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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 1-11608
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WILLIAMS COAL SEAM GAS ROYALTY TRUST
(Exact Name of Registrant as specified in its charter)
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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)
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Registrant's telephone number, including area code:
(214) 508-2364
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
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NAME OF EXCHANGE
TITLE OF CLASS ON WHICH REGISTERED
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Units of Beneficial Interest New York Stock Exchange, Inc.
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SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ].
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of 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. Yes [X]
At March 13, 1998, 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 $142,469,000.
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:
NONE.
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TABLE OF CONTENTS
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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......................................... 5
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............................... 9
Periodic Reports to Unitholders............................. 10
Voting Rights of Unitholders................................ 10
Liability of Unitholders.................................... 11
Transfer Agent.............................................. 11
Federal Income Taxation..................................... 11
Summary of Certain Federal Income Tax Consequences.......... 12
ERISA Considerations........................................ 16
State Tax Considerations.................................... 16
Regulation and Prices....................................... 16
Regulation of Natural Gas................................... 16
Environmental Regulation.................................... 17
Competition, Markets and Prices............................. 18
ITEM 2. Properties.................................................. 19
The Royalty Interests....................................... 19
The Underlying Properties................................... 20
The NPI..................................................... 23
Reserve Report.............................................. 24
Historical Gas Sales Prices and Production.................. 25
Purchase Price Adjustments.................................. 25
NPI Percentage Changes...................................... 26
Gas Purchase Contract....................................... 26
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............................ 35
ITEM 3. Legal Proceedings........................................... 36
ITEM 4. Submission of Matters to a Vote of Security Holders......... 36
PART II
ITEM 5. Market for Registrant's Common Equity and Related
Stockholder Matters....................................... 36
ITEM 6. Selected Financial Data..................................... 36
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ITEM 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 36
Year 2000 Issue........................................... 38
ITEM 7A. Quantitative and Qualitative Disclosures About Market
Risk...................................................... 38
ITEM 8. Financial Statements and Supplementary Data................. 38
ITEM 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................. 49
PART III
ITEM 10. Directors and Executive Officers of the Registrant.......... 49
ITEM 11. Executive Compensation...................................... 49
ITEM 12. Security Ownership of Certain Beneficial Owners and
Management................................................ 49
Williams' Ownership of Units................................ 50
ITEM 13. Certain Relationships and Related Transactions.............. 50
Administrative Services Agreement........................... 50
Potential Conflicts of Interest............................. 50
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K....................................................... 51
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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.
"Buyer" means Quattro Finale LLC, a Delaware limited liability company,
which purchased the Underlying Properties from WPC in a transaction effective
May 1, 1997.
"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 Interests
and the Underlying Properties as of December 31, 1994, prepared by
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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.
"December 31, 1997 Reserve Report" means the Reserve Report, dated March 5,
1998, 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, 1997, 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 Gas 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.
"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.
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"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 Gas Resources from WPC for
each MMBtu of natural gas purchased by WFS Gas 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, December 31, 1995 Reserve Report and
December 31, 1996 Reserve Report.
"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.
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"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 Gas 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.
"WPC Payment Obligations" has the meaning assigned to such term under "Item
2 -- The Royalty Interests -- Williams' Performance Assurances."
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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.
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
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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 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
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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 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.
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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 13, 1998, 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 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
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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."
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
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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 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
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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").
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.
UNITHOLDERS SHOULD CONSULT THEIR TAX ADVISOR ABOUT THE POTENTIAL IMPACT OF THE
SOUTHERN UTE LITIGATION ON THE AVAILABILITY OF SECTION 29 TAX CREDITS. SEE "ITEM
2 -- THE ROYALTY INTERESTS -- TITLE TO PROPERTIES -- SOUTHERN UTE LITIGATION."
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
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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.
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 1997, 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
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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.
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 1997, the
available Section 29 tax credit is approximately
$1.845220 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 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
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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.
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.
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
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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.
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
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<PAGE> 20
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.
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
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<PAGE> 21
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 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."
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<PAGE> 22
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.
On May 7, 1997, effective as of May 1, 1997, WPC transferred the Underlying
Properties to Quattro Finale LLC, an unaffiliated third party ("Buyer"),
pursuant to the terms of a Purchase and Sale Agreement dated as of May 1, 1997
(the "Transaction Agreement") 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 described in more detail in the Trust's 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 "Transaction MS 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.
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 that are held by WPC prior to
payment to the Trust. WPC is entitled to retain any amounts attributable to the
Underlying Properties that are not required to be paid to the Trust with respect
to the Royalty Interests.
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<PAGE> 23
Concurrently with the Transaction, WPC, Williams, the Trust and Buyer
entered into an Agreement dated May 7, 1997 pursuant to which (i) the parties
acknowledged that, although WPC was selling the Underlying Properties to Buyer,
WPC retained 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 Transaction Agreement and the agreements entered
into pursuant to the Transaction 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 and where otherwise
dictated by context, 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 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 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 584 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
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<PAGE> 24
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, 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."
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<PAGE> 25
The following table reflects certain information from the Reserve Report as
of December 31, 1997 prepared by Miller and Lents, Ltd. dated March 5, 1998 (the
"December 31, 1997 Reserve Report") regarding the Federal Units in which the WI
Properties participate. At December 31, 1997, the WI Properties covered 538
gross (67 net) coal seam gas wells with working interests ranging from .833
percent to 100 percent, with an average working interest of approximately 12.5
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, 1997.
<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 23.5 $11,352
San Juan 30-6.......................... Meridian Oil Inc. 22.2 11,796
San Juan 32-8.......................... Phillips Petroleum Company 17.4 8,401
San Juan 29-6.......................... Phillips Petroleum Company 15.3 8,046
San Juan 31-6.......................... Phillips Petroleum Company 13.9 6,253
San Juan 32-9.......................... Meridian Oil Inc. 10.8 4,726
San Juan 32-7.......................... Phillips Petroleum Company 7.3 3,322
San Juan 29-7.......................... Meridian Oil Inc. 5.1 2,794
Northeast Blanco....................... Blackwood & Nichols Co., Ltd. 2.0 967
San Juan 29-5.......................... Phillips Petroleum Company 1.3 586
Huerfano............................... Meridian Oil Inc. .6 128
San Juan 28-6.......................... Meridian Oil Inc. .1 15
</TABLE>
Meridian Oil Inc. is a subsidiary of Burlington Resources Inc. and
Blackwood & Nichols Co., Ltd. is a subsidiary of Devon Energy Corporation.
Well Count and Acreage Summary. The following table shows as of December
31, 1995, 1996 and 1997, 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,
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
=== == ======= ======
1997
Producing................................................ 563 69 150,988 20,681
Nonproducing............................................. 0 0 0 0
--- -- ------- ------
Total............................................ 563 69 150,988 20,681
=== == ======= ======
</TABLE>
Of the total gross wells described above at December 31, 1997, 538 gross
wells are located in unitized areas. In addition to the above, the Farmout
Properties have 21 gross wells.
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<PAGE> 26
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, 1997, WPC's working interest and net revenue interests in
these wells averaged 8.054 percent and 6.581 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, 1997, 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 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, 1997 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, 1997 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
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<PAGE> 27
(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, 1997, and certain related information for the Royalty Interests and
Underlying Properties from the December 31, 1997 Reserve Report prepared by
Miller and Lents, Ltd., independent petroleum engineers. Summaries of the
December 31, 1997 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.
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, 1997 Reserve Report occur. The December 31, 1997 Reserve Report was
prepared in accordance with criteria established by the Commission and,
accordingly, is based upon a contractual price for gas for December 1997, of
$1.70 per MMBtu before transportation charges. The December 31, 1997 Reserve
Report is also based on the percentage share of NPI Net Proceeds payable to the
Trust remaining at 81 percent until 2000 and then reduced to 60 percent for the
remaining life of the reserves.
<TABLE>
<CAPTION>
ROYALTY UNDERLYING
INTERESTS PROPERTIES
--------- ----------
<S> <C> <C>
Net Proved Gas Reserves (Bcf)(a)(b)......................... 102.0 146.8
Estimated Future Net Revenues (in millions)(c).............. $91.1 $115.5
Discounted Estimated Future Net Revenues (in millions)(c)... $65.8 $ 82.9
</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.
24
<PAGE> 28
(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, 1997 Reserve
Report for the January 1, 1998 through December 31, 2002 period, and assuming
constant future Section 29 tax credits at the estimated 1997 rate of $1.026 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 $54 million, having a discounted present value (assuming a 10
percent discount rate) of approximately $45 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 Operating Expenses for the Underlying
Properties to be contained in the Trust's annual report to Unitholders for the
year ended December 31, 1997. 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, 1995, 1996
and 1997:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Production from the WI Properties (MMcf).............. 29,050 19,948 14,316
Weighted average lifting costs (dollars per Mcf)...... $ 0.07 $ 0.08 $ 0.17
Weighted average sales price of gas produced from the
WI Properties (dollars per Mcf)..................... $ 1.10 $ 1.11 $ 1.33
Average Blanco Hub Spot Price (dollars per MMBtu)..... $ 1.18 $ 1.65 $ 2.32
</TABLE>
The published Blanco Hub Spot Price for December 1997 was $2.16 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."
25
<PAGE> 29
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>
WPC'S
NPI 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>
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, 1997, cumulative production since October 1, 1992 was
144.1 Bcf. Using the definitions described above, which do not include any
terminal value, the internal rate of return is not currently projected by Miller
and Lents to be 12 percent or higher until the third quarter of 2000, although
no assurance can be made that it will not occur sooner than projected.
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 Gas Resources Company ("WFS Gas Resources") all of
its right, title, interest, duties and obligations under the Gas Purchase
Contract, and WFS Gas 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 Gas 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. The Gas Purchase Contract provides
for a pricing mechanism during an initial five-year period ("Primary Term")
which expired on December 31, 1997. Following the expiration of the Primary
Term, the Gas Purchase Contract continues for one or more consecutive additional
one-year terms (each such term a "Contract Year") unless and until
26
<PAGE> 30
WFS Gas Resources exercises its annual option, exercisable fifteen (15) days
prior to the end of each Contract Year, to discontinue purchasing gas from WPC
under the terms of the Gas Purchase Contract and instead purchase gas at a
monthly price equal to the "Index Price" as described hereafter. For the
Contract Year January 1, 1998 through December 31, 1998 ("1998 Contract Year"),
WFS Gas Resources did not exercise this option and the pricing mechanism of the
Primary Term will therefore remain in place through at least December 31, 1998.
Under this mechanism, the monthly price to be paid by WFS Gas 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 Gas 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 1998 Contract Year is
greater than $1.94 per MMBtu, then WFS Gas Resources will pay WPC an amount
for gas purchased equal to $1.94 per MMBtu, less the costs paid by WFS Gas
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 Gas Resources has
no accrued Price Credits (see below) in the Price Credit Account (defined
below). If WFS Gas Resources has accrued Price Credits in the Price Credit
Account then WFS Gas 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 Gas 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 1998 Contract Year is
greater than the Minimum Purchase Price but less than or equal to $1.94 per
MMBtu, then WFS Gas Resources will pay WPC an amount for each MMBtu
purchased equal to the Index Price less the costs paid by WFS Gas 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, then WFS Gas Resources will be entitled to reduce the amount in
excess of the Minimum Purchase Price Credit Account, then WFS Gas 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 to specified delivery points) that otherwise would be payable by
any accrued and unrecouped Price Credits in the Price Credit Account, and
WFS Gas 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.
(iii) If the Index Price in any month during the 1998 Contract Year
(or in any subsequent Contract Year as long as WFS Gas Resources has not
elected to discontinue paying under the Gas Purchase Contract) is less than
the Minimum Purchase Price, then WFS Gas Resources will pay for each MMBtu
of gas purchased the Minimum Purchase Price less the costs paid by WFS Gas
Resources to gather and process such gas and deliver it a specified
delivery points, and if such month commences on or after January 1, 1994,
WFS Gas Resources will receive a credit (the "Price Credit") from WPC for
each MMBtu of natural purchased by WFS Gas 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 Gas
Resources prior to January 1, 1994.
The Index Price was below the Minimum Purchase Price in each month from
April 1994 through October 1996. In each month from November 1996 through
February 1997 and from May 1997 through February 1998 the Index Price exceeded
the Minimum Purchase Price. The Index Price was below the Minimum Purchase Price
during the months of March and April 1997. WPC estimates that, as of December
31, 1997, WFS Gas Resources had aggregate Price Credits in the Price Credit
Account of Approximately $13.9 million of which the Trust's 81 percent interest
was approximately $11.3 million.
27
<PAGE> 31
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.
Cash distributions in 1997 to Unitholders were reduced by approximately $9
million in recoupment of Price Credits.
Subsequent to the expiration of the Primary Term of the pricing provision
of the Gas Purchase Contract, which occurred on December 31, 1997, WFS Gas
Resources has an annual option (which can be exercised only once during the term
of the Gas Purchase Contract) to discontinue paying the Minimum Purchase Price
by giving written notice of its election to pay solely the Index Price (less the
costs paid by WFS Gas Resources to gather, treat and process such gas and
deliver it to specified points). If WFS Gas Resources so elects to discontinue
paying the Minimum Purchase Price, WFS Gas 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 San Juan 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 first of month El Paso
Natural Gas Co. San Juan Spot Price. The El Paso Natural Gas Co. -- San Juan
Spot Price is a posted index price per MMBtu (dry basis) published in Inside
F.E.R.C.'s Gas Market Report which is a bi-monthly publication by The
McGraw-Hill Companies, Inc. The Gas Purchase Contract provides WFS Gas Resources
a one time option to convert the Index Price from the first of month posting of
El Paso Natural Gas Co. -- San Juan Spot Price to the average of the bi-monthly
postings for that same index. The Gas Purchase Contract further provides for an
alternative indexing mechanism in the event the Inside F.E.R.C.'s Gas Market
Report indices 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 Gas Resources will absorb a portion of the gathering
charges based on a formula specified within 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 Gas
Resources at the Wellhead. WFS Gas 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 Gas Resources. The balance of the
production is gathered on behalf of WFS Gas 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 Gas Resources to gather,
treat and process such gas (including costs incurred by WFS Gas Resources under
the Gas Gathering Contract). Payments to WPC for gas purchased pursuant to the
Gas Purchase Contract are made by WFS Gas 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 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
28
<PAGE> 32
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 Gas Resources all of its right, title, interest, duties and
obligations under the Gas Gathering Contract, and WFS Gas 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(2) 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 Gas 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 Gas 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 WFS 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.
The Gas Gathering Contract was further amended effective as of April 1,
1997, for the purpose of increasing the field rights held by the Trust on the
Manzanares gathering system. The increase accommodates 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.
29
<PAGE> 33
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.
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
30
<PAGE> 34
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, 1997 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 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
31
<PAGE> 35
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.
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
32
<PAGE> 36
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. As previously reported in the Public Offering
Prospectus and each of the Trust's prior Annual Reports on Form 10-K as filed
with the Securities and Exchange Commission, WPC is a named defendant in a
lawsuit (the "Southern Ute Litigation") 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 updates the Trust's previously
reported disclosures regarding the Southern Ute Litigation.
On December 31, 1991, the Tribe initiated the Southern Ute Litigation in
the United States District Court for the District of Colorado (the "District
Court") against WPC, Amoco Production Company ("Amoco") 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 being and has been wrongfully
extracted by 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 Southern Ute 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.
Amoco, on behalf of itself, WPC and 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 claims of equitable ownership of the coal seam gas. The Tribe
appealed the order to the United States Court of Appeals for the Tenth Circuit
(the "Court of Appeals"), which issued an opinion dated July 16, 1997 reversing
the District Court 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, as class representative of the
Defendant Class, subsequently sought and obtained a rehearing en banc from the
Court of Appeals on the ownership issue. The en banc hearing was held on March
17, 1998, and no ruling has to date been issued. If the original opinion of the
Court of Appeals finding ownership in the Tribe is upheld by the Court of
Appeals after the en banc hearing, Amoco on behalf
33
<PAGE> 37
of the Defendant Class may seek additional review of the Court for Appeals'
decision. If any such further review is sought and denied, District Court
proceedings would then be conducted to adjudicate the respective affirmative
defenses of the members of the Defendant Class 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 the Southern Ute Litigation and all
legal costs the Trust might incur if the Trust is named as a defendant in such
litigation. The Trust has not been named a defendant at the present time. In the
event of a settlement or issuance of a final non-appealable court decision in
the Southern Ute Litigation, 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 is obligated under the terms 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 proved reserves
estimated in the October 1, 1992 Reserve Report for the Royalty Interests that
are affected by such settlement or court decision, less (b) the aggregate cash
distributions paid by the Trust and tax benefits, if any, available to the
Unitholders, in each case attributable to the portion of the Farmout Properties
affected by such settlement or court decision prior to the effective date of
such settlement or court decision (the "Formula Reimbursement Amount"). If,
however, the Trust's share of revenues from the Farmout Properties is instead
reduced as a consequence of a settlement or judgment, WPC will bear any such
loss or reduction to such revenues resulting from such a settlement or court
decision out of (and limited to) WPC's retained interest percentage of its 35
percent net profits interest in the portion of the Farmout Properties subject to
the Southern Ute Litigation and affected by such settlement or court decision.
Only in the event that the amounts realized by WPC with respect to such retained
interest percentage are inadequate to offset any loss or reduction otherwise
affecting the Trust's future NPI Net Proceeds or there is a failure of title
will the Trust's share of future revenues be reduced.
WPC has advised the Trustee that, according to WPC's calculations, as of
December 21, 1997, the Formula Reimbursement Amount had been exceeded by
approximately $340,000. Accordingly, if the final resolution of the litigation
results in a failure of title of WPC's interest in the portion of the Farmout
Properties subject to such litigation, no additional amounts will be paid to the
Trust with respect to such portion and the amount of NPI Net Proceeds thereafter
payable to the Trust for distribution to Unitholders would be decreased.
Should the Tribe ultimately prevail in the Southern Ute Litigation, in
addition to the loss of future revenues attributable to the Farmout Properties
affected by the litigation, WPC may be held liable to repay to the Tribe amounts
attributable to such properties, plus interest thereon, including amounts
attributable to such properties previously paid by WPC to the Trust pursuant to
the terms of the Conveyance and Trust Agreement. However, Section 1.25(d) of the
Conveyance provides that litigation costs and other losses, charges or
liabilities incurred by WPC in relation to the Southern Ute Litigation will
neither be included in the calculation of Net Profits Costs nor borne by the
Trust and will be borne by WPC.
WPC has notified the Trustee that WPC intends to recoup out of subsequent
amounts that otherwise would be paid to the Trust any amounts paid the Trust in
prior periods in excess of the amounts that were due in prior periods pursuant
to the provisions of Section 8.03 of the Conveyance. For example, if there is a
failure of title resulting from the Southern Ute Litigation, because the Formula
Reimbursement Amount has already been paid, any further payments to the Trust
attributable to the Farmout Properties would be subject to such recoupment. Any
such recoupment by WPC would reduce or possibly eliminate Trust revenues (and
therefore distributions to Unitholders) attributable to the WI Properties and to
the Farmout Properties, including the portion of the Farmout Properties not
directly affected by the Southern Ute Litigation. As indicated above, WPC
calculates that the amount subject to such recoupment as of December 21, 1997
was approximately $340,000, if there is a failure of title resulting from the
Southern Ute litigation. The extent and timing of any such reduction would
depend upon the ultimate resolution of the Southern Ute Litigation and cannot be
predicted at the present time.
34
<PAGE> 38
Amoco has advised WPC that, at a selected time in the future, it may
suspend payment of amounts attributable to the portion of the Farmout Properties
affected by the Southern Ute Litigation in light of the original opinion of the
Court of Appeals. To the extent any such amounts are so suspended, the then
current revenues of the Trust will be reduced correspondingly. According to
WPC's calculations, revenues attributable to the Farmout Properties affected by
the Southern Ute Litigation have constituted between approximately 3 percent and
21 percent of the Trust's quarterly royalty income, averaging approximately 9
percent of the Trust's quarterly royalty income. Whether any amounts so
suspended are thereafter released and paid to WPC (and the applicable portion
thereof ultimately paid to the Trust), and the timing of any such release, will
depend upon the outcome of the Southern Ute Litigation and cannot be predicted
at this time.
To the extent that any such amounts are so suspended by Amoco, Unitholders
will not be required currently to take into income such amounts, nor will they
be entitled to claim depletion on such production or Section 29 tax credits
attributable thereto. If and when any amounts so suspended by Amoco are released
and payment thereof received by the Trust, Unitholders on the record date for
such payment will then be required to report all of the income attributable to
the previously suspended amounts paid and will then be entitled to claim the
Section 29 tax credits thereon, subject to the requirement that each such
Unitholder be an owner of such Units during the period that such production was
actually produced and sold. Each Unitholder should consult his tax advisor
regarding tax compliance matters relating to these circumstances.
The Trustee makes no prediction as to the ultimate resolution of the
Southern Ute Litigation or as to the likely effect, if any, that such resolution
may have upon the Trust or its Unitholders.
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 maintained that
drilling in the Fruitland coal formation caused methane and other substances to
migrate through conventional gas wellbores and natural fractures and faults to
their water sources. The plaintiffs were seeking both compensatory and punitive
damages, injunctive relief, a remediation program and an air and medical
monitoring program.
The state court ruled it did not have jurisdiction over the plaintiffs'
claims. All of the federal cases in which the affiliate of WPC was a named
defendant have been dismissed. The defendants have agreed to forego
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<PAGE> 39
collection of attorneys' fees in the state case upon plaintiffs' execution of
settlement agreements precluding their raising the same issues in the future.
This matter will be concluded at such time as all such settlements have been
signed and approved by the court.
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.
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.
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
HIGH LOW PER UNIT
---- --- -------------
<S> <C> <C> <C>
1997
First Quarter............................................... $ 20 1/2 $ 17 1/4 $0.408865
Second Quarter.............................................. $ 18 5/8 $ 17 1/8 $0.617428
Third Quarter............................................... $ 19 7/8 $ 17 13/16 $0.472711
Fourth Quarter.............................................. $ 19 5/16 $ 13 9/16 $0.430231
1996
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
</TABLE>
At March 13, 1998, there were 9,700,000 Units outstanding and approximately
843 Unitholders of record.
ITEM 6. SELECTED FINANCIAL DATA.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------
1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Royalty Income................. $19,121,242 $22,330,613 $26,524,115 $22,292,821 $ 19,449,173
Distributable Income........... $18,545,401 $21,835,994 $26,053,210 $21,753,943 $ 18,890,743
Distributable Income per
Unit......................... $ 1.91 $ 2.25 $ 2.69 $ 2.24 $ 1.95
Distributions per Unit......... $ 1.93 $ 2.25 $ 2.69 $ 2.24 $ 1.93
Total Assets at Year End....... $61,446,413 $70,162,736 $82,752,593 $99,948,540 $117,580,814
Total Corpus at Year End....... $61,271,700 $70,021,573 $82,695,754 $99,881,511 $117,515,559
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
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.
36
<PAGE> 40
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 herein for additional information regarding the
determination of the amount of cash available for distribution to Unitholders.
For 1997 royalty income received by the Trust amounted to $19,121,242 as
compared to $22,330,613 and $26,524,115 for 1996 and 1995, respectively. The
decrease in royalty income in 1997 is primarily due to lower net production from
the Underlying Properties and increased payments of royalties to third parties
and taxes as compared to 1996. Net production related to the royalty income
received by the Trust in 1997 was approximately 17,031,000 MMBtu as compared to
23,636,000 MMBtu and 25,545,000 MMBtu in 1996 and 1995, respectively. The lower
volumes were due to lower production along with adjustments for Unit expansion
in 1996, 1995 and 1994. Interest income for 1997 was $67,558 as compared to
$78,549 and $90,476 for 1996 and 1995, respectively, representing lower
investment income on lower average invested balances.
General and administrative expenses for 1997 were $643,399 compared to
$573,168 and $561,381 for 1996 and 1995, respectively. The increase in these
expenses in 1997 was primarily due to increases in legal services as compared to
the prior years.
Distributable income for 1997 was $18,545,401 or $1.91 per Unit compared to
$21,835,994 or $2.25 per Unit for 1996 and $26,053,210 or $2.69 per Unit for
1995. This decrease resulted from lower production and taxes from the Underlying
Properties.
Reserve values as of December 31, 1997 were impacted by decreases in
natural gas prices used to value the reserves and the change in the NPI
percentage of NPI Net Proceeds from 81 percent to 60 percent expected to occur,
based on current estimates, during the year 2000. See "Item 2 -- The Royalty
Interests -- NPI Percentage Changes." The year end prices required to be
utilized in such valuations were $1.142 per Mcf, $1.345 per Mcf and $.81 per Mcf
at December 31, 1997, 1996 and 1995, respectively.
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 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 herein ("Note 1")) during the first three quarters of that
year
37
<PAGE> 41
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, 1997, 1996 and 1995, was based on production volumes
and natural gas prices for the twelve months ended September 30, 1997, 1996 and
1995, 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.
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED SEPTEMBER 30,
--------------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Production, Net (MMBtu)(1)
WI Properties..................................... 14,089,778 21,483,636 24,556,075
Farmout Properties(2)............................. 6,936,604 7,696,547 6,980,709
Average Blanco Hub Spot Price ($/MMBtu)................ $ 2.28 $ 1.34 $ 1.22
Average Net Wellhead Price
WI Properties ($/MMBtu)........................... $ .98 $ 1.11 $ 1.20
</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 the Gas
Purchase Contract. For more information regarding the Gas Purchase Contract and
the right of WFS Gas Resources to recoup certain Price Credits, see "Item
2 -- The Royalty Interests -- Gas Purchase Contract."
The information herein 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.
YEAR 2000 ISSUE
Many existing computer programs use only two digits to identify a year in
the date field. These programs were designed and developed without considering
the impact of the upcoming change in the century. If not corrected, many
computer applications could fail or create erroneous results by or at the Year
2000. The Year 2000 issue affects virtually all companies and organizations. If
a company or organization does not successfully address its Year 2000 issues, it
may face material adverse consequences.
The Trust is reliant on the performance of Williams and third party vendors
for the receipt of royalty income, payment of expenses and disbursement of
distributable income. The Trustee can provide no assurance as to whether
Williams and third party vendors will successfully address the Year 2000 issue.
Failing to successfully address the Year 2000 issue by Williams and third party
vendors could have a material adverse impact on the Trust and its Unitholders.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Inapplicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Audited Statements of Assets, Liabilities and Trust Corpus of the Trust as
of December 31, 1997 and 1996, and the related Statements of Distributable
Income and Changes in Trust Corpus for each of the three years in the period
ended December 31, 1997, are included in this Form 10-K.
38
<PAGE> 42
REPORT OF INDEPENDENT AUDITORS
The Trustee
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, 1997 and
1996, and the related statements of distributable income and changes in trust
corpus for each of the three years in the period ended December 31, 1997. 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, 1997 and 1996, and its distributable
income and its changes in trust corpus for each of the three years in the period
ended December 31, 1997, on the basis of accounting described in Note 2.
/s/ ERNST & YOUNG LLP
Tulsa, Oklahoma
March 27, 1998
39
<PAGE> 43
WILLIAMS COAL SEAM GAS ROYALTY TRUST
FINANCIAL STATEMENTS
STATEMENTS OF ASSETS, LIABILITIES AND TRUST CORPUS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1997 1996
----------- -----------
<S> <C> <C>
ASSETS
Current assets -- cash and cash equivalents................. $ 30,636 $ 165,290
Royalty interests in oil and gas properties (less
accumulated amortization of $77,150,886 and $68,569,217 at
December 31, 1997 and 1996, respectively) (Note 2)........ 61,415,777 69,997,446
----------- -----------
Total............................................. $61,446,413 $70,162,736
=========== ===========
LIABILITIES AND TRUST CORPUS
Current liabilities:
Payable to The Williams Companies, Inc. (Note 4).......... $ 56,275 $ 54,636
Other accounts payable.................................... 118,438 86,527
----------- -----------
Current liabilities......................................... 174,713 141,163
Trust corpus (9,700,000 units of beneficial interest
authorized and outstanding) (Note 2)...................... 61,271,700 70,021,573
----------- -----------
Total............................................. $61,446,413 $70,162,736
=========== ===========
</TABLE>
STATEMENTS OF DISTRIBUTABLE INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Royalty income..................................... $19,121,242 $22,330,613 $26,524,115
Interest income.................................... 67,558 78,549 90,476
----------- ----------- -----------
Total............................................ 19,188,800 22,409,162 26,614,591
General and administrative expenses (Note 4)....... (643,399) (573,168) (561,381)
----------- ----------- -----------
Distributable income............................... $18,545,401 $21,835,994 $26,053,210
=========== =========== ===========
Distributable income per Unit (9,700,000 units)
(Note 2)......................................... $ 1.91 $ 2.25 $ 2.69
=========== =========== ===========
Distributions per Unit (Note 5).................... $ 1.93 $ 2.25 $ 2.69
=========== =========== ===========
</TABLE>
STATEMENTS OF CHANGES IN TRUST CORPUS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Trust corpus, beginning of year................. $ 70,021,573 $ 82,695,754 $ 99,881,511
Amortization of royalty interests............... (9,581,669) (12,726,013) (17,128,499)
Distributable income............................ 18,545,401 21,835,994 26,053,210
Distributions to Unitholders (Note 5)........... (18,713,605) (21,784,162) (26,110,468)
------------ ------------ ------------
Trust corpus, end of year....................... $ 61,271,700 $ 70,021,573 $ 82,695,754
============ ============ ============
</TABLE>
See accompanying notes
40
<PAGE> 44
WILLIAMS COAL SEAM GAS ROYALTY TRUST
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
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 6,131,209 Units to
the public through various underwriters in January and February 1993 (the
"Public Offering"). 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
41
<PAGE> 45
WILLIAMS COAL SEAM GAS ROYALTY TRUST
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
percentage is subject to certain future downward adjustments based on a rate of
return computation once cumulative aggregate production targets are met. Based
on current estimates, a downward adjustment to the NPI is expected during the
year 2000. 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 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, 1997 and 1996 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 may 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.
42
<PAGE> 46
WILLIAMS COAL SEAM GAS ROYALTY TRUST
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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, 1997 and 1996 represent the fourth quarter fees. Aggregate fees incurred by
the Trust to Williams in 1997, 1996 and 1995 were $236,191, $220,183 and
$213,771, respectively.
Aggregate fees paid by the Trust to the trustees in 1997, 1996 and 1995
were $44,978, $43,360 and $40,990, respectively.
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 ("WFS Gas Resources") (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 Purchase Price provision
of 97 percent of $1.75 per MMBtu (see Item 2 -- The Royalty Interests -- Gas
Purchase Contract). 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 expired on December 31, 1997, at which time WFS Gas
Resources had the option to discontinue paying the Minimum Purchase Price by
giving notice of its election to pay solely on an index price. For the contract
year January 1, 1998 through December 31, 1998, WFS Gas Resources did not
exercise this option and the pricing mechanism of the Primary Term remains in
effect.
43
<PAGE> 47
WILLIAMS COAL SEAM GAS ROYALTY TRUST
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The applicable index price was above the Minimum Purchase Price throughout
most of 1997. Pursuant to the terms of the Gas Purchase Contract, WPC
established a price credit account. WPC estimates that, as of December 31, 1997,
WFSGR had aggregate price credits in the price credit account of approximately
$13.9 million of which the Trust's 81 percent interest was approximately $11.3
million. The applicable index price was above the Minimum Purchase Price in
January and February 1998.
The entitlement of WFSGR to recoup the price credits means that if and when
the applicable Blanco Hub Spot Price is above $1.75 per MMBtu, royalty income
paid to the Trust is reduced until such time as such price credits have been
fully recouped. Cash distributions to the Unitholders in 1997 were reduced by
approximately $9 million in recoupments of the price credits.
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, 1997,
1996 and 1995, 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. Amoco, on behalf of
itself, WPC, and the other defendants named in the lawsuit (the "Defendant
Class"), is vigorously defending the lawsuit. On September 13, 1994, the United
States District Court for the District of Colorado (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
44
<PAGE> 48
WILLIAMS COAL SEAM GAS ROYALTY TRUST
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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 appealed
the order to the United States Court of Appeals for the Tenth Circuit (the
"Court of Appeals"), which issued an opinion dated July 16, 1997 reversing the
District Court 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, as class representative of the
Defendant Class, subsequently sought and obtained a rehearing en banc from the
Court of Appeals on the ownership issue. The en banc hearing was held on March
17, 1998, and no ruling has to date been issued. 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. 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. See "Item 2 -- The Royalty
Interest -- Title to Properties -- Southern Ute Litigation" for additional
information regarding this litigation .
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 interest 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 accessed 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.
45
<PAGE> 49
WILLIAMS COAL SEAM GAS ROYALTY TRUST
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
7. SUBSEQUENT EVENT
Subsequent to December 31, 1997, the Trust declared the following
distribution:
<TABLE>
<CAPTION>
QUARTERLY RECORD DATE PAYMENT DATE DISTRIBUTION PER UNIT
- --------------------- ------------ ---------------------
<S> <C> <C>
February 17, 1998 February 27, 1998 $.302872
</TABLE>
The Trustee has estimated the Section 29 tax credit associated with the
February 17, 1998 quarterly distribution to be $.26 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, 1997 and 1996 (in thousands, except per Unit amounts):
<TABLE>
<CAPTION>
ROYALTY DISTRIBUTABLE DISTRIBUTABLE
CALENDAR QUARTER INCOME INCOME INCOME PER UNIT
---------------- ------- -------------- ---------------
<S> <C> <C> <C>
1997
First............................................. $ 4,104 $ 3,929 $0.41
Second............................................ 6,075 5,868 0.60
Third............................................. 4,708 4,652 0.48
Fourth............................................ 4,234 4,097 0.42
------- ------- -----
Total................................... $19,121 $18,546 $1.91
======= ======= =====
1996*
First............................................. $ 6,529 $ 6,393 $0.66
Second............................................ 4,818 4,615 0.48
Third............................................. 5,654 5,559 0.57
Fourth............................................ 5,530 5,269 0.54
------- ------- -----
Total................................... $22,331 $21,836 $2.25
======= ======= =====
</TABLE>
- ---------------
* Adjustments for Unit expansion decreased the distributions for the second,
third and fourth quarters of 1996.
Selected 1997 fourth quarter data are as follows (in thousands except per
Unit amounts):
<TABLE>
<S> <C>
Royalty income.............................................. $4,234
Interest income............................................. 14
General and administrative expenses......................... (151)
------
Distributable income........................................ $4,097
======
Distributable income per Unit (9,700,000 units)............. $ 0.42
======
Distribution per Unit....................................... $ 0.43
======
</TABLE>
9. SUPPLEMENTAL OIL AND GAS INFORMATION (UNAUDITED)
The net proved reserves attributable to the Royalty Interests have been
estimated as of December 31, 1997, 1996, and 1995, 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
46
<PAGE> 50
WILLIAMS COAL SEAM GAS ROYALTY TRUST
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
reserves is calculated based on discounting such future net revenues at an
annual rate of 10 percent. The Blanco Hub Spot Price for December 1997 of $2.16
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 $1.14 per Mcf. This computed price does
not include any possible future increases which may result upon the full
recoupment of the price credit. The standardized measure of discounted future
net revenues below has been reduced by operating and development costs which
such costs are 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 and 1995 and January 1, 1995
for Royalty Interests are based on a percentage share of NPI Net Proceeds
payable to the Trust of 81 percent. Based on inception to date experience in
estimating reserves production history and more detailed information with regard
to the status of the interest in the NPI, the reserve estimates as of December
31, 1997 for Royalty Interests are adjusted to reflect possible reduction of the
NPI upon meeting certain production targets and certain rates of return expected
to be met in the future.
<TABLE>
<CAPTION>
NATURAL GAS
(MMCF)
-----------
<S> <C>
Proved reserves at January 1, 1995.......................... 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
Revisions of previous estimates............................. (12,259)
Production.................................................. (17,264)
Changes due to revision of interest......................... (17,820)
-----------
Proved reserves at December 31, 1997........................ 102,048
===========
</TABLE>
- ---------------
* Includes reserve increases resulting from well recompletions and other
factors.
All proved reserve estimates presented above at December 31, 1997, 1996 and
1995 and January 1, 1995 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.
47
<PAGE> 51
WILLIAMS COAL SEAM GAS ROYALTY TRUST
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The following table sets forth the standardized measure of discounted
future net revenues at
December 31, 1997, 1996 and 1995 relating to proved reserves (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Future cash inflows................................ $103,497 $ 1,995 $131,819
Future production taxes............................ (12,461) (13,444) (8,897)
-------- -------- --------
Future net cash flows.............................. 91,036 187,602 122,922
10% discount factor................................ (25,198) (63,149) (43,089)
-------- -------- --------
Standardized measure of discounted future net
revenues......................................... $ 65,838 $124,453 $ 79,833
======== ======== ========
</TABLE>
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, 1997, 1996 and 1995 (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Balance at January 1............................... $124,453 $ 79,833 $ 99,160
Increase (decrease) due to:
Net sales of coal seam gas....................... (18,065) (20,629) (27,603)
Net changes in prices and costs.................. (27,518) 46,392 (17,547)
Development costs incurred....................... 0 724 449
Net change in cost estimates..................... 0 (724) (449)
Change in estimated volumes...................... (8,448) 8,133 14,856
Accretion of discount............................ 12,445 7,983 9,916
Changes in revision of interest.................. (11,095) -- --
Other............................................ (5,934) 2,741 1,051
-------- -------- --------
(58,615) 44,620 (19,737)
-------- -------- --------
Balance at December 31............................. $ 65,838 $124,453 $ 79,833
======== ======== ========
</TABLE>
48
<PAGE> 52
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.
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 1997
base amount of $37,817, 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
1997 of $37,817 and $7,161, 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 1997 were $30,580.
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 13, 1998 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>
NUMBER OF UNITS PERCENT
NAME AND ADDRESS 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>
49
<PAGE> 53
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.
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 16, 1998, 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 16, 1998, 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 1997 was $236,191.
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 Gas Resources has the right, exercisable in its sole
discretion, at any
50
<PAGE> 54
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 Gas Resources,
under the Gas Purchase Contract, or WFS and WFS Gas 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.
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 (included in Item 8 of this report)
<TABLE>
<CAPTION>
PAGE IN THIS
REPORT
------------
<S> <C>
Report of Independent Auditors.................... 39
Statements of Assets, Liabilities and Trust Corpus
as of December 31, 1997 and 1996.................. 40
Statements of Distributable Income for the years
ended December 31, 1997, 1996 and 1995............ 40
Statements of Changes in Trust Corpus for the
years ended December 31, 1997, 1996 and 1995...... 40
Notes to Financial Statements..................... 41
</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.
51
<PAGE> 55
3. Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
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).
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).
</TABLE>
52
<PAGE> 56
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
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).
23.1 -- Consent of Miller and Lents, Ltd.
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).
</TABLE>
53
<PAGE> 57
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
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).
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 (filed as Exhibit 99.7 to
the Registrant's Form 10-K for the year ended December
31, 1996 and incorporated herein by reference.)
99.8 -- Reserve Report, dated March 5, 1998, 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, 1997, prepared by Miller and Lents, Ltd.,
independent petroleum engineers.
</TABLE>
(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]
54
<PAGE> 58
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, 1998
(The Registrant has no directors or executive officers.)
55
<PAGE> 59
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
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).
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).
</TABLE>
<PAGE> 60
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
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).
23.1 -- Consent of Miller and Lents, Ltd.
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).
</TABLE>
<PAGE> 61
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
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).
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 (filed as Exhibit 99.7 to
the Registrant's Form 10-K for the year ended December
31, 1996 and incorporated herein by reference.)
99.8 -- Reserve Report, dated March 5, 1998, 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, 1997, prepared by Miller and Lents, Ltd.,
independent petroleum engineers.
</TABLE>
<PAGE> 1
EXHIBIT 23.1
[MILLER AND LENTS, LTD. LETTERHEAD]
March 5, 1998
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.
8. Report dated March 5, 1998 for reserves as of December 31, 1997.
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 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>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 30,636
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 30,636
<PP&E> 138,566,663
<DEPRECIATION> 77,150,886
<TOTAL-ASSETS> 61,446,413
<CURRENT-LIABILITIES> 174,713
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 61,271,700
<TOTAL-LIABILITY-AND-EQUITY> 61,446,413
<SALES> 19,121,242
<TOTAL-REVENUES> 19,188,800
<CGS> 0
<TOTAL-COSTS> 643,399
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 18,545,401
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 18,545,401
<EPS-PRIMARY> 1.91
<EPS-DILUTED> 1.91
</TABLE>
<PAGE> 1
[MILLER AND LENTS, LTD LETTERHEAD]
March 5, 1998
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, 1997
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 subject interests of the Williams Coal Seam Gas Royalty
Trust ("WTU"), These interests consist of net profits interests in natural gas
properties located in tile San Juan Basin in Colorado and New Mexico.
In order to estimate the reserves to the WTU, it was necessary to
estimate the reserves attributable to (i) the "Underlying Properties," which
are certain working interest properties ("Working Interest Properties") and net
profits interests properties ("Farmout Properties") that are owned by Williams
Production Company ("WPC") and (ii) the "Royalty Interests," the variable net
revenue interest conveyed to WTU by WPC. WTU receives a "Specified Percentage"
of "Net Proceeds" from gas produced and sold from the Working Interest
Properties and from the revenue stream of the Farmout Properties.
For the Working Interest 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. Net Proceeds is defined as revenues derived from the sale of Working
Interest Properties gas volumes less 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 attributable to the Royalty Interests
from the Working Interest Properties were computed by multiplying the net gas
reserves of the Working Interest Properties by the ratio of (i) the net
income received by WTU from the Working Interest Properties to (ii) total
revenues from the Working Interest Properties after severance and ad valorem
taxes.
<PAGE> 2
[MILLER AND LENTS, LTD LETTERHEAD]
NationsBank of Texas, N.A., Trustee March 5, 1998
Williams Coal Seam Gas Royalty Trust Page 2
A summary of the reserves for the Underlying Properties and Royalty Interests
is as follows:
Proved Reserves as of December 31, 1997
<TABLE>
<CAPTION>
Net Gas Reserves, Future Net Present Value
MMcf at Income, at 10 Percent
14.73 Psia M$ Per Annum, M$
----------------------- ------------- ----------------
<S> <C> <C> <C>
The Underlying Properties
Proved Developed Producing 146,751 115,457 82,931
The Royalty Interests (Net to the Trust)
Proved Developed Producing 102,048 91,063 65,838
</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 1997 rate of $1.026 per MMBtu, are $88 million with
a 10 percent present worth of $72 million. The tax credits attributable to the
Royalty Interests are S54 million with a 10 percent present worth of $45
million.
The production forecast for the Proved Reserves and future net
revenues as of December 31, 1997 attributable to the Underlying Properties and
to the WTU are shown on Table 1. The Proved Reserves and future net revenues as
of December 31, 1997 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 1997 wellhead
price, reported by WPC of $2.16 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.
Deductions for production and ad valorem taxes were based on prices
applicable to the Royalty Interests. Lease royalty deductions for the Working
Interest Properties were based on the average 1997 wellhead gas price of $2.32
per MMBtu, reported by WPC.
<PAGE> 3
[MILLER AND LENTS, LTD LETTERHEAD]
NationsBank of Texas, N.A., March 5,1998
Williams Coal Seam Gas Royalty Trust Page 3
Operating expense estimates were based on expenses incurred during
1997 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 WTU.
The Specified Percentage is 81 percent until such time that a
shareholder who bought at the IPO price realizes an Internal Rate of Return of
12 percent on the distributions from the WTU, after federal taxes at 31
percent, and Section 29 tax credits. After that time, estimated to occur during
the third quarter of 2000, the Specified Percentage is 60 percent.
We relied on production histories, accounting and cost data,
engineering and geological information supplied by WPC data existing in our
files. and data from public records. The ownership interests evaluated herein
were provided by WPC 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
