Registrant's Form 10-K for the year ended December 31, 1992 and
incorporated herein by reference).
99.2 -- Reserve Report, dated November 21, 1992, on the estimated
reserves, estimated future net revenues and the discounted
estimated future net revenues attributable to the Royalty
Interests and the Underlying Properties as of October 1, 1992,
prepared by Miller and Lents, Ltd., independent petroleum
engineers, included as Exhibit A of the Prospectus dated
January 13, 1993, which constitutes a part of the Registration
Statement on Form S-3 of The Williams Companies, Inc.
(Registration No. 33-53662) (filed as Exhibit 28.1 to the
Registrant's Form 10-K for the year ended December 31, 1992 and
incorporated herein by reference).
99.3 -- Reserve Report, dated February 23, 1994, on the estimated
reserves attributable to the Royalty Interests as of December
31, 1993 (but using October 1, 1992 Reserve Report pricing),
prepared by Miller and Lents, Ltd., independent petroleum
engineers (filed as Exhibit 99.4 to the Registrant's Form 10-K
for the year ended December 31, 1993 and incorporated herein by
reference).
99.4 -- Reserve Report, dated February 23, 1994, on the estimated
reserves, estimated future net revenues and the discounted
estimated future net revenues attributable to the Royalty
Interests and the Underlying Properties as of December 31,
1993, prepared by Miller and Lents, Ltd., independent petroleum
engineers (filed as Exhibit 99.5 to the Registrant's Form 10-K
for the year ended December 31, 1993 and incorporated herein by
reference).
99.5 -- Reserve Report, dated February 28, 1995, on the estimated
reserves, estimated future net revenues and the discounted
estimated future net revenues attributable to the Royalty
Interests and the Underlying Properties as of December 31,
1994, prepared by Miller and Lents, Ltd., independent petroleum
engineers (filed as Exhibit 99.6 to the Registrant's Form 10-K
for the year ended December 31, 1994 and incorporated herein by
reference).
99.6 -- Reserve Report, dated March 8, 1996, on the estimated
reserves, estimated future net revenues and the discounted
estimated future net revenues attributable to the Royalty
Interests and the Underlying Properties as of December 31,
1995, prepared by Miller and Lents, Ltd., independent petroleum
engineers (filed as Exhibit 99.7 to the Registrant's Form 10-K
for the year ended December 31, 1995 and incorporated herein by
reference).
40
<PAGE>
EXHIBIT
NUMBER EXHIBIT
------- -------
99.7 -- Reserve Report, dated March 17, 1997, on the estimated
reserves, estimated future net revenues and the discounted
estimated future net revenues attributable to the Royalty
Interests and the Underlying Properties as of December 31,
1996, prepared by Miller and Lents, Ltd., independent petroleum
engineers.
(b) Reports on Form 8-K. No report on Form 8-K was filed by the Registrant
during the last quarter of the period covered by this report.
[Remainder of page intentionally left blank]
41
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
WILLIAMS COAL SEAM GAS
ROYALTY TRUST
By: NATIONSBANK OF TEXAS, N.A., Trustee
By: /s/ RON E. HOOPER
-------------------------------------
Ron E. Hooper
Vice President and Administrator
Date: March 31, 1997
(The Registrant has no directors or executive officers.)
42
<PAGE>
EXHIBIT 13.1
WILLIAMS COAL SEAM GAS Royalty Trust
1996 ANNUAL REPORT AND FORM 10-K
THE TRUST
Williams Coal Seam Gas Royalty Trust (the "Trust") was formed as a Delaware
business trust pursuant to the Trust Agreement of Williams Coal Seam Gas Royalty
Trust entered into effective as of December 1, 1992 by and among Williams
Production Company ("WPC"), as trustor, The Williams Companies, Inc., the parent
company of WPC, and NationsBank of Texas, N.A. (the "Trustee") and Chemical Bank
Delaware, as trustees. The Trust owns net profits interests (the "Royalty
Interests") in proved coal seam gas properties located in the San Juan Basin of
New Mexico and Colorado (the "Underlying Properties"). These Royalty Interests
are the only assets of the Trust, other than cash and temporary investments
being held for the payment of expenses and liabilities and for distribution to
Unitholders.
The Trust makes quarterly cash distributions to Unitholders. The record date for
the quarterly cash distributions is the 45th day following the end of the
calendar quarter or the next business day. The quarterly cash distribution is
payable within 60 days after the end of the calendar quarter. Generally, the
quarterly distribution amount will be determined and announced by the Trustee in
the first week of February, May, August or November each year. Set forth below
are the scheduled record dates and approximate distribution payment dates for
each quarter of 1997 production attributable to the Trust.
<TABLE>
<CAPTION>
================================================================================
1997 1998
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Record Dates May 15 August 14 November 14 February 17
Distribution
- --------------------------------------------------------------------------------
Payment Dates
(approximate) May 30 August 29 November 28 February 27
================================================================================
</TABLE>
UNITS OF BENEFICIAL INTEREST
The units of beneficial interest ("Units") in the Trust are listed and traded on
the New York Stock Exchange under the symbol "WTU." The following table sets
forth, for the periods indicated, the high and low sales prices per Unit and the
amount of quarterly cash distributions per Unit made by the Trust.
<TABLE>
<CAPTION>
======================================================
Sales Price Distributions
- ------------------------------------------------------
1996 High Low per Unit
- ------------------------------------------------------
<S> <C> <C> <C>
First Quarter $21-1/2 $18-1/2 $0.657528
- ------------------------------------------------------
Second Quarter $22-7/8 $17-7/8 $0.488129
- ------------------------------------------------------
Third Quarter $20-1/4 $18-1/4 $0.564256
- ------------------------------------------------------
Fourth Quarter $20-1/2 $18-1/8 $0.535875
- ------------------------------------------------------
1995
- ------------------------------------------------------
First Quarter $19-3/4 $16-1/8 $0.590825
- ------------------------------------------------------
Second Quarter $18-3/4 $16-7/8 $0.672417
- ------------------------------------------------------
Third Quarter $19-1/2 $17-1/4 $0.733171
- ------------------------------------------------------
Fourth Quarter $20-7/8 $19-1/8 $0.695386
======================================================
</TABLE>
At March 18, 1997, there were 9,700,000 Units outstanding and approximately 843
Unitholders of record.
<PAGE>
<TABLE>
<CAPTION>
SELECTED FINANCIAL DATA
====================================================================================
Years Ended December 31 1996 1995 1994 1993
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ROYALTY INCOME $22,330,613 $26,524,115 $22,292,821 $ 19,449,173
- ------------------------------------------------------------------------------------
DISTRIBUTABLE INCOME $21,835,994 $26,053,210 $21,753,943 $ 18,890,743
- ------------------------------------------------------------------------------------
DISTRIBUTABLE INCOME PER UNIT $2.25 $2.69 $2.24 $1.95
- ------------------------------------------------------------------------------------
DISTRIBUTIONS PER UNIT $2.25 $2.69 $2.24 $1.93
- ------------------------------------------------------------------------------------
TOTAL ASSETS AT YEAR END $70,162,736 $82,752,593 $99,948,540 $117,580,814
- ------------------------------------------------------------------------------------
TOTAL CORPUS AT YEAR END $70,021,573 $82,695,754 $99,881,511 $117,515,559
====================================================================================
</TABLE>
TO UNITHOLDERS:
We are pleased to present the 1996 Annual Report to Unitholders of Williams Coal
Seam Gas Royalty Trust (the "Trust"). The report includes a copy of the Trust's
annual report on Form 10-K for the year ended December 31, 1996. The Form 10-K
contains important information concerning the creation and administration of the
Trust, and the assets of the Trust, including coal seam gas reserves
attributable to the net profits interests owned by the Trust estimated as of
December 31, 1996.
The Trust was formed as a Delaware business trust under the Delaware Business
Trust Act pursuant to 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 ("WPC"), as trustor, The
Williams Companies, Inc. ("Williams"), the indirect parent company of WPC, and
NationsBank of Texas, N.A. (the "Trustee") and Chemical Bank Delaware, as
trustees. The Trust was formed to acquire and hold certain net profits interests
(the "Royalty Interests") in proved coal seam gas properties located in the San
Juan Basin of New Mexico and Colorado. These Royalty Interests are the only
assets of the Trust, other than cash and temporary investments being held for
the payment of expenses and liabilities and for distribution to Unitholders.
On January 21, 1993, all 9,700,000 authorized units of beneficial interest in
the Trust ("Units") were issued to WPC upon the conveyance by WPC to the Trust
of the Royalty Interests. On that date, WPC transferred all 9,700,000 Units to
its parent, Williams, by dividend. Williams then sold an aggregate of 6,131,209
Units to the public in an underwritten public offering. During the second
quarter of 1995 Williams transferred its remaining Units to Williams Holdings of
Delaware, Inc., a separate holding company for Williams' non-regulated business.
Under the Trust Agreement, the Trustee has the function of collecting proceeds
attributable to the Royalty Interests and making quarterly cash distributions to
Unitholders after deducting administrative expenses and any amounts necessary
for cash reserves.
Distributable income for the year ended December 31, 1996 was $21,835,994 or
$2.25 per Unit as compared to $26,053,210 or $2.69 per Unit for 1995.
Royalty income for the year totaled $22,330,613 as compared to $26,524,115 for
1995. The Trust also earned interest of $78,549 from temporary investments of
royalty income prior to quarterly distribution dates as compared to $90,476 for
1995. General and administrative expenses for the year were $573,168 as compared
to $561,381 for 1995.
<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.
Production from the Royalty Interests held by the Trust which is sold during the
year qualifies for the Federal income tax credit for producing nonconventional
fuels under Section 29 of the Internal Revenue Code. As a result, for a
Unitholder who owned the same Units of record on all four quarterly record dates
during 1996, the available Section 29 tax credit was approximately $2.366527 per
Unit, based on the first estimate of the GNP implicit price deflator published
by the Bureau of Economic Analysis. The available Section 29 tax credit for a
Unitholder who owned the same Units of record on all four quarterly record dates
during 1995 was $2.584823 per Unit.
Tax information for calendar year 1996 permitting each Unitholder to make all
calculations reasonably necessary for tax purposes was distributed by the
Trustee to Unitholders prior to March 15, 1997, in accordance with the Trust
Agreement. Such income tax information will be provided annually to Unitholders
by the Trustee not later than March 15th of each year.
WILLIAMS COAL SEAM GAS ROYALTY TRUST
BY: NATIONSBANK OF TEXAS, N.A., TRUSTEE
BY:/SIG/RON E. HOOPER
VICE PRESIDENT
MARCH 31, 1997
TRUSTEE'S DISCUSSION AND ANALYSIS
The Trust makes quarterly cash distributions to Unitholders. The only assets of
the Trust, other than cash and cash equivalents being held for the payment of
expenses and liabilities and for distribution to Unitholders, are the Royalty
Interests. The Royalty Interests owned by the Trust burden the Underlying
Properties, which are owned by WPC and not the Trust.
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 until its subsequent distribution to
Unitholders.
The amount of distributable income of the Trust for any calendar year may differ
from the amount of cash available for distribution to the Unitholders in such
year 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 year is determined by deducting from the income received by
the Trust the amount of expenses incurred by the Trust during such year. The
amount of cash available for distribution to Unitholders, however, is determined
in accordance with the provisions of the Trust Agreement and reflects the
deduction from the income actually received by the Trust of the amount of
expenses actually paid by the Trust and adjustment for changes in reserves for
unpaid liabilities. See Note 5 to the financial statements of the Trust
appearing elsewhere in this Annual Report to Unitholders for additional
information regarding the determination of the amount of cash available for
distribution to Unitholders.
For 1996 royalty income received by the Trust amounted to $22,330,613 as
compared to $26,524,115 and $22,292,821 for 1995 and 1994, respectively. The
<PAGE>
decrease in royalty income in 1996 as compared to 1995 was primarily due to
lower production from the Underlying Properties and higher payments of taxes and
of royalties to third parties. Royalty income in 1996 was comparable to 1994
because the lower production levels in 1994 were offset in part by the higher
gas prices received by the Trust in 1994. Production related to the royalty
income received by the Trust in 1996 was 29,180,183 MMBtus as compared to
31,536,784 MMBtus and 24,309,530 MMBtus in 1995 and 1994, respectively. The
lower volumes in 1996 as compared to 1995 were primarily due to normal
production declines along with adjustments resulting from expansion in 1996,
1995 and 1994 of certain participating areas to include additional producing
wells. Interest income for 1996 was $78,549 as compared to $90,476 and $57,391
for 1995 and 1994, respectively, representing lower investment income on lower
average invested balances in 1996 as compared to 1995.
Distributable income for 1996 was $21,835,994 or $2.25 per Unit compared to
$26,053,210 or $2.69 per Unit for 1995 and $21,753,943 or $2.24 per Unit for
1994. These results reflect the factors discussed above regarding royalty
income.
Reserve values in 1996 were impacted by increases in natural gas prices used to
value the reserves. The year end prices required to be utilized in such
valuations were $1.75/Mcf, $.81/Mcf and $1.06/Mcf at December 31, 1996, 1995 and
1994, respectively.
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 year will generally
reflect the sum of (i) proceeds from the sale of gas produced from the WI
Properties (as defined in Note 1 to the financial statements of the Trust
appearing elsewhere in this Annual Report to Unitholders ("Note 1")) during the
first three quarters of that year and the fourth quarter of the preceding
calendar year, plus (ii) cash received by WPC with respect to the Farmout
Properties (as defined in Note 1) during the first three quarters of that year
(or in the month immediately following the third quarter, if received by WPC in
sufficient time to be paid to the Trust) and the fourth quarter of the preceding
calendar year.
Accordingly, the royalty income included in distributable income for the years
ended December 31, 1996, 1995 and 1994, was based on production volumes and
natural gas prices for the twelve months ended in September 30, 1996, 1995 and
1994, respectively, as shown in the table below. The production volumes included
in the table are for production attributable to the Underlying Properties, and
not production attributable to the Royalty Interests owned by the Trust, 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.
<PAGE>
<TABLE>
<CAPTION>
============================================================================
Twelve Months Ended September 30,
- ----------------------------------------------------------------------------
1996 1995 1994
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Production, Net (MMBtu)(1)
WI Properties 21,483,636 24,556,075 18,177,999
- ----------------------------------------------------------------------------
Farmout Properties(2) 7,696,547 6,980,709 6,131,531
- ----------------------------------------------------------------------------
Average Blanco Hub Spot Price
($/MMBtu) $1.34 $1.22 $1.75
- ----------------------------------------------------------------------------
Average Net Wellhead Price WI
Properties ($/MMBtu) $1.11 $1.20 $1.23
============================================================================
</TABLE>
(1) Million British Thermal Units.
(2) Includes previously reported estimated amounts for certain months.
Production from the WI Properties is generally sold pursuant to a gas purchase
contract between WPC and WFS Gas Resources Company ("WFSGR") (as successor to
Williams Gas Marketing Company). The gas purchase contract provides certain
protections for WFSGR in the form of price credits 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. For more detailed information regarding the terms and conditions
of the gas purchase contract, see "Item 2. Properties - Gas Purchase Contract"
in the Form 10-K of the Trust appearing elsewhere in this Annual Report to
Unitholders.
The Blanco Hub Spot Price was below $1.75 per MMBtu during each month of 1995
and most months in 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 December 31, 1996, WFSGR had
aggregate price credits of approximately $25.1 million of which the Trust's 81
percent interest was approximately $20.3 million. The Blanco Hub Spot Price was
above $1.75 per MMBtu in January and February 1997 although there can be no
assurance it will not again fall below such price level.
The entitlement of WFSGR to recoup the price credits means that even though the
applicable Blanco Hub Spot Price is above $1.75 per MMBtu, royalty income
otherwise payable to the Trust will be reduced until such time as all accrued
and unrecouped price credits have been received by WFSGR. Reduced royalty income
to the Trust correspondingly reduces cash distributions to Unitholders. Royalty
income for 1996 was reduced by approximately $4.4 million in price credits
recouped by WFSGR.
The information in this Annual Report to Unitholders 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 Annual Report and the accompanying Form 10-K include "forward-looking
statements" within the meaning of Section 21E of the Securities Exchange Act of
1934, which are intended to be covered by the safe harbor created thereby. All
statements other than statements of historical fact included in this Annual
Report and the accompanying Form 10-K are forward-looking statements. Such
statements include, without limitation, the reserve information and other
statements contained in Item 2, "Properties" of the accompanying Form 10-K.
Although the Trust believes that the expectations reflected in such forward-
looking statements are reasonable, such expectations are subject to numerous
risks and uncertainties and the Trust can give no assurance that they will prove
correct. There are many factors, none of which is within the Trust's control,
that may cause such expectations not to be realized, including, among other
things, factors identified in this Annual Report and the accompanying Form 10-K
affecting oil and gas prices and the recoverability of reserves, and future
economic, competitive and market conditions.
FINANCIAL STATEMENTS
Audited Statements of Assets, Liabilities and Trust Corpus of the Trust as of
December 31, 1996 and 1995, and the related Statements of Distributable Income
and Changes in Trust Corpus for the three years ended December 31, 1996,
are included in this Annual Report to Unitholders immediately following the
Report of Independent Auditors below.
The Royalty Interests owned by the Trust burden the Underlying Properties, which
are owned by WPC and not the Trust. For the information of Unitholders, an
audited Statement of Revenues and Direct Operating Expenses of the
<PAGE>
Underlying Properties for each of the three years in the period ended December
31, 1996 has been prepared and furnished by WPC to the Trustee for inclusion in
this annual Report to Unitholders. This financial statement of WPC appears
immediately preceding the Form 10-K of the Trust.
REPORT OF INDEPENDENT AUDITORS
THE TRUSTEES
WILLIAMS COAL SEAM GAS ROYALTY TRUST
We have audited the accompanying statements of assets, liabilities and trust
corpus of Williams Coal Seam Gas Royalty Trust as of December 31, 1996 and 1995,
and the related statements of distributable income and changes in trust corpus
for each of the three years in the period ended December 31, 1996. These
financial statements are the responsibility of the Trust's management. 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 also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
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.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the assets, liabilities and trust corpus of Williams Coal
Seam Gas Royalty Trust at December 31, 1996 and 1995, and its distributable
income and its changes in trust corpus for each of the three years in the period
ended December 31, 1996, on the basis of accounting described in Note 2.
/SIG/ERNST & YOUNG LLP
Tulsa, Oklahoma
March 21, 1997
FINANCIAL STATEMENTS
WILLIAMS COAL SEAM GAS ROYALTY TRUST
STATEMENTS OF ASSETS, LIABILITIES AND TRUST CORPUS
<TABLE>
<CAPTION>
================================================================================
December 31, 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
- --------------------------------------------------------------------------------
CURRENT ASSETS - CASH AND CASH EQUIVALENTS $ 165,290 $ 29,134
- --------------------------------------------------------------------------------
ROYALTY INTERESTS IN OIL AND GAS PROPERTIES 69,997,446 82,723,459
(LESS ACCUMULATED AMORTIZATION OF $68,569,217
AND $55,843,204 AT DECEMBER 31, 1996 AND 1995,
RESPECTIVELY) (NOTE 2)
- --------------------------------------------------------------------------------
TOTAL $70,162,736 $82,752,593
- --------------------------------------------------------------------------------
LIABILITIES AND TRUST CORPUS
- --------------------------------------------------------------------------------
CURRENT LIABILITIES:
- --------------------------------------------------------------------------------
PAYABLE TO THE WILLIAMS COMPANIES, INC.(NOTE 4) $ 54,636 $ 53,045
- --------------------------------------------------------------------------------
OTHER ACCOUNTS PAYABLE 86,527 3,794
- --------------------------------------------------------------------------------
CURRENT LIABILITIES 141,163 56,839
- --------------------------------------------------------------------------------
TRUST CORPUS (9,700,000 UNITS OF BENEFICIAL 70,021,573 82,695,754
INTEREST AUTHORIZED AND OUTSTANDING) (NOTE 2)
- --------------------------------------------------------------------------------
TOTAL $70,162,736 $82,752,593
================================================================================
</TABLE>
<PAGE>
STATEMENTS OF DISTRIBUTABLE INCOME
<TABLE>
<CAPTION>
============================================================================
Year Ended December 31 1996 1995 1994
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
ROYALTY INCOME $22,330,613 $26,524,115 $22,292,821
- ----------------------------------------------------------------------------
INTEREST INCOME 78,549 90,476 57,391
- ----------------------------------------------------------------------------
TOTAL 22,409,162 26,614,591 22,350,212
- ----------------------------------------------------------------------------
GENERAL AND ADMINISTRATIVE EXPENSES
(NOTE 4) 573,168 561,381 596,269
- ----------------------------------------------------------------------------
DISTRIBUTABLE INCOME $21,835,994 $26,053,210 $21,753,943
- ----------------------------------------------------------------------------
DISTRIBUTABLE INCOME PER UNIT
(9,700,000 UNITS)(NOTE 2) $ 2.25 $ 2.69 $ 2.24
- ----------------------------------------------------------------------------
DISTRIBUTIONS PER UNIT (NOTE 5) $ 2.25 $ 2.69 $ 2.24
============================================================================
</TABLE>
STATEMENTS OF CHANGES IN TRUST CORPUS
<TABLE>
<CAPTION>
=============================================================================
Year Ended December 31 1996 1995 1994
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
- -----------------------------------------------------------------------------
TRUST CORPUS, BEGINNING OF YEAR $82,695,754 $99,881,511 $117,515,559
- -----------------------------------------------------------------------------
Amortization of royalty interests (12,726,013) (17,128,499) (17,693,798)
- -----------------------------------------------------------------------------
DISTRIBUTABLE INCOME 21,835,994 26,053,210 21,753,943
- -----------------------------------------------------------------------------
DISTRIBUTIONS TO UNITHOLDERS (NOTE 5) (21,784,162) (26,110,468) (21,694,193)
- -----------------------------------------------------------------------------
TRUST CORPUS, END OF YEAR $70,021,573 $82,695,754 $99,881,511
=============================================================================
</TABLE>
SEE ACCOMPANYING NOTES
NOTES TO FINANCIAL STATEMENTS
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
<PAGE>
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") and an additional 151,209 Units in the second quarter of
1993. During the second quarter of 1995 Williams transferred its remaining Units
to Williams Holdings of Delaware, Inc. ("WHD"), a separate holding company for
Williams' non-regulated businesses. 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. 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
NPI percentage is subject to certain future downward adjustments based on a rate
of return computation once cumulative aggregate production targets are met. The
complete definitions of NPI Net Proceeds and Infill Net Proceeds are set forth
in the Conveyance.
<PAGE>
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 5).
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 statements of assets, liabilities
and trust corpus at December 31, 1996 and 1995 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 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 the 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. RELATED PARTY TRANSACTIONS
Williams provides accounting, bookkeeping and informational services to the
Trust in accordance with an Administrative Services Agreement effective December
1, 1992. The fee is $50,000 per quarter, escalating 3 percent each October 1
commencing October 1, 1993. Amounts payable by the Trust to Williams at December
31, 1996 and 1995 represent the fourth quarter fees. Aggregate fees incurred by
the Trust to Williams in 1996, 1995 and 1994 were $220,183, $213,771 and
$207,545, respectively.
Aggregate fees paid by the Trust to the trustees in 1996, 1995 and 1994 were
$36,448, $40,990 and $42,806, respectively.
<PAGE>
5. DISTRIBUTIONS TO UNITHOLDERS
The Trustee determines for each quarter the amount of cash available for
distribution to Unitholders. Such amount (the "Quarterly Distribution Amount")
is an amount equal to the excess, if any, of the cash received by the Trust, on
or prior to the last day of the month following the end of each calendar quarter
from the Royalty Interests, plus, with certain exceptions, any other cash
receipts of the Trust during such quarter, over the liabilities of the Trust
paid 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 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.
6. CONTINGENCIES
Under the terms of the gas purchase contract entered into by WPC and WFS Gas
Resources Company ("WFSGR") (as successor to Williams Gas Marketing Company), 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 after
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 throughout most
of 1996. Pursuant to the terms of the Gas Purchase Contract, WPC established a
price credit account. WPC estimates that, as of December 31, 1996, WFSGR had
aggregate price credits in the price credit account of approximately $25.1
million of which the Trust's 81 percent interest was approximately $20.3
million. The applicable index price was above the Minimum Purchase Price in
January and February 1997.
The entitlement of WFSGR to recoup the price credits means that even though the
applicable Blanco Hub Spot Price is above $1.75 per MMBtu, royalty income
otherwise payable to the Trust will be reduced until such time as all accrued
and unrecouped price credits have been received by WFSGR. Reduced royalty income
to the Trust correspondingly reduces cash distributions to the Unitholders.
Through December 1996 royalty income was reduced by approximately $4.4 million
in price credits recouped by WFSGR.
<PAGE>
The majority of the production attributable to the Trust is within Federal
units. Unit participating areas are formed by pooling production from the
participating area. Entitlement to the pooled production is based on each
party's acreage in the participating area divided by the total participating
acreage. Wells drilled outside the participating area may create an enlargement
to the participating area and a revision of the unit ownership entitlement. The
Bureau of Land Management ("BLM") must approve unit participating area
expansions. The effective date for unit expansions is retroactive to the date
the well creating the expansion was tested. The revenues presented in the
accompanying statements of distributable income are on an entitlement basis and
reflect the most recent BLM participating area approvals at December 31, 1996,
1995 and 1994, respectively. There are pending or anticipated applications or
approvals for additional participating area enlargements. WPC has advised the
Trustee that it does not believe that final approval of these unit participating
area enlargements and the resulting retroactive adjustments, if any, will have a
material impact on the revenues as presented in these statements.
The Trustee has been advised by WPC that the Minerals Management Service
("MMS"), a subagency of the U.S. Department of the Interior, has from time to
time considered the inclusion of the value of the Section 29 tax credits
attributable to coal seam gas production in the calculation of gross proceeds
for purposes of calculating the royalty that is payable to the MMS. On August
30, 1993, the U.S. Office of the Inspector General (the "OIG") issued an audit
report stating that Section 29 tax credits should be included in the calculation
of gross proceeds and recommending that the MMS pursue collection of additional
royalties with respect to past and future production. On December 8, 1993,
however, the Office of the Solicitor of the U.S. Department of the Interior gave
its opinion to the MMS that the report of the OIG was incorrect and that Section
29 tax credits are not part of gross proceeds for the purpose of Federal royalty
calculations. WPC believes that any such inclusion of the value of Section 29
tax credits for the purposes of calculating royalty payments required to be made
on Federal and Indian lands would be inappropriate since all mineral interest
owners, including royalty owners, are entitled to Section 29 tax credits for
their proportionate share of qualifying coal seam gas production. WPC has
advised the Trustee that it would vigorously oppose any attempt by the MMS to
require the inclusion of the value of Section 29 tax credits in the calculation
of gross proceeds. However, if such regulations were adopted and upheld, royalty
payments would be increased which would decrease NPI Net Proceeds and,
therefore, the amounts payable to the Trust. The reduction in amounts payable to
the Trust would cause a corresponding reduction in associated Section 29 tax
credits available to Unitholders.
The Southern Ute Indian Tribe (the "Tribe") filed a lawsuit on December 31,
1991, challenging the legal rights of WPC and others to extract coal seam gas
from certain properties within the Tribal boundaries. The Tribe is seeking
compensation from the producers and the oil and gas estate owners for the value
of the gas allegedly wrongfully taken from the Tribe. WPC, together with the
other defendants named in the lawsuit, is vigorously defending the lawsuit. On
September 13, 1994, the court issued a memorandum opinion and order in the
litigation granting the motion for summary judgment filed by the defendant
class on the question of ownership of the coal seam gas. The court ruled that
the U.S. Congress did not reserve the coal seam gas in the Coal Land Acts of
1909 and 1910, and denied the Tribe's claim of equitable ownership of the coal
seam gas. The Tribe has appealed the order to the U.S. Court of Appeals for the
Tenth Circuit. WPC has agreed to indemnify the Trust from and against any loss,
charge or liability as may arise in respect of the Underlying Properties or the
Royalty Interests in connection with the defense of such lawsuit and all legal
costs the Trust might incur if the Trust is
<PAGE>
named as a defendant in such litigation. WPC's indemnity with respect to the
Farmout Properties is limited to its retained interest share of any settlement
costs that may reduce the revenue stream it receives from its 35 percent net
profits interest in the Farmout Properties. If the Tribe is successful in
showing that WPC has no right to produce or receive proceeds from the Fruitland
coal formation, WPC has agreed to pay to the Trust, in addition to the
indemnification described above, for distribution to the then current
Unitholders as a return of a portion of the original purchase price paid for the
Units in the Public Offering, an amount equal to $1.47 per Mcf multiplied by the
estimated reserves in the October 1, 1992 Reserve Report (as defined)
attributable to the interest of the Trust in the Farmout Properties subject to
such dispute minus the aggregate cash distributions paid by the Trust prior to
the date of such redetermination and minus the tax benefits, if any, available
to the Unitholders and attributable to the portion of the interest of the Trust
in the Farmout Properties so purchased. Williams has agreed to pay the above
described obligations of WPC to the extent not paid by WPC when due and payable.
If an adverse decision were to be received, WPC has advised the Trustee of the
Trust that it believes the adjustment to the statements presented here would not
be significant for the periods presented.
Also, a Tribal Proposed Mineral Assignment Ordinance (the "Proposed Ordinance")
could apply to the conveyance to the Trust of the Farmout Properties involving
Tribal mineral interests. Although the Proposed Ordinance does not specifically
reference a net profits interest, it is possible that the Tribe would consider
the assignment of the net profits interest tied to Tribal mineral interests as
being covered by the Proposed Ordinance and requiring the approval of the
Chairman of the Tribe. If the Proposed Ordinance is applicable, the assignment
of the net profits interest would not be approved if the Tribe determined that
such creation would not be in the best interests of the Tribe and, absent such
Tribal approval, the net profits interest would be invalid. In addition, a
knowing violation could result in removal of the offending party from the
reservation and the party's forfeiture of any Tribal mineral interests located
on the reservation. Under the Proposed Ordinance, a mineral interest owner is
limited to seeking declaratory relief in Tribal Court. Additionally, under the
Proposed Ordinance, the Tribe would have a right of first refusal to acquire the
net profits interest associated with Tribal leases. The Tribe would have 120
days after the submission of a completed assignment of a Tribal Mineral Interest
Form to exercise the right to acquire said interest for the same terms and
conditions as are disclosed by the filing. It is unknown if the Proposed
Ordinance will be enacted at all, enacted in its current form or enacted in an
altered form. Therefore, the potential effect of the Proposed Ordinance cannot
be assessed at this time.
While no assurances can be given, the Trustee of the Trust does not believe that
the ultimate resolution of the foregoing matters, taken as a whole, will have a
material adverse effect on the Trust Corpus or distributable income.
7. SUBSEQUENT EVENT
Subsequent to December 31, 1996, the Trust declared the following distribution:
<TABLE>
<CAPTION>
=======================================================================
Quarterly Record Date Payment Date Distribution per Unit
<S> <C> <C>
- -----------------------------------------------------------------------
February 14, 1997 February 28, 1997 $0.408865
=======================================================================
</TABLE>
The Trustee has estimated the Section 29 tax credit associated with the February
28, 1997 quarterly distribution to be $0.43 per Unit.
8. Quarterly Financial Data (Unaudited)
The following table sets forth the royalty income, distributable income and
distributable income per Unit of the Trust for each quarter in the years ended
December 31, 1996 and 1995 (in thousands, except per Unit amounts):
<PAGE>
<TABLE>
<CAPTION>
======================================================================
Calendar Quarter Royalty Income Distributable Income Distributable
per Unit
- ----------------------------------------------------------------------
<S> <C> <C> <C>
1996*
- ----------------------------------------------------------------------
First $6,529 $6,393 $.66
- ----------------------------------------------------------------------
Second 4,818 4,615 .48
- ----------------------------------------------------------------------
Third 5,654 5,559 .57
- ----------------------------------------------------------------------
Fourth 5,530 5,269 .54
- ----------------------------------------------------------------------
$22,331 $21,836 $2.25
======================================================================
1995
- ----------------------------------------------------------------------
First $5,899 5,701 $.59
- ----------------------------------------------------------------------
Second 6,681 6,563 .67
- ----------------------------------------------------------------------
Third 7,088 7,020 .73
- ----------------------------------------------------------------------
Fourth 6,856 6,769 .70
- ----------------------------------------------------------------------
$26,524 $26,053 $2.69
======================================================================
</TABLE>
*Adjustments for unit expansion decreases the distributions for the second,
third and fourth quarters of 1996.
Selected 1996 fourth quarter data are as follows (in thousands except per Unit
amounts):
<TABLE>
<CAPTION>
===================================================
<S> <C>
Royalty income $5,330
- ---------------------------------------------------
Interest income 19
- ---------------------------------------------------
General and administrative expenses (80)
- ---------------------------------------------------
Distributable income $5,269
- ---------------------------------------------------
Distributable income per unit $ .54
(9,700,000 units)
- ---------------------------------------------------
Distribution per unit $ .54
===================================================
</TABLE>
9. SUPPLEMENTAL OIL AND GAS INFORMATION (UNAUDITED)
The net proved reserves attributable to the Royalty Interests have been
estimated as of December 31, 1996, 1995, and 1994, by independent petroleum
engineers. In accordance with Statement of Financial Accounting Standards No.
69, estimates of future net revenues from proved reserves have been prepared
using contractual gas prices and related costs. The standardized measure of
future net revenues from the gas reserves is calculated based on discounting
such future net revenues at an annual rate of 10 percent. The Blanco Hub Spot
Price for December 1996 of $3.55 per MMBtu, after adjustments for certain costs
and provisions of the Gas Purchase Contract, including potential recoupment of
the price credits, resulted in a weighted average wellhead price of $1.35 per
Mcf. The standardized measure of discounted future net revenues below has been
reduced by operating and development costs which such costs are
<PAGE>
paid by Williams and are included in computing the royalty income of the Trust.
The standardized measure has not been reduced for income taxes as no income
taxes are paid by the Trust (Note 3).
Numerous uncertainties are inherent in estimating volumes and value of proved
reserves and in projecting future production rates and timing of development
expenditures. Such reserve estimates are subject to change as additional
information becomes available. The reserves actually recovered and the timing of
production may be substantially different from the reserve estimates.
The reserve estimates as of December 31, 1996, 1995 and 1994 for Royalty
Interests are based on a percentage share of NPI Net Proceeds payable to the
Trust of 81 percent.
<TABLE>
<CAPTION>
=========================================================
Natural Gas(MMcf)
- ---------------------------------------------------------
<S>
<C>
Proved reserves at January 1, 1994 133,902
- ---------------------------------------------------------
Revisions of previous estimates 50,183*
- ---------------------------------------------------------
Production (22,510)
- ---------------------------------------------------------
Proved reserves at December 31, 1994 161,575
- ---------------------------------------------------------
Revisions of previous estimates 30,299*
- ---------------------------------------------------------
Production (29,050)
- ---------------------------------------------------------
Proved reserves at December 31, 1995 162,824
- ---------------------------------------------------------
Revisions of previous estimates 9,763*
- ---------------------------------------------------------
Production (23,196)
- ---------------------------------------------------------
Proved reserves at December 31, 1996 149,391
=========================================================
</TABLE>
*Includes reserve increases resulting from well recompletions and other factors.
All proved reserve estimates presented above at December 31, 1996, 1995 and 1994
and January 1, 1994 are proved developed.
Proved reserves are estimated quantities of 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.
The following table sets forth the standardized measure of discounted future net
revenues at December 31, 1996, 1995 and 1994 relating to proved reserves (in
thousands):
<TABLE>
<CAPTION>
====================================================================
Years Ended December 31, 1996 1995 1994
- --------------------------------------------------------------------
<S> <C> <C> <C>
Future cash inflows $201,046 $131,819 $170,540
- --------------------------------------------------------------------
Future production taxes (13,444) (8,897) (15,646)
- --------------------------------------------------------------------
Future net cash flows 187,602 122,922 154,894
- --------------------------------------------------------------------
10% discount factor (63,149) (43,089) (55,734)
- --------------------------------------------------------------------
Standardized measure of discounted
future net revenues $124,453 $ 79,833 $ 99,160
====================================================================
</TABLE>
<PAGE>
The following table sets forth the changes in the aggregate standardized measure
of discounted future net revenues from proved reserves during the years ended
December 31, 1996, 1995 and 1994 (in thousands):
<TABLE>
<CAPTION>
========================================================================
1996 1995 1994
- ------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at January 1 $ 79,833 $ 99,160 $111,023
- ------------------------------------------------------------------------
Increase (decrease) due to:
- ------------------------------------------------------------------------
Net sales of coal seam gas (20,629) (27,603) (23,443)
- ------------------------------------------------------------------------
Net changes in prices and costs 46,392 (17,547) (29,197)
- ------------------------------------------------------------------------
Development costs incurred 724 449 1,196
- ------------------------------------------------------------------------
Net change in cost estimates (724) (449) (1,196)
- ------------------------------------------------------------------------
Change in estimated volumes 8,133 14,856 30,798
- ------------------------------------------------------------------------
Accretion of discount 7,983 9,916 11,102
- ------------------------------------------------------------------------
Other 2,741 1,051 (1,123)
- ------------------------------------------------------------------------
44,620 (19,737) (11,863)
- ------------------------------------------------------------------------
Balance at December 31 $124,453 $ 79,833 $ 99,160
========================================================================
</TABLE>
SUPPLEMENTAL INFORMATION
The Royalty Interests owned by the Trust burden the Underlying Properties, which
are owned by WPC and not the Trust. For the information of Unitholders, the
following Statement of Revenues and Direct Operating Expenses of the Underlying
Properties for each of the three years in the period ended December 31, 1996,
audited by Ernst & Young LLP, independent auditors, has been prepared and
furnished by WPC to the Trustee for inclusion herein.
REPORT OF INDEPENDENT AUDITORS
THE BOARD OF DIRECTORS
WILLIAMS PRODUCTION COMPANY:
We have audited the accompanying Statement of Revenues and Direct Operating
Expenses of certain coal seam gas producing properties (the "Underlying
Properties") of Williams Production Company (the "Company") for each of the
three years in the period ended December 31, 1996. This financial statement is
the responsibility of Company's management. Our responsibility is to express an
opinion on this financial statement 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 statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statement. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the statement referred to previously presents fairly, in all
material respects, the revenues and direct operating expenses described in Note
2 of the Underlying Properties for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
/SIG/ERNST & YOUNG LLP
Tulsa, Oklahoma
March 21, 1997
<PAGE>
UNDERLYING PROPERTIES
STATEMENT OF REVENUES AND DIRECT OPERATING EXPENSES
<TABLE>
<CAPTION>
================================================================================
Year ended December 31,
- --------------------------------------------------------------------------------
1996 1995 1994
- --------------------------------------------------------------------------------
(In Thousands)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues -- gas sales $28,598 $36,859 $32,145
- --------------------------------------------------------------------------------
Direct operating expenses:
- --------------------------------------------------------------------------------
Taxes on production and 2,713 2,096 2,645
property
- --------------------------------------------------------------------------------
Production and other expenses 1,573 1,882 1,905
- --------------------------------------------------------------------------------
Total 4,286 3,978 4,550
- --------------------------------------------------------------------------------
Excess of revenues over direct $24,312 $32,881 $27,595
operating expenses
================================================================================
</TABLE>
See accompanying notes.
UNDERLYING PROPERTIES
NOTES TO STATEMENT OF REVENUES AND DIRECT OPERATING EXPENSES
1. UNDERLYING PROPERTIES
The Underlying Properties consist of certain coal seam gas interests currently
owned by Williams Production Company ("WPC"), a wholly owned indirect subsidiary
of The Williams Companies, Inc. ("Williams"). These properties, all of which are
located in the San Juan Basin of New Mexico and Colorado, are burdened by net
profits interests conveyed to Williams Coal Seam Gas Royalty Trust (the "Trust")
on January 21, 1993. All of the Underlying Properties were acquired by
predecessor entities of Williams prior to 1989. Significant development of the
Underlying Properties did not occur until 1989 and significant production did
not occur until 1990. During the periods presented, all of the production from
these properties was sold in the spot gas sales market to nonaffiliated entities
or Williams Gas Marketing Company ("WGM") or Williams Field Services Gas
Resources Company ("WFSGR"), wholly owned subsidiaries of Williams.
2. BASIS OF PRESENTATION
The Statement of Revenues and Direct Operating Expenses of the Underlying
Properties was derived from the historical accounting records of WPC and does
not give effect to the conveyance of interests in these properties to the Trust.
The statement does not include depreciation, depletion and amortization, general
and administrative expenses, interest expenses or income taxes. The revenues are
reflected net of existing royalties and overriding royalties and have been
reduced by gathering and processing expenses. The revenues are presented on a
production entitlement basis wherein WPC's revenue interest is applied to
volumes produced for revenue recognition. Actual cash receipts may vary due to
timing delays of actual cash receipts from the property operators or purchasers
and due to wellhead and pipeline volume balancing agreements or practices.
Expenses are presented on an accrual basis.
3. RELATED PARTY TRANSACTIONS
Effective October 1, 1992, WPC entered into a long term contract with WGM to
purchase substantially all of the production from these properties. Effective
May 1, 1995 WGM assigned to WFSGR all of its rights and obligations under such
contract. Gross revenues (before deductions for applicable royalties and
gathering and processing expenses) from WGM and WFSGR included in this statement
are $45,720,988, $52,182,150 and $43,002,000 for 1996, 1995 and 1994,
respectively.
<PAGE>
In addition, gas produced from the Underlying Properties is gathered and
processed by Williams Field Services Company ("WFS"), a wholly indirectly owned
subsidiary of Williams, at rates which Williams believes are consistent with
industry practice. The fees charged to WPC and WFS applicable to these
properties for 1996, 1995 and 1994 were $14,913,157, $14,408,168 and
$11,845,000, respectively, and are accounted for as deductions from revenues by
WPC. WPC has also sold some of the gas at the wellhead to purchasers who then
contract with WFS for gathering and processing services. Amounts paid by these
unrelated purchasers to WFS are not included in the fees disclosed above.
4. CONTINGENCIES
The majority of the production from the Underlying Properties is from Federal
units. Unit acreage is formed by pooling production from the participating area.
Entitlement to the pooled production is based on each party's acreage in the
participating area divided by the total unit acreage. Wells drilled outside the
participating area may create an enlargement to the participating area and a
revision of the unit ownership entitlement. The Bureau of Land Management
("BLM") must approve unit participating area expansions. The effective date for
unit expansions is retroactive to the date the well creating the expansion was
tested. The revenues presented in the accompanying statement are on a production
entitlement basis and reflect the most recent BLM participating area approvals
at December 31, 1996. There are pending or anticipated additional applications
which may be approved for participating area enlargements. WPC does not believe
that final approval of these unit participating area enlargements and any
resulting retroactive adjustments will have a significant impact on the revenues
as presented in this statement.
WPC has been advised that the Minerals Management Service ("MMS") has from time
to time considered the inclusion of the value of the Section 29 tax credits
attributable to coal seam gas production in the calculation of gross proceeds
for royalty purposes. On August 30, 1993, the U.S. Office of the Inspector
General (the "OIG") issued an audit report stating that Section 29 tax credits
should be included in the calculation of gross proceeds and recommending that
the MMS pursue collection of additional royalties with respect to past and
future production. On December 8, 1993, however, the Office of the Solicitor of
the U.S. Department of the Interior gave its opinion to the MMS that the report
of the OIG was incorrect and that Section 29 tax credits are not part of gross
proceeds for the purpose of federal royalty calculations. WPC believes that any
such inclusion of the value of Section 29 tax credits for purposes of
calculating royalty payments required to be made on Federal and Indian lands
would be inappropriate since all mineral interest owners, including royalty
owners, are entitled to Section 29 tax credits for their proportionate share of
qualifying coal seam gas production. WPC would vigorously oppose any attempt by
the MMS to require the inclusion of the value of Section 29 tax credits in the
calculation of gross proceeds. However, if such regulations were adopted and
upheld, royalty payments would be increased which would decrease NPI Net
Proceeds and, therefore, the amounts payable to the Trust. The reduction in
amounts payable to the Trust would cause a corresponding reduction in associated
Section 29 tax credits available to Unitholders.
The Southern Ute Indian Tribe (the "Tribe") filed a lawsuit on December 31,
1991, challenging WPC's and others' legal right to extract coal seam gas from
certain properties within the Tribal boundaries. The Tribe is seeking
compensation from the producers for the value of the gas allegedly wrongfully
extracted from the properties. WPC is aggressively defending its title to the
gas. On September 13, 1994, the court issued a memorandum opinion and order in
the litigation granting the motion for summary judgement filed by the defendant
class on the question of ownership of the coal seam gas. The Tribe has appealed
the order to the U.S. Court of Appeals for the Tenth Circuit. If an adverse
decision were to be received, WPC believes the adjustment to the statement
presented would not be significant for the periods presented.
<PAGE>
5. SUPPLEMENTAL OIL AND GAS RESERVE INFORMATION (UNAUDITED)
Proved reserves of the Underlying Properties have been estimated by independent
petroleum engineers.
In accordance with Statement of Financial Accounting Standards No. 69, estimates
of the standardized measure of future net revenues from proved reserves have
been prepared using end-of-period gas prices. The standardized measure of future
net revenues from the coal seam gas reserves is calculated based on discounting
such future net revenues at an annual rate of 10 percent. The standardized
measure has not been reduced for income tax consistent with the basis of
presentation described in Note 2. The wellhead spot market price for gas in the
San Juan Basin (a Blanco Hub Spot Price), adjusted for certain costs and the
provisions of a gas purchase contract with an affiliate, was $1.35, $1.05 and
$1.07 Mcf at December 31, 1996, 1995 and 1994, respectively.
The following table sets forth the Underlying Properties' proved coal seam gas
reserves and the related changes in such reserves:
<TABLE>
<CAPTION>
================================================================================
Natural Gas (MMcf)
- --------------------------------------------------------------------------------
Year ended December 31
- --------------------------------------------------------------------------------
1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Proved reserves at beginning of period 201,017 199,475 165,314
- --------------------------------------------------------------------------------
Increases (decreases) due to:
- --------------------------------------------------------------------------------
Revisions 12,054 37,406 61,952
- --------------------------------------------------------------------------------
Production (28,637) (35,864) (27,791)
- --------------------------------------------------------------------------------
Proved reserves at end of period 184,434 201,017 199,475
- --------------------------------------------------------------------------------
Proved developed reserves at end of 184,434 201,017 199,475
period
================================================================================
</TABLE>
Proved reserves are estimated quantities of coal seam gas which geological and
engineering data indicate with reasonable certainty to be recoverable in future
years from the Fruitland formation under existing economic and operating
conditions. Proved developed reserves are proved reserves which are expected to
be recovered through existing wells with existing equipment and operating
methods.
Numerous uncertainties are inherent in estimating volumes and value of proved
reserves and in projecting future production rates and timing of development
expenditures. Such reserve estimates are subject to change as additional
information becomes available. The reserves actually recovered and the timing of
production may be substantially different from the reserves estimates.
The following table sets forth the standardized measure of discounted future net
revenues relating to proved reserves:
<TABLE>
<CAPTION>
================================================================================
Year ended December 31,
- --------------------------------------------------------------------------------
1996 1995 1994
- --------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C>
- --------------------------------------------------------------------------------
Future cash inflows 248,205 $162,739 $210,577
- --------------------------------------------------------------------------------
Future production and (39,846) (26,632) (35,223)
development costs.
- --------------------------------------------------------------------------------
Future net cash flows 208,359 136,107 175,354
- --------------------------------------------------------------------------------
10% discount factor (68,010) (45,256) (60,441)
- --------------------------------------------------------------------------------
Standardized measure of $140,349 $ 90,851 $114,913
discounted future net revenues
================================================================================
</TABLE>
<PAGE>
The following table sets forth the changes in the present value of estimated
future net revenues from proved reserves:
<TABLE>
<CAPTION>
================================================================================
Year ended December 31,
(In Thousands)
- --------------------------------------------------------------------------------
1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of period $ 90,851 $114,913 $129,292
- --------------------------------------------------------------------------------
Increase (decrease) due to:
- --------------------------------------------------------------------------------
Sales of coal seam gas (24,312) (32,881) (27,595)
- --------------------------------------------------------------------------------
Net change in prices 52,556 (22,059) (34,376)
- --------------------------------------------------------------------------------
Development costs incurred 209 105 1,966
- --------------------------------------------------------------------------------
Net change in cost estimates (209) (105) (1,966)
- --------------------------------------------------------------------------------
Change in estimated volumes 9,173 16,906 35,689
- --------------------------------------------------------------------------------
Accretion of discount 9,085 11,491 12,929
- --------------------------------------------------------------------------------
Other 2,996 2,481 (1,026)
- --------------------------------------------------------------------------------
49,498 (24,062) (14,379)
- --------------------------------------------------------------------------------
Balance at end of period $140,349 $90,851 $114,913
================================================================================
</TABLE>
The information presented with respect to estimated future net revenues and the
present value thereof is not intended to represent the fair value of coal seam
gas reserves. 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. Actual future sales prices and production and
development costs may vary significantly from those in effect at December 31,
1996 and actual future production may not occur in the periods or amounts
projected.
TRANSFER AGENT AND REGISTRAR
Chemical Shareholder Services Group, Inc.
Dallas, Texas and New York, New York
TRUST AUDITORS
Ernst & Young LLP
Tulsa, Oklahoma
TRUSTEE COUNSEL
Thompson & Knight,
A Professional Corporation
Dallas, Texas
FORM 10-K
A copy of the Form 10-K of the Trust for the year ended December 31, 1996 as
filed with the Securities and Exchange Commission has been provided with this
Annual Report to Unitholders. Additional copies of the Form 10-K will be
provided, without charge, upon written request to:
<PAGE>
Williams Coal Seam Gas Royalty Trust
NationsBank of Texas, N.A.
901 Main Street, Suite 1700
Dallas, Texas 75202
Attention: Ron E. Hooper, Vice President
Trust Oil & Gas
WILLIAMS COAL SEAM GAS Royalty Trust
NationsBank of Texas, N.A.
901 Main Street, Suite 1700
Dallas, Texas 75202
1-800-365-6544
<PAGE>
EXHIBIT 23.1
LETTERHEAD OF MILLER AND LENTS, LTD.
March 27,1997
NationsBank of Texas, N.A., Trustee
Williams Coal Seam Gas Royalty Trust
NationsBank Plaza
901 Main Street, Suite 1700
Dallas, Texas 75202
Re: Williams Coal Seam Gas Royalty Trust
Securities and Exchange Commission Form 10-K
Annual Report
Gentlemen:
The firm of Miller and Lents, Ltd. consents to the references to Miller and
Lents, Ltd. and to the use of its reports listed below regarding the Williams
Coal Seam Gas Royalty Trust Proved Reserves and Future Net Income in the Form
10-K Annual Report to be filed by the Williams Coal Seam Gas Royalty Trust with
the Securities and Exchange Commission.
1. Report dated November 21, 1992 for reserves as of October 1, 1992
2. Report dated March 10, 1993 for reserves as of December 31, 1992
3. Report dated February 23, 1994 for reserves as of December 31, 1993
(using October 1, 1992 prices)
4. Report dated February 23, 1994 for reserves as of December 31, 1993
(using December 31, 1993 prices)
5. Report dated February 28, 1995 for reserves as of December 31, 1994
6. Report dated March 8, 1996 for reserves as of December 31, 1995
7. Report dated March 17, 1997 for reserves as of December 31, 1996
Miller and Lents, Ltd. has no interests in the Williams Coal Seam Gas
Royalty Trust or in any of its affiliated companies or subsidiaries and does not
receive any such interest as payment for its report. No director, officer, or
employee of Miller and Lents, Ltd. is employed by or otherwise connected with
the Williams Coal Seam Gas Royalty Trust nor is Miller and Lents, Ltd. employed
by the Williams Coal Seam Gas Royalty Trust on a contingent basis.
Very truly yours,
MILLER AND LENTS, LTD.
By /s/ S. John Stieber
----------------------------------------
S. John Stieber, Senior Vice President
SJS/hsd
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 165,290
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 165,290
<PP&E> 138,566,663
<DEPRECIATION> 68,569,217
<TOTAL-ASSETS> 70,162,736
<CURRENT-LIABILITIES> 141,163
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 70,021,573
<TOTAL-LIABILITY-AND-EQUITY> 70,162,736
<SALES> 22,330,613
<TOTAL-REVENUES> 22,409,162
<CGS> 0
<TOTAL-COSTS> 573,168
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 21,835,994
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 21,835,994
<EPS-PRIMARY> 2.25
<EPS-DILUTED> 0
</TABLE>
<PAGE>
EXHIBIT 99.7
[LETTERHEAD OF MILLER AND LENTS, LTD]
March 17, 1997
NationsBank of Texas, N.A., Trustee
Williams Coal Seam Gas Royalty Trust
NationsBank Plaza
901 Main Street, Suite 1700
Dallas, Texas 75202
Re: Proved Reserves and Future Net Income
As of December 31, 1996
Gentlemen:
At your request, we estimated the Proved Reserves and projected the Future
Net Income from the gas reserves in the Fruitland Coal formation that are
attributable to the interests of Williams Coal Seam Gas Royalty Trust. These
interests consist of net profits interests in natural gas properties located
in the San Juan Basin in Colorado and New Mexico.
In order to estimate the reserves to the Williams Coal Seam Gas Royalty
Trust, it was necessary to estimate the reserves attributable to the "Underlying
Properties," the Williams Production Company working interests and net profits
interests from which the royalty trust was created. A portion of these
Underlying Properties was conveyed to the Williams Coal Seam Gas Royalty
Trust as the "Royalty Interests." The Williams Coal Seam Gas Royalty Trust
is assumed to receive 81 percent of the "Net Proceeds" (as defined) from
the gas produced and sold from the Underlying Properties which are working
interests and 81 percent of the revenue stream of the Underlying Properties
for the net profits interests in the Farmout Properties.
For the working interest of the Underlying Properties, overhead costs
(beyond the standard overhead charges for the non-operated properties), have
not been included, nor have the effects of depreciation, depletion, and Federal
Income Tax. The calculations of the Net Proceeds for the Royalty Interests
from the working interest properties are based on revenues derived from 81
percent of the working interest gas volumes of the Underlying Properties less 81
percent of the severance and ad valorem taxes, lease royalty payments, and
operating expenses in excess of the estimates shown in Exhibit B of the
Conveyance. The reserves to the Royalty Interests are based on 81 percent of the
net reserves to the Underlying Properties.
For the wells in the Colorado farmout area, we computed the income to
the net profits interests by considering a net revenue interest equivalent
to the net profits interest and deducting the working interests costs associated
therewith. This results in the income stream to the net profits interests.
The reserves for the Underlying Properties for the net profits interests
were computed by multiplying the ratio of the net profits income to the total
gross income by the gross gas reserves. The reserves and income to the Royalty
Interests are based on 81 percent of the reserves and income attributable to the
net profits interest for the Underlying Properties for these wells.
<PAGE>
MILLER AND LENTS, LTD.
NationsBank of Texas, N.A., Trustee March 17, 1997
Williams Coal Seam Gas Royalty Trust Page 2
A summary of the reserves for the Underlying Properties and the Royalty
Interests is as follows:
Proved Reserves as of December 31, 1996
---------------------------------------
<TABLE>
<CAPTION>
Future Present
Net Gas Reserves Net Value at
MMcf at Income, 10 Percent
14.73 Psia M$ Per Annum, M$
---------- ------ -------------
<S> <C> <C> <C>
The Underlying Properties
- -------------------------
Proved Developed Producing 184,434 208,359 140,349
The Royalty Interests (Net to the Trust)
- ----------------------------------------
Proved Developed Producing 149,391 188,426 124,453
</TABLE>
The Proved Reserves were estimated in accordance with the definitions
contained in Securities and Exchange Commission Regulation S-X, Rule 4-10(a).
Estimates of Future Net Income and discounted Future Net Income are not intended
and should not be interpreted to represent the fair market value of the
estimated reserves. There are no Proved Developed Nonproducing Reserves or
Proved Undeveloped Reserves.
The Section 29 tax credits attributable to the total Proved Reserves in
the Underlying Properties through the year 2002, assuming no future
escalation of the estimated 1996 rate of $1.016 per MMBtu, are $108 million
with a 10 percent present worth of $86 million. The tax credits attributable
to the Royalty Interests are $82 million with a 10 percent present worth of
$65 million.
The production forecast for the Proved Reserves and future net revenues
as of December 31, 1996 attributable to the Underlying Properties and to
the Williams Coal Seam Gas Royalty Trust are shown on Table 1. The Proved
Reserves and future net revenues as of December 31, 1996 attributable to the
individual Underlying Properties are summarized by areas and shown on the
attached one-line summary identified as Table 2.
The gas reserves for the Fruitland Coal were estimated by decline curve
analyses utilizing type curves for the various areas in the San Juan Basin.
These type curves were developed for each area and were based on production
histories and the initial reservoir pressures of the wells in the separate
areas.
The gas price used in these projections is the December 1996 wellhead
price, reported by Williams Production Company, of $3.5613 per MMBtu for the
Farmout Properties. For the working interest properties, the Minimum Purchase
Price of 1.70 per MMBtu was employed. These prices were held constant.
<PAGE>
MILLER AND LENTS LTD.
NationsBank of Texas, N.A., Trustee March 17, 1997
Williams Coal Seam Gas Royalty Trust Page 3
Production taxes, ad valorem taxes, and lease royalty deductions for the
working interest properties were based on the average 1996 wellhead gas price of
$1.655 per MMBtu, reported by Williams Production Company.
Operating expense estimates were based on expenses incurred during 1996 and
were not escalated. Where appropriate, estimated operating expenses which
exceeded the operating expenses in Exhibit B to the conveyance were deducted in
calculating Net Proceeds and, therefore, reduced the amounts payable to the
Trust.
We relied on production histories, accounting and cost data, engineering
and geological information supplied by Williams Production Company, data
existing in our files, and data from public records. The ownership interests
evaluated herein were provided by Williams Production Company and were employed
as presented. No independent verification of these interests was made by
Miller and Lents, Ltd.
Capital expenditures to plug and abandon wells are considered to be equal
to the salvage values of the wells at the time of abandonment. We did not
include any consideration for the future environmental restoration that might
be required as such was beyond the scope of our assignment. In our projection
of Future Net Income, no provisions are made for production prepayments or
for the consequences of future production balancing.
The evaluations presented in this report, with the exceptions of those
parameters specified by others, reflect our informed judgments based on accepted
standards of professional investigation, but are subject to those generally
recognized uncertainties associated with the interpretations of geological
and engineering information. Government policies and market conditions different
from those employed in this study may cause the total quantity of oil and
gas to be recovered, actual production rates, prices received, and operating
and capital costs to vary from those presented in this report.
Very truly yours,
MILLER AND LENTS, LTD.
By /s/ S. John Stieber
---------------------
S. John Stieber
Senior Vice President
SJS/hsd
