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 June 30, 2010
or
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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
(State or other jurisdiction
of incorporation or
organization)
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75-6437433
(I.R.S. Employer
Identification No.)
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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 has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulations S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). 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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(Do not check if a smaller reporting company)
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Smaller reporting company
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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 August 16, 2010: 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 and notes thereto 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,
2009 (the 2009 Annual Report). The December 31, 2009 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 June 30, 2010, and the distributable income for the three-month and six-month
periods ended June 30, 2010 and 2009, and the changes in trust corpus for the six-month periods
ended June 30, 2010 and 2009, 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 June 30, 2010, and for the three-month and six-month periods
ended June 30, 2010 and 2009 included herein have been reviewed by Ernst & Young LLP, an
independent registered public accounting firm, as stated in their report appearing herein.
2
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 June 30, 2010, and the related condensed statements of
distributable income for the three-month and six-month periods ended June 30, 2010 and 2009, and
the condensed statements of changes in trust corpus for the six-month periods ended June 30, 2010
and 2009. 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, 2009, and the related statements of
distributable income and changes in trust corpus for the year then ended not provided herein, and
in our report dated March 31, 2010, we expressed an unqualified opinion on those financial
statements and included explanatory paragraphs regarding the Williams Coal Seam Gas Royalty Trusts
ability to continue as a going concern and regarding the Trusts change in its reserve estimates
and related disclosures as a result of adopting new oil and gas reserve estimation and disclosure
requirements. In our opinion, the information set forth in the accompanying condensed statement of
assets, liabilities and trust corpus as of December 31, 2009, 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
August 16, 2010
3
WILLIAMS COAL SEAM GAS ROYALTY TRUST
CONDENSED STATEMENTS OF ASSETS, LIABILITIES AND TRUST CORPUS
(UNAUDITED)
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June 30,
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December 31,
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2010
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2009
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(Unaudited)
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ASSETS
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Current Assets cash and cash equivalents
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$
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166,226
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$
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52,195
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Royalty interests in oil and gas properties
(less accumulated amortization
of $134,882,068 at June 30, 2010 and
$134,091,719 at December 31, 2009)
(Note 2)
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3,684,596
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4,474,945
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TOTAL ASSETS
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$
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3,850,822
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$
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4,527,140
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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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30,907
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$
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116,341
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Trust corpus
9,700,000 units of
beneficial interest authorized
and outstanding (Note 2)
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3,819,915
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4,410,799
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TOTAL LIABILITIES
AND TRUST CORPUS
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$
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3,850,822
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$
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4,527,140
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The accompanying notes are an integral part of these financial statements. See accountants
review report.
4
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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June 30, 2010
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June 30, 2009
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Royalty income (Notes 2, 4 and 7)
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$
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407,607
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$
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931,608
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Interest income
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50
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180
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Total
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407,657
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931,788
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General and administrative
expenses (Note 4)
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(174,670
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(266,079
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Distributable income
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$
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232,987
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$
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655,709
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Distributable income per unit
(9,700,000 units) (Note 2)
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$
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.02
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$
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.07
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The accompanying notes are an integral part of these financial statements. See
accountants review report.
5
WILLIAMS COAL SEAM GAS ROYALTY TRUST
CONDENSED STATEMENTS OF DISTRIBUTABLE INCOME (UNAUDITED)
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SIX MONTHS
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SIX MONTHS
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ENDED
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ENDED
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June 30, 2010
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June 30, 2009
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Royalty income (Notes 2, 4 and 7)
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$
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1,172,185
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$
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2,325,261
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Interest income
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117
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799
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Total
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1,172,302
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2,326,060
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General and administrative
expenses (Note 4)
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(700,539
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(638,367
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Distributable income
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$
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471,763
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$
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1,687,693
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Distributable income per unit
(9,700,000 units) (Note 2)
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$
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0.05
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$
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.17
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The accompanying notes are an integral part of these financial statements. See
accountants review report.
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WILLIAMS COAL SEAM GAS ROYALTY TRUST
CONDENSED STATEMENTS OF CHANGES IN TRUST CORPUS (UNAUDITED)
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SIX MONTHS
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SIX MONTHS
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ENDED
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ENDED
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June 30, 2010
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June 30, 2009
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Trust corpus, beginning of period
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$
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4,410,799
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$
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5,592,220
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Amortization of royalty interests (Note 2)
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(790,349
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(656,315
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Distributable income
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471,763
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1,687,693
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Distributions to Unitholders (Note 5)
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(272,298
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(1,736,104
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Trust corpus, end of period
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$
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3,819,915
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$
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4,887,494
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Distributions per unit
(9,700,000 units) (Note 5)
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$
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.03
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$
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.18
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The accompanying notes are an integral part of these financial statements. See
accountants review report.
7
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 The Bank of New York Mellon
Trust Company, N.A. (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 report on 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 August 1,
2010 and owned a remaining 789,291 Units as of such date.
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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 NPI 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). NPI Net
Proceeds consists generally of the aggregate proceeds attributable to WPCs net revenue interest,
based on the sale at the wellhead of gas produced from the WI Properties and the revenue stream
received by WPC from its 35 percent net profits interest in the Farmout Properties, less certain
taxes and costs.
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, after payout, 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
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pool. The WI
Properties contain 442 infill locations designated as proved locations according to U.S. Securities
and Exchange Commission (SEC) guidelines. As of June 30, 2010, all of these infill locations
represent proved developed producing reserves, while there are no economical proved undeveloped
locations.
WPC has informed the Trustee that the Infill Wells reached payout in the aggregate during
2008. However, during 2009, WPC informed the Trustee that due to the net deficit realized by the
Infill Wells during the third and fourth quarters of 2009, the Infill Net Profit Costs exceeded the
Infill Net Profit Gross Proceeds. The Trust was not liable for such excess costs, and such excess
costs constituted Excess Infill Net Profits Costs until recovered by WPC from the distribution
received by the Trust during the first quarter of 2010. 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 Trust terminated effective March 1, 2010 (the Termination Date), pursuant to the terms
of the Trust Agreement. Accordingly, there exists substantial doubt about the Trusts ability to
continue as a going concern. Cancellation of the Trust will occur on or following the Termination
Date when all Trust assets have been sold and the net proceeds therefrom distributed to holders of
Units in the Trust (Unitholders).
The Trust Agreement required termination of the Trust 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, 2009 was approximately $8.4 million. The
results of this computation triggered an early termination of the Trust. Because the Trusts
computed net present value fell below the $30 million stipulated threshold as of December 31, 2009
the Trust terminated effective March 1, 2010. The accompanying financial statements have been
prepared on a going concern basis and do not include any adjustments, costs and expenses or other
matters that might result from the outcome of this termination. All of these adjustments, costs
and expenses resulting from the outcome of this termination are not presently known; however, they
could be significant.
Following termination of the Trust, the Trustee will continue to act as Trustee of the Trust
until all Trust assets are sold and the net proceeds from such sales distributed to Unitholders.
The Trustee will use best efforts to sell the Trusts assets in accordance with the procedures set
forth in the Trust Agreement.
The Trust has retained Albrecht & Associates, Inc., an investment banking firm (the
Advisor), on behalf of the Trust who will assist the Trustee in selling the remaining Royalty
Interests owned by the Trust (the Remaining Royalty Interests). WPC had the right, but not the
obligation, to make a cash offer to purchase all the Remaining Royalty Interests following
termination of the Trust as described in the following paragraph.
10
WPC had the right, within 60 days of the Termination Date, to make a cash offer to purchase
all of the Remaining Royalty Interests then held by the Trust. An offer was not made by WPC during
this 60 day period. Under the terms of the Trust Agreement, the Trustee has used Best Efforts (as
defined in the Trust Agreement), assisted by the Advisor to obtain offers for the Remaining Royalty
Interests. At the end of a 120-day period following the Termination Date, the Trustee notified
WPC of the highest offer (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 had the exclusive right, but not the obligation, to purchase all Remaining
Royalty Interests for a cash purchase price equal to 105 percent of the Highest Acceptable Offer.
WPC notified the Trustee that it will not be exercising its right to purchase all Remaining Royalty
Interests pursuant to such provisions of the Trust Agreement.
The Trustee is in the process of assisting with the due diligence process and negotiating the
terms of a potential sale of the Remaining Royalty Interests, but no definitive agreement has been
executed and no assurances can be made as to when or if such sale will occur or the ultimate net
proceeds that will be derived therefrom.
Because a definitive contract for sale of the Remaining Royalty Interests was not entered into
prior to the 150
th
day following the Termination Date, according to the Trust Agreement,
all net proceeds of production attributable to the Remaining Royalty Interests following the
Termination Date and until a sale of the Remaining Royalty Interests will be distributed to the
Unitholders. All proceeds of production following the Termination Date attributable to the
Remaining Royalty Interests have been deposited into a non-interest bearing account until they are
distributed in accordance with the Trust Agreement.
After receipt of royalty income in May 2010, the Trust withheld in cash and cash equivalents
$300,000 for anticipated general and administrative expenses, including expenses relating to this
termination process some of which have been incurred through June 30, 2010.
The Trustee may accept an offer for all or a part (but 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.
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). The financial statements do not include any
adjustments that might result from execution of the plan for termination or liquidation of the
Trusts assets. Preparation of the Trusts financial statements on the modified cash basis on a
going concern basis includes the following:
11
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Revenues are recognized in the period in which amounts are received by the
Trust. Routine 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.
3. FEDERAL AND STATE 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.
Some Trust Units are held by middlemen, as such term is broadly defined in U.S. Treasury
Regulations (and includes custodians, nominees, certain joint owners, and brokers holding an
interest for a custodian in a street name, referred to herein collectively as middlemen).
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, EIN
56-0906609, 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.
Notwithstanding the foregoing, the middlemen holding Trust Units on behalf of the Unitholders, and
not the Trustee of the Trust, are solely responsible for complying with the information reporting
requirements under the U.S. Treasury Regulations with respect to such Trust Units, including the
issuance of IRS Form 1099 and certain written tax statements. Unitholders whose Trust Units are
held by middlemen should consult with such middlemen regarding the information that will be
reported to them by the middlemen with respect to the Trust Units.
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In connection with the termination of the Trust and the resulting cancellation of the Trust
pursuant to the provisions of the Trust Agreement, the Trust will not incur any Federal income tax
liability at the Trust level as a result of the sale of the Remaining Royalty Interests or payment
to Unitholders of the net proceeds form such sale. However, for Federal income tax purposes, the
sale of the Remaining Royalty Interests will be taxable to the Unitholders. Each Unitholder will
recognize gain or loss on such sale measured by the difference between the Unitholders share of
the amount realized from the sale of the Remaining Royalty Interests and such Unitholders adjusted
basis in his or her Units. The amount realized from the sale of the Remaining Royalty Interests
will be allocated to Unitholders in the same manner as the Trustee allocates the income received by
the Trust.
Prior to determining the gain or loss resulting from the sale of the Remaining Royalty
Interests following the cancellation of the Trust, each Unitholder should reduce his tax basis (but
not below zero) in the Remaining Royalty Interests (and, correspondingly, his Units) by (1) the
amount of depletion allowable with respect to the Remaining Royalty Interests through the date of
the cancellation, and (2) by the amount of any return of capital, including returns of capital
resulting from a reduction to the cash reserve maintained by the Trust during a quarterly period.
Assuming a Unitholder holds his or her Units as a capital asset, gain or loss from the sale of
the Remaining Royalty Interests will be treated as a capital gain or loss. If the Units have been
held for more than one year, the gain or loss will constitute a long-term capital gain or loss;
otherwise, the gain or loss will constitute a short-term capital gain or loss. Notwithstanding the
foregoing, a Unitholder must, upon the sale of the Remaining Royalty Interests, treat as ordinary
income his or her depletion recapture amount, which is an amount equal to the lesser of (i) the
gain on the sale of the Remaining Royalty Interests or (ii) the sum of the prior depletion
deductions taken with respect to the Remaining Royalty Interests (but not in excess of the initial
basis of such Units allocated to the Remaining Royalty Interests).
Following the termination of the Trust, the Trust Agreement provides that any purchaser of the
Remaining Royalty Interests, regardless of the date of closing of the purchase, shall generally be
entitled to net proceeds of production attributable to the Remaining Royalty Interests after the
Termination Date and until a sale of the Remaining Royalty Interests and neither the Trust nor the
Unitholders shall be entitled to any such proceeds (the Purchaser Allocation Proceeds). However,
because a definitive agreement for sale of all the Remaining Royalty Interests was not entered into
prior to the 150
th
day following the Termination Date, the Purchaser Allocation
Proceeds, and all amounts thereafter payable to the Trust until a sale of the Remaining Royalty
Interests, will be distributed instead to the Unitholders in accordance with the provisions of the
Trust Agreement.
The proceeds from the sale of the Remaining Royalty Interests, less liabilities and expenses
of the Trust and amounts used for cash reserves, will be distributed, together with any interest
expected to be earned thereon, to Unitholders of record on the record date established for such
distribution. No assurances can be given as to the amount, or timing, or distributions, if any, to
Unitholders of the Trust, as such amount and timing would depend in part on the amount of expenses
ultimately payable by the Trust and when such expenses become payable and the net sales price of
the Remaining Royalty Interests and when the sale of the Remaining Royalty Interests occurs.
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The sale of the Remaining Royalty Interests following the termination of the Trust may be
taxable events to the Unitholders for state tax purposes. Unitholders should consult their own tax
advisors regarding the state tax consequences of the sale of the Remaining Royalty Interests
following the termination of the Trust.
Each Unitholder should consult his tax advisor regarding Trust tax compliance matters,
including tax consequences resulting from the termination of the Trust on the Termination Date.
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. For the three
and six month periods ended June 30, 2010, the administration fee included in general and
administrative expenses was $82,642 and $165,285, respectively, as compared to $80,235 and $160,471
for the comparable period in 2009. 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 or the
purchase or sale of the Remaining Royalty Interests. 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. Williams interest could conflict with those of the Trust and Unitholders to the extent
the interests of WPX Gas Resources (hereinafter defined), 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 or a potential purchaser of any Remaining
Royalty Interests. 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.
During 2009 WPC notified the Trust that royalty income for the second quarter 2009 includes an
overpayment of approximately $766,000. In connection with assisting with the due diligence process
for the potential sale of the Remaining Royalty Interests with the party that provided the Highest
Acceptable Offer, WPC notified the Trust of the discovery of certain errors related to the
accounting for the Underlying Properties that had impacted royalty income receipts of the Trust
over the course of the last five years. WPC informed the Trust that the net effect of
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these errors
is a cumulative overpayment to the Trust of approximately $1,067,000. Williams waived any right to
seek recoupment of the amounts of these overpayments or reduce any future payments of royalty
income to the Trust by the amounts of these overpayments.
5. DISTRIBUTIONS TO UNITHOLDERS
For production through the March 1, 2010 Termination Date, the Trustee determined for each
quarter the amount of cash available for distribution to Unitholders. Such amount (the Quarterly
Distribution Amount) was 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 or accrued 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 distributed 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.
Because a definitive contract for the sale of the Remaining Royalty Interests was not entered
into prior to the 150
th
day following the Termination Date, the Trust and the
Unitholders, and not the buyer of the Remaining Royalty Interests, are generally entitled to net
proceeds of production attributable to the Remaining Royalty Interests following the Termination
Date and until a sale of the Remaining Royalty Interests (Note 2).
6. SUBSEQUENT EVENTS
Subsequent to June 30, 2010, 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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August 4, 2010
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August 27, 2010
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$.132276
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The distribution per unit was $.132276 attributable to production for the months of March,
April, May and June, 2010 (except for the Farmout Properties for which production for the months of
March through May was included), following the Termination Date (payable in the third quarter of
2010) as compared to $0.0111 attributable to the months of January and February, 2010 (except for
the Farmout Properties for which production for the months of December 2009 to February 2010 was
included), prior to the Termination Date (paid in the second quarter of 2010). The increase in
distributions is mainly the result of non-recurring items impacting second quarter royalty income
including a retroactive unit expansion adjustment that
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reduced royalty income by approximately
$807,000 and including only the months of production preceding the Termination Date being included
in the royalty income received during the second quarter of 2010 as discussed in Note 2. The Trust
withheld in cash and cash equivalents of $200,000 for anticipated general and administrative
expenses, including expenses relating to the termination process in the first quarter all of which
has been incurred at June 30, 2010 and an additional $300,000 for anticipated general and
administrative expenses, including expenses relating to the termination process in the second
quarter, some of which has been incurred at June 30, 2010.
The proceeds from the sale of the Remaining Royalty Interests, less liabilities and expenses
of the Trust and amounts used for cash reserves, will be distributed, together with any interest
expected to be earned thereon, to Unitholders of record on the record date established for such
distribution. No assurances can be given as to the amount, or timing, or distributions, if any, to
Unitholders of the Trust, as such amount and timing would depend in part on the amount of expenses
ultimately payable by the Trust and when such expenses become payable and the net sales price of
the Remaining Royalty Interests and when the sale of the Remaining Royalty Interests occurs.
7. CONTINGENCIES
Prior to August 1, 2010, WPX Gas Resources Company (WPX Gas Resources, as successor in
interest to Williams Gas Marketing Company), purchased 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 provided for
a pricing mechanism during an initial 5-year period, which expired on December 31, 1997, and
continued for one or more consecutive additional 1-year terms unless and until WPX Gas Resources
exercised 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 did not exercise this option, and
therefore the pricing mechanism continued to remain in effect through the expiration of the Gas
Purchase Contract on August 1, 2010. The terms for the purchase of natural gas produced from the
WI Properties (except for certain small volumes related to the Farmout Properties, which were not
affected by the Gas Purchase Contract expiration) subsequent to the expiration date are currently
being negotiated.
Under the pricing mechanism of the Gas Purchase Contract, when the market price was less than
$1.70 per MMBtu (the Minimum Purchase Price), the Trust was paid the Minimum Purchase Price for
the gas and an account (the Price Credit Account) was 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 were subject to future recoupment when the market price exceeded the Minimum
Purchase Price. As of June 30, 2010, there were no remaining unrecouped price credits in the Price
Credit Account.
While the terms of the Gas Purchase Agreement pricing mechanism remained in place and no
balance existed in the Price Credit Account, when the market price for natural gas exceeded $1.94
per MMBtu (as was the case during the first six months of 2010), the Trust
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received only 50 percent
of the excess of the market price over the $1.94 price per MMBtu before reduction for gathering,
processing and certain other costs.
In 2008, WPC notified the Trust that certain royalty matters were currently being litigated by
a federal regulatory agency and another producer. WPC learned that this case was decided
unfavorably to the producer in October 2009. Neither WPC nor the Trust was a party to the
litigation; however, given the similarities to the Trusts Underlying Properties, WPC and the
Royalty Interests will more than likely be impacted as well. WPC is currently evaluating the
negative impact to the Trusts NPI. In addition, there are other cases pending against other
producers on related issues that could potentially have a significant negative impact to future
royalty income with respect to the Royalty Interests, natural gas reserves and reserve value.
The majority of the production attributable to the Trust is within Federal Units. Unit
participating areas are formed by pooling production from the participating area. Entitlement to
the pooled production is based on each 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
notified the Trust that the second quarter 2010 royalty distribution to the Trust was negatively
impacted by approximately $807,000 for a unit expansion adjustment it processed during the period.
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 June 30, 2010.
Item 2. Trustees Discussion and Analysis of Financial Condition and Results of Operations.
Termination and Liquidation of the Trust
With respect to the Trust termination provisions as outlined in the Trust Agreement, the net
present value of the estimated future net revenues computed in accordance with the Trust Agreement,
using an average 2009 index price of $3.25, by the independent petroleum engineers as of December
31, 2009 was approximately $8.4 million (which assumed continuation of the Gas Purchase Contract
with WPX through 2012). The results of this computation have triggered an early termination of the
Trust. Because the Trusts computed net present value fell below the $30 million stipulated
threshold as of December 31, 2009, the Trust terminated effective March 1, 2010 (Termination
Date).
Following termination, the Trustee and the Delaware Trustee will continue to act as trustees
of the Trust until all remaining Trust assets have been sold and the net proceeds from such sales,
if any, are 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 has retained Albrecht & Associates, Inc., an investment banking
firm (the Advisor), on behalf of the Trust who has and will continue to
17
assist the Trustee in
selling the remaining Royalty Interests then owned by the Trust (the Remaining Royalty
Interests). WPC had 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 had the right, within 60 days following the Termination Date, to make a cash offer to
purchase all of the Remaining Royalty Interests then held by the Trust. An offer was not made by
WPC during this 60 day period. Under the terms of the Trust Agreement, the Trustee has used Best
Efforts (as defined in the Trust Agreement), assisted by the Advisor to obtain offers for the
Remaining Royalty Interests. At the end of a 120-day period following the Termination Date, the
Trustee notified WPC of the highest offer (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 had the exclusive right, but not the obligation, to
purchase all Remaining Royalty Interests for a cash purchase price equal to 105 percent of the
Highest Acceptable Offer. WPC notified the Trustee that it will not be exercising its right to
purchase all Remaining Royalty Interests pursuant to such provisions of the Trust Agreement.
The Trustee is in the process of assisting with the due diligence process and negotiating the
terms of a potential sale of the Remaining Royalty Interests, but no definitive agreement has been
executed and no assurances can be made as to when or if such sale will occur or the ultimate net
proceeds that will be derived therefrom.
Because a definitive contract for sale of the Remaining Royalty Interests was not entered into
prior to the 150
th
day following the Termination Date, the Trust and the Unitholders,
and not the buyer of the Remaining Royalty Interests, will generally be entitled to net proceeds of
production attributable to the Remaining Royalty Interests following the Termination Date and until
a sale of the Remaining Royalty Interests (Note 2). Therefore, WPC will distribute to the Trust
the net proceeds from production attributable to the Remaining
Royalty Interests for this period. All proceeds of production
following the Termination Date attributable to the Remaining Royalty
Interests have been deposited into a non-interest bearing account
until they are distributed in accordance with the Trust Agreement.
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.
The sale of the Remaining Royalty Interests following the termination of the Trust will be
taxable events to the Unitholders for Federal income tax purposes. Generally, a Unitholder will
realize gain or loss equal to the difference between the amount realized on the sale of the
Remaining Royalty Interests upon 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
18
loss except to the extent of any depletion recapture amount, which must be treated as ordinary
income. State tax consequences may also result to Unitholders upon the termination of the Trust
and the sale of the Remaining Royalty Interests. Each Unitholder should consult his own tax
advisor regarding Trust tax compliance matters, including Federal and state tax implications
concerning the sale of the Remaining Royalty Interests following the
termination of the Trust (Note 3).
Distributable Income
Prior to the termination of the Trust, when excess cash was available, the Trust made
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. Currently, funds are invested in Bank of America
money market accounts which are backed by the good faith of Bank of America, N.A., but are not
insured by the Federal Deposit Insurance Corporation (FDIC). The Trust does not lend money and
has limited ability to borrow money, which the Trustee believes limits the Trusts risk from the
current tightening of credit markets. The Trusts future royalty income, however, may be subject
to risks relating to the creditworthiness of the operators of the Underlying Properties and WPX Gas
Resources and other purchasers of the natural gas produced from the Underlying Properties, as well
as risks associated with fluctuations in the price of natural gas. Additional risks are described
in Item 1A Risk Factors of the 2009 Annual Report.
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 general and administrative
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 or
accrued by the Trust and adjustments for changes in reserves for unpaid liabilities. See Notes 5
and 6 to the financial statements of the Trust appearing elsewhere in this report on Form 10-Q for
additional information regarding the determination of the amount of cash available for distribution
to Unitholders.
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Three Months and Six Months Ended June 30, 2010 Compared to Three Months and Six Months Ended
June 30, 2009
For the quarter ended June 30, 2010, royalty income received by the Trust amounted to $407,607
as compared to $931,608 received for the same quarter in 2009. Royalty income would have been
$165,792 for the quarter ended June 30, 2009, if the Trust had not received an overpayment from WPC
of $765,816. 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 second quarter of 2010 was 462,627 MMBtu (exclusive of the
impact of the retroactive unit expansion adjustment described below) as compared to 473,556 MMBtu
for the second quarter 2009. Excluding the impact of WPCs overpayment error in the second quarter
of 2009, the increase in royalty income received is primarily resulting from significant increases
in prices realized for the months of January and February 2010 compared with those in the prior
year. These significant price increases were substantially offset by a retroactive unit expansion
adjustment, which reduced royalty income in 2010 by approximately $807,000 and a reduction in
proceeds related to the lack of inclusion of the production month of March 2010, which was received
following the Termination Date. General and administrative expenses for the quarter ended June 30,
2010 were lower compared to the same quarter in 2009 due to the elimination of various on-going
services as a result of the impending liquidation of the Trust.
Royalty income for the six months ended June 30, 2010 was $1,172,185 as compared to $2,325,261
for the same period in 2009. Royalty income for the six month period ended June 30, 2009 would
have been $1,559,445 if not for the overpayment by WPC. Production related to the royalty income
received by the Trust for the six months ended June 30, 2010 was 1,002,835 MMBtu (exclusive of the
impact of the retroactive unit expansion adjustment) as compared to 1,128,876 MMBtu for the six
months ended June 30, 2009. Excluding the impact of WPCs overpayment error in the second quarter
of 2009, the decrease in royalty income received is primarily resulting from the $807,000
retroactive unit expansion adjustment, which reduced royalty income for the first half of 2010
partially offset by price increases between the comparative periods.
General and administrative expenses for the six month period ended June 30, 2010 increased
$62,172 or 10 percent compared to the same period in 2009 due to costs incurred related to the
termination of the Trust.
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 has maintained
for the foreseeable future a cash reserve that will be reduced by Trust expenses in excess of
royalty income. After receipt of royalty income in May 2010, the Trust withheld in cash and cash
equivalents an additional $300,000 for anticipated general and administrative expenses, including
expenses relating to the termination process, some of which had been incurred at June 30, 2010. As
discussed in Note 2, because a definitive contract for sale of the Remaining Royalty Interests was
not entered into prior to the 150th day following the
20
Termination Date, the Trust and the Unitholders, and not the buyers of the Remaining Royalty
interests, are generally entitled to net proceeds of production attributable to the Remaining
Royalty Interests following the Termination Date and until a sale of the Remaining Royalty
Interests.
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 June 30, 2010, was based generally on
production volumes as shown in the table below and natural gas prices for the months of January
2010 and February 2010 (Note 2). Due to delays associated with the receipt of income related to
the Farmout Properties, the Trusts royalty income for the second quarter of 2010 reflects
estimated production volumes shown in the table below from the Farmout Properties for the months of
December 2009 through February 2010. 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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March 31, 2010
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March 31, 2009
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Production (MMBtu) (1)
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WI Properties
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494,670
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(2)
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517,461
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(3)
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Farmout Properties
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188,621
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216,729
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Infill Properties
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263,264
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165,212
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Blanco Hub Spot Price ($/MMBtu) (4)
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$
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5.52
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$
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3.54
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Net Wellhead Price WI Properties
($/MMBtu) (4)
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$
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2.80
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(2)
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$
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1.80
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(5)
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(1)
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Million British Thermal Units.
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(2)
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Excludes the impact of the retroactive unit expansion adjustment described in Note 7.
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(3)
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Includes unfavorable retroactive adjustments of (38,339) 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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(5)
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Reflects a prior year overpayment by WPC of $765,816 which Williams has waived any
right to recoup.
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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
21
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 2009 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 continued to remain in effect for one or more consecutive additional one-year terms (each
such term a Contract Year) unless and until WPX Gas Resources exercised 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 did not exercise this
option, and the pricing mechanism of the Primary Term continued to remain in effect through the
expiration of the Gas Purchase Agreement on August 1, 2010. The terms for the purchase of natural
gas produced from the WI Properties (except for certain small volumes related to the Farmout
Properties, which were not affected by the Gas Purchase Contract expiration) subsequent to the
expiration date are currently being negotiated.
For the six months ended June 30, 2010, which is based on production volumes and natural gas
prices through the March 1, 2010 Termination Date, 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 July 2010.
The information in this report on 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.
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
22
thereby. All statements other than statements of historical fact included in this report on
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 and any sale of the Remaining Royalty Interests upon termination of the
Trust, 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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The only assets of and sources of income to the Trust are the Royalty Interests, which, prior
to the termination of the Trust, generally entitled the Trust to receive a share of the net profits
from natural gas production from the Underlying Properties. Consequently, the Trusts financial
results are 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, was sold by WPC pursuant to the terms of the Gas Purchase
Contract which expired August 1, 2010. Although the Trust was not a party to the Gas Purchase
Contract, the Gas Purchase Contract significantly impacted revenues to the Trust. Although the Gas
Purchase Contract mitigated the risk to the Trust of low gas prices, it also limited the ability of
the Trust to benefit from the effects of higher gas prices, particularly to the extent a balance
existed in the Price Credit Account. See Item 2 Properties The Royalty Interests Gas
Purchase Contract in the 2009 Annual Report for detailed information about the Gas Purchase
Contract and its impact on the Trust and Unitholders.
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. Currently, funds are
invested in Bank of America money market accounts which are backed by the good faith and credit of
Bank of America, N.A., but are not insured by the FDIC. Each Unitholder should independently
assess the creditworthiness of Bank of America, N.A. For more information about the credit rating
of Bank of America, N.A., please refer to its periodic filings with the SEC. The Trust does not
lend money and has limited ability to borrow money, which the Trustee believes limits the Trusts
risk from the current tightening of credit markets. The Trusts future royalty income, however,
may be subject to risks relating to the creditworthiness of the operators of the Underlying
Properties and WPX Gas Resources and other purchasers of the natural gas produced from the
Underlying Properties, as well as risks associated with fluctuations in the price of natural gas.
The market prices of the Units are determined by the buyers and sellers on the New York Stock
Exchange. The Trust does not make market on any Units and is not in any position to advise any
Unitholder on any market position. Unitholders should be aware that any position of the market
concerning the Units is beyond the Trusts control and on any given day, various market conditions
will affect the market of the Units.
23
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 the 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 on Form 10-Q, 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 recording, processing,
summarizing and reporting, on a timely basis, information required to be disclosed by the Trust in
the reports that it files or submits under the Securities Exchange Act of 1934 and are effective in
ensuring that information required to be disclosed by the Trust in the reports that it files or
submits under the Securities Exchange Act of 1934 is accumulated and communicated to the Trustee to
allow timely decisions regarding required disclosure. 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 on Form 10-Q that has materially affected, or is reasonably
likely to materially affect, the Trusts internal control over financial reporting.
PART II OTHER INFORMATION
Item 1. Legal Proceedings.
Not applicable.
Items 1A through 5.
Not applicable.
Item 6. Exhibits.
The exhibits listed below are filed as part of this report on Form 10-Q:
24
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|
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EXHIBIT
|
|
|
NUMBER
|
|
EXHIBIT
|
4.1
|
|
Trust Agreement of Williams Coal Seam Gas Royalty Trust
effective as of December 1, 1992, by and among Williams
Production Company, The Williams Companies, Inc. and
Chemical Bank Delaware and Bank of America, N.A. (as
successor to NationsBank of Texas, N.A.), as trustees
(filed as Exhibit 4.1 to the Registrants Form 10-K for the
year ended December 31, 1992 and incorporated herein by
reference).
|
|
|
|
4.2
|
|
First Amendment to the Trust Agreement of Williams Coal
Seam Gas Royalty Trust effective as of December 15, 1992,
by and among Williams Production Company, The Williams
Companies, Inc., Chemical Bank Delaware and Bank of
America, N.A. (as successor to NationsBank of Texas, N.A.)
(filed as Exhibit 4.2 to the Registrants Form 10-K for the
year ended December 31, 1992 and incorporated herein by
reference).
|
|
|
|
4.3
|
|
Second Amendment to the Trust Agreement of Williams Coal
Seam Gas Royalty Trust effective as of January 12, 1993, by
and among Williams Production Company, The Williams
Companies, Inc., Chemical Bank Delaware and Bank of
America, N.A. (as successor to NationsBank of Texas, N.A.)
(filed as Exhibit 4.3 to the Registrants Form 10-K for the
year ended December 31, 1992 and incorporated herein by
reference).
|
|
|
|
4.4
|
|
Net Profits Conveyance effective as of October 1, 1992, by
and among Williams Production Company, The Williams
Companies, Inc., and Bank of America, N.A. (as successor to
NationsBank of Texas, N.A.), and Chemical Bank Delaware
(filed as Exhibit 4.4 to the Registrants Form 10-K for the
year ended December 31, 1992 and incorporated herein by
reference).
|
|
|
|
4.5
|
|
Supplemental Net Profits Conveyance dated as of May 19,
2010 by and between Williams Production Company LLC and
Bank of America, N.A. as successor Trustee of the Williams
Coal Seam Gas Royalty Trust.
|
|
|
|
15.1
|
|
Letter regarding unaudited interim financial information
dated August 16, 2010, from the independent Registered
Public Accounting Firm which acknowledges awareness of the
use in a registration statement of a report on unaudited
interim financial information.
|
25
|
|
|
EXHIBIT
|
|
|
NUMBER
|
|
EXHIBIT
|
31.1
|
|
Certification by Ron E. Hooper, Senior Vice President and
Administrator of Bank of America, Trustee of Williams Coal
Seam Gas Royalty Trust, dated August 16, 2010, and
submitted pursuant to Rule 13a-14(a)/15d-14(a) and pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
32.1
|
|
Certificate by Bank of America, Trustee of Williams Coal
Seam Gas Royalty Trust, dated August 16, 2010, and
submitted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 (18 U.S.C. Section 1350).
|
26
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:
|
BANK OF AMERICA, N.A., Trustee
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By:
|
/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: August 16, 2010
27
INDEX TO EXHIBITS
|
|
|
EXHIBIT NUMBER
|
|
EXHIBIT
|
4.1
|
|
Trust Agreement of Williams Coal Seam Gas Royalty Trust
effective as of December 1, 1992, by and among Williams
Production Company, The Williams Companies, Inc. and
Chemical Bank Delaware and Bank of America, N.A. (as
successor to NationsBank of Texas, N.A.), as trustees
(filed as Exhibit 4.1 to the Registrants Form 10-K for the
year ended December 31, 1992 and incorporated herein by
reference).
|
|
|
|
4.2
|
|
First Amendment to the Trust Agreement of Williams Coal
Seam Gas Royalty Trust effective as of December 15, 1992,
by and among Williams Production Company, The Williams
Companies, Inc., Chemical Bank Delaware and Bank of
America, N.A. (as successor to NationsBank of Texas, N.A.)
(filed as Exhibit 4.2 to the Registrants Form 10-K for the
year ended December 31, 1992 and incorporated herein by
reference).
|
|
|
|
4.3
|
|
Second Amendment to the Trust Agreement of Williams Coal
Seam Gas Royalty Trust effective as of January 12, 1993, by
and among Williams Production Company, The Williams
Companies, Inc., Chemical Bank Delaware and Bank of
America, N.A. (as successor to NationsBank of Texas, N.A.)
(filed as Exhibit 4.3 to the Registrants Form 10-K for the
year ended December 31, 1992 and incorporated herein by
reference).
|
|
|
|
4.4
|
|
Net Profits Conveyance effective as of October 1, 1992, by
and among Williams Production Company, The Williams
Companies, Inc., and Bank of America, N.A. (as successor to
NationsBank of Texas, N.A.), and Chemical Bank Delaware
(filed as Exhibit 4.4 to the Registrants Form 10-K for the
year ended December 31, 1992 and incorporated herein by
reference).
|
|
|
|
4.5
|
|
Supplemental Net Profits Conveyance dated as of May 19,
2010 by and between Williams Production Company LLC and
Bank of America, N.A. as successor Trustee of the Williams
Coal Seam Gas Royalty Trust.
|
28
|
|
|
EXHIBIT NUMBER
|
|
EXHIBIT
|
15.1
|
|
Letter regarding unaudited interim financial information
dated August 16, 2010, from the independent Registered
Public Accounting Firm which acknowledges awareness of the
use in a registration statement of a report on unaudited
interim financial information.
|
|
|
|
31.1
|
|
Certification by Ron E. Hooper, Senior Vice President and
Administrator of Bank of America, Trustee of Williams Coal
Seam Gas Royalty Trust, dated August 16, 2010, and
submitted pursuant to Rule 13a-14(a)/15d-14(a) and pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
32.1
|
|
Certificate by Bank of America, Trustee of Williams Coal
Seam Gas Royalty Trust, dated August 16, 2010, and
submitted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 (18 U.S.C. Section 1350).
|
29
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