<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 1997
-------------
or
[ ] Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from _______ to _______
Commission File Number: 1-11608
WILLIAMS COAL SEAM GAS ROYALTY TRUST
(Exact name of registrant as specified in its charter)
Delaware 75-6437433
(State or other jurisdiction (I.R.S. Employer
of incorporation or Identification No.)
organization)
Trust Division
NationsBank of Texas, N.A.
NationsBank Plaza
901 Main Street
12th Floor
Dallas, Texas 75202
(Address of principal executive offices)
(Zip code)
(214) 508-2364
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes x No
--- ---
Number of units of beneficial interest outstanding at July 31, 1997: 9,700,000.
<PAGE>
PART I - FINANCIAL INFORMATION
------------------------------
Item 1. Financial Statements.
The financial statements included herein have been prepared by NationsBank
of Texas, N.A., as Trustee (the "Trustee") of Williams Coal Seam Gas Royalty
Trust (the "Trust"), pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in annual financial statements have been condensed or omitted pursuant
to such rules and regulations, although the Trustee believes that the
disclosures are adequate to make the information presented not misleading. It is
suggested that these condensed financial statements be read in conjunction with
the financial statements and notes thereto incorporated by reference in the
Trust's Annual Report on Form 10-K for the year ended December 31, 1996. The
December 31, 1996 balance sheet is derived from the audited balance sheet of
that date. In the opinion of the Trustee, all adjustments, consisting only of
normal recurring adjustments, necessary to present fairly the assets,
liabilities and trust corpus of the Trust as of June 30, 1997, the distributable
income for the three-month and six-month periods ended June 30, 1997 and 1996,
and the changes in trust corpus for the six-month periods ended June 30, 1997
and 1996, have been included. The distributable income for such interim periods
is not necessarily indicative of the distributable income for the full year.
The financial statements as of June 30, 1997 and for the three-month
and six-month periods ended June 30, 1997 and 1996 included herein have been
reviewed by Ernst & Young LLP, independent public accountants, as stated in
their report appearing herein.
2
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Independent Accountants' Review Report
NationsBank of Texas, N.A.
Trustee of Williams Coal Seam Gas Royalty Trust
We have reviewed the accompanying condensed statement of assets, liabilities and
trust corpus of the Williams Coal Seam Gas Royalty Trust as of June 30, 1997,
and the related condensed statements of distributable income for the three-month
and six-month periods ended June 30, 1997 and 1996 and the statements of changes
in trust corpus for the six-month periods ended June 30, 1997 and 1996. These
financial statements are the responsibility of the Trustee.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data, and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, which will be performed
for the full year with the objective of expressing an opinion regarding the
financial statements taken as a whole. Accordingly, we do not express such an
opinion.
As described in Note 2 to the financial statements, these financial statements
have been prepared on a modified cash basis of accounting, which is a
comprehensive basis of accounting other than generally accepted accounting
principles.
Based on our reviews, we are not aware of any material modifications that should
be made to the accompanying condensed financial statements referred to above for
them to be in conformity with the basis of accounting described in Note 2.
We have previously audited, in accordance with generally accepted auditing
standards, the statement of assets, liabilities and trust corpus of the Williams
Coal Seam Gas Royalty Trust as of December 31, 1996, and the related statements
of distributable income and changes in trust corpus for the year then ended (not
presented herein) and in our report dated March 21, 1997, we expressed an
unqualified opinion on those financial statements. In our opinion, the
information set forth in the accompanying condensed statement of assets,
liabilities and trust corpus as of December 31, 1996, is fairly stated, in all
material respects, in relation to the statement of assets, liabilities and trust
corpus from which it has been derived.
Ernst & Young LLP
Tulsa, Oklahoma
August 12, 1997
3
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WILLIAMS COAL SEAM GAS ROYALTY TRUST
CONDENSED STATEMENTS OF ASSETS, LIABILITIES AND TRUST CORPUS (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
June 30, December 31,
ASSETS 1997 1996
- ------ ----------- ------------
<S> <C> <C>
Current Assets -
cash and cash equivalents $ 43,333 $ 165,290
Royalty interests in oil
and gas properties
(less accumulated
amortization of
$72,592,710 at
June 30, 1997
and $68,569,217 at
December 31, 1996) 65,973,953 69,997,446
----------- -----------
TOTAL ASSETS $66,017,286 $70,162,736
=========== ===========
LIABILITIES AND TRUST CORPUS
- ----------------------------
Current Liabilities -
trust expenses payable $ 177,417 $ 141,163
Trust corpus -
9,700,000 units of
beneficial interest
authorized and
outstanding 65,839,869 70,021,573
----------- -----------
TOTAL LIABILITIES
AND TRUST CORPUS $66,017,286 $70,162,736
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements. See
accountants' review report.
- --------------------------------------------------------------------------------
4
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WILLIAMS COAL SEAM GAS ROYALTY TRUST
CONDENSED STATEMENTS OF DISTRIBUTABLE INCOME (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
June 30, 1997 June 30, 1996
------------------- ------------------
<S> <C> <C>
Royalty income $6,075,355 $4,817,991
Interest income 23,698 16,868
---------- ----------
6,099,053 4,834,859
General and administrative
expenses (231,077) (219,629)
---------- ----------
Distributable income $5,867,976 $4,615,230
========== ==========
Distributable income
per unit
(9,700,000 units) $ .60 $ .48
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements. See
accountants' review report.
5
<PAGE>
- --------------------------------------------------------------------------------
WILLIAMS COAL SEAM GAS ROYALTY TRUST
CONDENSED STATEMENTS OF DISTRIBUTABLE INCOME (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
ENDED ENDED
June 30, 1997 June 30, 1996
------------------- ------------------
<S> <C> <C>
Royalty income $10,179,169 $11,347,034
Interest income 35,884 40,848
----------- -----------
10,215,053 11,387,882
General and administrative
expenses (418,211) (379,086)
----------- -----------
Distributable income $ 9,796,842 $11,008,796
=========== ===========
Distributable income
per unit
(9,700,000 units) $ 1.01 $ 1.13
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements. See
accountants' review report.
6
<PAGE>
- --------------------------------------------------------------------------------
WILLIAMS COAL SEAM GAS ROYALTY TRUST
CONDENSED STATEMENTS OF CHANGES IN TRUST CORPUS (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
ENDED ENDED
June 30, 1997 June 30, 1996
-------------- --------------
<S> <C> <C>
Trust corpus,
beginning of period $70,021,573 $ 82,695,754
Amortization of royalty
interests (4,023,493) (6,484,483)
Distributable income 9,796,842 11,008,796
Distributions to unitholders (9,955,053) (11,112,882)
----------- ------------
Trust corpus, end
of period $65,839,869 $ 76,107,185
=========== ============
Distributions per unit
(9,700,000 units) $ 1.03 $ 1.15
=========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements. See
accountants' review report.
- --------------------------------------------------------------------------------
7
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WILLIAMS COAL SEAM GAS ROYALTY TRUST
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
1. TRUST ORGANIZATION AND PROVISIONS
Williams Coal Seam Gas Royalty Trust (the "Trust") was formed as a Delaware
business trust pursuant to the terms of the Trust Agreement of Williams Coal
Seam Gas Royalty Trust (as amended, the "Trust Agreement") entered into
effective as of December 1, 1992 by and among Williams Production Company, a
Delaware corporation ("WPC"), as trustor, The Williams Companies, Inc., a
Delaware corporation ("Williams"), and NationsBank of Texas, N.A., a national
banking association (the "Trustee"), and Chemical Bank Delaware, a Delaware
banking corporation (the "Delaware Trustee"), as trustees. The trustees are
independent financial institutions.
The Trust was formed to acquire and hold certain net profits interests (the
"Royalty Interests") in proved natural gas properties located in the San Juan
Basin of New Mexico and Colorado (the "Underlying Properties") formerly owned by
WPC. The Trust was initially created effective as of December 1, 1992 with a
$100 contribution by WPC. On January 21, 1993, the Royalty Interests were
conveyed to the Trust by WPC pursuant to the Net Profits Conveyance (the
"Conveyance") dated effective as of October 1, 1992 by and among WPC, Williams,
the Trustee and the Delaware Trustee, in consideration for all the 9,700,000
authorized units of beneficial interest in the Trust ("Units"). WPC transferred
its Units by dividend to its parent, Williams, which sold an aggregate of
5,980,000 Units to the public through various underwriters in January and
February 1993 (the "Public Offering"). During the second quarter of 1995
Williams transferred its Units to Williams Holdings of Delaware, Inc. ("WHD"), a
separate holding company for Williams' non regulated businesses. Substantially
all of the production attributable to the Underlying Properties is from the
Fruitland coal formation and constitutes "coal seam" gas that entitles the
owners of such production, provided certain requirements are met, to tax credits
for Federal income tax purposes pursuant to Section 29 of the Internal Revenue
Code of 1986, as amended.
On May 7, 1997, effective as of May 1, 1997, WPC transferred the Underlying
Properties to an unaffiliated third party ("Buyer") pursuant to the terms of the
Purchase and Sale Agreement dated as of May 1, 1997 (herein so called) between
WPC and Buyer (the "Transaction"). Prior to the Transaction, WPC had owned the
Underlying Properties, subject to and burdened by the Royalty Interests owned by
the Trust, since the inception of the Trust. Neither the Trustee nor the
Delaware Trustee has any control over or responsibility relating to the
operation of the Underlying Properties. The Transaction was previously reported
as a subsequent event by the Trust in its Form 10-Q for the quarter ended March
31, 1997, and thereafter described in more detail in the Current Report on Form
8-K filed with the Securities and Exchange Commission on June 23, 1997 (the
"Transaction Form 8-K").
Concurrently with the Transaction, WPC and Buyer entered into a Management
Services Agreement dated May 1, 1997 (the "Management Services Agreement")
whereby WPC agreed, among other things, to continue to manage and operate the
Underlying Properties and to handle
8
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the receipt and payment of funds with respect thereto. Prior to the Transaction,
WPC received all payments relating to the Underlying Properties and, pursuant to
the Conveyance, paid to the Trust the portion thereof attributable to the
Royalty Interests. Following the Transaction, under the Management Services
Agreement, WPC continues to collect all revenues on behalf of Buyer and remains
obligated to pay to the Trust on behalf of Buyer the amounts payable with
respect to the Royalty Interests.
Concurrently with the Transaction, WPC, Williams, the Trust and Buyer
entered into an Agreement dated May 7, 1997 (the "Supplemental Agreement")
pursuant to which (i) the parties acknowledged that WPC was selling the
Underlying Properties to Buyer, but retaining all of its duties and obligations
under the Trust Agreement, Conveyance and related documents (the "Trust
Documents"), subject to the terms and conditions set forth in the Purchase and
Sale Agreement and the agreements entered into pursuant to the Purchase and sale
Agreement, (ii) Williams and WPC each confirmed and agreed that, notwithstanding
the sale of the Underlying Properties to Buyer, Williams and WPC would continue
to perform their respective obligations to the Trust pursuant to the Trust
Documents, including without limitation the performance assurances of Williams
set forth in the Conveyance, and (iii) Buyer acknowledged and agreed that it was
purchasing the Underlying Properties burdened by the Royalty Interests owned by
the Trust.
As a result of these assurances and the Trustee's belief that the
Transaction will have no adverse effect on Unitholders, the information and
descriptions set forth herein give no effect to the Transaction. Consequently,
with regard to ownership of the Underlying Properties, references herein to
"WPC" with respect to those periods after the effective date of the Transaction
are to Buyer. The Transaction Form 8-K should be consulted for further
information on the Transaction.
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").
9
<PAGE>
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.
2. BASIS OF ACCOUNTING
The financial statements of the Trust are prepared on a modified cash basis
and are not intended to present financial position and results of operations in
conformity with generally accepted accounting principles ("GAAP"). Preparation
of the Trust's financial statements on such basis includes the following:
Revenues are recognized in the period in which amounts are received by the
Trust. General and administrative expenses are recognized on an accrual
basis.
Amortization of the Royalty Interests is calculated on a unit-of-production
basis and charged directly to trust corpus.
Distributions to Unitholders are recorded when declared by the Trustee (see
Note 4).
The financial statements of the Trust differ from financial statements
prepared in accordance with GAAP because royalty income is not accrued in the
period of production and amortization of the Royalty Interests is not charged
against operating results.
Williams sold an aggregate of 5,980,000 Units of the Trust's authorized
9,700,000 Units in the Public Offering at the offering price of $20 per Unit,
retaining 3,720,000 Units. Subsequently, Williams sold an additional 151,209
Units for $23.50 per Unit. Accordingly, the condensed statements of assets,
liabilities and trust corpus reflect the sale of these Units at the respective
sale prices thereof, as well as the remaining 3,568,791 Units at Williams'
historical cost. During the second quarter of 1995 Williams transferred its
Units to WHD, a separate holding company for Williams' non regulated businesses.
If WHD, in the future, should sell all or a portion of its retained Units, at
that time, the carrying value on the Trust's statements 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.
10
<PAGE>
3. FEDERAL INCOME TAXES
The Trust is a grantor trust for Federal income tax purposes. As a grantor
trust, the Trust will not be required to pay Federal or state income taxes.
Accordingly, no provision for income taxes has been made in these financial
statements.
Because the Trust will be treated as a grantor trust, and because a
Unitholder will be treated as directly owning an interest in the Royalty
Interests, each Unitholder will be taxed directly on his per Unit pro rata share
of income attributable to the Royalty Interests consistent with the Unitholder's
method of accounting and without regard to the taxable year or accounting method
employed by the Trust.
Production from coal seam gas wells drilled after December 31, 1979 and
prior to January 1, 1993, qualifies for the Federal income tax credit for
producing nonconventional fuels under Section 29 of the Internal Revenue Code.
This tax credit is calculated annually based on each year's qualified production
through the year 2002. Such credit, based on the Unitholder's pro rata share of
qualifying production, may not reduce his regular tax liability (after the
foreign tax credit and certain other non-refundable credits) below his
alternative minimum tax. Any part of the Section 29 credit not allowed for the
tax year solely because of this limitation is subject to certain carryover
provisions. Each Unitholder should consult his tax advisor regarding Trust tax
compliance matters.
4. DISTRIBUTIONS TO UNITHOLDERS
The Trustee determines for each quarter the amount of cash available for
distribution to Unitholders. Such amount (the "Quarterly Distribution Amount")
is an amount equal to the excess, if any, of the cash received by the Trust, on
or prior to the last day of the month following the end of each calendar quarter
from the Royalty Interests, plus, with certain exceptions, any other cash
receipts of the Trust during such quarter, over the liabilities of the Trust
paid during such quarter, subject to adjustments for changes made by the Trustee
during such quarter in any cash reserves established for the payment of
contingent or future obligations of the Trust.
The Quarterly Distribution Amount for each quarter is payable to Unitholders
of record on the 45th day following the end of such calendar quarter unless such
day is not a business day in which case the record date is the next business day
thereafter. The Trustee distributes the Quarterly Distribution Amount within 60
days after the end of each calendar quarter to each person who was a Unitholder
of record on the associated record date, together with interest estimated to be
earned on such amount from the date of receipt thereof by the Trustee to the
payment date.
In addition to the regular quarterly distributions, under certain
circumstances specified in the Trust Agreement (such as upon a purchase price
adjustment, if any, or pursuant to the sale of a Royalty Interest), the Trust
would make a special distribution (a "Special Distribution 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
11
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Distribution Amount by the Trust (unless such day is not a business day in which
case the record date will be the next business day thereafter) unless such day
is within 10 days of the record date for a Quarterly Distribution Amount in
which case the record date will be the date as is established for the next
Quarterly Distribution Amount. Distribution to Unitholders of a Special
Distribution Amount will be made no later than 15 days after the Special
Distribution Amount record date.
5. SUBSEQUENT EVENTS
Subsequent to June 30, 1997, the Trust declared the following distribution:
<TABLE>
<CAPTION>
Quarterly
Record Payment Distribution
Date Date per Unit
-------- ------- ------------
<S> <C> <C>
August 14, 1997 August 29, 1997 $.472711
</TABLE>
The distribution per unit decreased from $.617428 in the second quarter of
1997 to $.472711 in the third quarter of 1997. The decrease in distributions
was mainly the result of higher payments from the Farmout Properties received in
the previous quarter. The Farmout Properties are paid at the Blanco Hub Spot
Price.
Expansions of federal unit acreage can either increase or decrease the
Trust's ownership of particular wells resulting in potential adjustments of
production for prior periods and associated distributions to unitholders can
either increase or decrease. Federal unit acreage expansions are determined by
the commercial value of the property as valued by the operator and approved by
the U.S. Bureau of Land and Mines (BLM). WPC does not operate any wells in
these federal acreage units.
6. CONTINGENCIES
Under the terms of the gas purchase contract entered into by WPC and WFS Gas
Resources Company ("WFSGR"), an affiliate of WPC, as amended (the "Gas Purchase
Contract"), additional revenues may be paid to the Trust to meet the minimum gas
price provision of 97 percent of $1.75 per MMBtu (the "Minimum Purchase Price").
This additional revenue is subject to recoupment by the purchaser from future
revenues received from production commencing January 1, 1994 when the applicable
index price exceeds the Minimum Purchase Price as long as the Minimum Purchase
Price commitment is in effect. The primary term of the Gas Purchase Contract
runs to December 31, 1997 at which time WFSGR may elect to discontinue paying
the Minimum Purchase Price by giving notice of its election to pay solely on an
index price.
During the second quarter of 1997, the applicable index price was below the
Minimum Purchase Price in April and June but was above the Minimum Purchase
Price in May. Pursuant to the terms of the Gas Purchase Contract, WPC
established a price credit account. WPC estimates that, as of June 30, 1997,
WFSGR had aggregate price credits in the price credit account of approximately
$17.1 million of which the Trust's 81 percent interest was approximately $21.1
million. The applicable index price was above the Minimum Purchase Price in July
1997.
On July 16, 1997, the U.S. Court of Appeals for the Tenth Circuit, issued
an opinion reversing the U.S. District Court of Colorado in the Southern Ute
litigation. It is unclear at this time what impact this will have on the Trust
or any future distributions. Further discussion may be found in this 10Q under
"Part II - Other Informaton," "Item 1. Legal Proceedings."
12
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The entitlement of WFSGR to recoup the price credits means that if and when
the applicable Blanco Hub Spot Price rises above $1.75 per MMBtu, future royalty
income paid to the Trust would be reduced until such time as such price credits
have been fully recouped. Corresponding cash distributions to Unitholders would
also be reduced.
Item 2. Trustee's Discussion and Analysis of Financial Condition and Results of
Operations.
On May 7, 1997, effective as of May 1, 1997, WPC transferred the Underlying
Properties to an unaffiliated third party ("Buyer") pursuant to the terms of the
Purchase and Sale Agreement dated as of May 1, 1997 (herein so called) between
WPC and Buyer (the "Transaction"). Prior to the Transaction, WPC had owned the
Underlying Properties, subject to and burdened by the Royalty Interests owned by
the Trust, since the inception of the Trust. Neither the Trustee nor the
Delaware Trustee has any control over or responsibility relating to the
operation of the Underlying Properties. The Transaction was previously reported
as a subsequent event by the Trust in its Form 10-Q for the quarter ended March
31, 1997, and thereafter described in more detail in the Current Report on Form
8-K filed with the Securities and Exchange Commission on June 23, 1997 (the
"Transaction Form 8-K").
Concurrently with the Transaction, WPC and Buyer entered into a Management
Services Agreement dated May 1, 1997 (the "Management Services Agreement")
whereby WPC agreed, among other things, to continue to manage and operate the
Underlying Properties and to handle the receipt and payment of funds with
respect thereto. Prior to the Transaction, WPC received all payments relating to
the Underlying Properties and, pursuant to the Conveyance, paid to the Trust the
portion thereof attributable to the Royalty Interests. Following the
Transaction, under the Management Services Agreement, WPC continues to collect
all revenues on behalf of Buyer and remains obligated to pay to the Trust on
behalf of Buyer the amounts payable with respect to the Royalty Interests.
Concurrently with the Transaction, WPC, Williams, the Trust and Buyer
entered into an Agreement dated May 7, 1997 (the "Supplemental Agreement")
pursuant to which (i) the parties acknowledged that WPC was selling the
Underlying Properties to Buyer, but retaining all of its duties and obligations
under the Trust Agreement, Conveyance and related documents (the "Trust
Documents"), subject to the terms and conditions set forth in the Purchase and
Sale Agreement and the agreements entered into pursuant to the Purchase and sale
Agreement, (ii) Williams and WPC each confirmed and agreed that, notwithstanding
the sale of the Underlying Properties to Buyer, Williams and WPC would continue
to perform their respective obligations to the Trust pursuant to the Trust
Documents, including without limitation the performance assurances of Williams
set forth in the Conveyance, and (iii) Buyer acknowledged and agreed that it was
purchasing the Underlying Properties burdened by the Royalty Interests owned by
the Trust.
As a result of these assurances and the Trustee's belief that the
Transaction will have no adverse effect on Unitholders, the information and
descriptions set forth herein give no effect to the Transaction. Consequently,
with regard to ownership of the Underlying Properties,
13
<PAGE>
references herein to "WPC" with respect to those periods after the effective
date of the Transaction are to Buyer. The Transaction Form 8-K should be
consulted for further information on the Transaction.
The Trust makes quarterly cash distributions to holders of units of
beneficial interest ("Units") in the Trust ("Unitholders"). The only assets of
the Trust, other than cash and cash equivalents being held for the payment of
expenses and liabilities and for distribution to Unitholders, are net profits
interests (the "Royalty Interests") in certain proved coal seam gas properties
located in the San Juan Basin of New Mexico and Colorado (the "Underlying
Properties"). The Royalty Interests owned by the Trust burden the Underlying
Properties, which are owned by WPC and not the Trust.
Distributable income of the Trust consists of the excess of royalty income
plus interest income over the general and administrative expenses of the Trust.
Upon receipt by the Trust, royalty income is invested in short-term investments
in accordance with the Trust Agreement (as defined in Note 1 to the financial
statements of the Trust appearing elsewhere in this Form 10-Q ("Note 1")) until
its subsequent distribution to Unitholders.
The amount of distributable income of the Trust for any quarter may differ
from the amount of cash available for distribution to Unitholders in such
quarter due to differences in the treatment of the expenses of the Trust in the
determination of those amounts. The financial statements of the Trust are
prepared on a modified cash basis pursuant to which the expenses of the Trust
are recognized when incurred. Consequently, the reported distributable income of
the Trust for any quarter is determined by deducting from the income received by
the Trust the amount of expenses incurred by the Trust during such quarter. The
amount of cash available for distribution to Unitholders, however, is determined
in accordance with the provisions of the Trust Agreement and reflects the
deduction from the income actually received by the Trust of the amount of
expenses actually paid by the Trust and adjustments for changes in reserves for
unpaid liabilities. See Note 4 to the financial statements of the Trust
appearing elsewhere in this Form 10-Q for additional information regarding the
determination of the amount of cash available for distribution to Unitholders.
Three Months and Six Months Ended June 30, 1997 Compared to Three Months and Six
- --------------------------------------------------------------------------------
Months Ended June 30, 1996
- --------------------------
For the quarter ended June 30, 1997, royalty income received by the Trust
amounted to $6,075,355 as compared to $4,817,991 received for the same quarter
in 1996. The increase in royalty income is primarily due to substantial
increases in proceeds from the Farmout Properties sales and to adjustments
resulting from expansion of federal units within the Underlying Properties.
Production related to the royalty income received by the Trust in the second
quarter of 1997 was 4,732,191 MMBtu as compared to 6,397,520 MMBtu for the same
quarter in 1996. Royalty income for the six months ended June 30, 1997 was
$10,179,169 as compared to $11,347,034 for the same period in 1996. Adjustments
in the federal units and overall production decline resulted in lower royalty
income for the six months ended June 30, 1997. Interest income for the quarter
ended June 30, 1997 was $23,698 compared to $16,868 for the same quarter in
1996. Interest income for the six months ended June 30, 1997 was $35,884 as
compared to $40,848 for the same period in 1996. General and administrative
expenses during the second
14
<PAGE>
quarter of 1997 amounted to $231,077 compared to $219,629 for the same quarter
in 1996. General and administrative expenses for the six months ended June 30,
1997 were $418,211 as compared to $379,086 for the same period in 1996.
Distributable income for the quarter ended June 30, 1997 was $5,867,979 or
$.60 per Unit compared to $4,615,230 or $.48 per Unit for the second quarter of
1996. This increase was the result of a substantial increase in proceeds from
the Farmout Properties and adjustments resulting from expansion of federal units
within the Underlying Properties. A distribution of $.617428 per Unit was made
on May 30, 1997 to Unitholders of record on May 15, 1997. Distributable income
for the six months ended June 30, 1997 was $9,796,842 as compared to $11,008,796
for the same period in 1996.
Because the Trust incurs administrative expenses throughout a quarter but
receives its royalty income only once in a quarter, the Trustee established in
the first quarter of 1993 a cash reserve for the payment of expenses and
liabilities of the Trust. The Trustee thereafter has adjusted the amount of
such reserve in certain quarters as required for the payment of the Trust's
expenses and liabilities, in accordance with the provisions of the Trust
Agreement. The Trustee anticipates that it will maintain for the foreseeable
future a cash reserve which will fluctuate as expenses are paid and royalty
income is received.
Royalty income to the Trust is attributable to the sale of depleting
assets. All of the Underlying Properties burdened by the Royalty Interests
consist of producing properties. Accordingly, the proved reserves attributable
to WPC's interest in the Underlying Properties are expected to decline
substantially during the term of the Trust and a portion of each cash
distribution made by the Trust will, therefore, be analogous to a return of
capital. Accordingly, cash yields attributable to the Units are expected to
decline over the term of the Trust.
Royalty income received by the Trust in a given calendar quarter will
generally reflect the sum of (i) proceeds from the sale of gas produced from the
WI Properties during the preceding calendar quarter, plus (ii) cash received by
WPC with respect to the Farmout Properties either (a) during the preceding
calendar quarter or (b) if received in sufficient time to be paid to the Trust,
in the month immediately following such calendar quarter. Accordingly, the
royalty income included in distributable income for the quarter ended June 30,
1997 was based on production volumes and natural gas prices for the period
January 1997 through March 1997, as shown in the table below. Due to delays
associated with the receipt of income related to the Farmout Properties, the
Trust's royalty income for the 1997 second quarter reflects estimated production
volumes from the Farmout Properties for the months of December 1996 through
February 1997, as shown in the table below. The production volumes included in
the table below are for production attributable to the Underlying Properties,
and not for production attributable to the Trust's Royalty Interests and are net
of the amount of production attributable to WPC's royalty obligations to third
parties, which is determined by contractual arrangement with such parties.
15
<PAGE>
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
March 31, 1997 March 31, 1996
------------------- ---------------
<S> <C> <C>
Production (MMBtu) (1)
WI Properties 8,532,885 (2) 5,871,713 (4)
Farmout Properties 2,057,051 (3) 2,482,138 (5)
Blanco Hub Spot Price
($/MMBtu) (6) $2.47 $1.28
Net Wellhead Price
WI Properties ($/MMBtu) (6) $1.09 $1.13
</TABLE>
- -----------------------
(1) Million British Thermal Units.
(2) Includes prior period adjustments of 1,189,290 MMBtu.
(3) Reflects estimated volumes for December 1996 through February 1997.
(4) Includes prior period adjustments of 1,859,291 MMBtu.
(5) Reflects actual volumes for December 1996 through February 1997.
(6) Simple average of the months included in the period presented.
Production from the WI Properties is generally sold pursuant to a gas
purchase contract between WPC and WFS Gas Resources Company ("WFSGR") (as
successor in interest to Williams Gas Marketing Company). The gas purchase
contract provides certain protections for WFSGR in the form of price credits
(for production purchased by WFSGR on or after January 1, 1994) and for
Unitholders when the a $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.
During the second quarter of 1997, the Blanco Hub Spot Price was below
$1.75 per MMBtu during April and June and above $1.75 per MMBtu in May. 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 June 30, 1997, WFSGR had aggregate price credits of approximately
$21.1 million of which the Trust's 81 percent interest was approximately $17.1
million. The Blanco Hub Spot Price was above $1.75 per MMBtu in July 1997.
The entitlement of WFSGR to recoup the price credits means that if and when
the applicable Blanco Hub Spot Price rises above $1.75 per MMBtu, future royalty
income paid to the Trust would be reduced until such time as such price credits
have been fully recouped. Corresponding cash distributions to Unitholders would
also be reduced.
16
<PAGE>
The information in this Form 10-Q concerning production and prices relating
to the Underlying Properties is based on information prepared and furnished by
WPC to the Trustee. The Trustee has no control over and no responsibility
relating to the operation of the Underlying Properties.
This report on Form 10-Q includes "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. All statements other
than statements of historical fact included in this Form 10-Q, including,
without limitation, statements contained in this "Trustee's Discussion and
Analysis of Financial Condition and Results of Operations" regarding the Trust's
financial position and industry conditions, are forward-looking statements.
Although the Trustee believes that the expectations reflected in such forward-
looking statements are reasonable, it can give no assurance that such
expectations will prove to have been correct.
17
<PAGE>
PART II - OTHER INFORMATION
---------------------------
Item 1. Legal Proceedings
The following discussion concerns a material development in a legal
matter which may effect the Trust and which occurred subsequent to
June 30, 1997.
Southern Ute Litigation. As previously reported in the Public Offering
Prospectus, each of the Trust's prior Annual Reports on Form 10-K as filed with
the SEC, and most recently in the Trust's 1996 Annual Report on Form 10-K (the
"1996 Annual Report") under "Item 2--The Royalty Interest--Title to Properties--
Southern Ute Litigation," WPC has been named as a defendant in a lawsuit brought
by the Southern Ute Indian Tribe (the "Tribe") which, among other things,
contests ownership rights in certain coal seam gas producing properties,
including a portion of the Farmout Properties in which WPC owns a net profits
interest. A portion of the revenues received by WPC with regard to the Farmout
Properties is paid to the Trust as a component of the NPI. The following
information is included herein for the purpose of updating the disclosure
provided in the Annual Report as a result of the July 16, 1997 opinion rendered
by the United States Court of Appeals for the Tenth Circuit (the "Court of
Appeals") and should be read in conjunction with the discussion of the
litigation provided in the 1996 Annual Report. Capitalized terms used and not
otherwise defined in the following discussion are used with the meanings given
to such terms in the 1996 Annual Report.
On December 31, 1991, the Tribe filed a lawsuit in the United States
District Court for the District of Colorado (the "District Court") against WPC,
Amoco Production Company and other major gas producers and affected parties in
the San Juan Basin area (collectively, the "Defendant Class") alleging that
certain coal strata and constituents within that strata (including coal seam
gas) were reserved by the United States, then granted to the Tribe for the
Tribe's perpetual benefit and ownership. The Tribe alleges that coal seam gas
from the coal strata is and has been wrongfully extracted by members of the
Defendant Class. The Tribe is seeking a declaration that it owns a beneficial
interest in the coal seam gas and that the extraction of such gas without Tribal
consent is an unlawful trespass. In addition to a declaration of ownership of
the gas, the Tribe is seeking compensation for the value of coal seam gas
heretofore extracted and certain other remedies.
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 members of the Defendant Class, is vigorously
defending the lawsuit. On September 13, 1994, the District 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 District 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 appealed the order
to the Court of Appeals which issued a July 16, 1997 opinion reversing the
District Court
18
<PAGE>
and holding that coal seam gas was "an integral component of coal" and had
therefore been vested in the Tribe as owners of the coal resource. The Court of
Appeals remanded the matter to the District Court for further proceedings
consistent with its decision. Amoco Production Company, the class representative
for the Defendant Class, has indicated its intent to seek review of the Court of
Appeals' decision. In the event further review is denied, the District Court
will be in the position to adjudicate the Defendant Class' affirmative defenses
to the Tribe's claims.
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
Properties. With respect to this litigation, in the event of a settlement or
issuance of a final non-appealable court decision either of which results in a
determination that WPC has no right to produce or receive proceeds from coal
seam gas from the properties in question, WPC agreed, pursuant to a provision of
the Conveyance, 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. The Trustee has been informed by Williams,
however, that the aggregate cash distributions and tax benefits attributable to
such interests heretofore received by the Trust already exceed the calculated
amount under (a) of the preceding sentence. Consequently, Unitholders should
not expect to receive any such distribution on account of the above described
provisions of the Conveyance regardless of the resolution of this litigation.
In the event that the eventual result of this litigation is a loss or diminution
of WPC's interest in the Farmout Properties in question, future distributions to
the Trust may decrease correspondingly.
The Trustee makes no prediction as to ultimate resolution of this
litigation or as to the likely effect, if any, that such resolution may have
upon the Trust or its Unitholders.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibit No. Description
----------- -----------
27 Financial Data Schedule
(b) Current Report on Form 8-K as filed with the Securities and Exchange
Commission June 23, 1997 regarding the transfer of the Underlying
Properties by Williams Production Company to an unaffiliated third
party effective as of May 1, 1997.
19
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WILLIAMS COAL SEAM GAS ROYALTY TRUST
By: NATIONSBANK OF TEXAS, N.A., Trustee
By: /s/ Ron Hooper
---------------------------------------
Ron Hooper
Vice President and Administrator
(The Trust has no directors or executive officers.)
Date: August 14, 1997
20
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> APR-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 43,333
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 43,333
<PP&E> 148,566,663
<DEPRECIATION> 72,592,710
<TOTAL-ASSETS> 66,017,286
<CURRENT-LIABILITIES> 177,417
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 65,839,869
<TOTAL-LIABILITY-AND-EQUITY> 66,017,286
<SALES> 10,179,169
<TOTAL-REVENUES> 10,215,053
<CGS> 0
<TOTAL-COSTS> 418,211
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 9,796,842
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,796,842
<EPS-PRIMARY> 1.01
<EPS-DILUTED> 0
</TABLE>
