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, 2013 |
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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: 1-7884
MESA ROYALTY TRUST
(Exact name of registrant as specified in its charter)
Texas (State or other jurisdiction of Incorporation or Organization) |
76-6284806 (I.R.S. Employer Identification No.) |
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The Bank of New York Mellon Trust Company, N.A., Trustee 919 Congress Avenue Austin, Texas (Address of Principal Executive Offices) |
78701 (Zip Code) |
1-800-852-1422
(Registrant's 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 ý No o
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 Regulation 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 o No o
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.
Large accelerated filer o | Accelerated filer ý | Non-accelerated filer o (Do not check if a smaller reporting company) |
Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý
As of August 9, 20131,863,590 Units of Beneficial Interest were outstanding in Mesa Royalty Trust.
MESA ROYALTY TRUST
STATEMENTS OF DISTRIBUTABLE INCOME
(Unaudited)
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Three Months Ended June 30, |
Six Months Ended June 30, |
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2013 | 2012 | 2013 | 2012 | |||||||||
Royalty income |
$ | 690,404 | $ | 919,695 | $ | 1,729,479 | $ | 2,189,062 | |||||
Interest income |
43 | 59 | 84 | 97 | |||||||||
General and administrative expense |
(37,148 | ) | (38,703 | ) | (90,133 | ) | (106,964 | ) | |||||
Distributable income |
$ | 653,299 | $ | 881,051 | $ | 1,639,430 | $ | 2,082,195 | |||||
Distributable income per unit |
$ | 0.3505 | $ | 0.4728 | $ | 0.8797 | $ | 1.1173 | |||||
Units outstanding |
1,863,590 | 1,863,590 | 1,863,590 | 1,863,590 | |||||||||
STATEMENTS OF ASSETS, LIABILITIES AND TRUST CORPUS
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June 30, 2013 |
December 31, 2012 |
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(Unaudited) |
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ASSETS |
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Cash and short-term investments |
$ | 1,653,299 | $ | 1,830,390 | |||
Net overriding royalty interest in oil and gas properties |
42,498,034 | 42,498,034 | |||||
Accumulated amortization |
(38,400,858 | ) | (38,013,221 | ) | |||
Total assets |
$ | 5,750,475 | $ | 6,315,203 | |||
LIABILITIES AND TRUST CORPUS |
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Distributions payable |
$ | 653,299 | $ | 830,390 | |||
Trust corpus (1,863,590 units of beneficial interest authorized, issued and outstanding) |
5,097,176 | 5,484,813 | |||||
Total liabilities and trust corpus |
$ | 5,570,475 | $ | 6,315,203 | |||
(The accompanying notes are an integral part of these financial statements.)
2
MESA ROYALTY TRUST
STATEMENTS OF CHANGES IN TRUST CORPUS
(Unaudited)
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Three Months Ended June 30, |
Six Months Ended June 30, |
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2013 | 2012 | 2013 | 2012 | |||||||||
Trust corpus, beginning of period |
$ | 5,251,869 | $ | 5,945,474 | $ | 5,484,813 | $ | 6,086,698 | |||||
Distributable income |
653,299 | 881,051 | 1,639,430 | 2,082,195 | |||||||||
Distributions to unitholders |
(653,299 | ) | (881,051 | ) | (1,639,430 | ) | (2,082,195 | ) | |||||
Amortization of net overriding royalty interest |
(154,693 | ) | (123,910 | ) | (387,637 | ) | (265,134 | ) | |||||
Trust corpus, end of period |
$ | 5,097,176 | $ | 5,821,564 | $ | 5,097,176 | $ | 5,821,564 | |||||
(The accompanying notes are an integral part of these financial statements.)
3
MESA ROYALTY TRUST
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
Note 1Trust Organization and Provisions
The Mesa Royalty Trust (the "Trust") was created on November 1, 1979. On that date, Mesa Petroleum Co., predecessor to Mesa Limited Partnership ("MLP") which was the predecessor to MESA Inc., conveyed to the Trust an overriding royalty interest (the "Royalty") equal to 90% of the Net Proceeds (as defined in the Conveyance and described below) attributable to the specified interests in properties conveyed by the assignor on that date (the "Subject Interests"). The Subject Interests consisted of interests in certain producing oil and gas properties located in the Hugoton field of Kansas, the San Juan Basin field of New Mexico and Colorado and the Yellow Creek field of Wyoming (the "Royalty Properties"). The Royalty is evidenced by counterparts of an Overriding Royalty Conveyance dated as of November 1, 1979 (the "Conveyance"). On April 30, 1991, MLP sold its interests in the Royalty Properties located in the San Juan Basin field to ConocoPhillips. ConocoPhillips sold the portion of its interests in the San Juan Basin Royalty Properties located in Colorado to MarkWest Energy Partners, Ltd. (effective January 1, 1993) and Red Willow Production Company (effective April 1, 1992). On October 26, 1994, MarkWest Energy Partners, Ltd. sold substantially all of its interest in the Colorado San Juan Basin Royalty Properties to BP Amoco Company ("BP"), a subsidiary of BP p.l.c. Until August 7, 1997, MESA Inc. operated the Hugoton Royalty Properties through Mesa Operating Co., a wholly owned subsidiary of MESA Inc. On August 7, 1997, MESA Inc. merged with and into Pioneer Natural Resources Company ("Pioneer"), formerly a wholly owned subsidiary of MESA Inc., and Parker & Parsley Petroleum Company merged with and into Pioneer Natural Resources USA, Inc. (successor to Mesa Operating Co.), a wholly owned subsidiary of Pioneer ("PNR") (collectively, the mergers are referred to herein as the "Merger"). Subsequent to the Merger, the Hugoton Royalty Properties have been operated by PNR. Substantially all of the San Juan Basin Royalty Properties located in New Mexico are operated by ConocoPhillips. Effective January 1, 2005, ConocoPhillips assigned its interest in an immaterial number of San Juan Basin Royalty Properties located in New Mexico to XTO Energy Inc. The San Juan Basin Royalty Properties located in Colorado are operated by BP. As used in this report, PNR refers to the operator of the Hugoton Royalty Properties, ConocoPhillips refers to the operator of the San Juan Basin Royalty Properties, other than the portion of such properties located in Colorado, and BP refers to the operator of the Colorado San Juan Basin Royalty Properties unless otherwise indicated.
Effective October 2, 2006, The Bank of New York Mellon Trust Company, N.A. (the "Trustee") succeeded JPMorgan Chase Bank, N.A. as Trustee of the Trust. JPMorgan Chase Bank, N.A. is the successor by mergers to the original name of the Trustee, Texas Commerce Bank National Association. The terms of the Mesa Royalty Trust Indenture (the "Trust Indenture") provide, among other things, that:
(a) the Trust cannot engage in any business or investment activity or purchase any assets;
(b) the Royalty can be sold in part or in total for cash upon approval by the unitholders;
(c) the Trustee can establish cash reserves and borrow funds to pay liabilities of the Trust and can pledge assets of the Trust to secure payment of the borrowings;
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MESA ROYALTY TRUST
NOTES TO FINANCIAL STATEMENTS (Continued)
(Unaudited)
Note 1Trust Organization and Provisions (Continued)
(d) the Trustee will make cash distributions to the unitholders in January, April, July and October each year as discussed more fully in Note 2;
(e) the Trust will terminate upon the first to occur of the following events: (i) at such time as the Trust's royalty income for two successive years is less than $250,000 per year or (ii) a vote by the unitholders in favor of termination. Upon termination of the Trust, the Trustee will sell for cash all the assets held in the Trust estate and make a final distribution to unitholders of any funds remaining after all Trust liabilities have been satisfied; and
(f) PNR, ConocoPhillips and BP (collectively the "Working Interest Owners") will reimburse the Trust for 59.34%, 27.45% and 1.77%, respectively, for general and administrative expenses of the Trust.
During 2011, the Trustee withheld $1.0 million for future unknown contingent liabilities and expenses in accordance with the Trust Indenture. As of June 30, 2013 the $1.0 million is included in cash and short term investments.
For the quarter ended June 30, 2013, The Bank of New York Mellon Trust Company, N.A. was paid fees totaling $83,938 in connection with services performed in its capacity as Trustee. These fees have been reimbursed by the working interest owners in accordance with the Trust Indenture. These reimbursements totaled $74,335.
Note 2Basis of Presentation
The accompanying unaudited financial information has been prepared by the Trustee in accordance with the instructions to Form 10-Q. The preparation of the financial statements requires estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates. The Trustee believes such information includes all the disclosures necessary to make the information presented not misleading. The information furnished reflects all adjustments which are, in the opinion of the Trustee, necessary for a fair presentation of the results for the interim periods presented. The financial information should be read in conjunction with the financial statements and notes thereto included in the Trust's Annual Report on Form 10-K for the year ended December 31, 2012. The Trust considers all highly liquid investments with a maturity of three months or less to be cash equivalents. Subsequent events were evaluated through the issuance date of the financial statements.
In accordance with the Conveyance, the Working Interest Owners are obligated to calculate and pay the Trust each month an amount equal to 90% of the Net Proceeds (as defined in the Conveyance) attributable to the month. In 1985, the Trust Indenture was amended and the Trust conveyed to an affiliate of Mesa Petroleum Co. 88.5571% of the original Royalty (such transfer, the "1985 Assignment"). The effect of the 1985 Assignment was an overall reduction of approximately 88.56% in
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MESA ROYALTY TRUST
NOTES TO FINANCIAL STATEMENTS (Continued)
(Unaudited)
Note 2Basis of Presentation (Continued)
the size of the Trust. As a result, the Trust is now entitled to receive 11.44% of 90% of the Net Proceeds attributable to each month.
The financial statements of the Trust are prepared on the following basis:
(a) Royalty income recorded for a month is the amount computed and paid by the Working Interest Owners to the Trustee for such month rather than either the value of a portion of the oil and gas produced by the Working Interest Owners for such month or the amount subsequently determined to be the Trust's proportionate share of the net proceeds for such month;
(b) Interest income, interest receivable and distributions payable to unitholders include interest to be earned on short-term investments from the financial statement date through the next date of distribution;
(c) Trust general and administrative expenses, net of reimbursements, are recorded in the month they are included in the calculation of the monthly distribution amount;
(d) Amortization of the Royalty is computed on a unit-of-production basis and is charged directly to trust corpus since such amount does not affect distributable income; and
(e) Distributions payable are determined on a monthly basis and are payable to unitholders of record as of the last business day of each month or such later date as the Trustee determines is required to comply with applicable law or stock exchange requirements. However, cash distributions are made quarterly in January, April, July and October, and include interest earned from the monthly record dates to the date of distribution.
This basis for reporting distributable income is considered to be the most meaningful because distributions to the unitholders for a month are based on net cash receipts for such month. However, these statements differ from financial statements prepared in accordance with accounting principles generally accepted in the United States of America because, under such principles, royalty income for a month would be based on net proceeds from production for such month without regard to when calculated or received, general and administrative expenses would be recorded in the month they accrue, and interest income for a month would be calculated only through the end of such month.
Note 3Legal Proceedings
There are no pending legal proceedings to which the Trust is a named party. The Trustee has been advised by PNR, ConocoPhillips and BP Amoco that it is subject to litigation in the ordinary course of business for certain matters that include the Royalty Properties. While each of the working interest owners has advised the Trustee that it does not currently believe any of the pending litigation will have a material adverse effect net to the Trust, in the event such matters were adjudicated or settled in a material amount and charges were made against Royalty income, such charges could have a material impact on future Royalty income.
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MESA ROYALTY TRUST
NOTES TO FINANCIAL STATEMENTS (Continued)
(Unaudited)
Note 4Income Tax Matters
In a technical advice memorandum dated February 26, 1982, the IRS advised the Dallas District Director that the Trust is classifiable as a grantor trust and not as an association taxable as a corporation. As a grantor trust, the Trust incurs no federal income tax liability and each unitholder is subject to tax on the unitholder's pro rata share of the income and expense of the Trust as if the unitholder were the direct owner of a pro rata share of the Trust's assets. In addition, there is no state tax liability for the period.
The Trustee assumes 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 joint owners, and brokers holding an interest for a custodian in street name). Therefore, the Trustee considers the Trust to be a non-mortgage widely held fixed investment trust ("WHFIT") for U.S. federal income tax purposes. The Bank of New York Mellon Trust Company, N.A., 919 Congress Avenue, Austin, Texas 78701, telephone number 1-800-852-1422, 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.
Note 5Excess Production Costs
Excess production costs result when costs, charges, and expenses attributable to a Working Interest Property exceed the revenue received from the sale of oil, gas, and other hydrocarbons produced from such property. The excess production costs must be recovered by the working interest owners before any distribution of Royalty income from the properties will be made to the Trust. As of June 30, 2013 and December 31, 2012, there were no excess production costs on the Trust Properties.
Note 6Tax Assessment
PNR has advised the Trustee that it received a proposed assessment from the Kansas Department of Revenue on September 10, 2009, for additional tax, penalty and interest of approximately $4.1 million resulting primarily from the settlement of the lawsuit John Steven Alford and Robert Larrabee, individually and on behalf of a Plaintiff Class v. Pioneer Natural Resources USA, Inc. in early 2007. The portion of the tax assessment net to the Trust is approximately $181,000, which could adversely affect Trust distributions. PNR has submitted a written response objecting to the proposed assessment. On March 25, 2010, the Kansas Department of Revenue issued a final assessment, which included additional interest and penalties, increasing the amount assessed to approximately $4.5 million. The portion of the tax assessment net to the Trust is approximately $197,000, which could adversely affect Trust distributions. On June 24, 2011, the hearing examiner of the Department of Revenue upheld the earlier assessment. PNR has filed an appeal to the Court of Tax Appeals in Kansas. No assurance can be made that any objections of disputed items raised by PNR will be successful.
On December 9, 2011, Pioneer and the Kansas Department of Revenue entered into a settlement of the Department of Revenue's assessment. The settlement amount was $2 million, which is less than 50% of the amount of the assessment. As a result of the settlement, the appeal of the assessment pending before the Court of Tax Appeals was dismissed on December 20, 2011. The portion of the tax assessment net to the Trust is approximately $84,719 and was withheld by Pioneer from cash available for distribution in January 2012.
7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
The following review of the Trust's financial condition and results of operations should be read in conjunction with the financial statements and notes thereto. The discussion of net production attributable to the Hugoton and San Juan properties represents production volumes that are to a large extent hypothetical as the Trust does not own and is not entitled to any specific production volumes. See Note 9 to the financial statements in the Trust's Annual Report on Form 10-K for the year ended December 31, 2012. Any discussion of "actual" production volumes represents the hydrocarbons that were produced from the properties in which the Trust has an overriding royalty interest.
The Trust is a passive entity whose purposes are limited to: (1) converting the Royalties to cash, either by retaining them and collecting the proceeds of production (until production has ceased or the Royalties are otherwise terminated) or by selling or otherwise disposing of the Royalties; and (2) distributing such cash, net of amounts for payments of liabilities to the Trust, to the unitholders. The Trust has no sources of liquidity or capital resources other than the revenues, if any, attributable to the Royalties and interest on cash held by the Trustee as a reserve for liabilities or for distribution.
Note Regarding Forward-Looking Statements
This 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. All statements other than statements of historical facts included in this Form 10-Q, including without limitation the statements under "Management's Discussion and Analysis of Financial Condition and Results of Operations," are forward-looking statements. Although the Working Interest Owners have advised the Trust that they believe that the expectations reflected in the forward-looking statements contained herein are reasonable, no assurance can be given that such expectations will prove to be correct. Important factors that could cause actual results to differ materially from expectations ("Cautionary Statements") are disclosed in this Form 10-Q and in the Trust's Annual Report on Form 10-K for the year ended December 31, 2012, including under "Item 1A. Risk Factors". All subsequent written and oral forward-looking statements attributable to the Trust or persons acting on its behalf are expressly qualified in their entirety by the Cautionary Statements.
8
SUMMARY OF ROYALTY INCOME, PRODUCTION AND AVERAGE PRICES
(Unaudited)
Royalty income is computed after deducting the Trust's proportionate share of capital costs, operating costs and interest on any cost carryforward from the Trust's proportionate share of "Gross Proceeds," as defined in the Conveyance. The following summary illustrates the net effect of the components of the actual Royalty computation for the periods indicated.
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Three Months Ended June 30, | ||||||||||||
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2013 | 2012 | |||||||||||
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Natural Gas |
Oil, Condensate and Natural Gas Liquids |
Natural Gas |
Oil, Condensate and Natural Gas Liquids |
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The Trust's proportionate share of Gross Proceeds(1) |
$ | 1,031,168 | $ | 741,319 | $ | 760,042 | $ | 1,072,366 | |||||
Less the Trust's proportionate share of: |
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Capital costs recovered |
(179,816 | ) | (182,518 | ) | (77,541 | ) | (211,351 | ) | |||||
Operating costs |
(407,539 | ) | (312,210 | ) | (271,828 | ) | (351,993 | ) | |||||
Royalty income |
$ | 443,813 | $ | 246,591 | $ | 410,673 | $ | 509,022 | |||||
Average realized price(2) |
$ | 2.98 | $ | 28.91 | $ | 2.13 | $ | 35.51 | |||||
Average production costs(3) |
$ | 3.94 | $ | 58.00 | $ | 1.82 | $ | 39.30 | |||||
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(Mcf) | (Bbls) | (Mcf) | (Bbls) | |||||||||
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Net production volumes attributable to the Royalty paid(4) |
148,941 | 8,529 | 192,471 | 14,335 | |||||||||
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Six Months Ended June 30, | ||||||||||||
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2013 | 2012 | |||||||||||
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Natural Gas |
Oil, Condensate and Natural Gas Liquids |
Natural Gas |
Oil, Condensate and Natural Gas Liquids |
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The Trust's proportionate share of Gross Proceeds(1) |
$ | 2,005,747 | $ | 1,522,427 | $ | 1,819,536 | $ | 2,238,392 | |||||
Less the Trust's proportionate share of: |
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Capital costs recovered |
(220,586 | ) | (229,264 | ) | (146,455 | ) | (348,395 | ) | |||||
Operating costs |
(761,670 | ) | (587,175 | ) | (623,199 | ) | (750,817 | ) | |||||
Royalty income |
1,023,491 | 705,988 | 1,049,882 | 1,139,180 | |||||||||
Average realized price(2) |
$ | 2.95 | $ | 27.98 | $ | 2.52 | $ | 36.41 | |||||
Average production costs(3) |
$ | 2.84 | $ | 32.36 | $ | 1.85 | $ | 35.13 | |||||
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(Mcf) | (Bbls) | (Mcf) | (Bbls) | |||||||||
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Net production volumes attributable to the Royalty paid(4) |
346,377 | 25,227 | 417,032 | 31,288 | |||||||||
9
Three Months Ended June 30, 2013 and 2012
Financial Review
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Three Months Ended June 30, |
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2013 | 2012 | |||||
Royalty income |
$ | 690,404 | $ | 919,695 | |||
Interest income |
43 | 59 | |||||
General and administrative expense |
(37,148 | ) | (38,703 | ) | |||
Distributable income |
$ | 653,299 | $ | 881,051 | |||
Distributable income per unit |
$ | 0.3505 | $ | 0.4728 | |||
Units outstanding |
1,863,590 | 1,863,590 | |||||
The Trust's Royalty income was $690,404 in the second quarter of 2013, a decrease of approximately 25% as compared to $919,695 in the second quarter of 2012, primarily as a result of increased capital expenditures and operating costs and lower natural gas liquids prices, offset in part by higher natural gas prices, in the second quarter of 2013 as compared to the second quarter of 2012.
The distributable income of the Trust for each period includes the Royalty income received from the working interest owners during such period, plus interest income earned to the date of distribution (if any). Trust administration expenses are deducted in the computation of distributable income. Distributable income for the quarter ended June 30, 2013 was $653,299, representing $0.3505 per unit, compared to $881,051, representing $0.4728 per unit, for the quarter ended June 30, 2012. Based on 1,863,590 units outstanding for the quarters ended June 30, 2013 and 2012, respectively, the per unit distributions were as follows:
|
2013 | 2012 | |||||
---|---|---|---|---|---|---|---|
April |
$ | 0.1801 | $ | 0.1721 | |||
May |
0.0565 | 0.1129 | |||||
June |
0.1139 | 0.1878 | |||||
|
$ | 0.3505 | $ | 0.4728 | |||
During 2011, the Trustee withheld $1.0 million for future unknown contingent liabilities and expenses in accordance with the Trust Indenture. As of June 30, 2013 the $1.0 million is included in cash and short term investments.
10
Operational Review
Hugoton Field
Natural gas and natural gas liquids production attributable to the Royalty from the Hugoton field accounted for approximately 50% of the Royalty income of the Trust during the second quarter of 2013.
PNR has advised the Trust that since June 1, 1995 natural gas produced from the Hugoton field has generally been sold under short-term and multi-month contracts at market clearing prices to multiple purchasers. During 2012, the primary purchaser was Oneok Gas Marketing, Inc. PNR has advised the Trust that it expects to continue to market gas production from the Hugoton field under short-term and multi-month contracts. As discussed below, overall market prices received for natural gas from the Hugoton Royalty Properties were lower in the second quarter of 2013 compared to the second quarter of 2012.
In June 1994, PNR entered into a Gas Transportation Agreement ("Gas Transportation Agreement") with Western Resources, Inc. ("WRI") for a primary term of five years commencing June 1, 1995. This contract has renewed on a year-to-year basis being effective June 1, 2001. The contract is renewed a year in advance, so PNR extended the contract to June 1, 2014. Pursuant to the Gas Transportation Agreement, WRI agreed to compress and transport up to 160 MMcf per day of gas and redeliver such gas to PNR at the inlet of PNR's Satanta Plant. PNR agreed to pay WRI a fee of $0.06 per Mcf escalating 4% annually as of June 1, 1996. This Gas Transportation Agreement was assigned to Oneok Field Services.
Royalty income attributable to the Hugoton Royalty decreased to $347,058 in the second quarter of 2013 from $420,863 in the second quarter of 2012 primarily due to lower natural gas liquids prices, decreased natural gas volumes and increased operating costs from the Hugoton Royalty Properties, offset in part by increased natural gas prices. The average price received in the second quarter of 2013 for natural gas and natural gas liquids sold from the Hugoton Royalty Properties was $3.65 per Mcf and $31.22 per barrel, respectively, as compared to $2.93 per Mcf and $45.34 per barrel, respectively, in the second quarter of 2012. Net production of natural gas attributable to the Hugoton Royalty decreased to 57,339 Mcf in the second quarter of 2013 from 78,326 Mcf in the second quarter of 2012. Net production of natural gas liquids attributable to the Hugoton Royalty increased from 4,221 barrels in the second quarter of 2012 to 4,413 barrels in the second quarter of 2013. Actual production volumes from the Hugoton properties decreased to 108,565 Mcf of natural gas and increased to 8,352 barrels of natural gas liquids in the second quarter of 2013 as compared to 133,579 Mcf of natural gas and 7,221 barrels of natural gas liquids for the same period in 2012. The decrease in natural gas volume was due to natural production decline. The increase in natural gas liquids was due to an increase in NGL yields.
The Hugoton capital expenditures were $0 in the second quarter of 2013, a decrease of approximately 100% as compared to $102 in the second quarter of 2012. Operating costs were $309,069 in the second quarter of 2013, an increase of approximately 4% as compared to $298,045 in the second quarter of 2012.
11
San Juan Basin
Royalty income from the San Juan Basin Royalty Properties is calculated and paid to the Trust on a state-by-state basis. Substantially all of the royalty income from the San Juan Basin Royalty Properties is attributable to the Royalty Properties located in the State of New Mexico.
Royalty income from the San Juan BasinNew Mexico was $218,210 during the second quarter of 2013 as compared with Royalty income $440,080 during the second quarter of 2012. The decrease in Royalty income was due primarily to an increase in capital expenditures and operating costs, a decrease in natural gas and natural gas liquids production and lower natural gas liquids prices for the second quarter of 2013 compared to the second quarter of 2012, offset in part by higher natural gas prices during the second quarter of 2013 compared to the second quarter of 2012. Net production attributable to the San Juan Basin Royalty located in New Mexico was 38,518 Mcf of natural gas and 4,116 barrels of natural gas liquids in the second quarter of 2013, as compared to 78,336 Mcf of natural gas and 10,114 barrels of natural gas liquids in the second quarter of 2012. The average price received in the second quarter of 2013 for natural gas and natural gas liquids sold from the San Juan Basin Royalty Properties located in the State of New Mexico was $2.84 per Mcf and $26.44 per barrel, respectively, compared to $1.56 per Mcf and $31.41 per barrel during the same period in 2012. Actual production volumes of natural gas attributable to the San Juan Basin properties located in the State of New Mexico decreased to 167,520 Mcf in the second quarter of 2013 as compared to 180,274 Mcf of natural gas for the same period in 2012. Actual production volumes of natural gas liquids attributable to the San Juan Basin properties located in the State of New Mexico decreased to 21,941 barrels in the second quarter of 2013 compared to 24,091 barrels for the same period in 2012. The decrease in natural gas and natural gas liquids production is due to an overall reduction in new well drilling and certain wells being shut-in during the current period.
Capital expenditures on these properties were $362,334 in the second quarter of 2013, an increase of approximately 25% as compared to $288,790 in the second quarter of 2012 primarily due to increased developmental drilling costs for certain wells. Operating costs were $375,798 in the second quarter 2013, an increase of approximately 26% as compared to $297,874 in the second quarter of 2012. The increase in operating costs was primarily due to plugging costs incurred related to certain wells.
The Trust's interest in the San Juan Basin was conveyed from PNR's working interest in 31,328 net producing acres in northwestern New Mexico and southwestern Colorado. Substantially all of the natural gas produced from the San Juan Basin is currently being sold on the spot market.
Royalty income from the San Juan BasinColorado Royalty Properties was $125,136 during the second quarter of 2013, compared to $58,752 during the second quarter of 2012. The increase in Royalty income was due to higher natural gas prices and increased natural gas production in the second quarter of 2013 offset in part by increased operating costs. Net production attributable to the San Juan Basin Royalty Properties located in Colorado was 53,083 Mcf of natural gas during the second quarter of 2013 with 35,809 Mcf of natural gas attributable to the Trust during the second quarter of 2012. The average price received in the second quarter of 2013 for natural gas sold from the San Juan Basin Colorado Properties was $2.36, as compared to average price of $1.64 for the second quarter of 2012. Actual production volumes attributable to the San Juan Basin Colorado Properties increased to 67,806 Mcf of natural gas in the second quarter of 2013 as compared to 52,461 Mcf of natural gas for the same period in 2012. Royalty income reported from BP is net of pre-main line production costs.
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These costs were charged to the Trust in error and as a result the Royalty income for previous periods was reduced. Because Royalty income recorded for a month is the amount computed and paid by BP, the additional Royalties, if any, will not be recorded until received by the Trust.
Operating costs on these properties were $34,882 in the second quarter of 2013, as compared to $27,901 in the second quarter of 2012.
Six Months Ended June 30, 2013 and 2012
Financial Review
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Six Months Ended June 30, |
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|
2013 | 2012 | |||||
Royalty income |
$ | 1,729,479 | $ | 2,189,062 | |||
Interest income |
84 | 97 | |||||
General and administrative expense |
(90,133 | ) | (106,964 | ) | |||
Distributable income |
$ | 1,639,430 | $ | 2,082,195 | |||
Distributable income per unit |
$ | 0.8797 | $ | 1.1173 | |||
Units outstanding |
1,863,590 | 1,863,590 | |||||
The Trust's Royalty income was $1,729,479 for the six months ended June 30, 2013, a decrease of approximately 21% as compared to $2,189,062 for the six months ended June 30, 2012, primarily as a result of lower natural gas production volumes and lower natural gas liquid prices, offset in part by decreased capital expenditures and operating costs and an increase in natural gas liquid volume and natural gas prices in the first six months of 2013 as compared to the first six months of 2012.
The distributable income of the Trust for each period includes the Royalty income received from the working interest owners during such period, plus interest income earned to the date of distribution. Trust administration expenses are deducted in the computation of distributable income. Distributable income for the six months ended June 30, 2013 was $1,639,430, representing $0.8797 per unit, compared to $2,082,195, representing $1.1173, for the six months ended June 30, 2012.
During 2011, the Trustee withheld $1.0 million for future unknown contingent liabilities and expenses in accordance with the Trust Indenture. As of June 30, 2013 the $1.0 million is included in cash and short term investments.
Operational Review
Hugoton Field
Natural gas and natural gas liquids revenue from the Hugoton field attributable to the Royalty accounted for approximately 41% of the Royalty income of the Trust during the six months ended June 30, 2013.
Royalty income attributable to the Hugoton Royalty Properties decreased to $709,144 for the six months ended June 30, 2013 from $895,383 for the same period in 2012 primarily due to lower prices for natural gas liquids and decreased natural gas production, offset in part by higher natural gas
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prices and lower capital expenditures and operating costs from the Hugoton Royalty Properties. The average price received in the first six months of 2013 for natural gas and natural gas liquids sold from the Hugoton field was $3.58 per Mcf and $31.75 per barrel, respectively, compared to $3.32 per Mcf and $46.97 per barrel, respectively, during the same period in 2012. Net production attributable to the Hugoton Royalty Properties decreased to 119,219 Mcf of natural gas and increased to 8,893 barrels of natural gas liquids for the six months ended June 30, 2013 as compared to 154,960 Mcf of natural gas and 8,110 barrels of natural gas liquids for the six months ended June 30, 2012. Actual production volumes attributable to the Hugoton Royalty Properties decreased to 225,330 Mcf of natural gas and increased to 16,828 barrels of natural gas liquids in the six months ended June 30, 2013 as compared to 272,819 Mcf of natural gas and 14,316 barrels of natural gas liquids for the same period in 2012. The decrease in natural gas production is a result of natural production decline. The increase in natural gas liquids production is due to an increase in NGL yields.
Capital expenditures on these properties were $0 during the six months ended June 30, 2013, a decrease of approximately 100% as compared to $1,140 during the six months ended June 30, 2012. Operating costs were $631,701 during the six months ended June 30, 2013, a decrease of approximately 7% as compared to $680,854 during the six months ended June 30, 2012.
San Juan Basin
Royalty income from the San Juan BasinNew Mexico was $807,719 for the first six months of 2013 compared to $1,108,362 in the first six months of 2012. The decrease in Royalty income was due primarily to lower natural gas liquids prices and lower production volumes, offset in part by decreased capital expenditures and operating costs and higher natural gas prices in the first six months of 2013 from the San Juan Basin properties. The average price received in the six months ended June 30, 2013 for natural gas and natural gas liquids sold from the San Juan Basin Royalty Properties located in the state of New Mexico was $2.74 per Mcf and $25.94 per barrel, respectively, compared to $2.07 per Mcf and $32.71 per barrel, respectively, during the same period in 2012. Net production attributable to the San Juan Basin Royalty located in New Mexico was 140,186 Mcf of natural gas and 16,335 barrels of natural gas liquids for the six months ended June 30, 2013 as compared to 168,950 Mcf of natural gas and 23,178 barrels of natural gas liquids for the six months ended June 30, 2012. Actual production volumes attributable to the San Juan Basin Royalty Properties decreased to 335,903 Mcf of natural gas and decreased to 44,573 barrels of natural gas liquids in the six months ended June 30, 2013 as compared to 338,023 Mcf of natural gas and 46,972 barrels of natural gas liquids for the same period in 2012.
San Juan-New Mexico capital expenditures were $449,850 during the six months ended June 30, 2013, a decrease of approximately 9% as compared to $493,709 during the six months ended June 30, 2012. This decrease is due to decreased developmental drilling activity during the six months ended June 30, 2013 when compared to the six months ended June 30, 2012. Operating costs were $650,849 during the six months ended June 30, 2013, a decrease of approximately 2% as compared to $663,496 during the six months ended June 30, 2012.
Royalty income from the San Juan BasinColorado Royalty Properties was $212,616 for the six months ended June 30, 2013, compared to $185,317 during the same period in 2012. The increase in Royalty income was primarily the result of increased actual natural gas production and higher natural gas prices offset in part by increased operating costs in the six months ended June 30, 2013 compared to the same period in 2012. Net production attributable to the San Juan Basin Royalty Properties
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located in Colorado was 86,972 Mcf of natural gas during the six months ended June 30, 2013 with 93,122 Mcf of natural gas attributable to the Trust during the same period in 2012. The average price received for the six months ended June 30, 2013 for natural gas sold from the San Juan Basin Colorado Properties was $2.44, compared to $1.99 received during the same period in 2012. Actual production volumes attributable to the San Juan Basin Colorado Properties increased to 114,067 Mcf of natural gas for the six months ended June 30, 2013 as compared to 107,120 Mcf of natural gas for the same period in 2012.
Operating costs on these properties were $66,295 for the six months ended June 30, 2013, an increase of approximately 123% as compared to $29,665 in the same period in 2012. The properties operate on a cash basis. As a result, the timing of payments of current costs and corrections to previously charged costs during the six months ended June 30, 2012 accounted for the increase during the six months ended June 30, 2013.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The Trust does not engage in any operations, and does not utilize market risk sensitive instruments, either for trading purposes or for other than trading purposes. The Trust's monthly distributions are highly dependent upon the prices realized from the sale of natural gas. Natural gas prices can fluctuate widely on a month-to-month basis in response to a variety of factors that are beyond the control of the Trust and the working interest owners. Factors that contribute to price fluctuation include, among others:
Moreover, government regulations, such as regulation of natural gas transportation, regulation of green house gas and other emissions associated with fossil fuel combustion and price controls, can affect product prices in the long term.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures. The Trustee maintains disclosure controls and procedures designed to ensure that information required to be disclosed by the Trust in the reports that it files or submits under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and regulations. Disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed by the Trust in the reports that it files or submits under the
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Exchange Act is accumulated and communicated by the working interest owners to The Bank of New York Mellon Trust Company, N.A., as Trustee of the Trust, and its employees who participate in the preparation of the Trust's periodic reports as appropriate to allow timely decisions regarding required disclosure.
As of the end of the period covered by this report, the trust officer acting on behalf of the Trustee responsible for the administration of the Trust conducted an evaluation of the Trustee's disclosure controls and procedures. The officer acting on behalf of the Trustee concluded that the Trust's disclosure controls and procedures were effective.
Due to the contractual arrangements of (i) the Trust Indenture and (ii) the rights of the Trust under the Conveyance regarding information furnished by the working interest owners, the Trustee relies on information provided by the working interest owners, including (i) the status of litigation, (ii) historical operating data, plans for future operating and capital expenditures and reserve information, (iii) information relating to projected production, and (iv) conclusions regarding reserves by their internal reserve engineers or other experts in good faith. See Part I Item 1A. "Risk FactorsTrust unitholders and the Trustee have no control over the operation or development of the Royalty Properties and have little influence over operation or development" and "The Trustee relies upon the working interest owners for information regarding the Royalty Properties" in the Trust's Annual Report on Form 10-K for the year ended December 31, 2012 for a description of certain risks relating to these arrangements and reliance, including filings such as this filing outside the time periods specified notwithstanding effective disclosure controls and procedures of the Trustee regarding information under its control.
The officer acting on behalf of the Trustee has not conducted a separate evaluation of the disclosure controls and procedures with respect to information furnished by the working interest owners. The Trustee notes that it is conducting an ongoing review of certain information and calculations by the working interest owners, along with an outside joint venture auditor. See "Management's Discussion and Analysis of Financial Condition and Results of OperationsLiquidity and Capital Resources" under Item 7 on Form 10-K for the year ended December 31, 2012 for information concerning controls and procedures with respect to the Royalty.
Changes in Internal Control over Financial Reporting. In connection with the evaluation by the Trustee of changes in internal control over financial reporting of the Trust that occurred during the Trust's last fiscal quarter, no change in the Trust's internal control over financial reporting was identified that has materially affected, or is reasonably likely to materially affect, the Trust's internal control over financial reporting. The Trustee notes for purposes of clarification that it has no authority over, has not evaluated and makes no statement concerning the internal control over financial reporting of the working interest owners.
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There are no pending legal proceedings to which the Trust is a named party. The Trustee has been advised by PNR, ConocoPhillips and BP Amoco that it is subject to litigation in the ordinary course of business for certain matters that include the Royalty Properties. While each of the working interest owners has advised the Trustee that it does not currently believe any of the pending litigation will have a material adverse effect net to the Trust, in the event such matters were adjudicated or settled in a material amount and charges were made against Royalty income, such charges could have a material impact of future Royalty income.
There have not been any material changes from risk factors previously disclosed in Item 1A to Part 1 of the Trust's Annual Report on Form 10-K for the year ended December 31, 2012.
(Asterisk indicates exhibit previously filed with the Securities and Exchange Commission and incorporated herein by reference. The Bank of New York Mellon Trust Company, N.A. is the successor trustee to JPMorgan Chase Bank, N.A. JPMorgan Chase Bank, N.A. was formerly known as The Chase Manhattan Bank and was successor by mergers to the original name of the Trustee, Texas Commerce Bank National Association).
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SEC File or Registration Number |
Exhibit Number |
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4(a) | * | Mesa Royalty Trust Indenture between Mesa Petroleum Co. and Texas Commerce Bank National Association, as Trustee, dated November 1, 1979 | 2-65217 | 1(a | ) | |||||
4(b) | * | Overriding Royalty Conveyance between Mesa Petroleum Co. and Texas Commerce Bank, as Trustee, dated November 1, 1979 | 2-65217 | 1(b | ) | |||||
4(c) | * | First Amendment to the Mesa Royalty Trust Indenture dated as of March 14, 1985 (Exhibit 4(c) to Form 10-K for year ended December 31, 1984 of Mesa Royalty Trust) | 1-7884 | 4(c | ) | |||||
4(d) | * | Form of Assignment of Overriding Royalty Interest, effective April 1, 1985, from Texas Commerce Bank National Association, as Trustee, to MTR Holding Co. (Exhibit 4(d) to Form 10-K for year ended December 31, 1984 of Mesa Royalty Trust) | 1-7884 | 4(d | ) | |||||
4(e) | * | Purchase and Sale Agreement, dated March 25, 1991, by and among Mesa Limited Partnership, Mesa Operating Limited Partnership and Conoco, as amended on April 30, 1991 (Exhibit 4(e) to Form 10-K for year ended December 31, 1991 of Mesa Royalty Trust) | 1-7884 | 4(e | ) | |||||
31 | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |||||||||
32 | Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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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.
Mesa Royalty Trust | ||||
By: |
The Bank of New York Mellon Trust Company, N.A., as Trustee |
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By: |
/s/ MIKE ULRICH Mike Ulrich Vice President |
Date: August 9, 2013
The Registrant, Mesa Royalty Trust, has no principal executive officer, principal financial officer, board of directors or persons performing similar functions. Accordingly, no additional signatures are available and none have been provided.
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I, Mike Ulrich, certify that:
In giving the foregoing certifications in paragraphs 4, 5 and 6, I have relied to the extent I consider reasonable on information provided to me by the working interest owners.
Date: August 9, 2013 | /s/ MIKE ULRICH Mike Ulrich, Vice President and Trust Officer The Bank of New York Mellon Trust Company, N.A. |
August 9, 2013
Via EDGAR
Securities
and Exchange Commission
Judiciary Plaza
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
Ladies and Gentlemen:
In connection with the Quarterly Report of Mesa Royalty Trust (the "Trust") on Form 10-Q for the period ended June 30, 2013 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), the undersigned, not in its individual capacity but solely as the trustee of the Trust, certifies pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to its knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Trust at the dates and for the periods presented.
The above certification is furnished solely pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350) and is not being filed as part of the Form 10-Q or as a separate disclosure document.
THE BANK OF NEW YORK MELLON TRUST COMPANY, N.A. TRUSTEE FOR MESA ROYALTY TRUST |
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By: |
/s/ MIKE ULRICH Mike Ulrich Vice President and Trust Officer |