UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
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Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
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For the quarterly period ended
March 31, 2008
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o
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Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
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For the transition period from
to
Commission File Number: 1-11608
WILLIAMS COAL SEAM GAS ROYALTY TRUST
(Exact name of registrant as specified in its charter)
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Delaware
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75-6437433
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(State or other jurisdiction
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(I.R.S. Employer
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of incorporation or
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Identification No.)
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organization)
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Trust Division
U.S. Trust, Bank of America Private Wealth Management
901 Main Street
17th Floor
Dallas, Texas 75202
(Address of principal executive offices)
(Zip code)
(214) 209-2400
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports) and (2) has been
subject to such filing requirements for the past 90 days. Yes
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No
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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act.
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Large accelerated filer
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Accelerated filer
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Non-accelerated filer
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Smaller reporting company
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(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes
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No
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Number of units of beneficial interest outstanding at May 1, 2008: 9,700,000
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
Item 1. Financial Statements.
The financial statements included herein have been prepared by Bank of America, N.A., as
Trustee (the Trustee) of Williams Coal Seam Gas Royalty Trust (the Trust), pursuant to the
rules and regulations of the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in annual financial statements have been condensed or omitted
pursuant to such rules and regulations, although the Trustee believes that the disclosures are
adequate to make the information presented not misleading. It is suggested that these condensed
financial statements be read in conjunction with the financial statements and notes thereto
included in the Trusts Annual Report on Form 10-K for the year ended December 31, 2007 (the 2007
Annual Report). The December 31, 2007 balance sheet is derived from the audited balance sheet of
that date. In the opinion of the Trustee, all adjustments, consisting only of normal recurring
adjustments, necessary to present fairly the assets, liabilities and trust corpus of the Trust as
of March 31, 2008, and the distributable income and the changes in trust corpus for the three-month
periods ended March 31, 2008 and 2007, have been included. The distributable income for such
interim periods is not necessarily indicative of the distributable income for the full year.
The financial statements as of March 31, 2008, and for the three-month periods ended March 31,
2008 and 2007 included herein have been reviewed by Ernst & Young LLP, an independent registered
public accounting firm, as stated in their report appearing herein.
Report of Independent Registered Public Accounting Firm
The Trustee
Williams Coal Seam Gas Royalty Trust
We have reviewed the condensed statement of assets, liabilities and trust corpus of the Williams
Coal Seam Gas Royalty Trust as of March 31, 2008, and the related condensed statements of
distributable income and changes in trust corpus for the three-month periods ended March 31, 2008
and 2007. These financial statements are the responsibility of the Trustees management.
We conducted our review in accordance with the standards of the Public Company Accounting Oversight
Board (United States). A review of interim financial information consists principally of applying
analytical procedures and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance with the
standards of the Public Company Accounting Oversight Board, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do
not express such an opinion.
As described in Note 2 to the financial statements, these financial statements have been prepared
on a modified cash basis of accounting, which is a comprehensive basis of accounting other than
U.S. generally accepted accounting principles.
Based on our review, we are not aware of any material modifications that should be made to the
condensed financial statements referred to above for them to be in conformity with the basis of
accounting described in Note 2.
We have previously audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the statement of assets, liabilities and trust corpus of the
Williams Coal Seam Gas Royalty Trust as of December 31, 2007, and the related statements of
distributable income and changes in trust corpus for the year then ended not presented herein, and
in our report dated March 10, 2008, we expressed an unqualified opinion on those financial
statements. In our opinion, the information set forth in the accompanying condensed statement of
assets, liabilities and trust corpus as of December 31, 2007, is fairly stated, in all material
respects, in relation to the statement of assets, liabilities and trust corpus from which it has
been derived.
/s/ Ernst & Young LLP
Tulsa, Oklahoma
May 6, 2008
WILLIAMS COAL SEAM GAS ROYALTY TRUST
CONDENSED STATEMENTS OF ASSETS, LIABILITIES AND TRUST CORPUS (UNAUDITED)
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March 31,
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December 31,
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2008
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2007
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ASSETS
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Current Assets cash and cash equivalents
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$
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62,475
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$
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73,931
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Royalty interests in oil and gas properties
(less accumulated amortization
of $132,003,307 at
March 31, 2008 and
$131,695,632 at December 31,
2007) (Note 2)
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6,563,357
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6,871,032
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TOTAL ASSETS
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$
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6,625,832
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$
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6,944,963
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LIABILITIES AND TRUST CORPUS
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Current Liabilities:
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Accounts payable
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$
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58,316
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$
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66,986
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Trust corpus 9,700,000 units of
beneficial interest authorized
and outstanding (Note 2)
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6,567,516
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6,877,977
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TOTAL LIABILITIES
AND TRUST CORPUS
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$
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6,625,832
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$
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6,944,963
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The accompanying notes are an integral part of these financial statements. See accountants review
report.
WILLIAMS COAL SEAM GAS ROYALTY TRUST
CONDENSED STATEMENTS OF DISTRIBUTABLE INCOME (UNAUDITED)
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THREE MONTHS
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THREE MONTHS
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ENDED
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ENDED
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March 31, 2008
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March 31, 2007
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Royalty income (Note 2)
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$
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2,034,650
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$
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2,312,842
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Interest income
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4,476
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10,136
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Total
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2,039,126
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2,322,978
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General and administrative
expenses (Note 4)
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(299,715
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(344,904
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Distributable income
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$
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1,739,411
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$
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1,978,074
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Distributable income per unit
(9,700,000 units) (Note 2)
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$
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.18
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$
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.20
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The accompanying notes are an integral part of these financial statements. See
accountants review report.
WILLIAMS COAL SEAM GAS ROYALTY TRUST
CONDENSED STATEMENTS OF CHANGES IN TRUST CORPUS (UNAUDITED)
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THREE MONTHS
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THREE MONTHS
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ENDED
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ENDED
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March 31, 2008
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March 31, 2007
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Trust corpus, beginning of period
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$
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6,877,977
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$
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8,316,439
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Amortization of royalty interests (Note 2)
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(307,675
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(372,065
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Distributable income
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1,739,411
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1,978,074
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Distributions to Unitholders (Note 5)
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(1,742,197
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(2,025,165
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Trust corpus, end of period
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$
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6,567,516
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$
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7,897,283
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Distributions per unit
(9,700,000 units) (Note 5)
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$
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.18
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$
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.21
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The accompanying notes are an integral part of these financial statements. See
accountants review report.
WILLIAMS COAL SEAM GAS ROYALTY TRUST
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
1. TRUST ORGANIZATION AND PROVISIONS
Williams Coal Seam Gas Royalty Trust (the Trust) was formed as a Delaware business trust
pursuant to the terms of the Trust Agreement of Williams Coal Seam Gas Royalty Trust (as amended,
the Trust Agreement) entered into effective as of December 1, 1992, by and among Williams
Production Company, a Delaware corporation (WPC), as trustor; The Williams Companies, Inc., a
Delaware corporation (Williams), as sponsor; Bank of America, N.A. (as successor to NationsBank
of Texas, N.A.), a national banking association (the Trustee) and Chase Bank (as successor to
Chemical Bank Delaware), a Delaware banking corporation (the Delaware Trustee) (the Trustee and
the Delaware Trustee are sometimes referred to collectively as the Trustees). The Trustees are
independent financial institutions. In 2007 the Bank of America private wealth management group
officially became known as U.S. Trust, Bank of America Private Wealth Management. The legal
entity that serves as Trustee of the Trust did not change, and references in this Form 10-Q to U.S.
Trust, Bank of America Private Wealth Management shall describe the legal entity Bank of America,
N.A.
The Trust was formed to acquire and hold certain net profits interests (the Royalty
Interests) in proved natural gas properties located in the San Juan Basin of New Mexico and
Colorado (the Underlying Properties) owned by WPC. The Trust was initially created effective as
of December 1, 1992, with a $100 contribution by WPC. On January 21, 1993, the Royalty Interests
were conveyed to the Trust by WPC pursuant to the Net Profits Conveyance (the Conveyance) entered
into effective as of October 1, 1992, by and among WPC, Williams, the Trustee and the Delaware
Trustee, in consideration for all the 9,700,000 authorized units of beneficial interest in the
Trust (Units). WPC transferred its Units by dividend to its parent, Williams, which sold an
aggregate of 5,980,000 Units to the public through various underwriters in January and February
1993 (the Public Offering). Subsequently, Williams sold to the public an additional 151,209
Units. During the second quarter of 1995, Williams transferred its remaining Units to Williams
Holdings of Delaware, Inc. (WHD), a separate holding company for Williams non-regulated
businesses. Effective July 31, 1999, WHD was merged into Williams, and by operation of the merger,
Williams assumed all assets, liabilities and obligations of WHD, including without limitation
ownership of WHDs Units. Effective August 11, 2000, Williams sold its Units to Quatro Finale IV
LLC, a Delaware limited liability company (QFIV), in a privately negotiated transaction.
Williams retained the voting rights and retained a call option on the transferred Units and QFIV
was granted a put option on the Units. Through a series of exercises of its call option,
Williams reacquired an aggregate of 3,568,791 Units from December 2001 through June 2003. Williams
has informed the Trustee that it has subsequently sold 2,779,500 of these Units through May 1, 2008
and owned a remaining 789,291 Units as of such date.
Effective May 1, 1997, WPC sold the Underlying Properties subject to and burdened by the
Royalty Interests to Quatro Finale LLC, an unaffiliated Delaware limited liability company.
Ownership of the Underlying Properties reverted back to WPC effective February 1, 2001,
pursuant to the terms of the May 1, 1997 transaction. Pursuant to a Purchase and Sale Agreement
dated March 14, 2001 (the 2001 Transaction Agreement), and effective March 1, 2001, WPC sold the
Underlying Properties subject to and burdened by the Royalty Interests to Quatro Finale V LLC, an
unaffiliated Delaware limited liability company. The sale of the Underlying Properties is
expressly permitted under the Trust Agreement. Effective January 1, 2003, ownership of the
Underlying Properties once again reverted back to WPC after it exercised its right to repurchase
interests in the Underlying Properties from Quatro Finale V LLC pursuant to the 2001 Transaction
Agreement. Unless otherwise dictated by context, references herein to WPC with respect to the
ownership of the Underlying Properties for any period from May 1, 1997 through February 1, 2001,
and for the period from March 1, 2001 through December 31, 2002, shall be deemed to refer to Quatro
Finale.
The Trustee has the power to collect and distribute the proceeds received by the Trust and to
pay Trust liabilities and expenses. The Delaware Trustee has only such powers as are set forth in
the Trust Agreement and is not empowered to otherwise manage or take part in the business of the
Trust. The Royalty Interests are passive in nature and neither the Delaware Trustee nor the
Trustee has any control over or any responsibility relating to the operation of the Underlying
Properties.
The only assets of the Trust, other than cash and cash equivalents being held for the payment
of expenses and liabilities and for distribution to Unitholders, are the Royalty Interests. The
Royalty Interests consist primarily of a net profits interest (the NPI) in the Underlying
Properties. The NPI generally entitles the Trust to receive 60 percent of the Infill Net Proceeds,
as defined below, attributable to (i) gas produced and sold from WPCs net revenue interests
(working interests less lease burdens) in the properties in which WPC has a working interest (the
WI Properties) and (ii) the revenue stream received by WPC attributable to its 35 percent net
profits interest in 5,348 gross acres in La Plata County, Colorado (the Farmout Properties).
The Royalty Interests also include a 20 percent interest in WPCs Infill Net Proceeds from the
sale of production since well spacing rules have been effectively modified and additional wells are
drilled on producing drilling blocks on the WI Properties (the Infill Wells) during the term of
the Trust. Infill Net Proceeds consists generally of the aggregate proceeds, based on the price
at the wellhead, of gas produced from WPCs net revenue interest in any Infill Wells less certain
taxes and costs.
On October 15, 2002, the New Mexico Oil and Gas Commission (NMOCD) revised the field rules for
the Basin Fruitland Coal (Gas) Pool to allow optional second (infill) wells on the standard
320-acre spacing unit in certain designated areas of the pool (the non-fairway wells). On July 17,
2003, the NMOCD further modified the field rules for the Basin Fruitland Coal (Gas) Pool to allow
these infill wells on the standard 320-acre spacing unit in all areas of the pool. The WI
Properties contain 500 infill locations designated as proved locations according to U.S. Securities
and Exchange Commission (SEC) guidelines. As of March 31, 2008, 430 infill locations are proved
developed producing and 70 locations are proved undeveloped.
As of March 31, 2008, WPC has informed the Trustee that its estimate is that the Infill Net
Profit Costs exceeded the Infill Net Profit Gross Proceeds by
approximately $1,500,000. The
Trust will not be liable for such excess costs, and such excess costs will hereafter
constitute Excess Infill Net Profit Costs until recovered by WPC. The Trust will not receive its
20 percent interest in WPCs Infill Net Proceeds until such time as the Infill Net Profits Gross
Proceeds exceeds the Infill Net Profit Costs on an aggregate basis. The complete definitions of
Infill Net Proceeds, Infill Net Profit Costs, Excess Infill Net Profit Costs, and Infill Net Profit
Gross Proceeds are set forth in the Conveyance.
2. BASIS OF ACCOUNTING
The financial statements of the Trust are prepared on a modified cash basis and are not
intended to present financial position and results of operations in conformity with United States
Generally Accepted Accounting Principles (GAAP). Preparation of the Trusts financial statements
on such basis includes the following:
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Revenues are recognized in the period in which amounts are received by the
Trust. General and administrative expenses are recognized on an accrual basis.
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Amortization of the Royalty Interests is calculated on a unit-of-production
basis and charged directly to trust corpus.
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Distributions to Unitholders are recorded when declared by the Trustee (See
Note 5).
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Loss contingencies are recognized in the period in which amounts are paid by
the Trust.
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The financial statements of the Trust differ from financial statements prepared in accordance
with GAAP. For example, royalty income is not accrued in the period of production, amortization of
the Royalty Interests is not charged against operating results, and loss contingencies are not
charged to operating results until paid. This comprehensive basis of accounting other than GAAP
corresponds to the accounting permitted for royalty trusts by the SEC, as specified by Staff
Accounting Bulletin Topic 12:E, Financial Statements of Royalty Trusts.
The Trust will terminate no later than December 31, 2012, subject to earlier termination under
certain circumstances described in the Trust Agreement. Cancellation of the Trust will occur on or
following the Termination Date (hereinafter defined) when all Trust assets have been sold and the
net proceeds therefrom distributed to holders of Units in the Trust (Unitholders).
One of the circumstances for which the Trust is subject to termination prior to December 31,
2012 is in the event that when a computation is performed as of each December 31, the net present
value (discounted at 10 percent) of the estimated future net revenues (calculated in accordance
with criteria established by the SEC) for proved reserves attributable to the Royalty Interests but
using the average monthly Blanco Hub Spot Price for the past calendar year less certain gathering
costs, is equal to or less than $30 million. The net present value of the estimated future net
revenues computed as described above by the independent petroleum engineers as of December 31, 2007
was approximately $64 million. While the results of this
computation did not trigger an early
termination of the Trust as of December 31, 2007, future
computations are subject to the numerous uncertainties in estimating the future net revenues
as described above, including changes in pricing, costs and production volumes. As a result, the
ability of these future net revenues of the Trust to exceed the threshold in the future is
uncertain.
3. FEDERAL INCOME TAXES
The Trust is a grantor trust for Federal income tax purposes. As a grantor trust, the Trust
is not required to pay Federal income taxes. Accordingly, no provision for income taxes has been
made in these financial statements.
Because the Trust is treated as a grantor trust, and because a Unitholder is treated as
directly owning an interest in the Royalty Interests, each Unitholder is taxed directly on his per
Unit pro rata share of income attributable to the Royalty Interests consistent with the
Unitholders method of accounting and without regard to the taxable year or accounting method
employed by the Trust.
The Trustee assumed that some Trust Units are held by a middleman, as such term is broadly
defined in U.S. Treasury Regulations (and includes custodians, nominees, certain join owners, and
brokers holding an interest for a custodian in a street name). Therefore, the Trustee considers
the Trust to be a widely held fixed investment trust (WHFIT) for U.S. federal income tax
purposes. U.S. Trust, Bank of America Private Wealth Management, 901 Main Street, 17th Floor,
Dallas, Texas 75202, telephone number (214) 209-2400, is the representative of the Trust that will
provide tax information in accordance with applicable U.S. Treasury Regulations governing the
information reporting requirements of the Trust as a WHFIT.
Each Unitholder should consult his tax advisor regarding Trust tax compliance matters.
4. RELATED PARTY TRANSACTIONS
Williams provides accounting, bookkeeping and informational services to the Trust in
accordance with an Administrative Services Agreement effective December 1, 1992. The fee is
$50,000 per quarter, escalating 3 percent each October 1 commencing October 1, 1993. Aggregate
fees incurred by the Trust to Williams at December 31, 2007 represent the fourth quarter fee, and
amounts paid by the Trust to Williams at March 31, 2008 represent the first quarter fee. For the
three month periods ended March 31, 2008 and 2007, the administration fee included in general and
administrative expenses was $77,898 and $75,629, respectively. Substantially all production from
the WI Properties is sold to a Williams subsidiary. Additionally, all royalty income is received
from Williams.
The interests of Williams and its affiliates and the interests of the Trust and the
Unitholders with respect to the Underlying Properties could at times be different. As a working
interest owner in the WI Properties, WPC could have interests that conflict with the interests of
the Trust and Unitholders. For example, such conflicts could be due to a number of factors
including, but not limited to, future budgetary considerations and the absence of any contractual
obligation on the part of WPC to spend for development of the WI Properties, except as noted
herein. Such decisions may have the effect of changing the amount or timing of future
distributions to Unitholders. WPCs interests may also conflict with those of the Trust and
Unitholders in situations involving the sale or abandonment of Underlying Properties. WPC has
the right at any time to sell any of the Underlying Properties subject to the Royalty
Interests and under certain circumstances may abandon any of the WI Properties. Such sales or
abandonment may not be in the best interests of the Trust. In addition, WPX Gas Resources
(hereinafter defined) has the right, exercisable in its sole discretion, to terminate its Minimum
Purchase Price (hereinafter defined) commitment under the Gas Purchase Contract (hereinafter
defined), Williams interest could conflict with those of the Trust and Unitholders to the extent
the interests of WPX Gas Resources, under the Gas Purchase Contract, or Williams Field Services
Company and WPX Gas Resources, under the Gas Gathering Contract, differ from the interests of the
Trust and the Unitholders. Except for amendments to the Gas Gathering Contract or Gas Purchase
Contract that must be approved by the vote of a majority of the Unitholders present at a meeting at
which a quorum is present if such amendment would materially adversely affect Trust revenues, no
mechanism or procedure has been included to resolve potential conflicts of interest between the
Trust, Williams, WPC or their affiliates.
5. DISTRIBUTIONS TO UNITHOLDERS
The Trustee determines for each quarter the amount of cash available for distribution to
Unitholders. Such amount (the Quarterly Distribution Amount) is an amount equal to the excess,
if any, of the cash received by the Trust, on or prior to the last day of the month following the
end of each calendar quarter from the Royalty Interests, plus, with certain exceptions, any other
cash receipts of the Trust during such quarter, over the liabilities of the Trust paid during such
quarter, subject to adjustments for changes made by the Trustee during such quarter in any cash
reserves established for the payment of contingent or future obligations of the Trust.
The Trustee distributes the Quarterly Distribution Amount within 60 days after the end of each
calendar quarter to each person who was a Unitholder of record on the associated record date (i.e.,
the 45th day following the end of each calendar quarter or if such day is not a business day, the
next business day thereafter), together with interest estimated to be earned on such amount from
the date of receipt thereof by the Trustee to the payment date.
In addition to the regular quarterly distributions, under certain circumstances specified in
the Trust Agreement (such as upon a purchase price adjustment, if any, or pursuant to the sale of a
Royalty Interest), the Trust would make a special distribution (a Special Distribution Amount).
A Special Distribution Amount would be made when amounts received by the Trust under such
circumstances aggregated in excess of $9,000,000. The record date for a Special Distribution
Amount will be the 15th day following receipt of amounts aggregating a Special Distribution Amount
by the Trust (unless such day is not a business day in which case the record date will be the next
business day thereafter or unless such day is within 10 days of the record date for a Quarterly
Distribution Amount in which case the record date will be the date as is established for the next
Quarterly Distribution Amount). Distribution to Unitholders of a Special Distribution Amount will
be made no later than 15 days after the Special Distribution Amount record date.
6. SUBSEQUENT EVENTS
Subsequent to March 31, 2008, the Trust declared the following distribution:
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Quarterly
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Record
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Payment
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Distribution
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Date
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Date
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per Unit
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May 15, 2008
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May 30, 2008
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$ 0.187237
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The distribution
per unit was $0.187237 attributable to the first quarter of 2008
(payable in the second quarter of 2008) as compared to $0.179608 attributable to the fourth quarter
of 2007 (paid in the first quarter of 2008). The increase in distributions is mainly the result
of higher natural gas prices during the three month period ended March 31, 2008 as compared to
the three month period ended December 31, 2007.
7. CONTINGENCIES
WPX Gas Resources Company (WPX Gas Resources, as successor in interest to Williams Gas
Marketing Company), purchases natural gas produced from the WI Properties (except for certain small
volumes) at the wellhead under the terms of a gas purchase contract dated October 1, 1992, as
amended (the Gas Purchase Contract). The Gas Purchase Contract provides for a pricing mechanism
during an initial 5-year period, which expired on December 31, 1997, and continuing for one or more
consecutive additional 1-year terms unless and until WPX Gas Resources exercises its annual option,
exercisable 15 days prior to the end of each contract year, to discontinue purchasing gas under the
pricing mechanism of the Gas Purchase Contract and instead purchase gas at a monthly market-based
price. WPX Gas Resources has not exercised this option and therefore the pricing mechanism will
continue to remain in effect through at least December 31, 2008.
Under the pricing mechanism of the Gas Purchase Contract, when the market price is less than
$1.70 per MMBtu (the Minimum Purchase Price), the Trust will be paid the Minimum Purchase Price
for the gas and an account (the Price Credit Account) will be maintained to identify the accrued
and unrecouped amount of payments made to the Trust in excess of the market price. Any amounts in
the Price Credit Account are subject to future recoupment when the market price exceeds the Minimum
Purchase Price. As of March 31, 2008, there were no remaining unrecouped price credits in the
Price Credit Account. To the extent there may in the future be a balance in the Price Credit
Account, the entitlement to recoup price credits means that if and when the index price is above
the Minimum Purchase Price, future royalty income paid to the Trust would be reduced until such
time as such Price Credit Account is once again reduced to zero. Corresponding cash distributions
to Unitholders would also be reduced.
While the terms of the Gas Purchase Agreement pricing mechanism remain in place and no balance
exists in the Price Credit Account, when the market price for natural gas exceeds $2.00 per MMBtu,
the Trust receives only 50 percent of the excess of the market price over the $2.00 price per MMBtu
before reduction for gathering, processing and certain other costs.
WPC has notified the Trust that certain royalty matters are currently being litigated by a
federal regulatory agency and another producer. Although neither WPC nor the Trust is a party
to the litigation, the final outcome of that case might lead to a future unfavorable impact on
the Trusts royalty income.
The majority of production attributable to the Trust is within Federal Units. Unit
participating areas are formed by pooling production from the participating area. Entitlement to
the pooled production is based on each partys acreage in the participating area divided by the
total participating acreage. Wells drilled outside the participating area may create an
enlargement to the participating area and a revision of the Unit ownership entitlement. The Bureau
of Land Management (BLM) must approve Unit participating area expansions. The effective date for
Unit expansions is retroactive to the date the well creating the expansion was tested. WPC has
informed the Trustee in 2007 that it has estimated the impact of various retroactive unit
expansions to the Trust and paid the Trust an adjusted amount, based on the estimate, in the third
quarter of 2007. This adjustment was the result of numerous expansions coming from the BLM that
impacted the Trusts royalty income. WPC has not completed these adjustments in its revenue
accounting system yet. WPC expects to have all of the estimated unit expansions completed with any
adjustments included in the Trusts royalty income during the third quarter 2008. These expansions
are retroactive to production periods beginning in 1996.
The royalty income presented in the accompanying statements of distributable income is on an
entitlement basis and reflects WPCs estimated impact of the most recent BLM participating area
approvals through March 31, 2008. With respect to the unit expansions described above, WPC has
indicated that it anticipates these unit expansions will be completely processed by June 2008.
Accordingly, the Trust could incur positive or negative revisions to royalty income in 2008 for the
conclusion of this process.
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Item 2.
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Trustees Discussion and Analysis of Financial Condition and Results of Operations.
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The Trust makes quarterly cash distributions to Unitholders. The only assets of the Trust,
other than cash and cash equivalents being held for the payment of expenses and liabilities and for
distribution to Unitholders, are the Royalty Interests. The Royalty Interests owned by the Trust
burden the Underlying Properties, which are owned by WPC and not the Trust.
Distributable income of the Trust generally consists of the excess of royalty income plus
interest income over the general and administrative expenses of the Trust. Upon receipt by the
Trust, royalty income is invested in short-term investments in accordance with the Trust Agreement
until its subsequent distribution to Unitholders.
The amount of distributable income of the Trust for any quarter may differ from the amount of
cash available for distribution to Unitholders in such quarter due to differences in the treatment
of the expenses of the Trust in the determination of those amounts. The financial statements of
the Trust are prepared on a modified cash basis pursuant to which the expenses of the Trust are
recognized when incurred whereas royalty income is recognized when received. Consequently, the
reported distributable income of the Trust for any quarter is determined by deducting from the
income received by the Trust the amount of expenses incurred by the Trust during such quarter. The
amount of cash available for distribution to Unitholders, however, is determined in accordance with
the provisions of the Trust Agreement and reflects the deduction
from the income actually received by the Trust of the amount of expenses actually paid by the
Trust and adjustments for changes in reserves for unpaid liabilities. See Note 5 to the financial
statements of the Trust appearing elsewhere in this Form 10-Q for additional information regarding
the determination of the amount of cash available for distribution to Unitholders.
Three Months Ended March 31, 2008 Compared to Three Months Ended March 31, 2007
For the quarter ended March 31, 2008, royalty income received by the Trust amounted to
$2,034,650 as compared to $2,312,842 received for the same quarter in 2007. The decrease in
royalty income is primarily due to lower production. Production
volumes are affected by changes in sales prices for natural gas
produced and costs that are deducted in calculating the NPI Net
Proceeds. Production related to the royalty income
received by the Trust in the first quarter of 2008 was 864,407 MMBtu as compared to 955,292 MMBtu
for the same quarter in 2007. Interest income for the quarter ended March 31, 2008 was lower due
to less funds available for investment compared to the same quarter in 2007. General and
administrative expenses for the quarter ended March 31, 2008 were lower compared to the same
quarter in 2007.
Distributable income for the quarter ended March 31, 2008 was $1,739,411 or $.18 per Unit
compared to $1,978,074 or $.20 per Unit for the same quarter in 2007. This decrease was the result
of lower royalty income as previously described. A distribution of $0.179608 per Unit was made on
February 29, 2008 to Unitholders of record on February 14, 2008.
Because the Trust incurs administrative expenses throughout a quarter but receives its royalty
income only once in a quarter, the Trustee established in the first quarter of 1993 a cash reserve
for the payment of expenses and liabilities of the Trust. The Trustee thereafter has adjusted the
amount of such reserve in certain quarters as required for the payment of the Trusts expenses and
liabilities, in accordance with the provisions of the Trust Agreement. The Trustee anticipates
that it will maintain for the foreseeable future a cash reserve that will fluctuate as expenses are
paid and royalty income is received.
Royalty income to the Trust is attributable to the sale of depleting assets. All of the
Underlying Properties burdened by the Royalty Interests consist of producing properties.
Accordingly, the proved reserves attributable to WPCs interest in the Underlying Properties are
expected to decline substantially during the term of the Trust and a portion of each cash
distribution made by the Trust will, therefore, be analogous to a return of capital. Accordingly,
cash yields attributable to the Units are expected to decline over the term of the Trust.
Royalty income received by the Trust in a given calendar quarter will generally reflect the
sum of (i) net proceeds from the sale of gas produced from the WI Properties during the preceding
calendar quarter, plus (ii) cash received by WPC with respect to the Farmout Properties either (a)
during the preceding calendar quarter or (b) if received in sufficient time to be paid to the
Trust, in the month immediately following such calendar quarter. Accordingly, the royalty income
included in distributable income for the quarter ended March 31, 2008, was based on production
volumes and natural gas prices for the period October 2007 through December 2007, as shown in the
table below. The production volumes included in the table below are for production attributable to
net profits of the Underlying Properties, and not for production attributable to the Trusts
Royalty Interests.
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Three Months
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Three Months
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Ended
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Ended
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December 31, 2007
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December 31, 2006
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Production (MMBtu) (1)
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WI Properties
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1,152,481
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(2)
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1,254,473
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(3)
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Farmout Properties
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288,197
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337,681
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Blanco Hub Spot Price ($/MMBtu) (4)
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$
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5.89
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$
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5.42
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Net Wellhead Price WI Properties
($/MMBtu)
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$
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2.56
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$
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2.24
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(1)
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Million British Thermal Units.
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(2)
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Includes retroactive adjustments of (75,500) MMBtu.
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(3)
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Includes retroactive adjustments of (45,534) MMBtu.
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(4)
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Simple average of estimates for the months included in the period presented.
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Production from the WI Properties is generally sold by WPC to WPX Gas Resources pursuant to
the Gas Purchase Contract that provides certain protections for WPC and Unitholders by providing
that WPX Gas Resources will purchase gas from WPC at a minimum purchase price of $1.70 even when
the applicable index price (which is equal to 97% of the Blanco Hub Spot Price) falls below $1.70
per MMBtu, provided that WPX Gas Resources is entitled to accrue price credits in the amount of any
excess of the minimum price so paid over the applicable index price. When the applicable index
price exceeds $1.70 per MMBtu, WPX Gas Resources is entitled to recoup any price credits previously
accrued. When the applicable index price is greater than $1.94 per MMBtu, the Gas Purchase Contract
protects and benefits WPX Gas Resources by allowing it to purchase gas from WPC at a contract price
equal to $1.94 per MMBtu plus only 50 percent of the difference between the applicable index price
and $1.94 per MMBtu. The Gas Purchase Contract also provides that the price paid for gas by WPX
Gas Resources is reduced by the amount of gathering, processing and certain other costs paid by WPX
Gas Resources. See Item 2 Properties The Royalty Interests Gas Purchase Contract in the
2007 Annual Report for detailed information about the Gas Purchase Contract and its impact on Trust
income.
The initial five-year term of the pricing provision (Primary Term) of the Gas Purchase
Contract expired on December 31, 1997. Following the expiration of the Primary Term, the pricing
provision will continue in effect for one or more consecutive additional one-year terms (each such
term a Contract Year) unless and until WPX Gas Resources exercises its annual option, exercisable
15 days prior to the end of each Contract Year, to discontinue purchasing gas from WPC under the
pricing provision of the Gas Purchase Contract and instead purchase gas at a monthly price equal to
the index price of 97% of the Blanco Hub Spot Price. WPX has not yet exercised this option and the
pricing mechanism of the Primary Term therefore has been and will continue to remain in effect
through at least December 31, 2008.
For the three months ended March 31, 2008, which is based on production volumes and natural
gas prices for the three months ended December 31, 2007, the Blanco Hub Spot Price was above $2.00
per MMBtu, and therefore the applicable index price under the Gas Purchase Contract, which is equal
to 97% of the Blanco Hub Spot Price, was above $1.94 per MMBtu through such period. In general,
under the Gas Purchase Contract, the Trust only receives the benefit of 50 percent of any amount by
which the applicable index price exceeds $1.94 per MMBtu. Consequently, pursuant to the terms of
the Gas Purchase Contract, WPX Gas Resources paid WPC an amount for gas purchased equal to $1.94
per MMBtu, less the costs paid by WPX Gas Resources to gather and process such gas and deliver it
to specified delivery points plus 50 percent of the excess of the applicable index price over $1.94
per MMBtu. The Blanco Hub Spot Price remained above $2.00 per MMBtu in April 2008.
The information in this Form 10-Q concerning production and prices relating to the Underlying
Properties is based on information prepared and furnished by WPC to the Trustee. The Trustee has
no control over and no responsibility relating to the operation of the Underlying Properties.
Termination and Liquidation of the Trust
Pursuant to the terms of the Trust Agreement, the Trust will terminate no later than December
31, 2012 or upon the first to occur of certain events, including (i) the disposition by the Trust
of all Royalty Interests; (ii) following an affirmative vote in favor of termination of the Trust
by the holders of record of more than 50% of the then outstanding Units; (iii) such time as the
ratio of cash received by the Trust with respect to the Royalty Interests (excluding the effect on
cash distributions received by the Trust in respect of the Royalty Interests of excess capital
costs) to administrative costs of the Trust is less than 1.2 to 1.0 for three (3) consecutive
calendar quarters, and (iv) March 1 of any calendar year if, based on a reserve report as of
December 31 of the prior year, it is determined that, as of such date, the net present value
(discounted at 10 percent) of the estimated future net revenues (calculated in accordance with
criteria established by the SEC) for proved reserves attributable to the Royalty Interests but
using the average monthly Blanco Hub Spot Price for the past calendar year less certain gathering
costs is equal to or less than $30 million (the date of the first of such occurrences is referred
to herein as the Termination Date).
The Blanco Hub Spot Price means the posted index price of spot gas delivered to pipelines per
MMBtu (dry basis) as published in the first issue of the month during which gas is delivered or
such determination is made, as the case may be, in Inside FERCs Gas Market Report for El Paso
Natural Gas Company, San Juan, or in the event a Blanco Hub posted index price is at some time in
the future reported by Inside FERCs Gas Market Report, then the Blanco Hub posted index price will
be substituted in place of the El Paso Natural Gas Company, San Juan posted index price.
Following termination, the Trustee and the Delaware Trustee will continue to act as trustees
of the Trust until all remaining Trust assets have been sold and the net proceeds from such sales
distributed to Unitholders.
Upon the termination of the Trust, the Trustee will use best efforts (as defined in the Trust
Agreement) to sell any remaining Royalty Interests for cash pursuant to the procedures described in
the Trust Agreement. The Trustee will retain an investment banking firm (the
Advisor) on behalf of the Trust who will assist the Trustee in selling the remaining Royalty
Interests then owned by the Trust (the Remaining Royalty Interests). WPC has the right, but not
the obligation to make a cash offer, to purchase all Remaining Royalty Interests following
termination of the Trust as described in the following paragraph.
WPC may, within 60 days following the Termination Date, make a cash offer to purchase all of
the Remaining Royalty Interests then held by the Trust. In the event such an offer is made by WPC,
the Trustee will decide, based on the recommendation of the Advisor, to either (i) accept such
offer (in which case no sale to WPC will be made unless a fairness opinion is given by the Advisor
that the purchase price is fair to the Trust and Unitholders) or (ii) defer action on such offer.
If the Trustee defers action on WPCs offer, the offer will be deemed withdrawn and the Trustee
will then use Best Efforts (as defined in the Trust Agreement), assisted by the Advisor to obtain
alternative offers for the Remaining Royalty Interests. At the end of a 120-day period following
the Termination Date, the Trustee is required to notify WPC of the highest of any other offers (net
of any commissions or other fees payable by the Trust), acceptable to the Trustee (which must be an
all-cash offer), received during such period (the Highest Acceptable Offer), WPC then has the
exclusive right (whether or not it made an initial offer), but not the obligation, to purchase all
Remaining Royalty Interests for a cash purchase price computed as follows: (i) if the Highest
Acceptable Offer is more than 105 percent of WPCs original offer (or if WPC did not make a prior
offer), the purchase price will be 105 percent of the Highest Acceptable Offer, or (ii) if the
Highest Acceptable Offer is equal to or less than 105 percent of WPCs original offer, the purchase
price will be equal to the Highest Acceptable Offer. If no other acceptable offers are received for
all Remaining Royalty Interests, the Trustee may request WPC to submit another offer for
consideration by the Trustee and may accept or reject such offer. Acceptance of an offer by the
Trustee shall be conditioned upon the opinion of the Advisor of the fairness of the offer.
If a sale of the Remaining Royalty Interests is made or a definitive contract for sale of the
Remaining Royalty Interests is entered into within a 150-day period following the Termination Date,
the buyer of the Remaining Royalty Interests, and not the Trust or Unitholders, will be entitled to
all proceeds of production attributable to the Remaining Royalty Interests following the
Termination Date.
In the event that WPC does not purchase the Remaining Royalty Interests, the Trustee may
accept any offer for all or any part (not more than six parts) of the Remaining Royalty Interests
as it deems to be in the best interests of the Trust and Unitholders and may continue, for up to
one calendar year after the Termination Date, to attempt to locate a buyer or buyers of the
Remaining Royalty Interests in order to sell such interests in an orderly fashion not involving a
public auction. If any Remaining Royalty Interests have not been sold or a definitive agreement for
sale has not been entered into by the end of such calendar year, the Trustee is required to sell
the Remaining Royalty Interests at public auction to the highest cash bidder, which sale may be to
WPC or any of its affiliates. Notice of such sale by auction shall be mailed at least 30 days prior
to such sale to each Unitholder at his address as it appears on the ownership ledger of the
Trustee.
WPCs purchase rights, as described, may be exercised by WPC and each of its
successors-in-interest and assigns. WPCs purchase rights are fully assignable by WPC to any
person. The costs of liquidation, including the fees and expenses of the Advisor, and the
Trustees liquidation fee will be paid by the Trust.
The sale of the Remaining Royalty Interests and the termination of the Trust will be taxable
events to the Unitholders. Generally, a Unitholder will realize gain or loss equal to the
difference between the amount realized on the sale and termination of the Trust and his adjusted
basis in such Units. Gain or loss realized by a Unitholder who is not a dealer with respect to such
Units and who has a holding period for the Units of more than one year will be treated as long-term
capital gain or loss except to the extent of any depletion recapture amount, which must be treated
as ordinary income. Each Unitholder should consult his own tax advisor regarding Trust tax
compliance matters, including Federal and state tax implications concerning the sale of the Royalty
Interests and the termination of the Trust.
Forward-Looking Statements
This report on Form 10-Q includes forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of
1934, as amended, which are intended to be covered by the safe harbor created thereby. All
statements other than statements of historical fact included in this Form 10-Q, including, without
limitation, statements contained in this Trustees Discussion and Analysis of Financial Condition
and Results of Operations regarding the Trusts financial position and industry conditions, are
forward-looking statements. Although the Trustee believes that the expectations reflected in such
forward-looking statements are reasonable, it can give no assurance that such expectations will
prove to have been correct.
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Item 3.
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Quantitative and Qualitative Disclosures About Market Risk.
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The only assets of and sources of income to the Trust are the Royalty Interests, which
generally entitle the Trust to receive a share of the net profits from natural gas production from
the Underlying Properties. Consequently, the Trusts financial results can be significantly
affected by fluctuations in natural gas prices and the Trust has commodity price risk exposure
associated with the natural gas markets in the United States. The Trust does not engage in any
hedging activities to manage its price risk associated with natural gas production from the
Underlying Properties. The Royalty Interests do not entitle the Trust to control or influence the
operation of the Underlying Properties or the sale of gas produced therefrom. Natural gas produced
from the WI Properties, which comprises the majority of production attributable to the Royalty
Interests, is currently sold by WPC pursuant to the terms of the Gas Purchase Contract. Although
the Trust is not a party to the Gas Purchase Contract, the Gas Purchase Contract may significantly
impact revenues to the Trust. Although the Gas Purchase Contract mitigates the risk to the Trust
of low gas prices, it also limits the ability of the Trust to benefit from the effects of higher
gas prices, particularly to the extent a balance exists in the Price Credit Account. See Item 2
Properties The Royalty Interests Gas Purchase Contract in the 2007 Annual Report for
detailed information about the Gas Purchase Contract and its impact on the Trust and Unitholders.
The assets of the Trust are passive in nature, and other than the Trusts ability to
periodically borrow money as necessary to pay expenses, liabilities and obligations of the Trust
that cannot be paid out of cash held by the Trust, the Trust is prohibited from engaging in
borrowing transactions. The amount of any such borrowings is unlikely to be material to the
Trust. The Trust periodically holds short-term investments acquired with funds held by the Trust
pending distribution to Unitholders and funds held in reserve for the payment of Trust expenses and
liabilities. Because of the short-term nature of these borrowings and investments and certain
limitations upon the types of such investments that may be held by the Trust, the Trustee believes
that the Trust is not subject to any material interest rate risk. The Trust does not engage in
transactions in foreign currencies that could expose the Trust or Unitholders to any foreign
currency related market risk.
Item 4. Controls and Procedures.
The
Trust maintains a set of disclosure controls and procedures designed
to ensure that information required to be disclosed by the Trust in
reports that it files or submits under the Securities Exchange
Act of 1934 is recorded, processed, summarized and reported within
the time periods specified in the SEC rules and forms. In addition,
the disclosure controls and procedures are designed to ensure that
information required to be disclosed by the Trust is accumulated and
communicated to the Trustee to allow timely decisions regarding
required disclosure. As of the end of the period covered by this report, the Trustee carried out an evaluation of
the effectiveness of the design and operation of the Trusts disclosure controls and procedures
pursuant to Exchange Act Rule 13a-15 and 15d-15. Based upon that evaluation, the Trustee concluded
that the Trusts disclosure controls and procedures are effective in timely alerting the Trustee to
material information relating to the Trust required to be included in the Trusts periodic filings
with the Securities and Exchange Commission. In its evaluation of disclosure controls and
procedures, the Trustee has relied, to the extent considered reasonable, on information provided by
WPC. There has not been any change in the Trusts internal control over financial reporting during
the period covered by this report that has materially affected, or is reasonably likely to
materially affect, the Trusts internal control over financial reporting.
PART II OTHER INFORMATION
Items 1 through 5.
Not applicable.
Item 6. Exhibits.
The exhibits listed below are filed as part of this report:
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EXHIBIT
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NUMBER
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EXHIBIT
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15.1
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Letter regarding unaudited interim financial information
dated May 6, 2008, from the independent Registered Public
Accounting Firm which acknowledges awareness of the use in
registration statement of a report on unaudited interim
financial information.
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31.1
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Certification by Ron E. Hooper, Senior Vice President and
Administrator of Bank of America, Trustee of Williams Coal
Seam Gas Royalty Trust, dated May 8, 2008, and
submitted pursuant to Rule 13a-14(a)/15d-14(a) and pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
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32.1
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Certificate by Bank of America, Trustee of Williams Coal
Seam Gas Royalty Trust, dated May 8, 2008, and
submitted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 (18 U.S.C. Section 1350).
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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WILLIAMS COAL SEAM GAS ROYALTY TRUST
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By:
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BANK OF AMERICA, N.A., Trustee
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By:
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/s/ RON E. HOOPER
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Ron E. Hooper
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Senior Vice President and Administrator
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(The Trust has no directors or executive officers.)
Date: May
8, 2008
INDEX TO EXHIBITS
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EXHIBIT NUMBER
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EXHIBIT
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15.1
|
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Letter regarding unaudited interim financial information
dated May 6, 2008, from the independent Registered Public
Accounting Firm which acknowledges awareness of the use in
registration statement of a report on unaudited interim
financial information.
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31.1
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Certification by Ron E. Hooper, Senior Vice President and
Administrator of Bank of America, Trustee of Williams Coal
Seam Gas Royalty Trust, dated May 8, 2008, and
submitted pursuant to Rule 13a-14(a)/15d-14(a) and pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
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32.1
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Certificate by Bank of America, Trustee of Williams Coal
Seam Gas Royalty Trust, dated May 8, 2008, and
submitted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 (18 U.S.C. Section 1350).
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