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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, 1998
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)
DELAWARE 75-6437433
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
TRUST DIVISION 75202
NATIONSBANK, N.A. (ZIP CODE)
NATIONSBANK PLAZA
901 MAIN STREET, 17TH FLOOR
DALLAS, TEXAS
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
(214) 209-2364
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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Units of Beneficial Interest New York Stock Exchange, Inc.
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT
NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No[ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
At March 15, 1999, 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 $87,300,000.
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
Page
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PART I ..................................................................... 1
Item 1. Business ......................................................... 1
GLOSSARY ......................................................... 1
DESCRIPTION OF THE TRUST ......................................... 5
Creation and Organization of the Trust ........................ 5
Assets of the Trust ........................................... 6
Liabilities of the Trust ...................................... 6
Duties and Limited Powers of the Trustee ...................... 6
Liabilities of the Delaware Trustee and the Trustee ........... 7
Termination and Liquidation of the Trust ...................... 7
DESCRIPTION OF UNITS ............................................. 8
Distributions and Income Computations ......................... 9
Transfer of Royalty Interests ................................. 9
Possible Divestiture of Units .................................10
Periodic Reports to Unitholders ...............................10
Voting Rights of Unitholders ..................................10
Liability of Unitholders ......................................11
Transfer Agent ................................................11
FEDERAL INCOME TAXATION ..........................................11
Summary of Certain Federal Income Tax Consequences ............12
ERISA CONSIDERATIONS .............................................17
STATE TAX CONSIDERATIONS .........................................17
REGULATION AND PRICES ............................................17
Regulation of Natural Gas .....................................17
Environmental Regulation ......................................18
Competition, Markets and Prices ...............................19
Item 2. Properties .......................................................20
THE ROYALTY INTERESTS ............................................20
The Underlying Properties .....................................21
The NPI .......................................................24
Reserve Report ................................................25
Historical Gas Sales Prices and Production ....................27
Purchase Price Adjustments ....................................27
NPI Percentage Changes ........................................27
Gas Purchase Contract .........................................28
Gas Gathering Contract ........................................30
Federal and Indian Lands ......................................31
Sale and Abandonment of Underlying Properties .................32
The Infill NPI ................................................33
Williams' Performance Assurances ..............................33
Title to Properties ...........................................34
Methane Contamination Litigation ..............................36
Item 3. Legal Proceedings ................................................37
Item 4. Submission of Matters to a Vote of Security Holders ..............37
PART II ....................................................................37
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters .............................................37
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Item 6. Selected Financial Data ..........................................38
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations .............................38
Year 2000 Issue ...............................................40
Item 7A. Quantitative and Qualitative Disclosure About Market Risk ........41
Item 8. Financial Statements and Supplementary Data ......................41
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure ..........................51
PART III ...................................................................51
Item 10. Directors and Executive Officers of the Registrant ...............51
Item 11. Executive Compensation ...........................................51
Item 12. Security Ownership of Certain Beneficial Owners and Management ...52
Williams' Ownership of Units ..................................52
Item 13. Certain Relationships and Related Transactions ...................53
Administrative Services Agreement .............................53
Potential Conflicts of Interest ...............................53
PART IV ....................................................................53
Item 14. Exhibits, Financial Statement Schedules and
Reports On Form 8-K .............................................53
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PART I
ITEM 1. BUSINESS.
The following is a glossary of certain defined terms used in this Annual
Report on Form 10-K.
GLOSSARY
"Administrative Services Agreement" means the Administrative Services
Agreement, dated effective December 1, 1992, between Williams and the Trust, a
copy of which is filed as an exhibit to this Form 10-K.
"Aftertax Cash Flow per Unit" means the sum of the following amounts that a
hypothetical purchaser of a Unit in the Public Offering would have received or
been allocated if such Unit were held through the date of such determination:
(a) total cash distributions per Unit plus (b) total tax credits available per
Unit under Section 29 of the IRC less (c) the net taxes payable per Unit
(assuming a Federal income tax rate of 31 percent, which at the time of the
formation of the Trust was the highest Federal income tax rate applicable to
individuals).
"Bcf" means billion cubic feet of natural gas. Natural gas volumes are
stated herein at the legal pressure base of 14.73 pounds per square inch
absolute at 60 degrees Fahrenheit.
"Blanco Hub Spot Price" means the posted index price of spot gas delivered
to pipelines per MMBtu (dry basis) as published in the first issue of the month
during which gas is delivered or such determination is made, as the case may be,
in Inside FERC's Gas Market Report for "El Paso Natural Gas Company, San Juan,"
or in the event a Blanco Hub posted index price is at some time in the future
reported by Inside FERC's Gas Market Report, then the Blanco Hub posted index
price will be substituted in place of the "El Paso Natural Gas Company, San
Juan" posted index price.
"Btu" means British Thermal Unit, the common unit of gross heating value
measurement.
"Citibank's Base Rate" means a fluctuating interest rate per annum
(compounded quarterly) as shall be in effect from time to time which rate per
annum shall at all times be equal to the rate of interest announced publicly by
Citibank, N.A. in New York, New York, from time to time, as its base rate.
"Comparison Reserve Report" means the Reserve Report, dated February 23,
1994, on the estimated reserves attributable to the Royalty Interests as of
December 31, 1993 (but using October 1, 1992 Reserve Report pricing), prepared
by Miller and Lents, Ltd., independent petroleum engineers, a copy of which is
filed as an exhibit to this Form 10-K.
"Confirmation Agreement" means the Confirmation Agreement dated effective
as of May 1, 1995 by and among WPC, Williams and the Trust, a copy of which is
filed as an exhibit to this Form 10-K.
"Conveyance" means the Net Profits Conveyance dated effective as of October
1, 1992, by and among Williams, WPC, the Trustee and the Delaware Trustee, a
copy of which is filed as an exhibit to this Form 10-K.
"December 31, 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 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
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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.
"December 31, 1998 Reserve Report" means the Reserve Report, dated February
10, 1999, 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, 1998, 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 Quatro Finale 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 Quatro Finale (as successor to 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 its successor,
has retained an interest in the income from the trust.
"Gross acres" means the total number of surface acres of land without
regard to ownership interest.
"Gross wells" means the total whole number of gas wells without regard to
ownership interest.
"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) Quatro Finale'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.
"IRC" means the Internal Revenue Code of 1986, as amended.
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"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) Quatro Finale'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.
"Performance Acknowledgement Agreement" means the Agreement dated effective
as of May 1, 1997, by and among Williams, the Trust and Quatro Finale, 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, 1994 Reserve
Report, December 31, 1995 Reserve Report, December 31, 1996 Reserve Report and
the December 31, 1997 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."
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"Public Offering Prospectus" has the meaning assigned to such term herein
defined under "Item 1--Federal Income Taxation."
"Quatro Finale" means Quatro Finale LLC, a Delaware limited liability
company, which purchased the Underlying Properties from WPC in a transaction
effective May 1, 1997.
"Royalty Interests" means the NPI and Infill NPI conveyed to the Trust.
"Trust" means Williams Coal Seam Gas Royalty Trust, a Delaware business
trust formed pursuant to the Trust Agreement.
"Trust Agreement" means the Trust Agreement, dated as of December 1, 1992,
among Williams, WPC, as grantor, Chemical Bank Delaware, as the Delaware
Trustee, and NationsBank, N.A. (as successor to 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, N.A. (as successor to NationsBank of Texas,
N.A.), in its capacity as a trustee of the Trust.
"Underlying Properties" means certain proved properties in the Fruitland
coal formation in the San Juan Basin of New Mexico and Colorado as specified in
the Conveyance in which Quatro Finale has certain net revenue interests (working
interests less lease burdens) and net profits interests.
"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 indirect
subsidiary of Williams Energy Services (formerly known as 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.
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"WPC Payment Obligations" has the meaning assigned to such term under "Item
2--The Royalty Interests--Williams' Performance Assurances."
DESCRIPTION OF THE TRUST
Williams Coal Seam Gas Royalty Trust (the "Trust") was formed as a Delaware
business trust under the Delaware Business Trust Act, Title 12, Chapter 38 of
the Delaware Code, Sections 3801 et seq. (the "Delaware Code"). The following
information is subject to the detailed provisions of (i) the Trust Agreement of
Williams Coal Seam Gas Royalty Trust (as amended, the "Trust Agreement") entered
into effective as of December 1, 1992 by and among Williams Production Company,
a Delaware corporation ("WPC"), as trustor, The Williams Companies, Inc., a
Delaware corporation ("Williams"), and Chemical Bank Delaware, a Delaware
banking corporation (the "Delaware Trustee"), and NationsBank, N.A. (as
successor to 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.
Effective May 6, 1998, NationsBank of Texas, N.A., of Dallas, Texas, merged
with NationsBank, N.A., of Charlotte, North Carolina. NationsBank, N.A., as
survivor of the merger, has assumed by operation of law all rights, properties
and interests of NationsBank of Texas, N.A., including all rights and interests
as trustee, executor or administrator or in other fiduciary capacities, in the
same manner and to the same extent as such rights, properties and interests were
held by NationsBank of Texas, N.A. at the time of the merger. In accordance with
applicable law and the provisions of the Trust Agreement, NationsBank, N.A., as
successor to NationsBank of Texas, N.A., now serves as Trustee of the Trust.
NationsBank, N.A. is performing such functions through its Dallas, Texas, branch
office, which is the former principal office of NationsBank of Texas, N.A.
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.
As described under "Item 2 -- The Royalty Interests," effective May 1, 1997, WPC
sold the Underlying Properties subject to and burdened by the Royalty Interests
to Quatro Finale LLC, a non-affiliated Delaware limited liability company
("Quatro Finale"). The sale of the Underlying Properties is expressly permitted
under the Trust Agreement. Unless otherwise dictated by context, references
herein to Quatro Finale with respect to the ownership of the Underlying
Properties for any period prior to May 1, 1997 actually refer to WPC. For a
description of the Underlying Properties and other information relating to such
properties, see "Item 2--The Royalty Interests."
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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 and sold from Quatro Finale's
net revenue interests (working interests less lease burdens) in the properties
in which Quatro Finale has a working interest (the "WI Properties") and (ii) the
revenue stream received by Quatro Finale 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 Quatro Finale from its 35 percent net profits
interest in the Farmout Properties plus the aggregate proceeds attributable to
Quatro Finale'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 Quatro Finale'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 Quatro Finale'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
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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 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
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<PAGE> 11
"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.
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 (net of any commissions or other fees payable
by the Trust), or (ii) if the Highest Offer Price is equal to or less than 105
percent of WPC's original offer, the purchase price will be equal to the Highest
Offer Price. If no other acceptable offers are received for all remaining
Royalty Interests, the Trustee may request WPC to submit another offer for
consideration by the Trustee and may accept or reject such offer.
If a sale of the Royalty Interests is made or a definitive contract for
sale of the Royalty Interests is entered into within a 150-day period following
the Termination Date, the buyer of the Royalty Interests, and not the Trust or
Unitholders, will be entitled to all proceeds of production attributable to the
Royalty Interests following the Termination Date.
In the event that WPC does not purchase the Royalty Interests, the Trustee
may accept any offer for all or any part of the Royalty Interests as it deems to
be in the best interests of the Trust and Unitholders and may continue, for up
to one calendar year after the Termination Date, to attempt to locate a buyer or
buyers of the remaining Royalty Interests in order to sell such interests in an
orderly fashion. If any Royalty Interests have not been sold or a definitive
agreement for sale has not been entered into by the end of such calendar year,
the Trustee is required to sell the remaining Royalty Interests at public
auction, which sale may be to WPC or any of its affiliates.
WPC's purchase rights, as described, may be exercised by WPC and each of
its successors in interest and assigns. WPC's purchase rights are fully
assignable by WPC to any person. The costs of liquidation, including the fees
and expenses of the Advisor, and the Trustee's liquidation fee will be paid by
the Trust.
DESCRIPTION OF UNITS
Each Unit represents an equal undivided share of beneficial interest in the
Trust and is evidenced by a transferable certificate issued by the Trustee. Each
Unit entitles its holder to the same rights as the holder of any other Unit, and
the Trust has no other authorized or outstanding class of equity security. At
March 15, 1999, there were 9,700,000 Units outstanding. The Trust may not issue
additional Units.
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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 quarter, plus, (ii) cash received by Quatro Finale 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 preceding 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.
The Royalty Interests may be sold under certain circumstances and will be
sold following termination of the Trust. Any purchase price adjustments and the
proceeds from sales of the Royalty Interests, less liabilities and expenses of
the Trust and amounts used for cash reserves, will be distributed, together with
any interest expected to be earned thereon, to Unitholders of record on the
record date established for such distribution. A special distribution will be
made of undistributed sales proceeds, purchase price adjustments and other
amounts received by the Trust aggregating in excess of $9,000,000 (a "Special
Distribution Amount"). The record date for a Special Distribution Amount will be
the 15th day following receipt of amounts aggregating a Special Distribution
Amount by the Trust (unless such day is not a business day in which case the
record date will be the next business day thereafter) unless such day is within
10 days of the record date for a Quarterly Distribution Amount in which case the
record date will be the date as is established for the next Quarterly
Distribution Amount. Distribution to Unitholders will be made no later than 15
days after the Special Distribution Amount record date.
The terms of the Trust Agreement seek to assure, to the extent practicable,
that gross income attributable to cash being distributed will be reported by the
Unitholder who receives such distributions assuming that such Unitholder is the
owner of record on the applicable record date. In certain circumstances,
however, a Unitholder will not receive the cash giving rise to such income. For
example, the Trustee maintains a cash reserve, and is authorized to borrow money
under certain conditions, in order to pay or provide for the payment of Trust
liabilities. Income associated with the cash used to increase that reserve or to
repay any such borrowings must be reported by the Unitholder, even though that
cash is not distributed to him. Likewise, if a portion of a cash distribution is
attributable to a reduction in the cash reserve maintained by the Trustee, such
cash is treated as a reduction to the Unitholder's basis in his Units and is not
treated as taxable income to such Unitholder (assuming such Unitholder's basis
exceeds the amount of the distribution of cash reserve).
TRANSFER OF ROYALTY INTERESTS
WPC is required to pay to the Trust, as a purchase price adjustment,
certain amounts in the event WPC is prohibited from producing or receiving
proceeds from coal seam gas from certain Underlying Properties because of
Southern Ute Indian claims. In such event, the affected Royalty Interests will
be released by the Trust or reconveyed, as the case may be, to WPC or its
assigns. WPC or its assigns may also, at any time after January 1, 2003,
purchase for cash all Royalty Interests attributable to Underlying Properties
which are uneconomical to operate. See "Item 2--The Royalty Interests--Title to
Properties" and "--Sale and Abandonment of Underlying Properties." Upon
termination of the Trust, any remaining Royalty Interests will be sold by the
Trust and any such sales may, and under certain circumstances will, be made to
WPC or Williams or their respective successors or assigns. See "--Description of
the Trust--Termination and Liquidation of the Trust."
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POSSIBLE DIVESTITURE OF UNITS
The Trust Agreement imposes no restrictions based on nationality or other
status of Unitholders. However, the Trust Agreement provides that in the event
of certain judicial or administrative proceedings seeking the cancellation or
forfeiture of any property in which the Trust has an interest, or asserting the
invalidity of or otherwise challenging any portion of the Royalty Interests,
because of the nationality, citizenship or any other status, of any one or more
Unitholders, the Trustee will give written notice thereof to each Unitholder
whose nationality, citizenship or other status is an issue in the proceeding,
which notice will constitute a demand that such Unitholder dispose of his Units
within 30 days. If any Unitholder fails to dispose of his Units in accordance
with such notice, the Trustee shall have the right to cancel all outstanding
certificates issued in the name of such Unitholder, transfer all Units held by
such Unitholder to the Trustee and sell such Units (including by private sale).
The proceeds of such sale (net of sales expenses), pending delivery of
certificates representing the Units, will be held by the Trustee in a
non-interest bearing account for the benefit of the Unitholder and paid to the
Unitholder upon surrender of such certificates. Cash distributions payable to
such Unitholder will also be held in a non-interest bearing account pending
disposition by the Unitholder of the Units or cancellation of certificates
representing the Units by the Trustee.
PERIODIC REPORTS TO UNITHOLDERS
Within 60 days following the end of each of the first three calendar
quarters of each calendar year, the Trustee mails to each party who was a
Unitholder of record (i) on the quarterly record date for such quarter or (ii)
on a Special Distribution Amount record date occurring during such quarter (if
any), a report which shows in reasonable detail the assets and liabilities and
receipts and disbursements of the Trust for such quarter. Unitholders are also
furnished with comparable quarterly information with respect to the Underlying
Properties. Within 120 days following the end of each fiscal year or such
shorter period of time as may be required by the rules of the New York Stock
Exchange, the Trustee mails to Unitholders of record as of a date to be selected
by the Trustee an annual report containing audited financial statements relating
to the Trust and the Underlying Properties.
The Trustee files such returns for Federal income tax purposes as it is
advised are required to comply with applicable law. The Trustee mails to each
party who was a Unitholder of record (i) on the quarterly record date for such
quarter or (ii) on a Special Distribution Amount record date occurring during
such quarter (if any), a report which shows in reasonable detail the information
necessary to permit each Unitholder to make all calculations reasonably
necessary for tax purposes. The Trustee treats all income, credits and
deductions recognized during each quarter as having been recognized by holders
of record on the quarterly record date established for the distribution unless
otherwise advised by counsel. Available year-end tax information permitting each
Unitholder to make all calculations reasonably necessary for tax purposes is
distributed by the Trustee to Unitholders no later than March 15 of the
following year.
Each Unitholder and his duly authorized agents and attorneys have the right
during reasonable business hours to examine and inspect records of the Trust and
the Trustee.
VOTING RIGHTS OF UNITHOLDERS
Unitholders have only such voting rights as are provided in the Trust
Agreement and such rights are more limited than those of stockholders of most
corporations. Unitholder approval is, however, required to terminate the Trust
before January 1, 2003 and to appoint a successor Trustee or Delaware Trustee.
Also, Unitholder approval is required to amend the Trust Agreement (except for
changing the name of the Trust and except to correct or cure ambiguities in the
Trust Agreement which do not adversely affect Unitholders) and to adopt any
amendment to the gas gathering contract relating to production from the
Underlying Properties (the "Gas Gathering Contract") entered into between
Williams Field Services Company (a subsidiary of Williams Energy Services,
"WFS") and WFS Gas Resources Company (a subsidiary of WPC, "WFS Gas Resources")
as successor in interest to Williams Gas Marketing Company (a former
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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 Gas Resources (as
successor in interest to WGM), if such amendment would materially adversely
affect revenues of the Trust. Unitholders may also remove the Trustee or
Delaware Trustee. Unitholders are not entitled to any rights of appraisal or
similar rights in connection with the termination of the Trust.
The Trust Agreement may be amended, the Delaware Trustee and the Trustee
may be removed and, after December 31, 2002, the Trust may be terminated by a
vote of holders of a majority of the outstanding Units, but no provision of the
Trust Agreement may be amended that would (i) increase the power of the Delaware
Trustee or the Trustee to engage in business or investment activities, or (ii)
alter the rights of the Unitholders as among themselves. Prior to January 1,
2003, the Trust may be terminated only upon the affirmative vote of the holders
of not less than 75 percent of the outstanding Units. All other actions may be
approved by a majority vote of the Units represented at a meeting at which a
quorum, constituting a majority of the outstanding Units, is present or
represented (except that amendment of required voting percentages requires
approval of at least 80 percent of the outstanding Units). The parties to the
Trust Agreement may, without approval of the Unitholders, from time to time,
supplement or amend the Trust Agreement in order to cure any ambiguity or to
correct or supplement any defective or inconsistent provisions, provided such
supplement or amendment is not adverse to the interest of the Unitholders. In
addition, Williams may direct the Trustee to change the name of the Trust which
change shall not require approval of the Unitholders.
Meetings of Unitholders may be called by the Trustee or by Unitholders
owning not less than 10 percent in number of the outstanding Units. All such
meetings shall be held in Dallas, Texas, and written notice of every such
meeting setting forth a time and place of the meeting and the matters proposed
to be acted upon shall be given not more than 60 nor less than 20 days before
such meeting. Each Unitholder shall be entitled to one vote for each Unit owned
by such holder.
LIABILITY OF UNITHOLDERS
Consistent with Delaware law, the Trust Agreement provides that the
Unitholders will have the same limitation on personal liability as is accorded
under the laws of such state to stockholders of a corporation for profit. No
assurance can be given, however, that the courts in jurisdictions outside of
Delaware will give effect to such limitation.
TRANSFER AGENT
The Trustee has appointed Chemical Shareholder Services Group, Inc.
transfer agent and registrar for the Units (the "Transfer Agent").
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 ADVISORS 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.
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In connection with the registration of the Units for offer and sale in the
Public Offering, Williams and the underwriters of the Units received certain
opinions of counsel to Williams (upon which the Trustee and the Delaware Trustee
were entitled to rely), including, without limitation, opinions as to the
material Federal income tax consequences of the ownership and sale of the Units
acquired in the Public Offering. The opinions of counsel to Williams as to such
Federal income tax consequences were based on provisions of the Internal Revenue
Code of 1986, as amended (the "IRC"), as of January 21, 1993, the date of the
closing of the Public Offering, existing and proposed regulations thereunder and
administrative rulings and court decisions as of January 21, 1993, all of which
are subject to changes that may or may not be retroactively applied. Some of the
applicable provisions of the IRC have not been interpreted by the courts or the
Internal Revenue Service ("IRS"). In addition, such opinions of counsel to
Williams were based on various representations as to factual matters made by
Williams and WPC in connection with the Public Offering. As is typically the
case, these opinions were limited in their application to certain investors
purchasing Units in the Public Offering and, as a result, provide no assurance
to investors purchasing Units following the Public Offering.
Neither counsel to the Trust, the Trustee nor the Delaware Trustee,
respectively, has rendered any opinions with respect to any tax matters
associated with the Trust or the Units.
No ruling was requested by Williams, as the sponsor of the Trust, from the
IRS with respect to any matter affecting the Trust or Unitholders. No assurance
can be provided that the opinions of counsel to Williams (which do not bind the
IRS) will not be challenged by the IRS or will be sustained by a court if so
challenged.
SUMMARY OF CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following summary of certain Federal income tax consequences of
acquiring, owning and disposing of Units is based on the opinions of counsel to
Williams on Federal income tax matters, which are set forth in the Public
Offering Prospectus, and is qualified in its entirety by express reference to
the sections of the Public Offering Prospectus identified in the first paragraph
of this "Federal Income Taxation" section. Although the Trust believes that the
following summary contains a description of all of the material matters
discussed in the opinions referenced above, the summary is not exhaustive and
many other provisions of the Federal tax laws may affect individual Unitholders.
Furthermore, the summary does not purport to be complete or to address the tax
issues potentially affecting Unitholders acquiring Units other than by purchase
through the Public Offering. Each Unitholder should consult the Unitholder's tax
advisor with respect to the effects of the Unitholder's ownership of Units on
the Unitholder's personal tax situation.
<TABLE>
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Classification and Taxation of the
Trust ................................... The Trust will be treated as a grantor trust and not as an association
taxable as a corporation. As a grantor trust, the Trust will not be
subject to Federal income tax. There can be no assurance that the IRS
will not challenge this treatment. The tax treatment of the Trust and
Unitholders could be materially different if the IRS were to
successfully challenge this treatment.
Taxation of Unitholders..................... Each Unitholder will be taxed directly on his proportionate share of
income, deductions and credits of the Trust attributable to the
Royalty Interests consistent with such Unitholder's taxable year and
method of accounting, and without regard to the taxable year or method
of accounting employed by the Trust.
Income and Deductions....................... The income of the Trust consists primarily of a specified share of the
proceeds from the sale of coal seam gas produced from the Underlying
Properties. During 1998, 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
</TABLE>
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<TABLE>
<S> <C>
obligations of the Trust. The deductions of the Trust consist of
severance taxes and administrative expenses. In addition, each
Unitholder is entitled to depletion deductions. See "Unitholder's
Depletion Allowance" below.
Limits on Deductions and Credits............ Generally, a taxpayer is entitled to claim deductions and tax credits
generated by an investment only if the investment has economic
substance. The application of this principle in the context of the
production and sale of nonconventional fuels (like coal seam gas)
which generate the Section 29 tax credit is uncertain because such
application has not been addressed either by a court or the IRS. An
investment has economic substance if the investor can demonstrate that
there is a reasonable possibility of deriving an economic profit from
the investment in excess of a de minimis amount, apart from tax
benefits. In many cases, economic profit has been computed by
comparing the taxpayer's total cash investment to the total cash
reasonably expected to be received by the taxpayer as a result of the
investment. At the time of the Public Offering, Williams, after
consultation with its counsel, expressed its belief only in connection
with the Public Offering that the purchaser of a Unit in the Public
Offering, who did not borrow funds in order to purchase his Unit, had
a reasonable possibility of deriving an economic profit in excess of a
de minimis amount apart from tax benefits associated with ownership of
the Unit. No assurance is given either by the Trustee or counsel to
the Trustee to a purchaser of Units in or following the Public
Offering as to whether (and to what extent) such purchaser will be
entitled to claim deductions and the Section 29 tax credit generated
with respect to such Units.
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 1998, the available
Section 29 tax credit is approximately $1.798098 per Unit, based on
the first estimate of the GNP implicit price deflator published by the
Bureau of Economic Analysis.
The availability of Section 29 tax credits is dependent upon meeting a
number of requirements, many of which are factual in nature. Williams
represented only in connection with the Public Offering that those
factual requirements were met and Williams expressed its belief in
connection with the Public Offering that substantially all of the
production attributable to the NPI from the coal seam gas wells
identified in the October 1, 1992 Reserve Report (defined herein)
qualified for Section 29 tax credits. At the time of the Public
Offering, counsel to Williams opined as to those
</TABLE>
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<TABLE>
<S> <C>
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 Quatro Finale's retained interest, no
Section 29 tax credit will be available to a Unitholder with respect
to production attributable to that portion. In addition, if the
production units or participating areas are expanded to include
additional production which does not qualify for the Section 29 tax
credit, the amount of Section 29 tax credits available to a Unitholder
will be reduced even though his share of production does not diminish.
Neither Quatro Finale, 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.
</TABLE>
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<TABLE>
<S> <C>
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 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
</TABLE>
15
<PAGE> 19
<TABLE>
<S> <C>
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.
</TABLE>
16
<PAGE> 20
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.
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<PAGE> 21
The transportation of natural gas in interstate commerce is subject to
federal regulation by FERC under the Natural Gas Act ("NGA") and the NGPA. FERC
has initiated a number of regulatory policy initiatives that may affect the
transportation of natural gas from the wellhead to the market and thus may
affect the marketing of natural gas. Such initiatives include regulations which
are intended to further open access to interstate pipelines by requiring such
pipelines to unbundle their transportation services from sales services and
allow customers to choose and pay for only the services they require, regardless
of whether the customer purchases natural gas from such pipelines or from other
suppliers. Although these regulations should generally facilitate the
transportation of natural gas produced from the Underlying Properties to natural
gas markets, the impact of these regulations on marketing production from the
Underlying Properties cannot be predicted at this time, and such impacts could
be significant.
Legislative Proposals. In the past, Congress has been very active in the
area of gas regulation. Legislation enacted in recent years repeals incremental
pricing requirements and gas use restraints previously applicable. At the
present time, it is impossible to predict what proposals, if any, might actually
be enacted by Congress or the various state legislatures and what effect, if
any, such proposals might have on the Underlying Properties and the Trust.
State Regulation. Many state jurisdictions have at times imposed
limitations on the production of gas by restricting the rate of flow for gas
wells below their actual capacity to produce and by imposing acreage limitations
for the drilling of a well. States may also impose additional regulation of
these matters. Most states regulate the production of gas, including
requirements for obtaining drilling permits, the method of developing new
fields, provisions for the unitization or pooling of gas properties, the
spacing, operation, plugging and abandonment of wells and the prevention of
waste of gas resources. The rate of production may be regulated and the maximum
daily production allowable from gas wells may be established on a market demand
or conservation basis or both.
Several states have in recent years enacted or proposed regulations
intended to revise significantly current systems of prorationing gas production.
The modified rules may decrease the total amount of gas produced in New Mexico
or Colorado, and could result in an increase in market prices for gas. The
foregoing developments have fostered debate regarding the purpose and effect of
the new prorationing rules, with opponents of such rules arguing that the
primary purpose thereof is to increase gas prices by withholding supplies from
the market. The Trustee cannot predict what effect, if any, proration rules will
have on the availability of or prices for the Underlying Properties' gas
supplies.
ENVIRONMENTAL REGULATION
General. Activities on the Underlying Properties are subject to existing
Federal, state and local laws (including case law), rules and regulations
governing health, safety, environmental quality and pollution control. It is
anticipated that, absent the occurrence of an extraordinary circumstance or
event, compliance with existing Federal, state and local laws, rules and
regulations regulating health, safety, the release of materials into the
environment or otherwise relating to the protection of the environment will not
have a material adverse effect upon the Trust or Unitholders. The Trustee cannot
predict what effect additional regulation or legislation, enforcement policies
thereunder, and claims for damages to property, employees, other persons and the
environment resulting from operations on the Underlying Properties could have on
the Trust or Unitholders. However, pursuant to the terms of the Conveyance, any
costs or expenses incurred by WPC in connection with environmental liabilities
arising out of or relating to activities occurring on, in or in connection with,
or conditions existing on or under, the Underlying Properties before October 1,
1992, will be borne by WPC and not the Trust and will not be deducted in
calculating NPI Net Proceeds or Infill Net Proceeds. Any environmental costs or
expenses that are attributable to Quatro Finale's working interest share of the
WI Properties that do not fall within the preceding sentence will be paid by
Quatro Finale 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
(on behalf of Quatro Finale) and, therefore, the amount of NPI Net Proceeds.
Solid and Hazardous Waste. The Royalty Interests are carved out of
Quatro Finale's interests in certain properties that have produced gas from
other formations for many years. Quatro Finale has never operated any of the
18
<PAGE> 22
coal seam gas wells related to the Underlying Properties. WPC, the previous
owner of the Underlying Properties, has acted as operator for only a small
number of the coal seam gas wells, and for a relatively short period of time.
Williams and WPC have advised the Trustee that to their knowledge, although WPC
and the other operators have utilized operating and disposal practices that were
standard in the industry at the time, hydrocarbons or other solid or hazardous
wastes may have been disposed or released on or under the Underlying Properties
by the current or previous operators. Federal, state and local laws applicable
to gas-related wastes and properties have become increasingly more stringent.
Under these laws, WPC or an operator of the Underlying Properties could be
required to remove or remediate previously disposed wastes or property
contamination (including groundwater contamination) or to perform remedial
plugging operations to prevent future contamination.
The operations of the Underlying Properties may generate wastes that are
subject to the Federal Resource Conservation and Recovery Act ("RCRA") and
comparable state statutes. The Environmental Protection Agency (the "EPA") has
limited the disposal options for certain hazardous wastes and may adopt more
stringent disposal standards for nonhazardous wastes.
Superfund. The Comprehensive Environmental Response, Compensation and
Liability Act ("CERCLA"), also known as the "superfund" law, imposes liability,
regardless of fault or the legality of the original conduct, on certain classes
of persons that contributed to the release of a "hazardous substance" into the
environment. These persons include the current or previous owner and the current
or previous operator of a site and companies that disposed or arranged for the
disposal of, the hazardous substance found at a site. CERCLA also authorizes the
EPA and, in some cases, private parties to take actions in response to threats
to the public health or the environment and to seek recovery from such
responsible classes of persons of the costs of such action. In the course of
their operations, the operators of the Underlying Properties have generated and
will generate wastes that may fall within CERCLA's definition of "hazardous
substances." Quatro Finale, 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. Quatro Finale and WPC encounter 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 Quatro Finale or 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,
19
<PAGE> 23
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."
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, Quatro Finale,
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 Quatro Finale pursuant to the terms of a Purchase and Sale
Agreement dated as of May 1, 1997 (the "Transaction Agreement") between WPC and
Quatro Finale (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. The sale of the Underlying
Properties is expressly permitted under the Trust Agreement. 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 Quatro Finale entered into a
Management Services Agreement dated May 1, 1997 (the "Management Services
Agreement") whereby WPC agreed, among other things, to continue to manage and
operate the Underlying Properties and to handle the receipt and payment of funds
with respect thereto. Prior to the Transaction, WPC received all payments
relating to the Underlying Properties and, pursuant to the Conveyance, paid to
the Trust the portion thereof attributable to the Royalty Interests. Following
the Transaction, under the Management Services Agreement, WPC continues to
collect all revenues on behalf of Quatro Finale and remains obligated to pay to
the Trust on behalf of Quatro Finale the amounts payable with respect to the
Royalty Interests.
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<PAGE> 24
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.
Concurrently with the Transaction, WPC, Williams, the Trust and Quatro
Finale entered into an Agreement dated May 7, 1997, (the "Performance
Acknowledgement Agreement"), pursuant to which (i) the parties acknowledged
that, although WPC was selling the Underlying Properties to Quatro Finale, 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 Quatro
Finale, 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) Quatro
Finale acknowledged and agreed that it was purchasing the Underlying Properties
burdened by the Royalty Interests owned by the Trust.
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 its interests in 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. Effective May 1, 1997, WPC conveyed its rights in the
Underlying Properties to Quatro Finale.
Development of the Fruitland coal formation acreage has resulted in the
drilling of 588 gross coal seam gas wells in the Underlying Properties, 21 of
which are in the Farmout Properties. Quatro Finale owns mineral rights in the
Fruitland coal formation under 214 oil and gas leases. Under the terms of
these leases, Quatro Finale has the right to extract oil and gas from the lease
properties. Quatro Finale 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 Quatro Finale's proved reserves in
the Fruitland coal formation. Neither Quatro Finale nor WPC operate any of the
coal seam gas wells on the Underlying Properties.
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<PAGE> 25
Unitized Areas. Approximately 90 percent of the Fruitland coal formation
proved developed coal seam gas wells on the WI Properties are located within the
boundaries of New Mexico Federal Units. Pursuant to the Federal Mineral Leasing
Act of 1920, as amended, and applicable state regulations, owners of oil and gas
leases in New Mexico created large unitized areas consisting of several
contiguous sections for the orderly development and conservation of oil and gas
reserves. The WI Properties participate in production from the 12 unitized areas
in New Mexico referred to in the following table (the "Federal Units").
Operation and development of the Federal Units is governed by unit agreements
and unit operating agreements (collectively, the "Unit Agreement"). Under the
Unit Agreement and applicable government regulations, the Federal Unit operators
request regulatory approval from the New Mexico Commission of Public Lands, the
New Mexico Oil Conservation Commission and the Bureau of Land Management to
establish or expand participating areas which produce oil and gas in paying
quantities from designated formations. The interests of participants in a
participating area are based on the surface acreage included in the
participating area. Under the terms of the Unit Agreements, the operators,
selected by a vote of the respective working interest owners, perform all
operating functions.
In all of the Federal Units, participating areas have been formed for the
Fruitland coal formation. After the wells capable of producing gas in paying
quantities from the Fruitland coal formation are drilled on the undeveloped
drill blocks included within a Federal Unit, such wells are added to the
participating area if approved in accordance with the appropriate Unit
Agreement. A delay of at least 18-36 months is usually incurred after a well is
completed and producing before it is added to a participating area. As
participating areas are created and expanded, such modification (which will be
effective retroactively to the date production commenced from the wells causing
such expansion) results in a participant owning undivided interests in all of
the producing wells within the participating area. Therefore, Quatro Finale'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."
The following table reflects certain information from the Reserve Report as
of December 31, 1998 prepared by Miller and Lents, Ltd. dated February 10, 1999
(the "December 31, 1998 Reserve Report") regarding the Federal Units in which
the WI Properties participate. At December 31, 1998, 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, 1998.
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<PAGE> 26
<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 18.9 $12,086
San Juan 30-6 Meridian Oil Inc. 17.4 12,293
San Juan 32-8 Phillips Petroleum Company 14.7 9,655
San Juan 29-6 Phillips Petroleum Company 11.8 8,044
San Juan 32-7 Phillips Petroleum Company 10.6 6,441
San Juan 32-9 Meridian Oil Inc. 8.8 4,799
San Juan 31-6 Phillips Petroleum Company 7.2 4,473
San Juan 29-7 Meridian Oil Inc. 4.6 2,974
Northeast Blanco Blackwood & Nichols Co., Ltd. 2.3 1,574
San Juan 29-5 Phillips Petroleum Company 1.1 628
Huerfano Meridian Oil Inc. 0.5 136
San Juan 28-6 Meridian Oil Inc. 0.1 31
San Juan 28-5 Meridian Oil Inc. -- --
</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, 1996, 1997 and 1998, 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
----- --- ----- ---
DECEMBER 31,
------------
<S> <C> <C> <C> <C>
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
1998
Producing ................ 567 70 150,988 20,681
Nonproducing ............. 0 0 0 0
--- --- ------- ------
Total ............ 567 70 150,988 20,681
</TABLE>
Of the total gross wells described above at December 31, 1998 542 gross
wells are located in unitized areas. In addition to the above, the Farmout
Properties have 21 gross wells.
Properties Outside Unitized Areas. The WI Properties also include interests
held by Quatro Finale in 25 proved developed Fruitland formation coal seam gas
wells held in areas outside of Federal Units that are not reflected in the
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<PAGE> 27
foregoing table. As of December 31, 1998, Quatro Finale's working interest and
net revenue interests in these wells averaged 8.86 percent and 7.16 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 Quatro Finale, 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, 1998, 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) Quatro Finale'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 Quatro Finale from its 35 percent net profits interest in the
Farmout Properties, less (a) Quatro Finale's working interest share of property
and production taxes on the WI Properties; (b) Quatro Finale's working interest
share of actual operating costs on the WI Properties to the extent in excess of
those agreed to be paid by Quatro Finale (as successor to WPC) as described
herein; (c) Quatro Finale's working interest share of capital costs on the WI
Properties to the extent in excess of those agreed to be paid by Quatro Finale
(as successor to 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, 1998 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, 1998 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 that
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 Quatro Finale'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
24
<PAGE> 28
result of capital costs incurred for enhanced recovery or similar operations on
the WI Properties, the Trust will receive no less than 20 percent of the NPI Net
Proceeds (calculated before such capital costs are deducted) until such excess
costs plus interest thereon at Citibank's Base Rate are recovered by Quatro
Finale 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 Quatro
Finale in respect of its 35 percent net profits interest in the Farmout
Properties. Quatro Finale'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, 1998, and certain related information for the Royalty Interests and
Underlying Properties from the December 31, 1998 Reserve Report prepared by
Miller and Lents, Ltd., independent petroleum engineers. Summaries of the
December 31, 1998 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 Quatro Finale (as
successor to 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, 1998 Reserve Report occur. The
December 31, 1998 Reserve Report was prepared in accordance with criteria
established by the Commission and, accordingly, is based upon a contractual
price for gas for December 1998, of $1.70 per MMBtu before transportation
charges. The December 31, 1998 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.
25
<PAGE> 29
<TABLE>
<CAPTION>
ROYALTY UNDERLYING
INTERESTS PROPERTIES
--------- ----------
<S> <C> <C>
Net Proved Gas Reserves (Bcf)(a)(b) ............................... 69.8 119.7
Estimated Future Net Revenues (in millions)(c) .................... 65.3 109.6
Discounted Estimated Future Net Revenues (in millions)(c) ......... 48.6 80.9
</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.
(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 Quatro
Finale. 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, 1998 Reserve
Report for the January 1, 1999 through December 31, 2003 period, and assuming
constant future Section 29 tax credits at the estimated 1998 rate of $1.052 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 $43 million, having a discounted present value (assuming a 10
percent discount rate) of approximately $37 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 contained in the Trust's annual report to Unitholders for the year
ended December 31, 1998. Williams has not filed reserve estimates covering the
Underlying Properties with any Federal authority or agency other than the
Commission.
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<PAGE> 30
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, 1996, 1997
and 1998:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1996 1997 1998
--------- ---------- -------
<S> <C> <C> <C>
Production from the WI Properties (MMcf) ................................ 19,948 14,316 19,671
Weighted average lifting costs (dollars per Mcf) ........................ $ 0.08 $ 0.17 $ 0.12
Weighted average sales price of gas produced from the WI Properties
(dollars per Mcf) .............................................. $ 1.11 $ 1.33 $ 1.15
Average Blanco Hub Spot Price (dollars per MMBtu) ....................... $ 1.65 $ 2.32 $ 1.86
</TABLE>
The published Blanco Hub Spot Price for December 1998 was $1.96 per MMBtu.
Information regarding average wellhead sales prices for production from the
Farmout Properties is not available to WPC (as manager of Quatro Finale's
interests in the Underlying Properties on behalf of Quatro Finale), although WPC
has advised the Trustee that it believes production from such properties is
currently sold by Amoco under short-term marketing arrangements at spot market
prices.
Purchase Price Adjustments
For a description of a potential purchase price adjustment provision, see
"--Title to Properties--Southern Ute Litigation."
NPI PERCENTAGE CHANGES
Possible Reduction. If there has been production since October 1, 1992 of
approximately 178.5 Bcf of gas in respect of the Underlying Properties, the
percentage of NPI Net Proceeds payable in respect of the NPI will be reduced
with respect to any additional production from the Underlying Properties if the
internal rate of return of the "Aftertax Cash Flow per Unit" (as defined below)
exceeds certain specified levels. For purposes hereof, "Aftertax Cash Flow per
Unit" is equal to the sum of the following amounts that a hypothetical purchaser
of a Unit in the Public Offering would have received or been allocated if such
Unit were held through the date of such determination: (a) total cash
distributions per Unit plus (b) total tax credits available per Unit under
Section 29 of the IRC less (c) the net taxes payable per Unit (assuming a
Federal income tax rate of 31 percent, which at the time of the formation of the
Trust was the highest Federal income tax rate applicable to individuals).
Internal rate of return ("IRR") is the annual discount rate (compounded
quarterly) that equates the present value of the Aftertax Cash Flow per Unit to
the initial price to the public of the Units in the Public Offering (which was
$20.00 per Unit). Set forth below is a table that reflects the IRR and the
corresponding percentage of NPI Net Proceeds represented by the NPI and the
retained interest of Quatro Finale (as acquired from WPC) in the NPI Net
Proceeds:
<TABLE>
<CAPTION>
QUATRO FINALE'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>
27
<PAGE> 31
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, 1998, cumulative production since October 1, 1992 was
172.7 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 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 WFS Gas
Resources exercises its annual option, exercisable fifteen (15) days prior to
the end of each Contract year, to discontinue purchasing gas from Quatro Finale
(as successor to 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 each of the Contract Year January 1, 1998 through December 31,
1998 and the Contract Year January 1, 1999 through December 31, 1999 ("1999
Contract Year"), WFS Gas Resources did not exercise this option and therefore
the pricing mechanism of the Primary Term remained in effect throughout 1998 and
will remain in place through at least December 31, 1999. 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 1999 Contract Year is
greater than $1.94 per MMBtu, then WFS Gas Resources will pay Quatro Finale
(as successor to 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 Quatro Finale 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.
28
<PAGE> 32
(ii) If the Index Price in any month during the 1999 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 Quatro Finale 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 Gas Resources has no accrued Price Credits in
the Price Credit Account. 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 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 1999 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 Quatro
Finale for each MMBtu of gas purchased by WFS Gas Resources equal to the
difference between the Minimum Purchase Price and the Index Price. Quatro
Finale 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 and during the months of March and April 1997.
In each month from November 1996 through February 1997 and from May 1997 through
August 1998 and from November through December 1998 the Index Price exceeded the
Minimum Purchase Price. The Index Price was below the Minimum Purchase Price
during September and October of 1998. WPC estimates that, as of December 31,
1998 WFS Gas Resources had aggregate Price Credits in the Price Credit Account
of approximately $10.9 million which, based on the Trust's 81 percent interest
in Quatro Finale's interest in the WI Properties, represents a potential offset
of $8.8 million against future royalty income to the Trust.
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 1998 were reduced by approximately $2.9 million as a
result of the 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.
29
<PAGE> 33
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 Quatro Finale 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 Quatro Finale 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 Quatro Finale 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 agent for Quatro Finale as if Quatro Finale
had produced and sold its working interest share of production from the WI
Properties, even if the actual volumes delivered to and sold by Quatro Finale
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 Quatro Finale because of a so-called imbalance (that
is, where a working interest owner is delivered more or less than the actual
share of production to which it is entitled).
The Gas Purchase Contract may not be amended in a manner that would
materially adversely affect the revenues to the Trust without the approval of
the holders of a majority of the Units present or represented at a meeting of
Unitholders at which a quorum (consisting of a majority of the outstanding
Units) is present or represented. As noted elsewhere herein, the Units held by
Williams (or an affiliate) immediately after the Public Offering may not be
voted on any such amendment nor will such Units be counted for quorum purposes
so long as such Units are held by Williams (or an affiliate). 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 Gas
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 CO2 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
30
<PAGE> 34
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 (or an affiliate) immediately after the Public Offering may not be
voted on any such amendment nor will such Units be counted for quorum purposes
so long as such Units are held by Williams (or an affiliate).
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 gas 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.
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 Gas
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, Quatro Finale is required to
calculate royalty payments based on the price WFS Gas Resources receives when it
markets the gas production ("Resale Price"), notwithstanding the price payable
by WFS Gas Resources to Quatro Finale 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.
31
<PAGE> 35
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 Gas Resources deducts the gathering charges paid by it
to WFS, Burlington, EFS and Northwest in calculating the wellhead price it pays
to Quatro Finale, the MMS could disallow the deduction of some portion of the
gathering charges after review of such charges on audit of Quatro Finale'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, on behalf of Quatro Finale, calculates royalty payments in
accordance with its interpretation of the then applicable MMS regulations, WPC
does not know whether the royalty payments made to the U.S. Government are
totally in conformance with MMS standards until the payments are audited. If an
MMS audit, or any other audit by a Federal or state body, results in additional
royalty charges, together with interest, relating to production from and after
October 1, 1992 in respect of the Underlying Properties, such charges and
interest will be deducted in calculating NPI Net Proceeds for the quarter in
which the charges are billed and in each quarter thereafter until the full
amount of the additional royalty charges and interest have been recovered.
SALE AND ABANDONMENT OF UNDERLYING PROPERTIES
Quatro Finale (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 Quatro Finale does not operate any of the
wells on the Underlying Properties, Quatro Finale does not normally control the
timing of plugging and abandoning wells. The Conveyance provides that Quatro
Finale's working interest share of the costs of plugging and abandoning
uneconomic wells will be deducted in calculating NPI Net Proceeds.
Just as WPC sold the Underlying Properties to Quatro Finale, Quatro Finale
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
32
<PAGE> 36
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, 1998 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. See "--Title to Properties--
Southern Ute Litigation". In addition, pursuant to the Conveyance and the
Performance Acknowledgement Agreement, Williams has agreed to pay each of the
following to the extent not paid by Quatro Finale (as successor to WPC) when due
and payable: all liabilities and operating and capital expenses that Quatro
Finale is required under the Conveyance to pay as owner of the Underlying
Properties, including without limitation, Quatro Finale'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 Quatro Finale is obligated to pay with respect to
environmental liabilities; (iv) all NPI Net Proceeds, Infill Net Proceeds and
other amounts which Quatro Finale is obligated to pay to the Trust under the
Conveyance, including amounts which Quatro Finale is obligated to pay with
respect to environmental liability; and (v) any proceeds from a sale of any
remaining Royalty Interests that Quatro Finale 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 Gas
Resources when due and payable, to pay all amounts which WFS Gas Resources is
required to pay to Quatro Finale (as successor to WPC) in respect of production
attributable to the Royalty Interests pursuant to the terms of the Gas Purchase
Contract between WPC and WFS Gas Resources (the "WFS Gas Resources Payment
Obligations"). In the Confirmation Agreement, Williams expressly confirmed that
its agreement to cause the WFS Gas 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 or Quatro Finale, as applicable,
does not pay any of the WPC Payment Obligations in full when due and, in the
event and to the extent that WFS Gas Resources does not pay any of the WFS Gas
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 Quatro Finale 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 Gas Resources Payment Obligations, upon
one or more sales or other transfers of a majority or more of Williams'
ownership interests in WFS Gas 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.
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<PAGE> 37
TITLE TO PROPERTIES
Williams has advised the Trustee that it believes that Quatro Finale's
title to the Underlying Properties (as successor to WPC), 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 Quatro Finale'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, prior to the sale
of the Underlying Properties to Quatro Finale WPC (or its predecessor) had 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 Quatro Finale'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 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, Quatro Finale (as successor to 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 Quatro Finale (as successor to WPC), the
Trust would be treated as an unsecured creditor of Quatro Finale with respect
34
<PAGE> 38
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 Quatro Finale owns a net profits interest. A portion of the
revenues received by WPC (on behalf of its successor Quatro Finale) 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 on July 20, 1998, a decision was issued upholding the original
opinion of the Court of Appeals finding ownership in the Tribe. Amoco on behalf
of the Defendant Class, filed a writ of certiorari with the United States
Supreme Court (the "Supreme Court") requesting review of the Court of Appeals
decision. On January 22, 1999, the Supreme Court granted certiorari on the
matter and a hearing date of April 19, 1999 has been set. In the event the case
is actually heard by the Supreme Court and the decision of the Supreme Court is
unfavorable to the Defendant Class, 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.
In late March 1999 WPC, Amoco, and the Tribe announced that they are in
settlement negotiations to finalize the terms of an agreement in connection with
the claims asserted against WPC. Under the proposed settlement, Quatro Finale
will convert its net profits interest in the production from the oil and gas
leases in dispute into a working interest. A portion of Quatro Finale's working
interest will then be transferred to the Tribe effective January 1, 1999. The
Tribe will release WPC and Quatro Finale from all other claims asserted in the
lawsuit. This pending settlement agreement does not address key issues still
being pursued on appeal to the Supreme Court, including the ownership of the
natural gas in the coal formation, tribal severance tax payments, and other
matters. The Supreme Court is expected to render its decision by mid-1999. The
details of this settlement are still being negotiated, and it must be approved
by the District Court after an opportunity
35
<PAGE> 39
for review and comment. WPC believes the parties will be successful in reaching
a final agreement on the partial settlement in principle and that it will be
approved by the District Court.
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, Quatro Finale (as
successor to WPC) will bear any such loss or reduction to such revenues
resulting from such a settlement or court decision out of (and limited to)
Quatro Finale'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 Quatro Finale 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, the
Formula Reimbursement Amount has been significantly exceeded. Accordingly, if
the final resolution of the litigation results in a failure of title of Quatro
Finale'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.
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. 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.
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.
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
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<PAGE> 40
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 collection
of attorneys' fees in the state case upon plaintiffs' execution of settlement
agreements precluding their raising the same issues in the future. The
settlement agreements were signed and approved by the court and this matter was
concluded in July of 1998.
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, as prior owner
of the Underlying Properties, 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 REGISTRANTS 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
1998 High Low per Unit
- ---- ----- ------ ---------
<S> <C> <C> <C>
First Quarter $14-5/16 $12-1/8 $0.302872
Second Quarter $13-3/16 $12-3/16 $0.533202
Third Quarter $12-1/8 $ 9-1/4 $0.473926
Fourth Quarter $11-13/16 $ 8-3/16 $0.322739
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 $0.430251
</TABLE>
At March 15, 1999, there were 9,700,000 Units outstanding and
approximately 976 Unitholders of record.
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<PAGE> 41
Item 6. Selected Financial Data.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Royalty Income .................... $16,452,220 $19,121,242 $22,330,613 $26,524,115 $22,292,821
Distributable Income .............. $15,968,274 $18,545,401 $21,835,994 $26,053,210 $21,753,943
Distributable Income per Unit ..... $ 1.63 $ 1.91 $ 2.25 $ 2.69 $ 2.24
Distributions per Unit ............ $ 1.63 $ 1.93 $ 2.25 $ 2.69 $ 2.24
Total Assets at Year End .......... $49,863,338 $61,446,413 $70,162,736 $82,752,593 $99,948,540
Total Corpus at Year End .......... $49,769,352 $61,271,700 $70,021,573 $82,695,754 $99,881,511
</TABLE>
ITEM 7. MANAGEMENTS 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 Quatro Finale and not the Trust.
Distributable income of the Trust consists of the excess of royalty income
plus interest income over the general and administrative expenses of the Trust.
Upon receipt by the Trust, royalty income is invested in short-term investments
in accordance with the Trust Agreement until its subsequent distribution to
Unitholders.
The amount of distributable income of the Trust for any calendar year may
differ from the amount of cash available for distribution to the Unitholders in
such year due to differences in the treatment of the expenses of the Trust in
the determination of those amounts. The financial statements of the Trust are
prepared on a modified cash basis pursuant to which the expenses of the Trust
are recognized when incurred. Consequently, the reported distributable income of
the Trust for any year is determined by deducting from the income received by
the Trust the amount of expenses incurred by the Trust during such year. The
amount of cash available for distribution to Unitholders, however, is determined
in accordance with the provisions of the Trust Agreement and reflects the
deduction from the income actually received by the Trust of the amount of
expenses actually paid by the Trust and adjustment for changes in reserves for
unpaid liabilities. See Note 5 to the financial statements of the Trust
appearing elsewhere herein for additional information regarding the
determination of the amount of cash available for distribution to Unitholders.
For 1998, royalty income received by the Trust amounted to $16,452,220 as
compared to $19,121,242 and $22,330,613 for 1997 and 1996, respectively. The
decrease in royalty income in 1998 is primarily due to lower net production from
the Underlying Properties and increased royalty payments to third parties and
taxes as compared to 1997. Net production related to the royalty income received
by the Trust in 1998 was approximately 17,097,192 MMBtu as compared to
17,031,000 MMBtu and 23,636,000 MMBtu in 1997 and 1996, respectively. Interest
income for 1998 was $55,364 as compared to $67,558 and $78,549 for 1997 and
1996, respectively, representing lower investment income on lower average
invested balances.
General and administrative expenses for 1998 were $539,310 compared to
$643,399 and $573,168 for 1997 and 1996, respectively. The decrease in these
expenses in 1998 was primarily due to lower legal expenses in 1998 than
1997.
Distributable income for 1998 was $15,968,274 or $1.65 per Unit compared to
$18,545,401 or $1.91 per Unit for 1997 and $21,835,994 or $2.25 per Unit for
1996. This decrease resulted from lower production and taxes from the Underlying
Properties.
Reserve values at December 31, 1998 and 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
38
<PAGE> 42
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 $1.09 per Mcf, $1.142 per Mcf
and $1.345 per Mcf at December 31, 1998, 1997 and 1996, 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 that 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 Quatro Finale'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 and the fourth quarter of the preceding calendar year, plus (ii) cash
received by WPC (on behalf of Quatro Finale) 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, 1998, 1997 and 1996, was based on production volumes
and natural gas prices for the twelve months ended in September 30, 1998, 1997
and 1996, 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 Quatro
Finale's royalty obligations to third parties, which are determined by
contractual arrangement with such parties.
<TABLE>
<CAPTION>
Twelve Months Ended September 30,
---------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Production, Net (MMBtu)(1)
WI Properties 15,609,101 14,089,778 21,483,636
Farmout Properties(2) 5,498,544 6,936,604 7,696,547
Average Blanco Hub Spot Price ($/MMBtu) $ 2.08 $ 2.28 $ 1.34
Average Net Wellhead Price WI Properties ($/MMBtu) $ 0.94 $ 0.98 $ 1.11
</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.
Properties - Gas Purchase Contract" in this Form 10-K of the Trust.
The information herein concerning production and prices relating to the
Underlying Properties is based on information prepared and furnished by WPC (on
behalf of Quatro Finale) to the Trustee. The Trustee has no control over and no
responsibility relating to the operation of the Underlying Properties.
39
<PAGE> 43
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 Trustee has identified its primary
system that is vulnerable to the Year 2000 issue: its General Ledger/Accounts
Payable System. The current system is Year 2000 compliant. The Trust selected a
system that has been warranted to be Year 2000 compliant and completed the
installation of the new system at the beginning of 1998. The cost of the system
was approximately $6,000. To date the Trustee has incurred no other costs in
connection with its efforts to identify, assess, remediate and test the Trust's
systems for Year 2000 compliance.
The Trustee is in the process of identifying and assessing other
information technology ("IT") systems used in connection with the Trust, as well
as other systems, for Year 2000 compliance. Non-IT systems are generally more
difficult to assess because they often contain embedded technology that may be
subject to Year 2000 problems. The total cost of the Trustee's Year 2000 efforts
is expected to be approximately $10,000 (including the $6,000 referred to
above), all of which will be incurred and paid during the last two quarters of
1998 and the first quarter of 1999. Of this amount, the Trustee expects to pay
$4,000 for identification and assessment of affected systems and $6,000 for
remediation (which may include the replacement of certain noncomplying systems).
The Trustee has additionally identified those vendors it believes could
have an impact on its day-to-day operations if their operations were interrupted
as a result of Year 2000 problems. The Trustee has developed a questionnaire
regarding the vendors' Year 2000 status. These vendors, consisting primarily of
energy companies, have been contacted before January 1, 1999 to determine their
Year 2000 status. WPC, which provides extensive accounting services to the
Trust, has indicated that its IT system will be Year 2000 complaint. The Trustee
is continuing discussions with WPC regarding its certification.
The Trustee has no reason to believe that its vendors will not be Year 2000
compliant. In the event the Trustee learns that a vendor's system will not be
Year 2000 compliant, the Trustee will assess the potential risk and develop
contingency plans at that time.
The Trust is a passive entity with no business operations, and the IT
systems employed by the Trustee in connection with its duties on behalf of the
Trust are less extensive than the systems employed by many business entities.
The Trust has no formal IT budget, and the Trustee does not anticipate making
any other significant capital expenditures relating to the Trustee's IT systems
used in connection with Trust during 1998 or 1999. Thus, the expenditures
expected to be made in connection with the Year 2000 efforts described above
will represent substantially all of the Trustee's IT-related capital
expenditures on behalf of the Trust during 1998 and 1999. These expenses will be
paid as expenses of the Trust.
Because the royalty interests held by the Trust are fixed, the Trustee is
dependent upon the third parties (primarily energy companies) that hold
operating interests with respect thereto for the receipt of royalty income.
Thus, if any such third party failed to deliver royalty income, the Trustee
would have available no alternative source for such income. The Trustee believes
that the worst case scenario would be the failure by the Trustee and one or more
third parties who pay royalties to the Trust to identify or remediate Year 2000
problems on a timely basis, which could cause the Trustee to be unable to make
required distributions to Unitholders. Such inability could result in the
incurrence by the Trust of interest charges or other liabilities to Unitholders.
The Trustee believes that in the event of a failure of any of its internal
systems it would be able to replace such systems in a relatively short period of
time, relying on internal resources of NationsBank, N.A., which serves as the
Trustee, although there can be no assurance that such replacement would not be
costly or that it would be completed without resulting in a significant delay in
the distributions to Unitholders. With respect to a failure by a third party to
deliver royalty income on a timely basis, the Trustee believes that it would
have no control over the efforts of such third party to correct the problems,
and significant delays in the receipt of royalty income could result.
40
<PAGE> 44
The Trust will utilize both internal and external resources to achieve Year
2000 compliance. The Trustee estimates that its identification and assessment
activities are approximately 80% complete and that its remediation and testing
efforts are approximately 90% complete. It expects that all of its Year 2000
efforts related to the Trust's internal systems will be completed by the end of
the second quarter of 1999. However, there can be no guarantee that the Trustee
will be able to identify all potential Year 2000 problems or to fully remediate
all Year 2000 problems identified on a timely basis. There also can be no
assurance that the systems of third party vendors on which the Trust relies will
be timely remediated. The failure by the Trustee or any such third party to
fully remediate its Year 2000 problems on a timely basis could have a material
adverse affect on the Trustee's ability to account for and make timely
distribution of the Trust's distributable income.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The only assets of and sources of income to the Trust are the Royalty
Interests, which generally entitle the Trust to receive a share of the net
profits from natural gas production from the Underlying Properties.
Consequently, the Trust's financial results can be significantly affected by
fluctuations in natural gas prices and the Trust has commodity price risk
exposure associated with the natural gas markets in the United States. The
Royalty Interests do not entitle the Trust to control or influence the operation
of the Underlying Properties or the sale of gas produced therefrom. Natural gas
produced from the WI Properties, which comprises the majority of production
attributable to the Royalty Interests, is currently sold by Quatro Finale
pursuant to the terms of the Gas Purchase Contract. Although the Trust is not a
party to the Gas Purchase Contract, the Gas Purchase Contract may significantly
impact revenues to the Trust. Although the Gas Purchase Contract mitigates the
risk to the Trust of low gas prices, it also limits the ability of the Trust to
benefit from the effects of higher gas prices, particularly to the extent a
balance exists in the Price Credit Account. See "Item 2 -- The Royalty Interests
- -- Gas Purchase Contract" for detailed information about the Gas Purchase
Contract and its impact on the Trust and Unitholders.
The Trust is a passive entity and other than the Trust's ability to
periodically borrow money as necessary to pay expenses, liabilities and
obligations of the Trust that cannot be paid out of cash held by the Trust, the
Trust is prohibited from engaging in borrowing transactions. The amount of any
such borrowings is unlikely to be material to the Trust. The Trust periodically
holds short term investments acquired with funds held by the Trust pending
distribution to Unitholders and funds held in reserve for the payment of Trust
expenses and liabilities. Because of the short-term nature of these borrowings
and investments and certain limitations upon the types of such investments which
may be held by the Trust, the Trustee believes that the Trust is not subject to
any material interest rate risk. The Trust does not engage in transactions in
foreign currencies which could expose the Trust or Unitholders to any foreign
currency related market risk.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA .
Audited Statements of Assets, Liabilities and Trust Corpus of the Trust as
of December 31, 1998 and 1997, and the related Statements of Distributable
Income and Changes in Trust Corpus for each of the three years in the period
ended December 31, 1998, are included in this Form 10-K.
41
<PAGE> 45
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, 1998 and
1997, and the related statements of distributable income and changes in trust
corpus for each of the three years in the period ended December 31, 1998. 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, 1998 and 1997, and its distributable
income and its changes in trust corpus for each of the three years in the period
ended December 31, 1998, on the basis of accounting described in Note 2.
/s/ ERNST & YOUNG LLP
Tulsa, Oklahoma
March 26, 1999
42
<PAGE> 46
FINANCIAL STATEMENTS
WILLIAMS COAL SEAM GAS ROYALTY TRUST
STATEMENTS OF ASSETS, LIABILITIES AND TRUST CORPUS
<TABLE>
<CAPTION>
December 31,
-------------------------
1998 1997
----------- -----------
ASSETS
<S> <C> <C>
Current assets - cash and cash equivalents ........................... $ 80,599 $ 30,636
Royalty interests in oil and gas properties (less accumulated
amortization of $88,783,924 and $77,150,886 at $77,150,886 at
December 31, 1998 and 1997, respectively) (Note 2) ................ 49,782,739 61,415,777
----------- -----------
Total ................................................................ $49,863,338 $61,446,413
=========== ===========
LIABILITIES AND TRUST CORPUS
Current liabilities:
Payable to The Williams Companies, Inc.(Note 4) ...................... $ 57,964 $ 56,275
Other accounts payable ............................................... 36,022 118,438
----------- -----------
Current liabilities .................................................. 93,986 174,713
Trust corpus (9,700,000 units of beneficial interest authorized and
outstanding) (Note 2) ............................................. 49,769,352 61,271,700
----------- -----------
Total ................................................................ $49,863,338 $61,446,413
=========== ===========
</TABLE>
STATEMENTS OF DISTRIBUTABLE INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Royalty income ........................................... $ 16,452,220 $ 19,121,242 $ 22,330,613
Interest income .......................................... 55,364 67,558 78,549
------------ ------------ ------------
Total ................................................... 16,507,584 19,188,800 22,409,162
General and administrative expenses (Note 4) ............. (539,310) (643,399) (573,168)
------------ ------------ ------------
Distributable income ..................................... $ 15,968,274 $ 18,545,401 $ 21,835,994
============ ============ ============
Distributable income per Unit (9,700,000 units)(Note 2) .. $ 1.65 $ 1.91 $ 2.25
============ ============ ============
Distributions per Unit (Note 5) .......................... $ 1.63 $ 1.93 $ 2.25
============ ============ ============
</TABLE>
STATEMENTS OF CHANGES IN TRUST CORPUS
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Trust corpus, beginning of year ........ $ 61,271,700 $ 70,021,573 $ 82,695,754
Amortization of royalty interests ....... (11,633,038) (9,581,669) (12,726,013)
Distributable income .................... 15,968,274 18,545,401 21,835,994
Distributions to Unitholders (Note 5) ... (15,837,584) (18,713,605) (21,784,162)
------------ ------------ ------------
Trust corpus, end of year ............... $ 49,769,352 $ 61,271,700 $ 70,021,573
============ ============ ============
</TABLE>
- -----------------------
See accompanying notes
43
<PAGE> 47
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, N.A. (as successor to
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. Effective May 1, 1997, WPC transferred the Underlying Properties to
Quatro Finale, LLC, a non-affiliated Delaware limited liability company ("Quatro
Finale").
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 Quatro Finale's
net revenue interests (working interests less lease burdens) in the properties
in which Quatro Finale has a working interest (the "WI Properties") and (ii) the
revenue stream received by Quatro Finale 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 Quatro
Finale'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
Quatro Finale from its 35 percent net profits interest in the Farmout
Properties, plus the aggregate proceeds attributable to Quatro Finale'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 Quatro Finale'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
Quatro Finale's net revenue interest in any Infill Wells less certain taxes and
costs. The NPI percentage is subject to certain future downward adjustments
based on a rate of return computation
44
<PAGE> 48
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:
o Revenues are recognized in the period in which amounts are received by the
Trust. General and administrative expenses are recognized on an accrual
basis.
o Amortization of the Royalty Interests is calculated on a unit-of-production
basis and charged directly to trust corpus.
o 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, 1998 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.
45
<PAGE> 49
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, 1998 and 1997 represent the fourth quarter fees. Aggregate fees incurred by
the Trust to Williams in 1998, 1997 and 1996 were $222,373, $236,191, and
$220,183, respectively.
Aggregate fees paid by the Trust to the trustees in 1998, 1997 and 1996
were $45,921, $44,978, and $43,360, 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 each of the
contract years January 1, 1998 through December 31, 1998 and January 1, 1999
through December 31, 1999, WFS Gas Resources did not exercise this option and
the pricing mechanism of the Primary Term remains in effect.
46
<PAGE> 50
The applicable index price was above the Minimum Purchase Price throughout
most of 1998 (with the exception of September and October). Pursuant to the
terms of the Gas Purchase Contract, WPC established a price credit account. WPC
estimates that, as of December 31, 1998, WFS Gas Resources had aggregate price
credits in the price credit account of approximately $10.9 million of which the
Trust's 81 percent interest was approximately $8.8 million. The applicable index
price was below the Minimum Purchase Price in January and February 1999.
The entitlement of WFS Gas Resources 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 1998
were reduced by approximately $2.9 million as a result of the recoupment 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, 1998,
1997 and 1996, 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 Trustee has also been informed by WPC that the MMS has informed some
San Juan Basin natural gas producers that they have incorrectly deducted certain
costs in the producers' coal bed methane valuations in determining the amounts
due to Federal royalty owners. While WPC believes that their past computations
have been appropriately stated, applying the MMS methodology could result in an
adjustment to amounts previously paid to the Trust of approximately $3,000,000.
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
judgement 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 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
47
<PAGE> 51
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 on July 20, 1998, a decision was issued upholding the original
opinion of the Court of Appeals finding ownership in the Tribe. On January 22,
1999, the United States Supreme Court granted certiorari on the matter and a
hearing date of April 19, 1999, has been set.
In late March 1999, WPC, Amoco, and the Tribe announced that they are in
settlement negotiations to finalize the terms of an agreement in connection with
the claims asserted against WPC. Under the proposed settlement, WPC will convert
its net profits interest in the production from the oil and gas leases in
dispute into a working interest. A portion of WPC's working interest will then
be transferred to the Tribe effective January 1, 1999. The Tribe will release
WPC from all other claims asserted in the lawsuit. This pending settlement
agreement does not address key issues still being pursued on appeal to the
Supreme Court, including the ownership of the natural gas in the coal formation,
tribal severance tax payments, and other matters. The Supreme Court is expected
to render its decision by mid-1999. The details of this settlement are still
being negotiated, and it must be approved by the District Court after an
opportunity for review and comment. WPC believes the parties will be successful
in reaching a final agreement on the partial settlement in principal and that it
will be approved by the District Court.
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
that it believes the financial impact to the Trust would not be significant. See
"Item 2--The Royalty Interest--Title to Properties--Southern Ute Litigation" for
additional information regarding this litigation.
While no assurances can be given, the Trustee does not believe that the
ultimate resolution of the foregoing matter will have a material adverse effect
on the Trust Corpus or distributable income.
7. SUBSEQUENT EVENT
Subsequent to December 31, 1998, the Trust declared the following
distribution:
================================================================================
Quarterly Record Date Payment Date Distribution per Unit
- --------------------------------------------------------------------------------
February 16, 1999 March 1, 1999 $.410740
================================================================================
The Trustee has estimated the Section 29 tax credit associated with the
February 16, 1999 quarterly distribution to be $.41 per Unit.
48
<PAGE> 52
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, 1998 and 1997 (in thousands, except per Unit amounts):
<TABLE>
<CAPTION>
Calendar Quarter Royalty Income Distributable Income Distribution per Unit
- -------------------- ---------------- ----------------------- ------------------------
<S> <C> <C> <C>
1998
First .............. $ 3,048 $ 2,934 $ 0.30
Second ............. 5,412 5,166 0.53
Third .............. 4,762 4,688 0.48
Fourth ............. 3,230 3,180 0.32
-------- ------- ------
TOTAL .......... $ 16,452 $15,968 $ 1.65
======== ======= ======
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
======== ======= ======
</TABLE>
Selected 1998 fourth quarter data are as follows (in thousands except per
Unit amounts):
<TABLE>
<S> <C>
Royalty income ........................................ $ 3,230
Interest income ....................................... $ 10
General and administrative expenses ................... ($ 60)
Distributable income .................................. $ 3,180
Distributable income per Unit (9,700,000 units) ....... $ 0.33
Distribution per Unit ................................. $ 0.32
</TABLE>
9. SUPPLEMENTAL OIL AND GAS INFORMATION (UNAUDITED)
The net proved reserves attributable to the Royalty Interests have been
estimated as of December 31, 1998, 1997, and 1996, by independent petroleum
engineers. In accordance with Statement of Financial Accounting Standards No.
69, estimates of future net revenues from proved reserves have been prepared
using contractual gas prices and related costs. The standardized measure of
future net revenues from the gas reserves is calculated based on discounting
such future net revenues at an annual rate of 10 percent. The Blanco Hub Spot
Price for December 1998 of $1.96 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 $1.07 per
Mcf. This computed price does not include any possible future increases which
may result upon the full recoupment of the price credits. 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, 1997 and 1996 and January 1, 1996
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
49
<PAGE> 53
estimating reserves, production history and more detailed information with
regard to the status of the interest in the NPI, the reserve estimates as
December 31, 1998 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, 1996 .......... 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
========
Production .................................. (20,595)
Revisions of previous estimates ............. (11,640)
Proved reserves at December 31, 1998 ........ 69,813
========
</TABLE>
- -------------
*Includes reserve increases resulting from well recompletions and other factors.
All proved reserve estimates presented above at December 31, 1998, 1997 and
1996 and January 1, 1996 are proved developed.
Proved reserves are estimated quantities of natural gas which geological
and engineering data indicate with reasonable certainty to be recoverable in
future years from known reservoirs under existing economic and operating
conditions. Proved developed reserves are proved reserves which can be expected
to be recovered through existing wells with existing equipment and operating
methods.
The following table sets forth the standardized measure of discounted
future net revenues at December 31, 1998, 1997 and 1996 relating to proved
reserves (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Future cash inflows ....................................... $ 73,955 $ 103,497 $ 1,995
Future production taxes ................................... (8,616) (12,461) (13,444)
--------- --------- ---------
Future net cash flows ..................................... 65,339 91,036 187,602
10% discount factor ....................................... (16,755) (25,198) (63,149)
--------- --------- ---------
Standardized measure of discounted future net revenues .... $ 48,584 $ 65,838 $ 124,453
========= ========= =========
</TABLE>
50
<PAGE> 54
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, 1998, 1997 and 1996 (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Balance at January 1 ........................ $ 65,838 $ 124,453 $ 79,833
Increase (decrease) due to:
Net sales of coal seam gas ......... (19,498) (18,065) (20,629)
Net changes in prices and costs .... 2,654 (27,518) 46,392
Development costs incurred ......... 1,983 0 724
Net change in cost estimates ....... (1,983) 0 (724)
Change in estimated volumes ........ (8,100) (8,448) 8,133
Accretion of discount .............. 6,584 12,445 7,983
Other .............................. 1,106 (5,934) 2,741
Changes in revision of interest .... (11,095)
--------- --------- ---------
58,615 44,620
--------- --------- ---------
Balance at December 31 ...................... $ 48,584 $ 65,838 $ 124,453
========= ========= =========
</TABLE>
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 1998
base amount of $38,632, 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
1998 of $38,632 and $7,289, 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.
51
<PAGE> 55
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 $21,653.
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 15, 1999 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>
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 15, 1999, NationsBank, N.A., the Trustee, held
an aggregate of 1,000 Units in various fiduciary capacities, with no investment
or voting powers. As of March 15, 1999, 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.
52
<PAGE> 56
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 1998 was $222,373.
POTENTIAL CONFLICTS OF INTEREST
The interests of Quatro Finale and 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, Quatro Finale 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 Quatro Finale 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. Quatro Finale's interests may also conflict with
those of the Trust and Unitholders in situations involving the sale or
abandonment of Underlying Properties. Quatro Finale 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, 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 Quatro Finale, 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:
53
<PAGE> 57
1. Financial Statements (included in Item 8 of this report)
<TABLE>
<CAPTION>
PAGE IN THIS
REPORT
------
<S> <C>
Report of Independent Auditors 42
Statements of Assets, Liabilities and Trust Corpus as of December 31, 1998 and 1997 43
Statements of Distributable Income for the years ended December 31, 1998, 1997
and 1996 43
Statements of Changes in Trust Corpus for the years ended December 31, 1998,
1997 and 1996 43
Notes to Financial Statements 44
</TABLE>
2. Financial Statement Schedules
Financial statement schedules are omitted because of the absence of
conditions under which they are required or because the required information is
included in the financial statements and notes thereto.
3. Exhibits
EXHIBIT
NUMBER EXHIBIT
- ------ -------
3.1 -- Certificate of Trust of Williams Coal Seam Gas Royalty Trust (filed
as Exhibit 3.1 to the 3.1 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, N.A. (as successor to 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, N.A. (as successor to 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, N.A. (as successor to 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, N.A. (as successor to 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).
54
<PAGE> 58
EXHIBIT
NUMBER EXHIBIT
- ------ -------
10.2 -- Gas Purchase Agreement dated October 1, 1992, by and between
Williams Gas Marketing Company and Williams Production Company
(filed as Exhibit 10.2 to the Registrant's Form 10-K for the year
ended December 31, 1992 and incorporated herein by reference).
10.3 -- First Amendment to the Gas Purchase Agreement effective January 12,
1993, by and between Williams Gas Marketing Company and Williams
Production Company (filed as Exhibit 10.3 to the Registrant's Form
10-K for the year ended December 31, 1992 and incorporated herein
by reference).
10.4 -- Gas Gathering and Treating Agreement effective October 1, 1992, by
and between Williams Field Services Company and Williams Gas
Marketing Company (filed as Exhibit 10.4 to the Registrant's Form
10-K for the year ended December 31, 1992 and incorporated herein
by reference).
10.5 -- First Amendment to the Gas Gathering and Treating Agreement
effective as of January 12, 1993, by and between Williams Field
Services Company and Williams Gas Marketing Company (filed as
Exhibit 10.5 to the Registrant's Form 10-K for the year ended
December 31, 1992 and incorporated herein by reference).
10.6 -- Amendment #2 to the Gas Gathering and Treating Agreement dated as
of October 1, 1993, by and between Williams Field Services Company
and Williams Gas Marketing Company (filed as Exhibit 10.6 to the
Registrant's Form 10-K for the year ended December 31, 1993 and
incorporated herein by reference).
10.7 -- Amendment #3 to the Gas Gathering and Treating Agreement dated as
of October 1, 1993, by and between Williams Field Services Company
and Williams Gas Marketing Company (filed as Exhibit 10.7 to the
Registrant's Form 10-K for the year ended December 31, 1993 and
incorporated herein by reference).
10.8 -- Confirmation Agreement effective as of May 1, 1995 by and among
Williams Production Company, The Williams Companies, Inc. and
Williams Coal Seam Gas Royalty Trust (filed as Exhibit 10.1 to the
Registrant's Form 10-Q for the quarter ended June 30, 1995 and
incorporated herein by reference).
10.9 -- Agreement dated May 7, 1997, effective as of May 1, 1997, by and
among Williams Production Company, The Williams Companies, Inc.,
Williams Coal Seam Gas Royalty Trust and Quatro Finale LLC (filed
as Exhibit 10.1 to the Registrant's Form 8-K dated June 20, 1997
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).
55
<PAGE> 59
EXHIBIT
NUMBER EXHIBIT
- ------ -------
99.2 -- Reserve Report, dated November 21, 1992, on the estimated reserves,
estimated future net revenues and the discounted estimated future
net revenues attributable to the Royalty Interests and the
Underlying Properties as of October 1, 1992, prepared by Miller and
Lents, Ltd., independent petroleum engineers, included as Exhibit A
of the Prospectus dated January 13, 1993, which constitutes a part
of the Registration Statement on Form S-3 of The Williams
Companies, Inc. (Registration No. 33-53662) (filed as Exhibit 28.1
to the Registrant's Form 10-K for the year ended December 31, 1992
and incorporated herein by reference).
99.3 -- Reserve Report, dated February 23, 1994, on the estimated reserves
attributable to the Royalty Interests as of December 31, 1993 (but
using October 1, 1992 Reserve Report pricing), prepared by Miller
and Lents, Ltd., independent petroleum engineers (filed as Exhibit
99.4 to the Registrant's Form 10-K for the year ended December 31,
1993 and incorporated herein by reference).
99.4 -- Reserve Report, dated February 23, 1994, on the estimated reserves,
estimated future net revenues and the discounted estimated future
net revenues attributable to the Royalty Interests and the
Underlying Properties as of December 31, 1993, prepared by Miller
and Lents, Ltd., independent petroleum engineers (filed as Exhibit
99.5 to the Registrant's Form 10-K for the year ended December 31,
1993 and incorporated herein by reference).
99.5 -- Reserve Report, dated February 28, 1995, on the estimated reserves,
estimated future net revenues and the discounted estimated future
net revenues attributable to the Royalty Interests and the
Underlying Properties as of December 31, 1994, prepared by Miller
and Lents, Ltd., independent petroleum engineers (filed as Exhibit
99.6 to the Registrant's Form 10-K for the year ended December 31,
1994 and incorporated herein by reference).
99.6 -- Reserve Report, dated March 8, 1996, on the estimated reserves,
estimated future net revenues and the discounted estimated future
net revenues attributable to the Royalty Interests and the
Underlying Properties as of December 31, 1995, prepared by Miller
and Lents, Ltd., independent petroleum engineers (filed as Exhibit
99.7 to the Registrant's Form 10-K for the year ended December 31,
1995 and incorporated herein by reference).
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 (filed as Exhibit
99.8 to the Registrant's Form 10-K for the year ended December 31,
1997 and incorporated herein by reference).
99.9 -- Reserve Report, dated February 10, 1999, 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, 1998, prepared by Miller
and Lents, Ltd., independent petroleum engineers.
(b) Reports on Form 8-K. No report on Form 8-K was filed by the Registrant
during the last quarter of the period covered by this report.
56
<PAGE> 60
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, N.A., TRUSTEE
By: /s/ RON E. HOOPER
--------------------------------
RON E. HOOPER
Vice President and Administrator
Date: March 31, 1999
(The Registrant has no directors or executive officers.)
57
<PAGE> 61
EXHIBIT INDEX
EXHIBIT
NUMBER EXHIBIT
- ------ -------
3.1 -- Certificate of Trust of Williams Coal Seam Gas Royalty Trust (filed
as Exhibit 3.1 to the 3.1 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, N.A. (as successor to 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, N.A. (as successor to 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, N.A. (as successor to 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, N.A. (as successor to 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).
<PAGE> 62
EXHIBIT
NUMBER EXHIBIT
- ------ -------
10.2 -- Gas Purchase Agreement dated October 1, 1992, by and between
Williams Gas Marketing Company and Williams Production Company
(filed as Exhibit 10.2 to the Registrant's Form 10-K for the year
ended December 31, 1992 and incorporated herein by reference).
10.3 -- First Amendment to the Gas Purchase Agreement effective January 12,
1993, by and between Williams Gas Marketing Company and Williams
Production Company (filed as Exhibit 10.3 to the Registrant's Form
10-K for the year ended December 31, 1992 and incorporated herein
by reference).
10.4 -- Gas Gathering and Treating Agreement effective October 1, 1992, by
and between Williams Field Services Company and Williams Gas
Marketing Company (filed as Exhibit 10.4 to the Registrant's Form
10-K for the year ended December 31, 1992 and incorporated herein
by reference).
10.5 -- First Amendment to the Gas Gathering and Treating Agreement
effective as of January 12, 1993, by and between Williams Field
Services Company and Williams Gas Marketing Company (filed as
Exhibit 10.5 to the Registrant's Form 10-K for the year ended
December 31, 1992 and incorporated herein by reference).
10.6 -- Amendment #2 to the Gas Gathering and Treating Agreement dated as
of October 1, 1993, by and between Williams Field Services Company
and Williams Gas Marketing Company (filed as Exhibit 10.6 to the
Registrant's Form 10-K for the year ended December 31, 1993 and
incorporated herein by reference).
10.7 -- Amendment #3 to the Gas Gathering and Treating Agreement dated as
of October 1, 1993, by and between Williams Field Services Company
and Williams Gas Marketing Company (filed as Exhibit 10.7 to the
Registrant's Form 10-K for the year ended December 31, 1993 and
incorporated herein by reference).
10.8 -- Confirmation Agreement effective as of May 1, 1995 by and among
Williams Production Company, The Williams Companies, Inc. and
Williams Coal Seam Gas Royalty Trust (filed as Exhibit 10.1 to the
Registrant's Form 10-Q for the quarter ended June 30, 1995 and
incorporated herein by reference).
10.9 -- Agreement dated May 7, 1997, effective as of May 1, 1997, by and
among Williams Production Company, The Williams Companies, Inc.,
Williams Coal Seam Gas Royalty Trust and Quatro Finale LLC (filed
as Exhibit 10.1 to the Registrant's Form 8-K dated June 20, 1997
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).
<PAGE> 63
EXHIBIT
NUMBER EXHIBIT
- ------ -------
99.2 -- Reserve Report, dated November 21, 1992, on the estimated reserves,
estimated future net revenues and the discounted estimated future
net revenues attributable to the Royalty Interests and the
Underlying Properties as of October 1, 1992, prepared by Miller and
Lents, Ltd., independent petroleum engineers, included as Exhibit A
of the Prospectus dated January 13, 1993, which constitutes a part
of the Registration Statement on Form S-3 of The Williams
Companies, Inc. (Registration No. 33-53662) (filed as Exhibit 28.1
to the Registrant's Form 10-K for the year ended December 31, 1992
and incorporated herein by reference).
99.3 -- Reserve Report, dated February 23, 1994, on the estimated reserves
attributable to the Royalty Interests as of December 31, 1993 (but
using October 1, 1992 Reserve Report pricing), prepared by Miller
and Lents, Ltd., independent petroleum engineers (filed as Exhibit
99.4 to the Registrant's Form 10-K for the year ended December 31,
1993 and incorporated herein by reference).
99.4 -- Reserve Report, dated February 23, 1994, on the estimated reserves,
estimated future net revenues and the discounted estimated future
net revenues attributable to the Royalty Interests and the
Underlying Properties as of December 31, 1993, prepared by Miller
and Lents, Ltd., independent petroleum engineers (filed as Exhibit
99.5 to the Registrant's Form 10-K for the year ended December 31,
1993 and incorporated herein by reference).
99.5 -- Reserve Report, dated February 28, 1995, on the estimated reserves,
estimated future net revenues and the discounted estimated future
net revenues attributable to the Royalty Interests and the
Underlying Properties as of December 31, 1994, prepared by Miller
and Lents, Ltd., independent petroleum engineers (filed as Exhibit
99.6 to the Registrant's Form 10-K for the year ended December 31,
1994 and incorporated herein by reference).
99.6 -- Reserve Report, dated March 8, 1996, on the estimated reserves,
estimated future net revenues and the discounted estimated future
net revenues attributable to the Royalty Interests and the
Underlying Properties as of December 31, 1995, prepared by Miller
and Lents, Ltd., independent petroleum engineers (filed as Exhibit
99.7 to the Registrant's Form 10-K for the year ended December 31,
1995 and incorporated herein by reference).
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 (filed as Exhibit
99.8 to the Registrant's Form 10-K for the year ended December 31,
1997 and incorporated herein by reference).
99.9 -- Reserve Report, dated February 10, 1999, 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, 1998, prepared by Miller
and Lents, Ltd., independent petroleum engineers.
<PAGE> 1
EXHIBIT 23.1
[MILLER AND LENTS, LTD. LETTERHEAD]
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.
9. Report dated February 10, 1999 for reserves as of December 31, 1998.
<PAGE> 2
MILLER AND LENTS, LTD.
NationsBank of Texas, N.A., Trustee March 30, 1999
Williams Coal Seam Gas Royalty Trust Page 2
Miller and Lents, Ltd. has no interests in the Williams Coal Seam Gas
Royalty Trust or in any of its affiliated companies or subsidiaries and does not
receive any such interest as payment for its report. No director, officer, or
employee of Miller and Lents, Ltd. is employed by or otherwise connected with
the Williams Coal Seam Gas Royalty Trust nor is Miller and Lents , Ltd. employed
by the Williams Coal Seam Gas Royalty Trust on a contingent basis.
Very truly yours,
MILLER AND LENTS, LTD.
By /s/ S. JOHN STIEBER
---------------------------------
S. John Stieber
Senior Vice President
SJS/hsd
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 80,598
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 80,598
<PP&E> 138,566,663
<DEPRECIATION> 88,783,924
<TOTAL-ASSETS> 49,863,338
<CURRENT-LIABILITIES> 93,986
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 49,769,352
<TOTAL-LIABILITY-AND-EQUITY> 49,863,338
<SALES> 16,452,220
<TOTAL-REVENUES> 16,507,584
<CGS> 0
<TOTAL-COSTS> 539,310
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 15,968,274
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,968,274
<EPS-PRIMARY> 1.65
<EPS-DILUTED> 1.65
</TABLE>
<PAGE> 1
[MILLER AND LENTS, LTD. LETTERHEAD]
February 10, 1999
EXHIBIT 99.9
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, 1998
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 the 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
NationsBank of Texas, N.A., Trustee February 10, 1999
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, 1998
<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 119,737 109,589 80,863
The Royalty Interests (Net to the Trust)
Proved Developed Producing 69,813 65,339 48,584
</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 1998 rate of $1.0516 per MMBtu, are $67 million with a 10
percent present worth of $57 million. The tax credits attributable to the
Royalty Interests are $43 million with a 10 percent present worth of $37
million.
The production forecast for the Proved Reserves and future net revenues
as of December 31, 1998 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, 1998 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 1998 wellhead
price, reported by WPC of $1.96 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 lease royalty and production and ad valorem taxes for the
Working Interest Properties were based on the average 1998 wellhead gas price of
$1.86 per MMBtu, reported by WPC.
<PAGE> 3
MILLER AND LENTS, LTD
NationsBank of Texas, N.A., Trustee February 10, 1999
Williams Coal Seam Gas Royalty Trust Page 3
Operating expense estimates were based on expenses incurred during 1998
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
<PAGE> 4
- --------------------------------------------------------------------------------
WILLIAMS COAL SEAM GAS ROYALTY TRUST
RESERVES AND ECONOMICS AS OF DECEMBER 31, 1998 @ 14.73 PSIA
UNDERLYING PROPERTIES AND TRUST INTERESTS
NON-ESCALATED 12/31/98 PRICES
TOTAL PROVED DEVELOPED RESERVES
<TABLE>
<CAPTION>
==============================================================================================================================
UNDERLYING PROPERTIES
==============================================================================================================================
Natural Gas, MMCF Net Oper Costs, M$ Future Net Income, M$ Tax Credit, M$
- ------------------------------------- Revenue -----------------------------------------------------------------------
Price to Net Intr Oper Adv&Sev Future
Year Gross Net $/Mcf M$ Expns Taxes Capital Annual Disc@10% Annual Disc@10%
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1999 315,335 25,436 1.235 31,417 2,528 3,063 - 25,826 24,582 22,992 21,884
- ------------------------------------------------------------------------------------------------------------------------------
2000 251,442 20,198 1.233 24,912 2,386 2,444 - 20,082 17,303 18,281 15,751
- ------------------------------------------------------------------------------------------------------------------------------
2001 200,653 16,060 1.232 19,782 2,255 1,952 - 15,575 12,147 14,549 11,348
- ------------------------------------------------------------------------------------------------------------------------------
2002 160,320 12,789 1.230 15,732 2,132 1,561 - 12,039 8,500 11,594 8,185
- ------------------------------------------------------------------------------------------------------------------------------
2003 127,957 10,200 1.229 12,532 2,026 1,250 - 9,256 5,916
- ------------------------------------------------------------------------------------------------------------------------------
2004 101,898 8,125 1.227 9,970 1,908 999 - 7,063 4,086
- ------------------------------------------------------------------------------------------------------------------------------
2005 80,643 6,383 1.226 7,823 1,707 787 - 5,329 2,791
- ------------------------------------------------------------------------------------------------------------------------------
2006 63,548 5,000 1.224 6,122 1,512 618 - 3,992 1,892
- ------------------------------------------------------------------------------------------------------------------------------
2007 49,767 3,860 1.223 4,722 1,278 478 - 2,966 1,273
- ------------------------------------------------------------------------------------------------------------------------------
2008 38,917 3,009 1.222 3,677 1,120 373 - 2,183 848
- ------------------------------------------------------------------------------------------------------------------------------
2009 30,070 2,280 1.221 2,784 912 283 - 1,589 559
- ------------------------------------------------------------------------------------------------------------------------------
2010 23,207 1,749 1.220 2,133 775 217 - 1,141 363
- ------------------------------------------------------------------------------------------------------------------------------
2011 17,417 1,317 1.219 1,605 640 164 - 801 231
- ------------------------------------------------------------------------------------------------------------------------------
2012 12,540 971 1.218 1,183 511 121 - 552 144
- ------------------------------------------------------------------------------------------------------------------------------
2013 8,746 701 1.218 854 393 87 - 374 88
- ------------------------------------------------------------------------------------------------------------------------------
2014 6,112 495 1.217 603 292 62 - 249 53
- ------------------------------------------------------------------------------------------------------------------------------
2015 4,238 337 1.217 410 202 42 - 166 32
- ------------------------------------------------------------------------------------------------------------------------------
2016 2,836 224 1.217 273 132 28 - 113 20
- ------------------------------------------------------------------------------------------------------------------------------
2017 1,902 162 1.216 197 94 20 - 83 13
- ------------------------------------------------------------------------------------------------------------------------------
2018 1,386 123 1.216 149 77 15 - 57 8
- ------------------------------------------------------------------------------------------------------------------------------
2019 1,022 83 1.216 101 52 10 - 39 5
- ------------------------------------------------------------------------------------------------------------------------------
2020 756 51 1.218 62 30 6 - 26 3
- ------------------------------------------------------------------------------------------------------------------------------
2021 586 31 1.219 38 16 4 - 18 2
- ------------------------------------------------------------------------------------------------------------------------------
2022 422 26 1.221 32 16 4 - 13 1
- ------------------------------------------------------------------------------------------------------------------------------
2023 316 20 1.221 25 10 3 - 12 1
- ------------------------------------------------------------------------------------------------------------------------------
2024 283 18 1.219 22 8 3 - 12 1
- ------------------------------------------------------------------------------------------------------------------------------
AFTER 1,359 88 1.215 107 60 12 35 2
- ------------------------------------------------------------------------------------------------------------------------------
TOT 1,503,677 119,737 1.230 147,266 23,074 14,603 - 109,589 80,863 67,416 57,168
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
===================================================
TRUST INTERESTS
===================================================
Future Net Income, M$ Tax Credits, M$
- ---------------------------------------------------
Net
MMCF Annual Disc@10% Annual Disc@10%
------------------------------------------
<S> <C> <C> <C> <C>
18,424 17,381 16,543 16,654 15,851
- ---------------------------------------------------
13,578 12,765 10,998 12,290 10,589
- ---------------------------------------------------
8,458 7,932 6,186 7,663 5,976
- ---------------------------------------------------
6,653 6,220 4,391 6,031 4,258
- ---------------------------------------------------
5,210 4,861 3,107
- ---------------------------------------------------
4,077 3,794 2,195
- ---------------------------------------------------
3,204 2,975 1,558
- ---------------------------------------------------
2,533 2,344 1,111
- ---------------------------------------------------
2,029 1,871 803
- ---------------------------------------------------
1,606 1,477 574
- ---------------------------------------------------
1,235 1,134 399
- ---------------------------------------------------
973 891 283
- ---------------------------------------------------
790 720 208
- ---------------------------------------------------
639 580 151
- ---------------------------------------------------
132 129 30
- ---------------------------------------------------
83 82 18
- ---------------------------------------------------
54 54 10
- ---------------------------------------------------
38 38 7
- ---------------------------------------------------
28 28 4
- ---------------------------------------------------
17 17 3
- ---------------------------------------------------
12 12 2
- ---------------------------------------------------
8 8 1
- ---------------------------------------------------
7 6 1
- ---------------------------------------------------
4 4 0
- ---------------------------------------------------
5 4 0
- ---------------------------------------------------
5 4 0
- ---------------------------------------------------
9 8 0
- ---------------------------------------------------
69,813 65,339 48,584 42,637 36,674
- ---------------------------------------------------
</TABLE>
