The condensed financial statements included herein have been prepared by Southwest Bank, as Trustee (the Trustee) of Sabine
Royalty Trust (the Trust), pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in annual financial statements have been condensed or omitted
pursuant to such rules and regulations, although the Trustee believes that the disclosures are adequate to make the information presented not misleading. The condensed financial statements of the Trust presented herein are unaudited. It is suggested
that these condensed financial statements and notes thereto be read in conjunction with the financial statements and notes thereto included in the Trusts latest annual report on
Form 10-K.
The
December 31, 2016 condensed statement of assets, liabilities and trust corpus is derived from the audited statement of assets, liabilities and trust corpus as of that date. In the opinion of the Trustee, all adjustments necessary to present
fairly the assets, liabilities and trust corpus of the Trust as of March 31, 2017, the distributable income and the changes in trust corpus for the three-month periods ended March 31, 2017 and 2016, have been included. The distributable
income for such interim periods is not necessarily indicative of the distributable income for the full year.
The condensed financial
statements as of March 31, 2017, and for the three-month period ended March 31, 2017, included herein, have been reviewed by Weaver and Tidwell L.L.P., an independent registered public accounting firm, as stated in their report appearing
herein.
The condensed interim financial statements for the three-month period ended March 31, 2016, included herein, was previously
reviewed by an independent registered public accounting firm.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Unit Holders of Sabine Royalty Trust and
Southwest Bank,
Trustee
Dallas, Texas
We have reviewed the accompanying
condensed statement of assets, liabilities and trust corpus of Sabine Royalty Trust (the Trust) as of March 31, 2017 and the related condensed statements of distributable income and changes in trust corpus for the three-month period
ended March 31, 2017. There interim financial statements are the responsibility of the Trustee.
We conducted our review in accordance with the
standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
As described in Note 2 to the condensed interim financial statements,
these condensed interim financial statements have been prepared on a modified cash basis of accounting, which is a comprehensive basis of accounting other than accounting principles generally accepted in the United States of America.
Based on our review, we are not aware of any material modifications that should be made to such condensed interim financial statements for them to be in
conformity with the basis of accounting described in Note 2.
/s/ WEAVER AND TIDWELL, L.L.P.
Dallas, TX
May 5, 2017
3
SABINE ROYALTY TRUST
CONDENSED STATEMENTS OF ASSETS, LIABILITIES, AND TRUST CORPUS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note
|
|
|
March 31,
2017
(UNAUDITED)
|
|
|
December 31,
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and short-term investments
|
|
|
|
|
|
$
|
6,526,059
|
|
|
$
|
4,961,157
|
|
Royalty interests in oil and gas properties (less accumulated amortization of $22,131,198 and
$22,121,895 at March 31, 2017 and December 31, 2016)
|
|
|
|
|
|
|
263,987
|
|
|
|
273,290
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
|
|
|
|
|
|
$
|
6,790,046
|
|
|
$
|
5,234,447
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Trust Corpus
|
|
|
|
|
|
|
|
|
|
|
|
|
Trust expenses payable
|
|
|
4
|
|
|
$
|
204,607
|
|
|
$
|
247,100
|
|
Other payables
|
|
|
4
|
|
|
|
290,906
|
|
|
|
564,048
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
495,513
|
|
|
|
811,148
|
|
Contingencies
|
|
|
6
|
|
|
|
|
|
|
|
|
|
Trust corpus 14,579,345 units of beneficial interest authorized and outstanding
|
|
|
|
|
|
|
6,294,533
|
|
|
|
4,423,299
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
|
|
|
|
|
|
$
|
6,790,046
|
|
|
$
|
5,234,447
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed financial statements.
4
SABINE ROYALTY TRUST
CONDENSED STATEMENTS OF DISTRIBUTABLE INCOME (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
|
Notes
|
|
|
2017
|
|
|
2016
|
|
Royalty Income
|
|
|
|
|
|
$
|
10,481,493
|
|
|
$
|
6,968,945
|
|
Interest Income
|
|
|
|
|
|
|
5,901
|
|
|
|
836
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
10,487,394
|
|
|
|
6,969,781
|
|
General and administrative expenses
|
|
|
|
|
|
|
(680,067
|
)
|
|
|
(801,119
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributable Income
|
|
|
|
|
|
$
|
9,807,327
|
|
|
$
|
6,168,662
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributable Income per unit (14,579,345 units)
|
|
|
1,3,5
|
|
|
$
|
.67
|
|
|
$
|
.42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed financial statements.
5
SABINE ROYALTY TRUST
CONDENSED STATEMENTS OF CHANGES IN TRUST CORPUS (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
|
Note
|
|
|
2017
|
|
|
2016
|
|
Trust corpus, beginning of period
|
|
|
|
|
|
$
|
4,423,300
|
|
|
$
|
5,180,285
|
|
Amortization of royalty interests
|
|
|
|
|
|
|
(9,303
|
)
|
|
|
(9,726
|
)
|
Distributable income
|
|
|
|
|
|
|
9,807,327
|
|
|
|
6,168,662
|
|
Distributions
|
|
|
3
|
|
|
|
(7,926,791
|
)
|
|
|
(7,979,129
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trust corpus, end of period
|
|
|
|
|
|
$
|
6,294,533
|
|
|
$
|
3,360,092
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions per unit (14,579,345 units)
|
|
|
3
|
|
|
$
|
.54
|
|
|
$
|
.55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed financial statements.
6
SABINE ROYALTY TRUST
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
1. TRUST ORGANIZATION AND PROVISIONS
Sabine Royalty Trust (the Trust) was established by the Sabine Corporation Royalty Trust Agreement (the Trust
Agreement), made and entered into effective as of December 31, 1982, to receive a distribution from Sabine Corporation (Sabine) of royalty and mineral interests, including landowners royalties, overriding royalty
interests, minerals (other than executive rights, bonuses and delay rentals), production payments and any other similar, nonparticipatory interests, in certain producing and proved undeveloped oil and gas properties located in Florida, Louisiana,
Mississippi, New Mexico, Oklahoma and Texas (the Royalties).
Certificates evidencing units of beneficial interest (the
Units) in the Trust were mailed on December 31, 1982, to Sabines shareholders of record on December 23, 1982, on the basis of one Unit for each share of Sabines outstanding common stock. In May 1988, Sabine was
acquired by Pacific Enterprises (Pacific), a California corporation. Through a series of mergers, Sabine was merged into Pacific Enterprises Oil Company (USA) (Pacific (USA)), a California corporation and a wholly owned
subsidiary of Pacific, effective January 1, 1990. This acquisition and the subsequent mergers had no effect on the Units. Pacific (USA), as successor to Sabine, has assumed by operation of law all of Sabines rights and obligations with
respect to the Trust. The Units are listed and traded on the New York Stock Exchange.
In connection with the transfer of the Royalties to
the Trust upon its formation, Sabine had reserved to itself all executive rights, including rights to execute leases and to receive bonuses and delay rentals. In January 1993, Pacific (USA) completed the sale of substantially all its
producing oil and gas assets to a third party. The sale did not include executive rights relating to the Royalties, and Pacific (USA)s ownership of such rights was not affected by the sale.
Southwest Bank (the Trustee), acts as trustee of the Trust. Southwest Bank became the Trustee effective May 30, 2014, upon the
resignation of Bank of America, N.A., the prior trustee. The terms of the Trust Agreement provide, among other things, that:
|
|
|
The Trust shall not engage in any business or commercial activity of any kind or acquire assets other than those initially transferred to the Trust.
|
|
|
|
The Trustee may not sell all or any part of its assets unless approved by the holders of a majority of the outstanding Units in which case the sale must be for cash and the proceeds, after satisfying all existing
liabilities, promptly distributed to Unit holders.
|
|
|
|
The Trustee may establish a cash reserve for the payment of any liability that is contingent or uncertain in amount or that otherwise is not currently due or payable.
|
|
|
|
The Trustee will use reasonable efforts to cause the Trust and the Unit holders to recognize income and expenses on monthly record dates.
|
|
|
|
The Trustee is authorized to borrow funds to pay liabilities of the Trust provided that such borrowings are repaid in full before any further distributions are made to Unit holders.
|
|
|
|
The Trustee will make monthly cash distributions to Unit holders of record on the monthly record date (see Note 3).
|
7
Because of the passive nature of the Trust and the restrictions and limitations on the powers and
activities of the Trustee contained in the Trust Agreement, the Trustee does not consider any of the officers and employees of the Trustee to be officers or executive officers of the Trust as such terms are defined under
applicable rules and regulations adopted under the Securities Exchange Act of 1934.
The proceeds of production from the Royalties are
receivable from hundreds of separate payors. In order to facilitate creation of the Trust and to avoid the administrative expense and inconvenience of daily reporting to Unit holders, the conveyances by Sabine of the Royalties located in five of the
six states provided for the execution of an escrow agreement by Sabine and the initial trustee of the Trust, in its capacities as trustee of the Trust and as escrow agent. The conveyances by Sabine of the Royalties located in Louisiana provided for
the execution of a substantially identical escrow agreement by Sabine and a Louisiana bank in the capacities of escrow agent and of trustee under the name of Sabine Louisiana Royalty Trust. Sabine Louisiana Royalty Trust, the sole beneficiary of
which is the Trust, was established in order to avoid uncertainty under Louisiana law as to the legality of the Trustees holding record title to the Royalties located in Louisiana. The Trust now only has one escrow agent, which is the Trustee,
and a single escrow agreement.
Pursuant to the terms of the escrow agreement and the conveyances of the properties by Sabine, the
proceeds of production from the Royalties for each calendar month, and interest thereon, are collected by the Trustee, as escrow agent, and are paid to and received by the Trust only on the next monthly record date. The Trustee, as escrow agent, has
agreed to endeavor to assure that it incurs and pays expenses and fees for each calendar month only on the next monthly record date. The Trust Agreement also provides that the Trustee is to endeavor to assure that income of the Trust will be accrued
and received and expenses of the Trust will be incurred and paid only on each monthly record date. Assuming that the escrow agreement is recognized for federal income tax purposes and that the Trustee is able to control the timing of income and
expenses, as stated above, cash and accrual basis Unit holders should be treated as realizing income only on each monthly record date. The Trustee is treating the escrow agreement as effective for federal income tax purposes. However, for financial
reporting purposes, royalty and interest income are recorded in the calendar month in which the amounts are received by either the escrow agent or the Trust.
Distributable income as determined for financial reporting purposes for a given quarter will not usually equal the sum of distributions made
during that quarter. Distributable income for a given quarter will approximate the sum of the distributions made during the last two months of such quarter and the first month of the next quarter.
8
2. ACCOUNTING POLICIES
Basis of Accounting
The
financial statements of the Trust are prepared on the following basis and are not intended to present financial position and results of operations in conformity with accounting principles generally accepted in the United States of America
(GAAP):
|
|
|
Royalty income, net of severance and ad valorem tax, and interest income are recognized in the month in which amounts are received by the Trust (see Note 1).
|
|
|
|
Trust expenses, consisting principally of routine general and administrative costs, include payments made during the accounting period. Expenses are accrued to the extent of amounts that become payable on the next
monthly record date following the end of an accounting period. Reserves for liabilities that are contingent or uncertain in amount may also be established if considered necessary.
|
|
|
|
Royalties that are producing properties are amortized using the
unit-of-production
method. This amortization is shown as a reduction of
Trust corpus.
|
|
|
|
Distributions to Unit holders are recognized when declared by the Trustee (see Note 3).
|
The
financial statements of the Trust differ from financial statements prepared in conformity with accounting principles generally accepted in the United States of America because of the following:
|
|
|
Royalty income is recognized in the month received rather than in the month of production.
|
|
|
|
Expenses other than those expected to be paid on the following monthly record date are not accrued.
|
|
|
|
Amortization of the Royalties is shown as a reduction to Trust corpus and not as a charge to operating results.
|
|
|
|
Reserves may be established for contingencies that would not be recorded under accounting principles generally accepted in the United States of America.
|
This comprehensive basis of accounting other than GAAP corresponds to the accounting permitted for royalty trusts by the U.S. Securities and
Exchange Commission, as specified by Staff Accounting Bulletin Topic 12:E,
Financial Statements of Royalty Trusts
.
Use of
Estimates
The preparation of financial statements in conformity with the basis of accounting described above requires the Trustee to
make estimates and assumptions that affect reported amounts of certain assets, liabilities, revenues and expenses as of and for the reporting periods. Actual results may differ from such estimates.
Impairment
The Trustee
routinely reviews the Trusts royalty interests in oil and gas properties for impairment whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. If an impairment event occurs and it is determined
that the carrying value of the Trusts royalty interests may not be recoverable, an impairment will be recognized as measured by the amount by which the carrying amount of the royalty interests exceeds the fair value of these assets, which
would likely be measured by discounting projected cash flows. As of March 31, 2017, no impairment is required.
9
Distributable Income per Unit
Basic distributable income per Unit is computed by dividing distributable income by the weighted average Units outstanding. Distributable
income per Unit assuming dilution is computed by dividing distributable income by the weighted average number of Units and equivalent Units outstanding. The Trust had no equivalent Units outstanding for any period presented. Therefore, basic
distributable income per Unit and distributable income per Unit assuming dilution are the same.
New Accounting Pronouncements
There are no new pronouncements that are expected to have a significant impact on the Trusts financial statements.
Federal Tax Considerations
The Internal Revenue Service has ruled that the Trust is classified as a grantor trust for federal income tax purposes and therefore is not
subject to federal income tax at the trust level. The Unit holders are considered, for federal income tax purposes, to own the Trusts income and principal as though no trust were in existence. Accordingly, no provision for federal income tax
expense has been made in these financial statements. The income of the Trust will be deemed to have been received or accrued by each Unit holder at the time such income is received or accrued by the Trust (on the applicable monthly record date) if
the escrow arrangement discussed in Note 1 to these financial statements is respected by the Internal Revenue Service. In the absence of the escrow arrangement, Unit holders would be deemed to receive or accrue income from production from the
royalty properties (and interest income) on a daily basis, in accordance with their method of accounting, as the proceeds from production and interest thereon were received or accrued by the Trust. The Trustee is treating the escrow arrangement as
effective for federal income tax purposes and furnishes tax information to Unit holders on that basis.
10
State Tax Considerations
The Trust holds properties located in Florida, Louisiana, Mississippi, New Mexico, Oklahoma, and Texas. Unit holders should consult the
Trusts latest annual report on Form
10-K
for a summary of tax matters.
Florida does not
have a personal income tax. Florida imposes an income tax on resident and nonresident corporations (except for S corporations not subject to the
built-in-gains
tax or
passive investment income tax), which will be applicable to royalty income allocable to a corporate Unit holder from properties located within Florida.
Louisiana, Mississippi, New Mexico and Oklahoma each impose taxes applicable to both resident and nonresident individuals and/or corporations
(subject to certain exceptions for S corporations and limited liability companies, depending on their treatment for federal tax purposes), which will be applicable to royalty income allocable to a Unit holder from properties located within those
states. New Mexico and Oklahoma impose a withholding tax on payments of oil and gas proceeds derived from royalty interests. To reduce the administrative burden imposed by these rules, the Trustee has opted to allow the payors of oil and gas
proceeds to withhold on royalty payments made to the Trust. The Trust files New Mexico and Oklahoma tax returns, obtains a refund, and distributes that refund to Unit holders. Unit holders who transfer their Units before either the New Mexico or
Oklahoma tax refunds are received by the Trust or after the refunds are received but before the next Monthly Record Date will not receive any portion of the refund. As a result, such Unit holders may incur a double tax first through the
reduced distribution received from the Trust as withholding at the Trust level reduces the amount of cash available for distribution and second by the tax payment made directly to New Mexico or Oklahoma with the filing of their New Mexico or
Oklahoma income tax returns.
Texas imposes a franchise tax at a rate of .75% on gross revenues less certain deductions, as specifically
set forth in the Texas franchise tax statutes. Entities subject to tax generally include trusts and most other types of entities that provide limited liability protection, unless otherwise exempt. Trusts that receive at least 90% of their federal
gross income from designated passive sources, including royalties from mineral properties and other
non-operated
mineral interest income, and do not receive more than 10% of their income from operating an
active trade or business generally are exempt from the Texas franchise tax as passive entities. The Trust has been and expects to continue to be exempt from Texas franchise tax as a passive entity. Because the Trust should be exempt from
Texas franchise tax at the Trust level as a passive entity, each Unit holder that is considered a taxable entity under the Texas franchise tax will generally be required to include its portion of Trust revenues in its own Texas franchise tax
computation. This revenue is sourced to Texas under provisions of the Texas Administrative Code sourcing such income according to the principal place of business of the Trust, which is Texas.
Each Unit holder should consult his or her tax advisor regarding state tax requirements, if any, applicable to such persons ownership of
trust units.
3. DISTRIBUTION TO UNIT HOLDERS
The amount to be distributed to Unit holders (Monthly Income Amount) is determined on a monthly basis. The Monthly Income Amount
is an amount equal to the sum of cash received by the Trust during a monthly period (the period commencing on the day after a monthly record date and continuing through and including the next succeeding monthly record date) attributable to the
Royalties, any reduction in cash reserves and any other cash receipts of the Trust, including interest, reduced by the sum of liabilities paid and any increase in cash reserves. Unit holders of record as of the monthly record date (the 15th day of
each calendar month except in limited circumstances) are entitled to have distributed to them the calculated Monthly Income Amount for such month on or before 10 business days after the monthly record date. The Monthly Income Amount per Unit is
declared by the Trust no later than 10 days prior to the monthly record date.
The cash received by the Trust from purchasers of the
Trusts oil and gas production consists of gross sales of production less applicable severance taxes.
11
4. PAYABLES
Payables consist primarily of royalty receipts suspended pending verification of ownership interest or title, as well as amounts the Trustee
has reserved for payments of other expenses.
The Trustee believes that these payables represent an ordinary operating condition of the
Trust and that such payables will be paid or released in the normal course of business with the exception of amounts reserved for payment of expenses.
5. SUBSEQUENT EVENTS
Subsequent to
March 31, 2017, the Trust declared the following distributions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notification
Date
|
|
|
|
Monthly Record
Date
|
|
|
|
Payment
Date
|
|
|
|
Distribution
per Unit
|
|
|
|
|
|
|
|
|
April 6, 2017
|
|
|
|
April 17, 2017
|
|
|
|
April 28, 2017
|
|
|
|
$
|
.34231
|
|
|
|
|
|
|
|
|
May 4, 2017
|
|
|
|
May 15, 2017
|
|
|
|
May 30, 2017
|
|
|
|
$
|
.16798
|
|
6. CONTINGENCIES
Contingencies related to the royalty properties that are unfavorably resolved would generally be reflected by the Trust as reductions to
future royalty income payments to the Trust with corresponding reductions to cash distributions to Unit holders. The Trustee is not aware of any such items as of March 31, 2017.
* * * * *