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itureAndFixturesMember2018-12-310000097517us-gaap:PropertyPlantAndEquipmentOtherTypesMember2019-12-310000097517us-gaap:PropertyPlantAndEquipmentOtherTypesMember2018-12-31tpl:numberOfCountiesiso4217:USDutr:acre00000975172019-10-012019-12-310000097517tpl:RoyaltyInterestsInAcresMember2019-12-310000097517tpl:RoyaltyInterestsInAcresMember2018-12-310000097517tpl:AdditionalRealEstateAcquisitionsMember2019-12-310000097517tpl:AdditionalRealEstateAcquisitionsMember2019-01-012019-12-310000097517tpl:AcquisitionInConjunctionWithSaleOf18thInterestRoyaltyAcresMember2018-12-310000097517tpl:AcquisitionInConjunctionWithSaleOf18thInterestRoyaltyAcresMember2018-01-012018-12-310000097517tpl:AdditionalRealEstateAcquisitionsMember2018-12-310000097517tpl:AdditionalRealEstateAcquisitionsMember2018-01-012018-12-310000097517us-gaap:FixedIncomeSecuritiesMember2019-01-012019-12-310000097517us-gaap:EquitySecuritiesMember2019-01-012019-12-310000097517tpl:InflationRateMember2019-01-012019-12-310000097517us-gaap:FixedIncomeSecuritiesMembersrt:MinimumMember2019-12-310000097517us-gaap:FixedIncomeSecuritiesMembersrt:MaximumMember2019-12-310000097517srt:MinimumMemberus-gaap:EquitySecuritiesMember2019-12-310000097517us-gaap:EquitySecuritiesMembersrt:MaximumMember2019-12-310000097517us-gaap:CashAndCashEquivalentsMember2019-12-310000097517us-gaap:CashAndCashEquivalentsMemberus-gaap:FairValueInputsLevel1Member2019-12-310000097517us-gaap:CashAndCashEquivalentsMemberus-gaap:FairValueInputsLevel2Member2019-12-310000097517us-gaap:CashAndCashEquivalentsMemberus-gaap:FairValueInputsLevel3Member2019-12-310000097517us-gaap:EquitySecuritiesMember2019-12-310000097517us-gaap:EquitySecuritiesMemberus-gaap:FairValueInputsLevel1Member2019-12-310000097517us-gaap:EquitySecuritiesMemberus-gaap:FairValueInputsLevel2Member2019-12-310000097517us-gaap:EquitySecuritiesMemberus-gaap:FairValueInputsLevel3Member2019-12-310000097517us-gaap:EquityFundsMember2019-12-310000097517us-gaap:EquityFundsMemberus-gaap:FairValueInputsLevel1Member2019-12-310000097517us-gaap:EquityFundsMemberus-gaap:FairValueInputsLevel2Member2019-12-310000097517us-gaap:EquityFundsMemberus-gaap:FairValueInputsLevel3Member2019-12-310000097517us-gaap:FixedIncomeFundsMember2019-12-310000097517us-gaap:FairValueInputsLevel1Memberus-gaap:FixedIncomeFundsMember2019-12-310000097517us-gaap:FairValueInputsLevel2Memberus-gaap:FixedIncomeFundsMember2019-12-310000097517us-gaap:FairValueInputsLevel3Memberus-gaap:FixedIncomeFundsMember2019-12-310000097517us-gaap:TaxableMunicipalBondsMember2019-12-310000097517us-gaap:TaxableMunicipalBondsMemberus-gaap:FairValueInputsLevel1Member2019-12-310000097517us-gaap:TaxableMunicipalBondsMemberus-gaap:FairValueInputsLevel2Member2019-12-310000097517us-gaap:TaxableMunicipalBondsMemberus-gaap:FairValueInputsLevel3Member2019-12-310000097517us-gaap:FairValueInputsLevel1Member2019-12-310000097517us-gaap:FairValueInputsLevel2Member2019-12-310000097517us-gaap:FairValueInputsLevel3Member2019-12-310000097517us-gaap:CashAndCashEquivalentsMember2018-12-310000097517us-gaap:CashAndCashEquivalentsMemberus-gaap:FairValueInputsLevel1Member2018-12-310000097517us-gaap:CashAndCashEquivalentsMemberus-gaap:FairValueInputsLevel2Member2018-12-310000097517us-gaap:CashAndCashEquivalentsMemberus-gaap:FairValueInputsLevel3Member2018-12-310000097517us-gaap:EquitySecuritiesMember2018-12-310000097517us-gaap:EquitySecuritiesMemberus-gaap:FairValueInputsLevel1Member2018-12-310000097517us-gaap:EquitySecuritiesMemberus-gaap:FairValueInputsLevel2Member2018-12-310000097517us-gaap:EquitySecuritiesMemberus-gaap:FairValueInputsLevel3Member2018-12-310000097517us-gaap:EquityFundsMember2018-12-310000097517us-gaap:EquityFundsMemberus-gaap:FairValueInputsLevel1Member2018-12-310000097517us-gaap:EquityFundsMemberus-gaap:FairValueInputsLevel2Member2018-12-310000097517us-gaap:EquityFundsMemberus-gaap:FairValueInputsLevel3Member2018-12-310000097517us-gaap:FixedIncomeFundsMember2018-12-310000097517us-gaap:FairValueInputsLevel1Memberus-gaap:FixedIncomeFundsMember2018-12-310000097517us-gaap:FairValueInputsLevel2Memberus-gaap:FixedIncomeFundsMember2018-12-310000097517us-gaap:FairValueInputsLevel3Memberus-gaap:FixedIncomeFundsMember2018-12-310000097517us-gaap:FairValueInputsLevel1Member2018-12-310000097517us-gaap:FairValueInputsLevel2Member2018-12-310000097517us-gaap:FairValueInputsLevel3Member2018-12-3100000975172019-03-152019-03-150000097517tpl:SubSharesMembertpl:CashDividendMember2019-03-152019-03-150000097517tpl:SubSharesMembertpl:SpecialDividendMember2019-03-152019-03-1500000975172018-03-162018-03-160000097517tpl:SubSharesMembertpl:CashDividendMember2018-03-162018-03-160000097517tpl:SubSharesMembertpl:SpecialDividendMember2018-03-162018-03-160000097517tpl:SubSharesMember2019-01-012019-12-310000097517tpl:SubSharesMember2018-01-012018-12-310000097517tpl:SubSharesMember2017-01-012017-12-310000097517tpl:LandAndResourceManagementSegmentMember2019-01-012019-12-310000097517tpl:LandAndResourceManagementSegmentMember2018-01-012018-12-310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PART I
Statements in this Annual Report on Form 10-K that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including statements regarding management’s expectations, hopes, intentions or strategies regarding the future. Forward-looking statements include statements regarding the Trust’s future operations and prospects, the markets for real estate in the areas in which the Trust owns real estate, applicable zoning regulations, the markets for oil and gas, production limits on prorated oil and gas wells authorized by the Railroad Commission of Texas, expected competition, management’s intent, beliefs or current expectations with respect to the Trust’s future financial performance and other matters. All forward-looking statements in this Report are based on information available to us as of the date this Report is filed with the Securities and Exchange Commission (the “SEC”), and we assume no responsibility to update any such forward-looking statements, except as required by law. All forward-looking statements are subject to a number of risks, uncertainties and other factors that could cause our actual results, performance, prospects or opportunities to differ materially from those expressed in, or implied by, these forward-looking statements. These risks, uncertainties and other factors include, but are not limited to, the factors discussed in Item 1A “Risk Factors” and Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Item 1. Business.
General
Texas Pacific Land Trust (which, together with its subsidiaries as the context requires, may be referred to as “Texas Pacific”, the “Trust”, “our”, “we” or “us”) is one of the largest landowners in the State of Texas with approximately 900,000 acres of land in West Texas. Texas Pacific was organized under a Declaration of Trust, dated February 1, 1888, to receive and hold title to extensive tracts of land in the State of Texas, previously the property of the Texas and Pacific Railway Company, and to issue transferable Certificates of Proprietary Interest pro rata to the holders of certain debt securities of the Texas and Pacific Railway Company. Our Trustees are empowered under the Declaration of Trust to manage the lands with all the powers of an absolute owner.
Our surface and royalty ownership allow steady revenue generation through the entire value chain of oil and gas development. While we are not an oil and gas producer, we benefit from various revenue sources throughout the life cycle of a well. During the initial development phase where infrastructure for oil and gas development is constructed, we receive fixed fee payments for use of our land and revenue for sales of materials (caliche) used in the construction of the infrastructure. During the drilling and completion phase, we generate revenue for providing sourced water and/or treated produced water in addition to fixed fee payments for use of our land. During the production phase, we receive revenue from our oil and gas royalty interests and also revenues related to saltwater disposal on our land. In addition, we generate revenue from a variety of land uses including midstream infrastructure projects and processing facilities as hydrocarbons are processed and transported to market.
Conversion Exploration Committee
On July 30, 2019, the Trust and Trustees John R. Norris III and David E. Barry entered into a settlement
agreement (the “Settlement Agreement”) with Horizon Kinetics LLC, Horizon Kinetics Asset Management LLC, Murray Stahl,
SoftVest, L.P., SoftVest Advisors, LLC, Eric L. Oliver, ART-FGT Family Partners Limited, Tessler Family Limited Partnership and Allan R. Tessler (the “Investor Group”) with respect to the previous proxy contest mounted by the Investor Group and the then pending litigation between the parties. Pursuant to the Settlement Agreement, the parties agreed, among other things, (i) to dismiss the pending litigation captioned Case 3:19-cv-01224-B Texas Pacific Land Trust et al v. Oliver in the U.S. District Court for the Northern District of Texas in Dallas, (ii) that the third Trustee position would remain vacant at least until the end of the Restricted Period (as defined in the Settlement Agreement), (iii) to add three new members, including Mr. Stahl and Mr. Oliver, to the Conversion Exploration Committee (the “Committee”), which was formed in June, 2019 to evaluate the conversion of the Trust into a C-corporation (the “Conversion”), (iv) the Committee would continue to be governed by its charter dated June 23, 2019, as amended and restated on July 30, 2019, and would complete its work by December 31, 2019, unless the Committee otherwise determined, (v) if the Committee recommends a plan of Conversion and proposes the approval of the Trust’s sub-shareholders, the Investor Group would be required to (1) vote all of the Sub-share Certificates of Proprietary Interest (“Sub-shares”) beneficially owned by it in favor of such Conversion at a special meeting called therefor by the Trustees, and (2) privately and publicly support such Conversion through a press release as an exempt solicitation, (vi) if the Trustees decide, within 30 days of recommendation (the “Decision Period”) to implement such plan of Conversion in the form recommended by the Committee in all material respects, (1) the Investor Group would be prohibited from challenging such Conversion in court or otherwise prior to the end of the Restricted Period, and (2) the parties would grant
mutual general releases in one another’s favor upon completion of such Conversion, and (vii) to abide by other customary terms of settlement.
The Committee met on a regular basis throughout the remainder of 2019 and into January 2020 to consult with the Trust's advisors regarding steps to effectuate the Trust's conversion or reorganization to a corporate structure.
On January 22, 2020, the Committee announced that, following a deliberation process initiated in June 2019, the Committee recommended to the Trustees that the Trust convert from a trust into a Delaware C-corporation. The Committee analyzed reasons for and alternatives to conversion with support from a team of advisors to the Trust, including financial advisor Credit Suisse and outside legal counsel. The Committee’s deliberations focused particularly on tax, corporate, corporate governance, accounting and business implications of the proposed conversion.
On February 20, 2020, the Trust and the Investor Group entered into the First Amendment to Settlement Agreement (the “Settlement Agreement Amendment”). The Settlement Agreement Amendment provides that the Decision Period will extend through March 6, 2020.
The decision of whether to convert the Trust into a C-corporation is subject to the determination of the Trustees. The Committee recommended that, if the Trustees elect to authorize the conversion, the conversion should follow a process intended to ensure a smooth transition that would be tax-free to shareholders. As proposed, the Trust would transfer all its assets, including cash, land, Texas Pacific Water Resources (“TPWR”), and other assets, to a wholly-owned limited liability company subsidiary of the Trust (“TPL Holdco”). The Trust would then contribute all of the equity in TPL Holdco, holding all of the Trust’s assets, to a newly-created corporation (“TPL Corporation”). Shareholders of the Trust would receive an amount of shares in TPL Corporation proportional to their ownership of shares in the Trust. When this process as recommended is completed, shares of the Trust would be cancelled. Shareholders of the Trust would not need to take any action to receive the new shares in TPL Corporation.
The process recommended by the Committee would require filings with the SEC and approval of the listing of the new shares by the New York Stock Exchange (the “NYSE”).
Business Segments
Land and Resource Management
Our Land and Resource Management segment encompasses the business of managing the approximately 900,000 acres of land and related resources in West Texas owned by the Trust. The revenue streams of this segment principally consist of royalties from oil and gas, revenues from easements and commercial leases, and land and material sales.
We are not an oil and gas producer. Rather, our oil and gas revenue is derived from our oil and gas royalty interests. Thus, in addition to being subject to fluctuations in response to the market prices for oil and gas, our oil and gas royalty revenues are also subject to decisions made by the owners and operators of the oil and gas wells to which our royalty interests relate as to investments in and production from those wells.
Our revenue from easements is generated from easement contracts covering activities such as oil and gas pipelines and subsurface wellbore easements. The majority of our easements have a thirty-plus year term but subsequently renew every ten years with an additional payment. We also enter into agreements with operators and mid-stream companies to lease land from us, primarily for facilities and roads.
The demand for, and sale price of, particular tracts of land is influenced by many factors beyond our control, including general economic conditions, the rate of development in nearby areas and the suitability of the particular tract for commercial uses prevalent in western Texas.
Operations
Revenues from the Land and Resource Management segment for the last three years were as follows (amounts presented in millions):
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Years Ended December 31,
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2019
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2018
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2017
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Segment
Revenue
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% of Total
Consolidated
Revenue
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Segment
Revenue
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% of Total
Consolidated
Revenue
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Segment
Revenue
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% of Total
Consolidated
Revenue
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Oil and gas royalties (1)
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$
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154.7
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31
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%
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$
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123.8
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41
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%
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$
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58.4
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38
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%
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Easements and other surface-related income
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73.1
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15
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%
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63.9
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21
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%
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64.2
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42
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%
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Sale of oil and gas royalty interests
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—
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—
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%
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18.9
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6
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%
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—
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—
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%
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Land sales and other operating revenue
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135.5
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28
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%
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4.9
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2
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%
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0.7
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—
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%
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Total Revenue - Land and Resource Management segment
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$
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363.3
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74
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%
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$
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211.5
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70
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%
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$
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123.3
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80
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%
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(1) On September 14, 2017, we settled the previously disclosed arbitration case with Chevron U.S.A., Inc. involving claims for underpayment of royalties. The Trust received $7.7 million as part of the settlement, including royalties that will be paid to the Trust on additional wells under several community leases. The settlement is included in oil and gas royalties for the year ended December 31, 2017.
Land Activity
For the year ended December 31, 2019, we sold approximately 21,986 acres for an aggregate sales price of approximately $113.0 million, an average price of approximately $5,141 per acre. Land sales for 2019 include a $100 million land sale for approximately 14,000 surface acres in Loving and Reeves Counties. The sale excluded any mineral or royalty interest in the lands conveyed. Additionally, the Trust conveyed approximately 5,620 acres of land in exchange for approximately 5,545 acres of land, all in Culberson County. As we had no cost basis in the land conveyed, we recognized land sales revenue of $22.0 million for the year ended December 31, 2019.
For the year ended December 31, 2019, the Trust acquired approximately 21,671 acres (Culberson, Glasscock, Loving and Reeves Counties) of land in Texas for an aggregate purchase price of approximately $74.4 million, an average of approximately $3,434 per acre (excludes land acquired through the land exchange as previously discussed).
Competition
Our Land and Resource Management segment does not have peers, as such, in that it sells, leases and generally manages land owned by the Trust and, to that extent, any owner of property located in areas comparable to the Trust is a potential competitor.
Water Services and Operations
Our Water Services and Operations segment encompasses the business of providing full-service water offerings to
operators in the Permian Basin through our wholly owned subsidiary, TPWR, a single member LLC. Our significant surface ownership in West Texas provides TPWR with a unique opportunity to provide multiple full-service water offerings to operators.
These full-service water offerings include, but are not limited to, water sourcing, produced-water gathering/treatment, infrastructure development, disposal solutions, water tracking, analytics and well testing services. TPWR is committed to sustainable water development with significant focus on the large-scale implementation of recycled water operations.
Currently, the revenue streams of this segment principally consist of revenue generated from sales of sourced and treated water as well as revenue from produced water royalties. Prior to the formation of TPWR, we entered into agreements with energy companies and oilfield service businesses to allow such companies to explore for water, drill water wells, construct
water-related infrastructure and purchase water sourced from land that we own. Energy businesses use water for their oil and gas projects while service businesses (i.e., water management service companies) operate water facilities to produce and sell water to energy businesses. While we continue to collect water royalties under these legacy agreements, the overall contribution to revenue from these legacy agreements has declined in the recent years and is expected to continue to decline in the future.
Operations
Revenues from our Water Services and Operations segment for the last three years were as follows (amounts presented in millions):
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Years Ended December 31,
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2019
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2018
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2017
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Segment
Revenue
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% of Total
Consolidated
Revenue
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Segment
Revenue
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% of Total
Consolidated
Revenue
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Segment
Revenue
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% of Total
Consolidated
Revenue
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Water sales and royalties
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$
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85.0
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17
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%
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$
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63.9
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21
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%
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$
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25.5
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16
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%
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Easements and other surface-related income
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42.2
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9
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%
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24.8
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9
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%
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5.8
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4
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%
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Total Revenue – Water Services and Operations segment
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$
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127.2
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26
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%
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$
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88.7
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30
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%
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$
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31.3
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20
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%
|
Our first sales from internally developed projects were made during the fourth quarter of 2017. The number of barrels of sourced and treated water sold during the year ended December 31, 2019 increased 44.0% over the same period in 2018.
During the year ended December 31, 2019, the Trust invested approximately $30.2 million in TPWR projects to develop and enhance water sourcing and water treatment assets with $21.0 million of this occurring during the first six months of 2019.
Competition
While there is competition in the water service business in West Texas, we believe our position as a significant landowner of approximately 900,000 acres in West Texas gives us a unique advantage over our competitors who must negotiate with existing landowners to source water and then for the right of way to deliver the water to the end user.
Major Customers
During 2019, we received $112.7 million, or approximately 23% of our total revenues (prior to deferrals), which included $100.0 million of land sales and $11.3 million of oil and gas royalties from WPX Energy Permian, LLC and $67.8 million, or approximately 14% of our total revenues (prior to deferrals), which included $33.7 million of oil and gas royalties, $24.5 million of easements and other surface-related income (prior to deferrals) and $9.6 million of water sales and royalties from Anadarko E&P Onshore, LLC.
Seasonality
The business of Texas Pacific is not seasonal in nature, as that term is generally understood, although due to the nature of our operations, our revenue may vary widely from year to year and quarter to quarter.
Regulations
We are subject to various federal, state and local laws. Management believes that our operations comply in all material respects with applicable laws and regulations and that the existence and enforcement of such laws and regulations have no more restrictive effect on our method of operations than on other companies similar to the Trust.
We cannot determine the extent to which new legislation, new regulations or changes in existing laws or regulations may affect our future operations.
Environmental Considerations
Compliance with Federal, State and local provisions that have been enacted or adopted regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, have had no material effect upon the capital expenditures, earnings and competitive position of Texas Pacific. To date, Texas Pacific has not been called upon to expend any funds for these purposes.
Employees
As of December 31, 2019, Texas Pacific had 94 full-time employees.
Available Information
The Trust makes available, free of charge, on or through its website copies of its Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports as soon as reasonably practicable after they are electronically filed with, or furnished to, the SEC pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”). Such reports are available there at http://www.sec.gov and on our website at www.TPLTrust.com. The information contained on our website is not part of this Report.
Item 1A. Risk Factors.
An investment in our securities involves a degree of risk. The risks described below are not the only ones facing us. Additional risks not presently known to us or that we currently deem immaterial may also have a material adverse effect on us. If any of the following risks actually occur, our financial condition, results of operations, cash flows or business could be harmed. In that case, the market price of our securities could decline and you could lose part or all of your investment.
Global economic conditions may materially and adversely affect our business.
Our business and results of operations are affected by international, national and regional economic conditions. A recurrence of recessionary conditions in the United States and elsewhere may lead to reduced industrial production which, in turn, may lead to lower demand and lower prices for oil and gas, which may adversely affect our results of operations.
We face the risks of doing business in a new and rapidly evolving market and may not be able to successfully address such risks and achieve acceptable levels of success or profits.
We have encountered and may continue to encounter the challenges, uncertainties and difficulties frequently experienced in new and rapidly evolving markets with respect to the business of TPWR, including:
•limited operating experience;
•start-up costs for a new line of business;
•lack of sufficient customers or loss of significant customers for the new line of business; and
•difficulties in managing potentially rapid growth.
The Trust’s oil and gas royalty revenue is dependent upon the market prices of oil and gas which fluctuate.
The oil and gas royalties which the Trust receives are dependent upon the market prices for oil and gas. The market prices for oil and gas are subject to national and international economic and political conditions and, in the past, have been subject to significant price fluctuations. Price fluctuations for oil and gas have been particularly volatile in recent years. When lower market prices for oil and gas occur, they will have an adverse effect on our oil and gas royalty revenues.
The Trust is not an oil and gas producer. Its revenues from oil and gas royalties are subject to the actions of others.
The Trust is not an oil and gas producer. Its oil and gas income is derived primarily from perpetual non-participating oil and gas royalty interests which it has retained. As oil and gas wells age, the costs of production may increase and their capacity may decline absent additional investment. However, the owners and operators of the oil and gas wells make all decisions as to investments in, and production from, those wells and the Trust’s royalties are dependent upon decisions made by those operators, among other factors. The Railroad Commission of the State of Texas sets authorized production levels for pro-rated wells by regulation. In the past, the Trust’s income from oil and gas royalties has been limited by the production levels authorized by the Railroad Commission and we cannot assure you that they may not be so limited in the future. Accordingly, a significant portion of our revenues is reliant on the management of third parties, over whom we have no control. There can be no assurance that such third parties will take actions or make decisions that will be beneficial to the Trust, which could result in adverse effects on our financial results and performance.
Our revenues from the sale of land are subject to substantial fluctuation. Land sales are subject to many factors that are beyond our control.
Land sales vary widely from year to year and quarter to quarter. The total dollar amount, the average price per acre, and the number of acres sold in any one year or quarter should not be assumed to be indicative of future land sales. The demand for, and the sale price of, any particular tract of the Trust’s land is influenced by many factors, including the national and local economies, rate of oil and gas well development by operators, the rate of residential and commercial development in nearby areas, livestock carrying capacity and the condition of the local agricultural industry, which itself is influenced by range conditions and prices for livestock and agricultural products. The Trust’s ability to sell land is, therefore, largely dependent on the actions of adjoining landowners.
The impact of government regulation on TPWR could adversely affect our business.
The business of TPWR is subject to applicable state and federal laws and regulations, including laws and regulations on environmental and safety matters. These laws and regulations may increase the costs and timing of planning, designing, drilling, installing, operating and abandoning water wells and treatment facilities. TPWR’s business could be affected by problems, slowdowns or other stoppages to operations of providing water treatment critical to the success of TPWR.
The loss of key members of our management team, or difficulty attracting and retaining experienced technical personnel, could reduce our competitiveness and prospects for future success.
The successful implementation of our strategies and handling of other issues integral to our future success will depend, in part, on our experienced management team, including with respect to the business of TPWR. The loss of key members of our management team could have an adverse effect on our business. If we cannot retain our experienced personnel or attract additional experienced personnel, our ability to compete could be harmed.
If the liability of holders of Certificates of Proprietary Interest and Sub-shares were to be found to be governed by the laws of Texas, holders of Certificates of Proprietary Interest and Sub-shares might be held to have personal liability for claims against the Trust, to the extent such claims exceeded the assets of the Trust.
The Declaration of Trust, which established the Trust, was executed and delivered in New York. Under the laws of the State of New York, the holders of Certificates of Proprietary Interest and Sub-shares are not subject to any personal liability for the acts or obligations of the Trust. The assets of the Trust are located in Texas. Under the laws of the State of Texas, the holders of Certificates of Proprietary Interest and Sub-shares may be held personally liable with respect to claims against the Trust, but only after the assets of the Trust first have been exhausted. Thus, if a court were to hold that the liability of holders of Certificates of Proprietary Interest and Sub-shares for obligations is governed by the laws of Texas, rather than New York, it is possible that holders of Certificates of Proprietary Interest and Sub-shares might be held to have personal liability for claims against the Trust to the extent such claims exceeded all of the Trust’s assets.
The Trustees are not subject to annual election and, as a result, the ability of the holders of Certificates of Proprietary Interest and Sub-shares to influence the policies of the Trust may be limited.
Directors of a corporation are generally subject to election at each annual meeting of stockholders or, in the case of staggered boards, at regular intervals. Under the Declaration of Trust, however, the Trust is not required to hold annual meetings of holders of Certificates of Proprietary Interest and Sub-shares to elect Trustees and Trustees generally hold office until their death, resignation or disqualification. As a result, the ability of holders of Certificates of Proprietary Interest and Sub-shares to effect changes in the Board of Trustees, and the policies of the Trust, is significantly more limited than that of the stockholders of a corporation.
Our results of operations for any quarter are not necessarily indicative of our results of operations for a full year.
Revenues from oil and gas royalties may fluctuate from quarter to quarter based upon market prices for oil and gas and production decisions made by the operators. Our other revenue streams, which include, but are not limited to, water sales and royalties, easements and other surface-related income and sales of land, may also fluctuate from quarter to quarter. As a result, the results of our operations for any particular quarter are not necessarily indicative of the results of operations for a full year.
Any governance or structural changes to the Trust could adversely affect the trading price and/or form of our Certificates of Proprietary Interest and Sub-shares.
Our Trustees formed a conversion exploration committee (the “Committee”) in June 2019 to evaluate, from a corporate, corporate governance, tax, accounting and business perspective, whether the Trust should be converted into a C-corporation or, in the alternative, whether the Trust should remain a business trust (with potential amendments to the Trust’s
Declaration of Trust). The Committee has made a non-binding recommendation to the Trustees that the Trust be converted into a Delaware C-corporation, and that such conversion be done in a certain way. There can be no assurance when any structural or governance change, if any, would be made that would affect the securities held by our sub-shareholders, our governance or our Declaration of Trust and how our sub-shareholders and investors may view any such structural or governance change. There can be no assurance of the terms of such changes, if any, or their effect on our securities or their trading price. The trading price of our securities may be adversely affected by any decision of the Trustees to convert the Trust to a C-corporation or to remain as a trust.
Item 1B. Unresolved Staff Comments.
Not Applicable.
Item 2. Properties.
As of December 31, 2019, Texas Pacific owned the surface estate in approximately 901,787 acres of land, comprised of numerous separate tracts, located in 19 counties in the western part of Texas. There were no material liens or encumbrances on the Trust’s title to the surface estate in those tracts. Additionally, the Trust also owns a 1/128th nonparticipating perpetual oil and gas royalty interest (“NPRI”) under approximately 84,934 acres of land and a 1/16th NPRI under approximately 370,737 acres of land in the western part of Texas. The following table shows our surface ownership and NPRI ownership by county as of December 31, 2019:
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Number of Acres
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|
|
|
|
County
|
|
Surface
|
|
1/128th
Royalty
|
|
1/16th
Royalty
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Callahan
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|
—
|
|
—
|
|
80
|
Coke
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|
—
|
|
—
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|
1,183
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Concho
|
|
3,401
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|
—
|
|
—
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Crane
|
|
3,622
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|
265
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|
5,198
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Culberson
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|
301,079
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|
—
|
|
111,513
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Ector
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|
19,888
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|
33,633
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|
11,793
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El Paso
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|
16,613
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|
—
|
|
—
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Fisher
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|
—
|
|
—
|
|
320
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Glasscock
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|
27,245
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|
3,600
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|
11,111
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Howard
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|
4,788
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|
3,099
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|
1,840
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Hudspeth
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|
162,119
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|
—
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|
1,008
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Jeff Davis
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|
13,117
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|
—
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|
7,555
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Loving
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|
63,677
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|
6,107
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48,066
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Midland
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|
28,372
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12,945
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|
13,120
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Mitchell
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|
3,842
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|
1,760
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586
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Nolan
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|
1,600
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|
2,488
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|
3,157
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Palo Pinto
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|
—
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|
—
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|
800
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Pecos
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|
43,407
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|
320
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|
16,895
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Presidio
|
|
—
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|
—
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|
3,200
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Reagan
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|
—
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|
6,162
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|
1,274
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Reeves
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|
188,650
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|
3,013
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|
116,691
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Stephens
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|
—
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|
2,817
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|
160
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Sterling
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|
5,212
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|
640
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|
2,080
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Taylor
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|
690
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|
—
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|
966
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Upton
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|
6,661
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|
6,903
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|
9,101
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Winkler
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|
7,804
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|
1,182
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|
3,040
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Total
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|
901,787
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|
84,934
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370,737
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As of December 31, 2019, the Trust owned additional royalty interests in the following counties:
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County
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Number of Net Royalty Acres(1)
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Glasscock
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1,059
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Howard
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770
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Martin
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489
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Midland
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|
450
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Reagan
|
|
115
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Upton
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191
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Total
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3,074
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(1) Normalized to 1/8th.
The Trust leases office space in Dallas, Texas for its corporate headquarters and office space in Midland, Texas for TPWR.
Item 3. Legal Proceedings.
Texas Pacific is not involved in any material pending legal proceedings.
Item 4. Mine Safety Disclosures.
Not Applicable.
PART III
Item 10. Directors, Executive Officers and Corporate Governance.
The Trustees hold office until their death, resignation or disqualification. The General Agent, Chief Executive Officer and Secretary and the General Agent and Chief Financial Officer hold office until their death, resignation, discharge or retirement. No Trustee or executive officer was selected to be an officer pursuant to any arrangement or understanding between him and any other person or persons other than the Trustees acting solely in their capacity as such.
Trustees
John R. Norris III, 66, has served as a Trustee since June 2000 and as Co-Chairman of the Trustees since February 2019. Prior to his election as a Trustee, he advised and represented the Trust in legal matters for more than 17 years. Mr. Norris is currently a partner in the Dallas law firm of Norris & Weber, PLLC. He has been board certified in Estate Planning and Probate Law by the Texas Board of Legal Specialization since 1998. We believe Mr. Norris’ qualifications to serve as a Trustee include his legal expertise and extensive background as a practicing attorney in Dallas, Texas which allows him to provide counsel and insight to his fellow Trustees and management with respect to the various legal issues which the Trust faces.
David E. Barry, 74, has served as a Trustee since January 2017 and as Co-Chairman of the Trustees since February 2019. He is the President of Tarka Resources, Inc., which is engaged in oil and gas exploration in Texas, Oklahoma and Louisiana. He has served as President of Tarka Resources, Inc. and Tarka, Inc. since 2012 and 2014, respectively, continuing through their merger in 2016. Mr. Barry is also President of Sidra Real Estate, Inc., a real estate company that owns commercial properties including three office buildings in Texas. Formerly, Mr. Barry was a partner of the law firm of Kelley Drye & Warren LLP (“Kelley Drye”) where he represented the Trust for 30 years. Mr. Barry is a member of the bar of New York State and retired as a member of the bar of the State of Connecticut. We believe Mr. Barry’s qualifications to serve as a Trustee include his legal expertise and knowledge gained over a 49 year career at Kelley Drye, including representing the Trust for many years prior to his election as a Trustee, as well as his experience in commercial real estate including in Texas.
Executive Officers
Tyler Glover, 35, has served as Chief Executive Officer, Co-General Agent and Secretary of the Trust since November 2016 and President and Chief Executive Officer of Texas Pacific Water Resources since its formation in June 2017. Prior to his appointment as CEO, Mr. Glover previously served as Assistant General Agent from December 2014 to November 2016 and Field Agent from September 2011 through December 2014. Prior to his employment with the Trust, Mr. Glover was an independent landman in the Permian Basin.
Robert J. Packer, 50, has served as Chief Financial Officer of the Trust since December 2014 and has been Co-General Agent since November 2016. Mr. Packer served as Accounting Supervisor for the Trust from March 2011 until his appointment as CFO in December 2014. Prior to his tenure at the Trust, Mr. Packer was Controller at StarCrest Realty. He is a Certified Public Accountant in the State of Texas.
Sameer Parasnis, 45, has served as Chief Commercial Officer and Executive Vice President since July 2019. Prior to joining the Trust, Mr. Parasnis served as a Managing Director of Stifel Financial Corporation's oil and gas investment banking team in Houston, Texas. Prior to his time at Stifel, Mr. Parasnis spent the majority of his 20 plus year finance career in oil and gas investment banking at Credit Suisse where he advised companies on equity capital markets, debt capital markets and strategic merger and acquisition transactions with considerable focus on the Permian Basin.
Significant Employees
Robert A. Crain, 41, has served as Executive Vice President of TPWR since its formation in June 2017. Prior to joining TPWR, Mr. Crain was Water Resources Manager with EOG Resources where he led the development of EOG’s water resource development efforts across multiple basins including the Permian and Eagleford. During his career, he has successfully developed multiple large-scale sourcing, distribution and treatment systems across multiple platforms and industries.
Code of Ethics
The Trust has adopted a Code of Conduct and Ethics applicable to its Chief Executive Officer, Chief Financial Officer and certain other employees. A copy of the Code of Ethics has been made available on the Trust’s corporate website. We maintain our website at www.TPLTrust.com. The information contained on our website is not part of this Report. We intend to disclose any amendment to, or waiver of, a provision of our Code of Conduct by filing a Current Report on Form 8-K with the SEC.
Nominating, Compensation and Governance Committee; Changes in Procedures Regarding Nomination of Trustees
There have been no material changes to the procedures by which security holders may recommend nominees to the Trust’s Board of Trustees. The Trust has a standing Nominating, Compensation and Governance Committee. The current members of the Nominating, Compensation and Governance Committee are Messrs. Norris and Barry. The Nominating, Compensation and Governance Committee has adopted a formal written charter (the “Nominating, Compensation and Governance Charter”). The Nominating, Compensation and Governance Committee is responsible for identifying and evaluating potential trustees in the event that a vacancy arises, determining compensation of the Trustees and the executive officers, and overseeing corporate governance matters. The Nominating, Compensation and Governance Charter is available on the Trust’s Internet website at www.TPLTrust.com.
Audit Committee
The Trust has a standing Audit Committee. The current members of the Audit Committee are Messrs. Barry and Norris. The Audit Committee has adopted a formal written charter (the “Audit Charter”). The Audit Committee is responsible for ensuring that the Trust has adequate internal controls and is required to meet with the Trust’s auditors to review these internal controls and to discuss other financial reporting matters. The Audit Committee is also responsible for the appointment, pre-approval of work, compensation and oversight of the auditors. The Audit Charter is available on the Trust’s Internet website at www.TPLTrust.com.
The Board of Trustees has determined that no current member of the Board of Trustees serving on the Trust’s Audit Committee would meet the requirements of the definition of “audit committee financial expert” set forth in the applicable rules of the SEC. The terms of the Trust, which was established in 1888, and governing law would require an amendment of the Trust in order to add new Trustees who would satisfy the requirements of the definition. The Audit Committee consists of two independent Trustees, each of whom has been determined by the Board of Trustees to be qualified, in their judgment, to monitor the performance of management, the Trust’s internal accounting operations and the independent auditors and to be qualified to monitor the disclosures of the Trust. In addition, the Audit Committee has the ability to retain its own independent accountants, attorneys and other advisors, whenever it deems appropriate, to advise it.
Item 11. Executive Compensation.
Compensation Discussion and Analysis
The Trust’s compensation program is designed to reward the performance of the Named Executive Officers (as defined below) in achieving the Trust’s primary goals of protecting and maintaining the assets of the Trust. The compensation program consists principally of a salary and an annual cash bonus. Base salaries provide our Named Executive Officers with a steady income stream that is not contingent on the Trust’s performance, while the addition of a cash bonus allows the Nominating, Compensation and Governance Committee flexibility to recognize and reward the Named Executive Officers’ contributions to the Trust’s performance in a given year. Salaries are reviewed annually and salary increases and the amounts of cash bonuses are determined by the Nominating, Compensation and Governance Committee of the Trustees based upon an evaluation of the Named Executive Officer’s performance against the goals and objectives of the Trust in accordance with the relevant employment agreements in effect. See “Employment Agreements” below. In accordance with the employment agreements, final bonus amounts for a completed year may be finalized during the first quarter of the following year. Differences in salary for the Named Executive Officers may reflect the differing responsibilities of their respective positions, the differing levels of experience of the individuals and internal pay equity considerations.
The Trust has not incorporated equity-related or other long-term compensation elements in its compensation programs. The Declaration of Trust pursuant to which the Trust was created empowers the Trustees to manage the lands with all the powers of an absolute owner. At their discretion, the Trustees may pay dividends to the certificate holders or repurchase and
cancel outstanding certificates. In view of that general directive to the Trustees, the issuance of equity to executive officers has not been made a part of the Trust’s compensation program.
As part of its compensation program the Trust maintains both a qualified defined benefit pension plan and a qualified defined contribution plan which are both available to employees generally, as well as to the Named Executive Officers. These plans are designed to assist employees in planning adequately for their retirement.
The Nominating, Compensation and Governance Committee has the sole authority to determine the compensation of the Named Executive Officers.
Summary Compensation Table
The following table sets forth information concerning compensation for services in all capacities awarded to, earned by, or paid to, the Trust’s Chief Executive Officer, its Chief Financial Officer and its Chief Commercial Officer, who are its only executive officers (collectively, the “Named Executive Officers”):
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Name and Position
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Year
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|
Salary
|
|
Bonus (1)
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|
Change in
Actuarial Present
Value of
Accumulated
Benefits (2)
|
|
All Other
Compensation (3)(4)
|
|
Total
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Tyler Glover
|
|
2019
|
|
$
|
800,000
|
|
|
$
|
2,900,000
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|
|
$
|
70,515
|
|
|
$
|
19,000
|
|
|
$
|
3,789,515
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|
General Agent, Chief Executive Officer and Secretary
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|
2018
|
|
$
|
480,167
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|
|
$
|
1,800,000
|
|
|
$
|
13,358
|
|
|
$
|
18,500
|
|
|
$
|
2,312,025
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|
|
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2017
|
|
$
|
381,250
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|
|
$
|
300,000
|
|
|
$
|
24,810
|
|
|
$
|
18,000
|
|
|
$
|
724,060
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
Robert J. Packer
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|
2019
|
|
$
|
800,000
|
|
|
$
|
2,900,000
|
|
|
$
|
101,139
|
|
|
$
|
32,866
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|
|
$
|
3,834,005
|
|
General Agent and Chief Financial Officer
|
|
2018
|
|
$
|
480,167
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|
|
$
|
1,800,000
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|
|
$
|
30,611
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|
|
$
|
18,500
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|
|
$
|
2,329,278
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|
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2017
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|
$
|
381,250
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|
|
$
|
300,000
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|
|
$
|
42,639
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|
|
$
|
29,000
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|
|
$
|
752,889
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|
|
|
|
|
|
|
|
|
|
|
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|
|
Sameer Parasnis (5)
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|
2019
|
|
$
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350,150
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|
|
$
|
1,400,000
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|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,750,150
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|
Chief Commercial Officer and Executive Vice President
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(1)For 2019, represents the bonus amount approved by the Trustees at their February 2020 meeting, accrued as of December 31, 2019 and expected to be paid on or before March 15, 2020. Mr. Parasnis's 2019 bonus amount includes a $50,000 bonus that was paid during 2019.
(2)Represents the aggregate change in the actuarial present value of the Named Executive Officer’s accumulated benefit under all defined benefit and actuarial pension plans (including supplemental plans) from the pension plan measurement date used for financial statement reporting purposes with respect to the Trust’s audited consolidated financial statements for the prior completed fiscal year to the pension plan measurement date used for financial statement reporting purposes with respect to the Trust’s audited consolidated financial statements for the covered fiscal year.
(3)Represents contributions by the Trust to the account of the Named Executive Officer under the Trust’s defined contribution retirement plan.
(4)The aggregate value of the perquisites and other personal benefits, if any, received by the Named Executive Officer for all years presented have not been reflected in the table because the amount was below the SEC’s $10,000 threshold for disclosure except for Mr. Packer, whose perquisites consisted of $10,594 and $11,000 in automobile allowance for 2019 and 2017, respectively.
(5)Mr. Parasnis joined the Trust as Chief Commercial Officer and Executive Vice President effective July 1, 2019. As of December 31, 2019, Mr. Parasnis was not eligible to participate in the defined benefit and actuarial pension plans of the Trust.
Pay Ratio Disclosure
For purposes of calculating the 2019 ratio of the median annual total compensation of all employees to the total annual compensation of the Chief Executive Officer, the Trust included base salary and annual bonus amounts in its calculation of annual total compensation. The Trust used December 31, 2019 as its measurement date. Base salary amounts were annualized for any employee who had less than a full year of service during 2019. Total compensation for Mr. Glover, the Trust’s Chief Executive Officer, was determined to be $3,700,000 and was approximately 33 times the median annual compensation of all
Trust employees, excluding the Chief Executive Officer, of $112,000. For purposes of this calculation, the Trust had 93 employees, excluding the Chief Executive Officer.
Employment Agreements
On August 8, 2019, the Trust entered into employment agreements (the “Agreements”) with Mr. Glover, its General Agent and Chief Executive Officer (the “Glover Agreement”), Mr. Packer, its General Agent and Chief Financial Officer (the “Packer Agreement”) and Mr. Parasnis, its Chief Commercial Officer and Executive Vice President (the “Parasnis Agreement”). The Agreements were effective as of July 1, 2019.
Under the Agreements, Mr. Glover and Mr. Packer will each receive a base salary of $800,000 per annum and Mr. Parasnis will receive a base salary of $700,000 per annum, subject to annual review, and be eligible for an annual cash bonus of up to 300% of such base salary for achievement of specified performance targets, except that with respect to Mr. Glover and Mr. Packer, the cash bonus for the calendar year 2019 will be at least 100% of the cash bonus paid with respect to 2018, as established by the Nominating, Compensation and Governance Committee of the Trust. Until the Trust establishes an equity compensation plan, Mr. Glover, Mr. Packer and Mr. Parasnis are required to use at least 25% of their cash bonuses (net of estimated taxes) to purchase shares of the Trust’s common stock. The term of each of the Glover Agreement and the Packer Agreement ends on December 31, 2020, with automatic one (1) year extensions unless notice not to renew is given by either party at least 120 days prior to the relevant end date. The term of the Parasnis Agreement ends on December 31, 2022, with automatic one (1) year extensions unless notice not to renew is given by either party at least 120 days prior to the relevant end date. Under the Parasnis Agreement, the cash bonus for 2019 is prorated for the period of employment during such year. Additionally, Mr. Parasnis is entitled to a retention bonus in the amount of $875,000, payable in three installments on March 15, 2020 and the second and third anniversaries of the effective date of the Parasnis Agreement and is eligible for a relocation allowance in the amount of $100,000 to cover his relocation to Dallas, Texas.
Each Agreement provides for payment of severance benefits if the officer’s employment is terminated by the Trust without cause or by the officer for good reason, provided that the officer executes a general waiver and release of claims and complies with the restrictive covenants described below. The severance benefits include (i) accrued but unpaid bonuses and vested long-term incentive benefits (ii) a pro rata bonus for the year of termination (if such termination occurs after the first calendar quarter), (iii) up to 18 months of COBRA premiums for continued group health, dental and vision coverage for the officer and his dependents, paid for by the Trust, (iv) if such termination occurs during the first 15 months (30 months for Mr. Parasnis) of the term, an amount equal to two times the average of his base salary and cash bonus for the preceding two years (for Mr. Parasnis, annualized for any partial year other than 2019), which amount will be reduced to one times such average for the preceding year if such termination occurs after the first 15 months (30 months for Mr. Parasnis) of the term and (v) for Mr. Parasnis, any unpaid portion of his retention bonus and relocation allowance. If the officer’s employment is terminated by the Trust without cause, by the officer for good reason, or upon failure of the Trust to renew the term of the Agreement, in all such cases, within 24 months following a change in control of the Trust as defined in the Agreements, then, in lieu of the amount specified in clause (iv), the officer will be entitled to an amount equal to 2.99 times the greater of (a) the average of his base salary and cash bonus for the two years preceding the change in control and (b) his base salary and target cash bonus for the year of the change in control, except that, with respect to Mr. Parasnis, if the change in control occurred in 2019, the amount of the change in control severance would be 50% of the otherwise applicable amount. If the officer's employment terminates due to death or disability, he will be entitled to the benefits described in clauses (i), (ii) and for Mr. Parasnis, (v) above. The officer will also be entitled to payment of accrued but unpaid salary, accrued but unused vacation, unsubsidized COBRA benefits, and unreimbursed business expenses following termination of employment for any reason.
The Agreements provide that Mr. Glover, Mr. Packer and Mr. Parasnis will be entitled to participate in all benefit plans provided to the Trust’s executives of like status from time to time in accordance with the applicable plan, policy or practices of the Trust, as well as in any long-term incentive program established by the Trust. They also provide for four weeks of annual paid vacation, reimbursement of business expenses, and indemnification rights.
Each Agreement contains restrictive covenants prohibiting the officer from disclosing the Trust’s confidential information at any time, from competing with the Trust in specified counties where the Trust does business during his employment, subject to certain exceptions, and for one year thereafter (or six months thereafter if he terminates his employment voluntarily without good reason), and from soliciting the Trust’s clients, suppliers and business partners during his employment and for one year thereafter.
Pension Benefits
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Name
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Plan Name
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Number of Years
Credited Service
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Actuarial
Present Value of
Accumulated Benefit
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Payments During
Last Fiscal Year
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Tyler Glover
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Restated Texas Pacific Land Trust Revised Employees’ Pension Plan
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7.0
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$
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130,345
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$
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—
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Robert J. Packer
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Restated Texas Pacific Land Trust Revised Employees’ Pension Plan
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7.5
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$
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225,139
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$
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—
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Sameer Parasnis (1)
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Restated Texas Pacific Land Trust Revised Employees’ Pension Plan
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—
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$
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—
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$
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—
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(1) Mr. Parasnis joined the Trust as Chief Commercial Officer and Executive Vice President effective July 1, 2019. As of December 31, 2019, Mr. Parasnis was not eligible to participate in the pension plan of the Trust.
The Restated Texas Pacific Land Trust Revised Employees’ Pension Plan is a noncontributory defined benefit pension plan qualified under Section 401 of the Internal Revenue Code in which our employees, excluding the Trustees, participate. The remuneration covered by the Plan is the participant's base compensation up to certain limits specified in the Internal Revenue Code (“Eligible Compensation”). The Plan provides a normal retirement benefit equal to 1.5% of a participant’s average Eligible Compensation for the last five years prior to retirement for each year of Credited Service under the Plan. Credited Service is earned from the participant’s date of membership in the Plan, which is generally the earlier of January 1 or July 1 following completion of the participant’s first year of service for the Trust. For information concerning the valuation method and material assumptions used in quantifying the present value of the Named Executive Officers’ current accrued benefits, see Note 6, “Employee Benefit Plans” of the Notes to Financial Statements incorporated by reference in Item 8 of this Report.
As of December 31, 2019, the annual accrued normal retirement benefits are estimated to be $22,645 and $24,909 for Mr. Glover and Mr. Packer, respectively.
The Plan provides for early retirement after the participant attains age 50 and completes 20 years of service with the Trust. Early retirement benefits are calculated in the same manner as the normal retirement benefit, but are reduced by 1/15 for each of the first five years and 1/30 for each of the next five years that benefits commence prior to the Plan's normal retirement age of 65. If benefits commence more than 10 years prior to normal retirement, the early retirement benefit is reduced actuarially for each year prior to age 55. None of the Named Executive Officers are currently eligible for early retirement benefits.
Trustee Compensation Table
The following table sets forth information concerning compensation paid to the Trustees during the year ended December 31, 2019:
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Name
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Fees Earned or Paid in Cash
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Total
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John R. Norris III
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$
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104,000
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$
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104,000
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David E. Barry
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$
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104,000
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$
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104,000
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Maurice Meyer III (resigned effective February 25, 2019)
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$
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26,000
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$
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26,000
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Trustees do not receive additional compensation for service on a committee or for attendance at meetings.
Compensation Committee Interlocks and Insider Participation
Each of the Trustees is a member of the Nominating, Compensation and Governance Committee of the Trustees. None of the Trustees is, or has been in the past, an officer or employee of the Trust. None of the Trustees had any relationship requiring disclosure by the Trust pursuant to Item 404 of Regulation S-K. There are no interlocking relationships requiring disclosure by the Trust pursuant to Item 407(e)(4)(iii) of Regulation S-K.
Compensation Committee Report
The Nominating, Compensation and Governance Committee has reviewed and discussed the Compensation Discussion and Analysis section of this Item 11 and, based on such review and discussion, recommended that it be included in this Report.
John R. Norris III
David E. Barry
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Security Holder Matters.
The Trust does not maintain any compensation plans (or individual compensation arrangements) under which equity securities of the Trust are authorized for issuance.
Security Ownership of Certain Beneficial Owners
The following table sets forth information as to all persons known to the Trust to be the beneficial owner of more than 5% of the Trust’s voting securities (Sub-shares) as of February 21, 2020:
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Name and Address
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Number of
Securities
Beneficially Owned
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Percent of Class
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Horizon Kinetics LLC(1)
470 Park Avenue South, 4th Floor South,
New York, New York 10016
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1,750,858
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22.6%
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Eric Oliver(2)
SoftVest Advisors, LLC(2)
SoftVest, L.P.(2)
400 Pine Street, Suite 1010,
Abilene, Texas 79601
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133,200
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1.7%
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Allan R. Tessler(3)
ART-FGT Family Partners Limited(3)
Tessler Family Limited Partnership(3)
2500 Moose-Wilson Road,
Wilson, WY 83014
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12,130
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*
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*Indicates ownership of less than 1% of the class.
(1)The information set forth is based on Amendment 7 to Schedule 13D filed on February 21, 2020 by Horizon Kinetics Asset Management LLC (“Horizon”). The number of Sub-shares beneficially owned excludes Sub-shares held by portfolio managers and other employees of Horizon personally. Amendment No. 5 to Schedule 13D filed by Horizon on May 28, 2019 indicated that Horizon is a wholly-owned subsidiary of Horizon Kinetics LLC, and that Horizon has shared voting power and shared dispositive power with respect to such Sub-shares . To the Trust’s knowledge, Horizon is controlled by Murray Stahl.
(2)The information is based on Amendment 3 to Schedule 13D filed on February 21, 2020 (the “Softvest/Tessler Schedule 13D”) by SoftVest, L.P, (“Softvest LP”), SoftVest Advisors, LLC (“Softvest Advisors”), Eric L. Oliver (“Mr. Oliver”), ART-FGT Family Partners Limited (“ART-FGT LP”), Tessler Family Limited Partnership (“Tessler Family LP”), and Allan R. Tessler (“Mr. Tessler” and, together with ART-FGT LP and Tessler Family LP, the "Tessler Persons”). Represents Sub-shares held by SoftVest, LP. The general partner of SoftVest LP is SoftVest GP I, LLC ("SV GP"). SoftVest Advisors is investment manager of SoftVest LP. Eric L. Oliver ("Mr. Oliver" and together with SoftVest LP and SoftVest Advisors, the "SoftVest Persons") is the managing member of SV GP. SoftVest LP, SoftVest Advisors and Mr. Oliver may be deemed to share voting and dispositive power with respect to such Sub-shares.. The SoftVest Persons disclaim beneficial ownership of the 130,500 Shares held by SoftVest LP for purposes of Section 16 of the Securities Exchange Act of 1934 (the “Act”), except for their pecuniary interest therein. Includes 100 Sub-shares held by Mr. Oliver, 350 Sub-shares held by trusts administered for the benefit of Mr. Oliver's grandchildren, for which Mr. Oliver has sole voting and dispositive power, and 2,250 Sub-shares owned by Debeck LLC and Debeck Properties LP, which Mr. Oliver controls and over which Mr. Oliver has sole voting and dispositive power. The other SoftVest Persons disclaim beneficial ownership of such 100, 350 and 2,250 Sub-shares for purposes of Section 16 of the Exchange Act. The SoftVest Persons disclaim beneficial ownership of the 130,500 Shares held by SoftVest LP for purposes of Section 16 of the Act, except for their pecuniary interest therein.
(3)The information is based on the Softvest/Tessler Schedule 13D. 10,830 of the Sub-shares are held by ART-FGT LP). 1,300 of the Sub-shares are held by Tessler Family LP. The general partner of ART-FGT LP is Tessler FMC, LLC ("Tessler LLC"). Mr. Tessler and his spouse, Frances G. Tessler, are the members of Tessler LLC. Andrea Tessler and Karla Tessler, daughters of Tessler, are the managers of Tessler LLC. Mr. Tessler is a partner and controls ART-FGT LP. ART-FGT LP and Mr. Tessler may be deemed to share voting power and dispositive power with respect to such Sub-shares. Mr. Tessler disclaims beneficial ownership of the 10,830 Shares held by ART-FGT LP for purposes of Section 16 of the Act, except for his pecuniary interest therein. The general partner of Tessler Family LP is Apres Vous, LLC ("Apres LLC"). Andrea Tessler, Karla Tessler and Christopher Tessler, the children of Mr. Tessler, are the members of Apres LLC. Andrea Tessler and Karla Tessler are the managers of Apres LLC.
Mr. Tessler is a partner and controls Tessler Family LP. Tessler Family LP and Mr. Tessler may be deemed to share voting power and dispositive power with respect to such Sub-shares. Mr. Tessler disclaims beneficial ownership of the 1,300 shares held by Tessler Family LP for purposes of Section 16 of the Act, except for his pecuniary interest therein.
Horizon, SoftVest Advisors, ART-FGT LP and Tessler Family LP have entered into a Cooperation Agreement, dated May 15, 2019 (the "Cooperation Agreement"). As a result of the Cooperation Agreement, the SoftVest Persons, ART-FGT LP, Tessler Family LP, Mr. Tessler and Horizon may be deemed to have formed a "group" pursuant to Rule 13d-5(b)(1) promulgated under the Act. Each of the SoftVest Persons, the Tessler Persons and Horizon may also be deemed to share voting power and dispositive power with respect to each other party's Sub-shares as a result of the covenants and restrictions set forth in the Cooperation Agreement. Therefore, each of the parties to the Cooperation Agreement may be deemed to beneficially own all Sub-shares beneficially owned by the other parties to the Cooperation Agreement. The parties to the Cooperation Agreement expressly disclaim any such beneficial ownership resulting from the terms of the Cooperation Agreement.
On July 30, 2019, the parties to the Cooperation Agreement entered into the Settlement Agreement with respect to the previous proxy contest and the pending litigation between the parties. Pursuant to the Settlement Agreement, the parties agreed to dismiss the pending litigation captioned Case 3:19-cv-01224-B Texas Pacific Land Trust et al v. Oliver in the U.S. District Court for the Northern District of Texas in Dallas. The Settlement Agreement further provides that Texas Pacific’s third trustee position will remain vacant at least until the end of the Restricted Period (as defined in the Settlement Agreement).
Security Ownership of Management
The following table sets forth information as to equity securities (Sub-shares) beneficially owned directly or indirectly as of February 21, 2020 by all Trustees and Named Executive Officers, naming them, and by all Trustees and executive officers of the registrant, as a group:
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Name of Beneficial Owner
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Amount and Nature of Ownership
on February 21, 2020
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Percent
of Class
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John R. Norris III
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1,000
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*
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David E. Barry
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300
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*
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Tyler Glover
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100
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*
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Robert J. Packer
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200
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*
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Sameer Parasnis
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—
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*
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All Trustees and Officers as a Group (5 persons)
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1,600
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*
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*Indicates ownership of less than 1% of the class.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
Transactions with Related Persons
There are no significant reportable transactions or currently proposed transactions between Texas Pacific and any Trustee or executive officer of Texas Pacific or any 5% security holder of Texas Pacific or any member of the immediate family of any of the foregoing persons.
Review, Approval or Ratification of Transactions with Related Persons
Transactions with Trustees, executive officers or 5% or greater stockholders, or immediate family members of the foregoing, which might require disclosure pursuant to paragraph (a), above, would be subject to review, approval or ratification by the Nominating, Compensation and Governance Committee of the Trustees. That Committee is composed of all of the Trustees. The Committee’s charter empowers it to review any transactions, including loans, which may confer any benefit upon any Trustee, executive officer or affiliated entity to confirm compliance with the Trust’s Code of Conduct and Ethics and applicable law. The Committee has not adopted specific standards for evaluating such transactions beyond that mentioned above, because it is the sense of the Trustees that the activities and procedures of the Committee should remain flexible so that it may appropriately respond to changing circumstances.
Independence
Each Trustee is an “independent director” within the meaning of the applicable rules of the NYSE. Each member of the Audit and the Nominating, Compensation and Governance Committees of the Trustees is “independent” within the meaning of the applicable committee independence standards of the NYSE.
Item 14. Principal Accountant Fees and Services.
The following table presents fees billed to the Trust for professional services rendered by our independent registered public accounting firm, Lane Gorman Trubitt, LLC, during 2019 and 2018:
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Years Ended December 31,
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2019
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2018
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Type of Fees:
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Audit fees
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$
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311,000
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$
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174,250
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Audit-related fees
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—
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—
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Tax fees
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—
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—
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All other fees
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—
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—
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$
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311,000
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$
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174,250
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The Audit Committee has established a policy requiring approval by it of all fees for audit and non-audit services to be provided by the Trust’s independent registered public accountants, prior to commencement of such services. Consideration and approval of fees generally occurs at the Committee’s regularly scheduled meetings or, to the extent that such fees may relate to other matters to be considered at special meetings, at those special meetings.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Description of Business Segments
Texas Pacific Land Trust (which, together with its subsidiaries as the context requires, may be referred to as “Texas Pacific”, the “Trust”, “our”, “we” or “us”) is one of the largest landowners in the State of Texas with approximately 900,000 acres of land in West Texas. Texas Pacific was organized under a Declaration of Trust, dated February 1, 1888, to receive and hold title to extensive tracts of land in the State of Texas, previously the property of the Texas and Pacific Railway Company, and to issue transferable Certificates of Proprietary Interest pro rata to the original holders of certain debt securities of the Texas and Pacific Railway Company.
The Trust announced the formation of Texas Pacific Water Resources LLC (“TPWR”) in June 2017. TPWR, a single member LLC and wholly owned subsidiary of the Trust, provides full-service water offerings to operators in the Permian Basin. These services include, but are not limited to, water sourcing, produced-water gathering/treatment, infrastructure development, disposal solutions, water tracking, analytics and well testing services.
The Trust is organized to manage land, including royalty interests, for the benefit of its owners. The Trust’s income is derived primarily from oil and gas royalties, sales of water and land, easements and commercial leases of the land.
We operate our business in two segments: Land and Resource Management and Water Services and Operations. Our segments provide management with a comprehensive financial view of our key businesses. The segments enable the alignment of strategies and objectives of the Trust and provide a framework for timely and rational allocation of resources within businesses. See Note 10, “Business Segment Reporting” for further information regarding our segments.
2. Summary of Significant Accounting Policies
Principles of Consolidation and Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and include our consolidated accounts and the accounts of our wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates in the Preparation of Financial Statements
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates.
Change in Accounting Estimate
Management evaluates its estimates on a routine basis. Effective July 1, 2019, the Trust revised the estimated useful lives of certain water service-related assets after its disaggregation of water service-related projects into sub classifications. The Trust purchased these water service-related assets from July 1, 2017 through June 30, 2019. Based on information gained from operations over this time period, management believes that these water service-related assets will benefit periods ranging from three to 30 years, beginning at the point the water service-related assets were originally placed in service.
The net book value of these water service-related assets at June 30, 2019, was not modified and is depreciated over the revised estimated useful lives of these assets. The effect of the change in estimated useful lives resulted in an additional $2.4 million of depreciation expense for the year ended December 31, 2019.
Revenue Recognition
Oil and Gas Royalties
Oil and gas royalties are received in connection with royalty interests owned by the Trust. Oil and gas royalties are reported net of production taxes and are recognized as revenue when crude oil and gas products are removed from the respective mineral reserve locations. Oil and gas royalty payments are generally received one to two months after the crude oil
and gas products are removed. An accrual is included in accrued receivables for amounts not received during the month removed based on historical trends.
The oil and gas royalties which the Trust receives are dependent upon the market prices for oil and gas. The market prices for oil and gas are subject to national and international economic and political conditions and, in the past, have been subject to significant price fluctuations.
The Trust has analyzed public reports of drilling activities by the oil companies operating where the Trust has an oil and gas royalty interest in an effort to identify unpaid royalties associated with royalty interests owned by the Trust. Rights to certain oil and gas royalties believed by the Trust to be due and payable may be subject to dispute with the oil company involved as a result of disagreements with respect to drilling and related engineering information. Disputed oil and gas royalties are recorded when these contingencies are resolved.
Easements and Other Surface-Related Income
Easement contracts represent contracts which permit companies to install pipe lines, electric lines and other equipment on land owned by the Trust. When the Trust receives a signed contract and payment, the Trust makes available the respective parcel of land to the grantee. Easement income is recognized upon the execution of the easement agreement, or in the event of a renewal upon receipt of the renewal payment, as at that point in time, the Trust has satisfied its performance obligation and the customer has right of use.
Other surface-related income includes commercial lease income related to leasing arrangements to companies in a wide array of industries, including: agricultural, oil and gas, construction, wind power, solar farms and other industries. Commercial lease income is recognized when earned. These leases generally require fixed annual payments or royalties and lease terms are typically ten years. Lease cancellations are allowed under certain circumstances, but initial lease payments are generally nonrefundable. Advance lease payments are deferred and amortized over the appropriate accounting period. Lease payments not received are included in accrued receivables. Additionally, other surface-related income includes permit income and material sales. Revenue from these sources is recognized when earned.
Water Sales and Royalties
Water sales and royalty revenue encompasses sales of water to operators and other customers and royalties received pursuant to legacy agreements with operators. The earnings cycle for both revenue streams is complete upon delivery of water. Water sales and royalty revenue is recognized as earned.
Land Sales and Exchanges
The Trust considers purchasers of land to be customers as land management, leasing and sales are a normal operating activity of the Trust. Revenue is recognized on land sales when the performance obligation to the purchaser (customer) is complete. Revenue from land exchanges is recognized based upon the estimated fair value of the consideration exchanged.
Sales of Oil and Gas Royalty Interests
Income is recognized on sales of oil and gas royalty interests when earned.
Cash, Cash Equivalents and Restricted Cash
The Trust considers investments in bank deposits, money market funds and highly-liquid cash investments with original maturities of three months or less to be cash equivalents. The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the condensed consolidated balance sheets that sum to the total of the same such amounts shown in the condensed consolidated statements of cash flows (in thousands):
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December 31, 2019
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December 31, 2018
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Cash and cash equivalents
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$
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303,645
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$
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119,647
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Tax like-kind exchange escrow
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—
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3,799
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Total cash, cash equivalents and restricted cash shown in the statement of cash flows
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$
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303,645
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$
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123,446
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Accrued Receivables
Accrued receivables consist primarily of amounts due under oil and gas royalty leases, water sales or royalty agreements and commercial leases. Accrued receivables are reflected at their net realizable value based on historical royalty and lease receipt information and other factors anticipated to affect valuation. A valuation allowance is recorded if amounts expected to be received are considered impaired. No allowance was considered necessary at December 31, 2019 and 2018.
Property, Plant and Equipment
Property, plant and equipment is carried at cost less accumulated depreciation. Maintenance and repair costs are expensed as incurred. Costs associated with our development of infrastructure for sourcing and treating water are capitalized. We account for depreciation of property, plant and equipment on the straight-line method over the estimated useful lives of the assets. Depreciable lives by category are as follows:
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Range of Estimated Useful Lives (in years)
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Water wells and other water-related assets
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3
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to
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30
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Furniture, fixtures and equipment
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5
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to
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7
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Real Estate Acquired
Real estate acquired is recorded at cost and carried at the lower of cost or market. Valuations are periodically performed or obtained by management whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Impairments, if any, are recorded by a charge to net income and a valuation allowance if the carrying value of the property exceeds its estimated fair value. Minimal real estate improvements are made to land. No impairments were recorded for the years ended December 31, 2019 and 2018.
Royalty Interests Acquired
Royalty interests acquired are carried at the lower of cost or market. Valuations are periodically performed or obtained by management whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Impairments, if any, are recorded by a charge to net income and a valuation allowance if the carrying value of the royalty interest exceeds its estimated fair value. Depletion is recorded based upon a units of production basis. Depletion expense was approximately $0.3 million for the year ended December 31, 2019. There was no significant depletion activity for the year ended December 31, 2018. There was no depletion expense for the year ended December 31, 2017, as the Trust had no depletable royalty interests.
Real Estate and Royalty Interests Assigned Through the 1888 Declaration of Trust
The fair market value of the Trust’s land and royalty interests that were assigned through the 1888 Declaration of Trust, (the “Assigned”) land and royalty interests, was not determined in 1888 when the Trust was formed; therefore, no value is assigned in the accompanying consolidated balance sheets to the Assigned land and royalty interests, Certificates of Proprietary Interest, and Sub-share Certificates of Proprietary Interest (“Sub-shares”). Consequently, in the consolidated statements of income and total comprehensive income, no allowance is made for depletion and no cost is deducted from the proceeds of sales of the Assigned land and royalty interests. Even though the 1888 value of real properties cannot be precisely determined, it has been concluded that the effect of this matter can no longer be significant to the Trust’s financial position or results of operations. For Federal income tax purposes, however, deductions are made for depletion, computed on the statutory percentage basis of income received from royalties. Minimal real estate improvements are made to land.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50% likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying balance sheet along with any associated interest and penalties that would be payable to the taxing authorities upon examination. The liability for unrecognized tax benefits is zero at December 31, 2019 and 2018.
Concentrations of Credit Risk
We invest our cash and cash equivalents (which include U.S. Treasury bills and commercial paper with maturities of three months or less) among four major financial institutions in an attempt to minimize exposure to risk from any one of these entities. As of December 31, 2019 and 2018, we had cash and cash equivalents deposited in our financial institutions in excess of federally-insured levels. We regularly monitor the financial condition of these financial institutions and believe that we are not exposed to any significant credit risk in cash and cash equivalents.
Net Income per Sub-share Certificate
Net income per Sub-share is based on the weighted average number of Sub-shares and equivalent Sub-shares outstanding during each period.
Purchases and Retirements of Sub-share Certificates
The costs of Sub-shares purchased and retired are charged to net proceeds from all sources.
Comprehensive Income (Loss)
Comprehensive income (loss) consists of net income and other gains and losses affecting capital that, under GAAP, are excluded from net income.
Significant Customers
Two customers represented, in the aggregate, 36.5%, 31.3% and 26.5% of the Trust’s total revenues (prior to any revenue deferral) for the years ended December 31, 2019, 2018 and 2017, respectively.
Reclassifications
Certain financial information on the consolidated balance sheet and consolidated statements of income and cash flows as of and for the year ended December 31, 2018 have been revised to conform to the current year presentation. These revisions include, but are not limited to, the classification of the tax like-kind exchange escrow from other assets to a separate balance sheet line item and certain expense items from one expense line item to another expense line item. Total assets and expenses were not affected by these reclassifications. Additionally, the tax like-kind exchange escrow was presented as restricted cash in the statement of cash flows.
Recently Adopted Accounting Guidance
Leases
In February 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, “Leases (Topic 842)” which amended the existing lease accounting guidance to require lessees to recognize a right of use asset and lease liability on the balance sheet for all leases with terms greater than twelve months. We adopted the new leasing standard and all related amendments on January 1, 2019. We elected the optional transition method provided by ASU No. 2018-11, “Leases (Topic 842): Targeted Improvements” and as a result, have not restated our condensed consolidated financial statements for prior periods presented. We also elected the practical expedients permitted under the
transition guidance that retain the lease classification and initial direct costs for any leases that existed prior to adoption of the standard. In addition, we have not reassessed the accounting treatment of contracts entered into prior to adoption of the new lease guidance. For further information regarding the adoption of the new lease standard, see Note 8, “Lease Commitments”.
Implementation Costs Incurred in Cloud Computing Arrangements
In August 2018, the FASB issued ASU 2018-15, “Intangibles — Goodwill and Other — Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.” The ASU requires a customer in a cloud computing arrangement that is a service contract to follow existing internal-use software guidance to determine which implementation costs to capitalize as an asset. The ASU is effective for fiscal years and interim periods beginning after December 15, 2019, with early adoption permitted, and may be applied retrospectively or as of the beginning of the period of adoption. The Trust adopted the guidance effective January 1, 2019. The adoption of the guidance did not have a significant impact on our consolidated financial statements.
Recent Accounting Pronouncements
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” The ASU amends the impairment model by requiring entities to use a forward-looking approach based on expected losses to estimate credit losses on certain types of financial instruments, including trade receivables. Upon adoption, we will be required to evaluate our trade accounts receivables for expected future credit losses. The ASU is effective for fiscal years beginning after December 31, 2019, including interim periods within those fiscal years. The Trust will adopt the ASU as of January 1, 2020. Due to the short-term nature of our trade accounts receivable, we anticipate the impact upon adoption of this ASU will be minimal to the Trust.
In August 2018, the FASB issued ASU 2018-14, “Compensation — Retirement Benefits — Defined Benefit Plans — General (Subtopic 715-20): Disclosure Framework — Changes to Disclosure Requirements for Defined Benefit Plans.” The ASU eliminates requirements for certain disclosures and requires additional disclosures under defined benefit pension plans and other post-retirement plans. The ASU is effective for fiscal years ending after December 15, 2020. Early adoption is permitted. The Trust is currently evaluating the impact that ASU 2018-14 will have on our consolidated financial statements and disclosures.
In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740) — Simplifying the Accounting for Income Taxes.” The ASU simplifies the accounting for income taxes by eliminating certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period, hybrid taxes and the recognition of deferred tax liabilities for outside basis differences. It also clarifies and simplifies other aspects of the accounting for income taxes. ASU 2019-12 is effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. Early adoption is permitted in interim or annual periods with any adjustments reflected as of the beginning of the annual period that includes that interim period. We are currently evaluating the impact that this guidance will have on our consolidated financial statements and disclosures.
3. Property, Plant and Equipment
Property, plant and equipment, net consisted of the following at December 31, 2019 and 2018 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
December 31, 2018
|
Property, plant and equipment, at cost:
|
|
|
|
Water service-related assets (1)
|
$
|
93,097
|
|
|
$
|
62,919
|
|
Furniture, fixtures and equipment
|
5,941
|
|
|
4,297
|
|
Other
|
598
|
|
|
598
|
|
Total property, plant and equipment, at cost
|
99,636
|
|
|
67,814
|
|
Less: accumulated depreciation
|
(11,313)
|
|
|
(3,012)
|
|
Property, plant and equipment, net
|
$
|
88,323
|
|
|
$
|
64,802
|
|
(1)Water service-related assets reflect assets related to water sourcing and water treatment projects.
Depreciation expense was $8.5 million, $2.6 million and $0.4 million for the years ended December 31, 2019, 2018 and 2017, respectively.
4. Real Estate Activity
As of December 31, 2019 and 2018, the Trust owned the following land and real estate (in thousands, except number of acres):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
December 31,
|
|
|
|
|
2019
|
|
|
|
2018
|
|
|
|
|
Number of Acres
|
|
Net Book Value
|
|
Number of Acres
|
|
Net Book Value
|
Land (surface rights) (1)
|
|
849,856
|
|
|
$
|
—
|
|
|
877,462
|
|
|
$
|
—
|
|
Real estate acquired
|
|
51,931
|
|
|
107,075
|
|
|
24,715
|
|
|
10,492
|
|
Total real estate situated in 19 counties in Texas
|
|
901,787
|
|
|
$
|
107,075
|
|
|
902,177
|
|
|
$
|
10,492
|
|
|
|
|
|
|
|
|
|
|
(1) Real estate assigned through the 1888 Declaration of Trust.
No valuation allowance was necessary at December 31, 2019 and December 31, 2018.
Land Sales
For the year ended December 31, 2019, the Trust sold approximately 21,986 acres (Culberson, Glasscock, Hudspeth, Loving, Midland and Reeves Counties) of land in Texas for an aggregate sales price of approximately $113.0 million, an average of approximately $5,141 per acre. Additionally, the Trust conveyed approximately 5,620 acres of land in exchange for approximately 5,545 acres of land, all in Culberson County. As the Trust had no cost basis in the land conveyed, the Trust recognized land sales revenue of $22.0 million for the fourth quarter ended December 31, 2019.
For the year ended December 31, 2018, the Trust sold approximately 171 acres (Culberson, El Paso, Loving and Reeves Counties) of land in Texas for an aggregate sales price of approximately $4.4 million, an average of approximately $25,464 per acre.
For the year ended December 31, 2017, the Trust sold approximately 11 acres (Loving County) of land in Texas for an aggregate sales price of approximately $0.2 million, an average of approximately $20,000 per acre.
Land Acquisitions
For the year ended December 31, 2019, the Trust acquired approximately 21,671 acres (Culberson, Glasscock, Loving and Reeves Counties) of land in Texas for an aggregate purchase price of approximately $74.4 million, an average of approximately $3,434 per acre (excludes land acquired through the land exchange as discussed above)
For the year ended December 31, 2018, the Trust acquired approximately 14,650 acres (Concho, Hudspeth, Mitchell and Upton Counties) of land in Texas for an aggregate purchase price of approximately $9.4 million, an average of approximately $640 per acre.
There were no land acquisitions for the year ended December 31, 2017.
5. Royalty Interests
As of December 31, 2019 and 2018, the Trust owned the following oil and gas royalty interests (in thousands, except number of interests):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Book Value
|
|
|
|
|
December 31, 2019
|
|
December 31, 2018
|
1/16th nonparticipating perpetual royalty interests (1)
|
|
$
|
—
|
|
|
$
|
—
|
|
1/128th nonparticipating perpetual royalty interests (2)
|
|
—
|
|
|
—
|
|
Royalty interests acquired (3)
|
|
29,320
|
|
|
24,303
|
|
Total royalty interests, gross
|
|
$
|
29,320
|
|
|
$
|
24,303
|
|
Less: accumulated depletion
|
|
(260)
|
|
|
|
—
|
|
Total royalty interests, net
|
|
$
|
29,060
|
|
|
$
|
24,303
|
|
|
|
|
|
|
(1) Nonparticipating perpetual royalty interests in approximately 370,737 gross royalty acres as of December 31, 2019 and 2018, respectively.
(2) Nonparticipating perpetual royalty interests in approximately 84,934 gross royalty acres as of December 31, 2019 and 2018, respectively.
(3) Royalty interests in approximately 3,074 net royalty acres and approximately 1,826 net royalty acres as of December 31, 2019 and 2018, respectively.
No valuation allowance was necessary at December 31, 2019 and 2018.
Real Estate and Royalty Interests Assigned Through the 1888 Declaration of Trust
The fair market value of the Trust’s Assigned royalty interests was not determined in 1888 when the Trust was formed, and accordingly, these Assigned royalty interests were recorded with no value. See Note 2, “Summary of Significant Accounting Policies — Real Estate and Royalty Interests Assigned Through the 1888 Declaration of Trust” for further information regarding the Assigned royalty interests. The Assigned royalty interests include 1/16th and 1/128th royalty interests.
Royalty Interests Transactions
For the year ended December 31, 2019, the Trust acquired oil and gas royalty interests in approximately 1,247 net royalty acres (normalized to 1/8th) for an aggregate purchase price of $4.7 million, an average price of approximately $3,800 per net royalty acre.
For the year ended December 31, 2018, the Trust sold nonparticipating perpetual oil and gas royalty interests in approximately 812 net royalty acres (1/8th interest) for approximately $18.9 million, an average price of approximately $23,234 per net royalty acre. In conjunction with this sale, the Trust acquired oil and gas royalty interests in approximately 1,480 net royalty acres for an aggregate purchase price of $20.6 million, an average of approximately $13,949 per net royalty acre.
Additionally, for the year ended December 31, 2018, the Trust acquired oil and gas royalty interests in approximately 346 net royalty acres for an aggregate purchase price of $3.7 million, an average price of approximately $10,555 per net royalty acre.
There were no oil and gas royalty interest transactions for the year ended December 31, 2017.
6. Employee Benefit Plans
The Trust has a defined contribution plan available to all regular employees having one or more years of continuous service. Contributions are at the discretion of the Trustees of the Trust. The Trust contributed approximately $0.3 million for the year ended December 31, 2019 and $0.1 million for the years ended December 31, 2018 and 2017, respectively.
The Trust has a noncontributory pension plan (the “Plan”) available to all regular employees having one or more years of continuous service. The Plan provides for normal retirement at age 65. Contributions to the Plan reflect benefits attributed to employees’ services to date, as well as services expected in the future.
The following table sets forth the Plan’s changes in benefit obligation, changes in fair value of plan assets, and funded status as of December 31, 2019 and 2018 using a measurement date of December 31 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
December 31, 2018
|
Change in projected benefits obligation:
|
|
|
|
Projected benefit obligation at beginning of year
|
$
|
4,745
|
|
|
$
|
5,032
|
|
Service cost
|
666
|
|
|
157
|
|
Interest cost
|
197
|
|
|
183
|
|
Actuarial (gain) loss
|
1,208
|
|
|
(369)
|
|
Benefits paid
|
(239)
|
|
|
(258)
|
|
Projected benefit obligation at end of year
|
$
|
6,577
|
|
|
$
|
4,745
|
|
|
|
|
|
Change in plan assets:
|
|
|
|
Fair value of plan assets at beginning of year
|
$
|
5,313
|
|
|
$
|
5,356
|
|
Actual return on plan assets
|
1,041
|
|
|
(185)
|
|
Contributions by employer
|
500
|
|
|
400
|
|
Benefits paid
|
(239)
|
|
|
(258)
|
|
Fair value of plan assets at end of year
|
6,615
|
|
|
5,313
|
|
Funded (unfunded) status at end of year
|
$
|
38
|
|
|
$
|
568
|
|
Amounts recognized in the balance sheets as of December 31, 2019 and 2018 consist of (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
December 31, 2018
|
Assets
|
$
|
38
|
|
|
$
|
568
|
|
Liabilities
|
—
|
|
|
—
|
|
|
$
|
38
|
|
|
$
|
568
|
|
Amounts recognized in accumulated other comprehensive income (loss) consist of the following as of December 31, 2019 and 2018 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
December 31, 2018
|
Net actuarial loss
|
$
|
(1,849)
|
|
|
$
|
(1,365)
|
|
Amounts recognized in accumulated other comprehensive income (loss), before taxes
|
(1,849)
|
|
|
(1,365)
|
|
Income tax benefit
|
388
|
|
|
287
|
|
Amounts recognized in accumulated other comprehensive income (loss), after taxes
|
$
|
(1,461)
|
|
|
$
|
(1,078)
|
|
Net periodic benefit cost for the years ended December 31, 2019, 2018 and 2017 include the following components (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Components of net periodic benefit cost:
|
|
|
|
|
|
Service cost
|
$
|
666
|
|
|
$
|
157
|
|
|
$
|
147
|
|
Interest cost
|
197
|
|
|
183
|
|
|
201
|
|
Expected return on plan assets
|
(364)
|
|
|
(367)
|
|
|
(339)
|
|
Amortization of net loss
|
46
|
|
|
64
|
|
|
108
|
|
Net periodic benefit cost
|
$
|
545
|
|
|
$
|
37
|
|
|
$
|
117
|
|
Service cost, a component of net periodic benefit cost, is reflected in our consolidated statements of income within salaries and related employee expenses. The other components of net periodic benefit cost are included in other income (expense) on the consolidated statements of income.
Other changes in plan assets and benefit obligations recognized in other comprehensive income for the years ended December 31, 2019, 2018 and 2017 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Net actuarial (gain) loss
|
$
|
530
|
|
|
$
|
183
|
|
|
$
|
(132)
|
|
Recognized actuarial loss
|
(46)
|
|
|
(64)
|
|
|
(108)
|
|
|
|
|
|
|
|
Total recognized in other comprehensive income, before taxes
|
$
|
484
|
|
|
$
|
119
|
|
|
$
|
(240)
|
|
Total recognized in net benefit cost and other comprehensive income, before taxes
|
$
|
1,029
|
|
|
$
|
156
|
|
|
$
|
(123)
|
|
The Trust reclassified less than $0.1 million (net of income tax expense of less than $0.1 million) out of accumulated other comprehensive income (loss) for net periodic benefit cost to other income (expense) for each of the years ended December 31, 2019, 2018 and 2017, respectively. The estimated net actuarial loss for the Plan that will be amortized from accumulated other comprehensive income (loss) to other income (expense) over the next fiscal year is less than $0.1 million.
The following table summarizes the Plan assets in excess of projected benefit obligation and accumulated benefit obligation at December 31, 2019 and 2018 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
December 31, 2018
|
Plan assets in excess of projected benefit obligation:
|
|
|
|
Projected benefit obligation
|
$
|
6,577
|
|
|
$
|
4,745
|
|
Fair value of plan assets
|
$
|
6,615
|
|
|
$
|
5,313
|
|
Plan assets in excess of accumulated benefit obligation:
|
|
|
|
Accumulated benefit obligation
|
$
|
5,056
|
|
|
$
|
4,173
|
|
Fair value of plan assets
|
$
|
6,615
|
|
|
$
|
5,313
|
|
The following are weighted-average assumptions used to determine benefit obligations and costs at December 31, 2019, 2018 and 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Weighted average assumptions used to determine benefit obligations as of December 31:
|
|
|
|
|
|
Discount rate
|
3.25
|
%
|
|
4.25
|
%
|
|
3.75
|
%
|
Rate of compensation increase
|
7.29
|
%
|
|
7.29
|
%
|
|
7.29
|
%
|
|
|
|
|
|
|
Weighted average assumptions used to determine benefit costs for the years ended December 31:
|
|
|
|
|
|
Discount rate
|
4.25
|
%
|
|
3.75
|
%
|
|
4.25
|
%
|
Expected return on plan assets
|
7.00
|
%
|
|
7.00
|
%
|
|
7.00
|
%
|
Rate of compensation increase
|
7.29
|
%
|
|
7.29
|
%
|
|
7.29
|
%
|
The expected return on Plan assets assumption of 7.0% was selected by the Trust based on historical real rates of return for the current asset mix and an assumption with respect to future inflation. The rate was determined based on a long-term allocation of about two-thirds fixed income and one-third equity securities; historical real rates of return of about 2.5% and 8.5% for fixed income and equity securities, respectively; and assuming a long-term inflation rate of 2.5%.
The Plan has a formal investment policy statement. The Plan’s investment objective is balanced income, with a moderate risk tolerance. This objective emphasizes current income through a 30% to 80% allocation to fixed income securities, complemented by a secondary consideration for capital appreciation through an equity allocation in the range of 20% to 60%. Diversification is achieved through investment in mutual funds and bonds. The asset allocation is reviewed annually with respect to the target allocations and rebalancing adjustments and/or target allocation changes are made as appropriate. The Trust’s current funding policy is to maintain the Plan’s fully funded status on an ERISA minimum funding basis.
Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (exit price) in an orderly transaction between market participants at the measurement date.
The fair value accounting standards establish a fair value hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are those that market participants would use in pricing the asset or liability based on market data obtained from independent sources. Unobservable inputs reflect our assumptions about the inputs market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The fair value hierarchy is categorized into three levels based on the inputs used in measuring fair value, as follows:
Level 1 – Inputs are based on unadjusted quoted prices in active markets for identical assets or liabilities that we have the ability to access. Since inputs are based on quoted prices that are readily and regularly available in an active market, Level 1 inputs require the least judgment.
Level 2 – Inputs are based on quoted prices for similar instruments in active markets, or are observable either directly or indirectly. Inputs are obtained from various sources including financial institutions and brokers.
Level 3 – Inputs that are unobservable and significant to the overall fair value measurement. The degree of judgment exercised by us in determining fair value is greatest for fair value measurements categorized in Level 3.
The fair values of plan assets by major asset category at December 31, 2019 and 2018, respectively, are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
As of December 31, 2019:
|
|
|
|
|
|
|
|
Cash and cash equivalents — money markets
|
$
|
528
|
|
|
$
|
528
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Equities
|
1,133
|
|
|
1,133
|
|
|
—
|
|
|
—
|
|
Equity funds
|
1,939
|
|
|
1,939
|
|
|
—
|
|
|
—
|
|
Fixed income funds
|
465
|
|
|
465
|
|
|
—
|
|
|
—
|
|
Taxable bonds
|
2,550
|
|
|
2,550
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
$
|
6,615
|
|
|
$
|
6,615
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
As of December 31, 2018:
|
|
|
|
|
|
|
|
Cash and cash equivalents — money markets
|
$
|
407
|
|
|
$
|
407
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Equities
|
813
|
|
|
813
|
|
|
—
|
|
|
—
|
|
Equity funds
|
2,448
|
|
|
2,448
|
|
|
—
|
|
|
—
|
|
Fixed income funds
|
1,645
|
|
|
1,645
|
|
|
—
|
|
|
—
|
|
Total
|
$
|
5,313
|
|
|
$
|
5,313
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Management intends to at least fund the minimum ERISA amount for 2020. The Trust may make some discretionary contributions to the Plan, the amounts of which have not yet been determined.
The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid for the following ten-year period (in thousands):
|
|
|
|
|
|
|
|
|
Year ending December 31,
|
|
Amount
|
2020
|
|
$
|
258
|
|
2021
|
|
254
|
|
2022
|
|
250
|
|
2023
|
|
246
|
|
2024
|
|
240
|
|
2025 to 2029
|
|
1,252
|
|
7. Income Taxes
The income tax provision charged to operations for the years ended December 31, 2019, 2018 and 2017 was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Current:
|
|
|
|
|
|
U.S. Federal
|
$
|
55,562
|
|
|
$
|
35,593
|
|
|
$
|
46,013
|
|
State and local
|
1,930
|
|
|
1,607
|
|
|
851
|
|
|
57,492
|
|
|
37,200
|
|
|
46,864
|
|
Deferred expense
|
26,035
|
|
|
14,814
|
|
|
966
|
|
|
$
|
83,527
|
|
|
$
|
52,014
|
|
|
$
|
47,830
|
|
The Trust is taxed as if it were a corporation. Total income tax expense differed from the amounts computed by applying the U.S. Federal income tax rate of 21% for the years ended December 31, 2019 and 2018 and 35% for the year ended 2017 to income before Federal income taxes as a result of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Computed tax expense at the statutory rate
|
$
|
84,473
|
|
|
$
|
54,968
|
|
|
$
|
50,771
|
|
Reduction in income taxes resulting from:
|
|
|
|
|
|
Statutory depletion
|
(5,163)
|
|
|
(4,185)
|
|
|
(3,378)
|
|
State taxes
|
1,657
|
|
|
1,243
|
|
|
530
|
|
Executive compensation
|
1,302
|
|
|
—
|
|
|
—
|
|
Prior year tax adjustments
|
755
|
|
|
—
|
|
|
—
|
|
Effect of change in statutory tax rate (1)
|
—
|
|
|
—
|
|
|
(103)
|
|
Other, net
|
503
|
|
|
(12)
|
|
|
10
|
|
|
$
|
83,527
|
|
|
$
|
52,014
|
|
|
$
|
47,830
|
|
(1)The effect of the change in statutory income tax rate from 35% to 21% effective January 1, 2018 which was anticipated as of December 31, 2017.
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at December 31, 2019 and 2018 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
December 31, 2018
|
Unearned revenue
|
$
|
3,741
|
|
|
$
|
2,878
|
|
|
|
|
|
Total deferred tax assets
|
3,741
|
|
|
2,878
|
|
|
|
|
|
Property, plant and equipment
|
17,030
|
|
|
10,723
|
|
§1031 tax exchanges
|
26,638
|
|
|
6,791
|
|
Deferred credits
|
748
|
|
|
—
|
|
Real estate acquired through foreclosure
|
142
|
|
|
142
|
|
Other
|
10
|
|
|
125
|
|
Total deferred tax liability
|
44,568
|
|
|
17,781
|
|
Net deferred tax liability
|
$
|
(40,827)
|
|
|
$
|
(14,903)
|
|
|
|
|
|
The Trust files a U. S. Federal income tax return. With few exceptions, the Trust is no longer subject to U. S. Federal income tax examination by tax authorities for years before 2016.
8. Lease Commitments
As of December 31, 2019, we have recorded right-of-use assets of $3.1 million and lease liabilities for $3.4 million primarily related to operating leases in connection with our administrative offices located in Dallas and Midland, Texas. The office lease agreements require monthly rent payments and expire in December 2025 and August 2022, respectively. Operating lease expense is recognized on a straight-line basis over the lease term. Operating lease cost for the year ended December 31, 2019 was $0.7 million.
Future minimum lease payments were as follows at December 31, 2019 (in thousands):
|
|
|
|
|
|
|
|
|
Year ending December 31,
|
|
Amount
|
2020
|
|
$
|
696
|
|
2021
|
|
796
|
|
2022
|
|
697
|
|
2023
|
|
537
|
|
2024
|
|
551
|
|
Thereafter
|
|
516
|
|
Total lease payments
|
|
3,793
|
|
Less: imputed interest
|
|
(426)
|
|
Total operating lease liabilities
|
|
$
|
3,367
|
|
Rent expense for these lease agreements amounted to approximately $0.7 million, $0.2 million and $0.1 million for the years ended December 31, 2019, 2018 and 2017, respectively.
9. Capital
Certificates of Proprietary Interest (“Certificates”) and Sub-shares are exchangeable in the ratio of one Certificate to 3,000 Sub-shares. No Certificates were exchanged for Sub-shares for the years ended December 31, 2019 and 2018.
The number of Certificates authorized for issuance at a given date is the number then outstanding plus one/three-thousandth of the number of Sub-shares then outstanding. The number of Sub-shares authorized for issuance at a given date is the number then outstanding plus three thousand times the number of Certificates then outstanding.
The Declaration of Trust was executed and delivered in New York. In the opinion of counsel for the Trust, under the laws of the State of New York, the Certificate and Sub-share Certificate holders are not subject to any personal liability for the acts or obligations of the Trust.
The assets of the Trust are located in Texas. In the opinion of Texas counsel, under the laws of the State of Texas, the Certificate and sub-shareholders may be held personally liable with respect to claims against the Trust, but only after the assets of the Trust first have been exhausted.
Dividends
On March 15, 2019, we paid $46.5 million in dividends representing a cash dividend of $1.75 per Sub-share and a special dividend of $4.25 per Sub-share for sub-shareholders of record at the close of business on March 8, 2019.
On March 16, 2018, we paid $31.7 million in dividends representing a cash dividend of $1.05 per Sub-share and a special dividend of $3.00 per Sub-share for sub-shareholders of record at the close of business on March 9, 2018.
Repurchases of Sub-shares
During the years ended December 31, 2019, 2018 and 2017, we purchased and retired 6,258, 59,185 and 105,715 Sub-shares, respectively.
10. Business Segment Reporting
During the periods presented, we reported our financial performance based on the following segments: Land and Resource Management and Water Services and Operations. Our segments provide management with a comprehensive financial view of our key businesses. The segments enable the alignment of strategies and objectives of the Trust and provide a framework for timely and rational allocation of resources within businesses. We eliminate any inter-segment revenues and expenses upon consolidation.
The Land and Resource Management segment encompasses the business of managing approximately 900,000 acres of land and related resources in West Texas owned by the Trust. The revenue streams of this segment consist primarily of royalties from oil and gas, revenues from easements and commercial leases and land and material sales.
The Water Services and Operations segment encompasses the business of providing full-service water offerings to operators in the Permian Basin. The revenue streams of this segment consist of revenue generated from sales of sourced and treated water as well as revenue from royalties on water service-related activity.
Segment financial results were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Revenues:
|
|
|
|
|
|
Land and resource management
|
$
|
363,328
|
|
|
$
|
211,476
|
|
|
$
|
123,340
|
|
Water services and operations
|
127,168
|
|
|
88,744
|
|
|
31,294
|
|
Total consolidated revenues
|
$
|
490,496
|
|
|
$
|
300,220
|
|
|
$
|
154,634
|
|
|
|
|
|
|
|
Net income:
|
|
|
|
|
|
Land and resource management
|
$
|
258,366
|
|
|
$
|
159,611
|
|
|
$
|
78,468
|
|
Water services and operations
|
60,362
|
|
|
50,125
|
|
|
18,763
|
|
Total consolidated net income
|
$
|
318,728
|
|
|
$
|
209,736
|
|
|
$
|
97,231
|
|
|
|
|
|
|
|
Capital Expenditures:
|
|
|
|
|
|
Land and resource management
|
$
|
1,603
|
|
|
$
|
2,790
|
|
|
$
|
920
|
|
Water services and operations
|
30,606
|
|
|
45,088
|
|
|
17,827
|
|
Total capital expenditures
|
$
|
32,209
|
|
|
$
|
47,878
|
|
|
$
|
18,747
|
|
|
|
|
|
|
|
Depreciation, depletion and amortization:
|
|
|
|
|
|
Land and resource management
|
$
|
1,201
|
|
|
$
|
506
|
|
|
$
|
136
|
|
Water services and operations
|
7,705
|
|
|
2,077
|
|
|
240
|
|
Total depreciation, depletion and amortization
|
$
|
8,906
|
|
|
$
|
2,583
|
|
|
$
|
376
|
|
The following table presents total assets and property, plant and equipment, net by segment (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
December 31, 2018
|
Assets:
|
|
|
|
Land and resource management
|
$
|
467,758
|
|
|
$
|
198,922
|
|
Water services and operations
|
130,418
|
|
|
86,153
|
|
Total consolidated assets
|
$
|
598,176
|
|
|
$
|
285,075
|
|
|
|
|
|
Property, plant and equipment, net:
|
|
|
|
Land and resource management
|
$
|
4,359
|
|
|
$
|
3,720
|
|
Water services and operations
|
83,964
|
|
|
61,082
|
|
Total consolidated property, plant and equipment, net
|
$
|
88,323
|
|
|
$
|
64,802
|
|
11. Subsequent Events
The Trust evaluated events that occurred after the balance sheet date through the date these financial statements were issued, and the following events that met recognition or disclosure criteria were identified:
Dividends Declared
At their February 2020 meeting, the Trustees declared a cash dividend of $10.00 per Sub-share, payable March 16, 2020 to sub-shareholders of record at the close of business on March 9, 2020. Additionally, the Trustees declared a special dividend of $6.00 per Sub-share, payable March 16, 2020 to sub-shareholders of record at the close of business on March 9, 2020.
Acquisition of Land and Royal Interest
On February 21, 2020, the Trust acquired approximately 671 surface acres of land and approximately 755 net royalty acres in Culberson County for a combined purchase price of approximately $14.9 million.
12. Oil and Gas Producing Activities (Unaudited)
We measure the Trust’s share of oil and gas produced in barrels of equivalency (“BOEs”). One BOE equals one barrel of crude oil, condensate, NGLs (natural gas liquids) or approximately 6,000 cubic feet of gas. As of December 31, 2019, December 31, 2018 and December 31, 2017, the Trust’s share of oil and gas produced was approximately 13.7, 8.8 and 5.1 thousand BOEs per day, respectively. Reserves related to the Trust’s royalty interests are not presented because the information is unavailable.
There are a number of oil and gas wells that have been drilled but are not yet completed (“DUC”) where the Trust has a royalty interest. The number of DUC wells are determined using uniform drilling spacing units with pooled interests for all wells awaiting completion. The Trust has identified 486, 362 and 319 DUC wells subject to our royalty interest as of December 31, 2019, 2018 and 2017, respectively.
13. Selected Quarterly Financial Data (Unaudited)
The following tables present unaudited financial data of the Trust for each quarter of December 31, 2019 and 2018 (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters ended
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
September 30, 2019
|
|
June 30,
2019
|
|
March 31, 2019
|
Revenues
|
|
$
|
113,332
|
|
|
$
|
98,530
|
|
|
$
|
87,310
|
|
|
$
|
191,324
|
|
Income before income taxes
|
|
$
|
89,071
|
|
|
$
|
74,759
|
|
|
$
|
62,879
|
|
|
$
|
175,546
|
|
Net income
|
|
$
|
69,122
|
|
|
$
|
60,022
|
|
|
$
|
49,586
|
|
|
$
|
139,998
|
|
Net income per Sub-share Certificate - basic and diluted
|
|
$
|
8.91
|
|
|
$
|
7.74
|
|
|
$
|
6.39
|
|
|
$
|
18.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters ended
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
September 30, 2018
|
|
June 30,
2018
|
|
March 31, 2018
|
Revenues
|
|
$
|
93,201
|
|
|
$
|
73,168
|
|
|
$
|
73,844
|
|
|
$
|
60,007
|
|
Income before income taxes
|
|
$
|
78,279
|
|
|
$
|
63,195
|
|
|
$
|
65,665
|
|
|
$
|
54,611
|
|
Net income
|
|
$
|
62,680
|
|
|
$
|
50,762
|
|
|
$
|
52,503
|
|
|
$
|
43,791
|
|
Net income per Sub-share Certificate - basic and diluted
|
|
$
|
8.06
|
|
|
$
|
6.52
|
|
|
$
|
6.73
|
|
|
$
|
5.60
|
|
*****