-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NpWmVlC82mFDokB4yKHSWCSza6a8YVdDQBEMRhzRGpRYJl1KwPoNtg1O9dv3LN80 bJKFSrn7vK7BuYrXbvD8Cw== 0000950134-98-002671.txt : 19980331 0000950134-98-002671.hdr.sgml : 19980331 ACCESSION NUMBER: 0000950134-98-002671 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980330 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: PERMIAN BASIN ROYALTY TRUST CENTRAL INDEX KEY: 0000319654 STANDARD INDUSTRIAL CLASSIFICATION: OIL ROYALTY TRADERS [6792] IRS NUMBER: 756280532 STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-08033 FILM NUMBER: 98579152 BUSINESS ADDRESS: STREET 1: P O BOX 1317 CITY: FT WORTH STATE: TX ZIP: 76101 BUSINESS PHONE: 8173906905 MAIL ADDRESS: STREET 1: P O BOX 1317 CITY: FORTH WORTH STATE: TX ZIP: 76101 10-K405 1 FORM 10-K FOR YEAR ENDED DECEMBER 31, 1997 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------------- FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 1-8033 PERMIAN BASIN ROYALTY TRUST (Exact Name of Registrant as Specified in the Permian Basin Royalty Trust Indenture) TEXAS 75-6280532 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) NATIONSBANK OF TEXAS, N.A. TRUST DEPARTMENT P.O. BOX 1317 FORT WORTH, TEXAS 76101 (Address of Principal Executive Offices) (Zip Code)
(817) 390-6905 (Registrant's Telephone Number, Including Area Code) Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED ------------------- ----------------------------------------- UNITS OF BENEFICIAL INTEREST NEW YORK STOCK EXCHANGE
Securities registered pursuant to Section 12(g) of the Act: NONE (Title of Class) 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 X No ____ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] At March 18, 1998, there were 46,608,796 Units of Beneficial Interest of the Trust outstanding with an aggregate market value on that date of $215,565,682. DOCUMENTS INCORPORATED BY REFERENCE "Units of Beneficial Interest" at page 1; "Trustee's Discussion and Analysis for the Three-Year Period Ended December 31, 1997" at pages 6 through 9; "Results of the 4th Quarters of 1997 and 1996" at page 10; and "Statements of Assets, Liabilities and Trust Corpus," "Statements of Distributable Income," "Statements of Changes in Trust Corpus," "Notes to Financial Statements" and "Independent Auditors' Report" at page 11 et seq., in registrant's Annual Report to security holders for fiscal year ended December 31, 1997 are incorporated herein by reference for Item 5 (Market for Units of the Trust and Related Security Holder Matters), Item 7 (Management's Discussion and Analysis of Financial Condition and Results of Operation) and Item 8 (Financial Statements and Supplementary Data) of Part II of this Report. ================================================================================ 2 FORWARD LOOKING INFORMATION Certain information included in this report contains, and other materials filed or to be filed by the Trust with the Securities and Exchange Commission (as well as information included in oral statements or other written statements made or to be made by the Trust) may contain or include, forward looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended. Such forward looking statements may be or may concern, among other things, capital expenditures, drilling activity, development activities, production efforts and volumes, hydrocarbon prices and the results thereof, and regulatory matters. Such forward looking statements generally are accompanied by words such as "estimate," "expect," "anticipate," "goal," "should," "assume," "believe," or other words that convey the uncertainty of future events or outcomes. PART I ITEM 1. BUSINESS The Permian Basin Royalty Trust (the "Trust") is an express trust created under the laws of the state of Texas by the "Permian Basin Royalty Trust Indenture" (the "Trust Indenture") entered into on November 3, 1980, between Southland Royalty Company ("Southland Royalty") and The First National Bank of Fort Worth, as Trustee. NationsBank of Texas, N.A. (formerly known as NCNB Texas National Bank), a banking association organized under the laws of the United States, as the successor of The First National Bank of Fort Worth, is now the Trustee of the Trust. The principal office of the Trust (sometimes referred to herein as the "Registrant") is located at 500 West Seventh Street, Fort Worth, Texas (telephone number 817/390-6905). On October 23, 1980, the stockholders of Southland Royalty approved and authorized that company's conveyance of net overriding royalty interests (equivalent to net profits interests) to the Trust for the benefit of the stockholders of Southland Royalty of record at the close of business on the date of the conveyance consisting of a 75% net overriding royalty interest carved out of that company's fee mineral interests in the Waddell Ranch properties in Crane County, Texas and a 95% net overriding royalty interest carved out of that company's major producing royalty properties in Texas. The conveyance of these interests (the "Royalties") was made on November 3, 1980, effective as to production from and after November 1, 1980 at 7:00 a.m. The function of the Trustee is to collect the income attributable to the Royalties, to pay all expenses and charges of the Trust, and then distribute the remaining available income to the Unit holders. The Trust is not empowered to carry on any business activity and has no employees, all administrative functions being performed by the Trustee. The Royalties were carved out of and now burden those properties and interests as are more particularly described under "Item 2. PROPERTIES" herein. The Royalties constitute the principal asset of the Trust and the beneficial interests in the Royalties are divided into that number of Units of Beneficial Interest (the "Units") of the Trust equal to the number of shares of the common stock of Southland Royalty outstanding as of the close of business on November 3, 1980. Each stockholder of Southland Royalty of record at the close of business on November 3, 1980, received one Unit for each share of the common stock of Southland Royalty then held. In 1985, Southland Royalty became a wholly-owned subsidiary of Burlington Northern Inc. ("BNI"). In 1988, BNI transferred its natural resource operations to Burlington Resources Inc. ("BRI") as a result of which Southland Royalty became a wholly-owned indirect subsidiary of BRI. As a result of these transactions, El Paso Natural Gas Company ("El Paso") also became an indirect subsidiary of BRI. In March 1992, El Paso completed an initial public offering of 5,750,000 newly issued shares of El Paso common stock, thereby decreasing BRI's ownership of El Paso to approximately eighty-five percent (85%). On June 30, 1992, BRI distributed all of the shares of El Paso common stock owned by BRI to BRI's stockholders of record as of June 15, 1992. See "Pricing Information" under "Item 2. PROPERTIES" herein. 1 3 Effective January 1, 1996, Southland Royalty, a wholly-owned subsidiary of Meridian Oil Inc. ("MOI") was merged with and into MOI, by which action the separate corporate existence of Southland Royalty ceased and MOI survived and succeeded to the ownership of all of the assets, has the rights, powers and privileges and assumed all of the liabilities and obligations of Southland Royalty. In 1996, MOI changed its name to Burlington Resources Oil & Gas Company ("BROG"). The term "net proceeds" as used in the above conveyance means the excess of "gross proceeds" received by BROG during a particular period over "production costs" for such period. "Gross proceeds" means the amount received by BROG (or any subsequent owner of the interests from which the Royalties were carved) from the sale of the production attributable to the properties and interests from which the Royalties were carved, subject to certain adjustments. "Production costs" means, generally, costs incurred on an accrual basis in operating the properties and interests out of which the Royalties were carved, including both capital and non-capital costs; for example, development drilling, production and processing costs, applicable taxes, and operating charges. If production costs exceed gross proceeds in any month, the excess is recovered out of future gross proceeds prior to the making of further payment to the Trust, but the Trust is not liable for any production costs or liabilities attributable to these properties and interests or the minerals produced therefrom. If at any time the Trust receives more than the amount due from the Royalties, it shall not be obligated to return such overpayment, but the amounts payable to it for any subsequent period shall be reduced by such amount, plus interest, at a rate specified in the conveyance. To the extent it has the legal right to do so, BROG is responsible for marketing the production from such properties and interests, either under existing sales contracts or under future arrangements at the best prices and on the best terms it shall deem reasonably obtainable in the circumstances. BROG also has the obligation to maintain books and records sufficient to determine the amounts payable to the Trustee. BROG, however, can sell its interests in the properties from which the Royalties were carved. Proceeds from production in the first month are generally received by BROG in the second month, the net proceeds attributable to the Royalties are paid by BROG to the Trustee in the third month and distribution by the Trustee to the Unit holders is made in the fourth month. The identity of Unit holders entitled to a distribution will generally be determined as of the last business day of each calendar month (the "monthly record date"). The amount of each monthly distribution will generally be determined and announced ten days before the monthly record date. Unit holders of record as of the monthly record date will be entitled to receive the calculated monthly distribution amount for each month on or before ten business days after the monthly record date. The aggregate monthly distribution amount is the excess of (i) net revenues from the Trust properties, plus any decrease in cash reserves previously established for contingent liabilities and any other cash receipts of the Trust over (ii) the expenses and payments of liabilities of the Trust plus any net increase in cash reserves for contingent liabilities. Cash held by the Trustee as a reserve for liabilities or contingencies (which reserves may be established by the Trustee in its discretion) or pending distribution is placed, at the Trustee's discretion, in obligations issued by (or unconditionally guaranteed by) the United States or any agency thereof, repurchase agreements secured by obligations issued by the United States or any agency thereof, or certificates of deposit of banks having a capital surplus and undivided profits in excess of $50,000,000, subject, in each case, to certain other qualifying conditions. The income to the Trust attributable to the Royalties is not subject in material respects to seasonal factors nor in any manner related to or dependent upon patents, licenses, franchises or concessions. The Trust conducts no research activities. The Trust has no employees since all administrative functions are performed by the Trustee. BROG has advised the Trustee that it believes that comparable revenues could be obtained in the event of a change in purchasers of production. 2 4 ITEM 2. PROPERTIES The net overriding royalties conveyed to the Trust include: (1) a 75% net overriding royalty carved out of Southland Royalty's fee mineral interests in the Waddell Ranch in Crane County, Texas (the "Waddell Ranch properties"); and (2) a 95% net overriding royalty carved out of Southland Royalty's major producing royalty interests in Texas (the "Texas Royalty properties"). The net overriding royalty for the Texas Royalty properties is subject to the provisions of the lease agreements under which such royalties were created. References below to "net" wells and acres are to the interests of Southland Royalty (from which the Royalties were carved) in the "gross" wells and acres. The following information in Item 2 is based upon data and information furnished to the Trustee by Southland Royalty or BROG. PRODUCING ACREAGE, WELLS AND DRILLING Waddell Ranch Properties. The Waddell Ranch properties consist of 78,175 gross (34,205 net) producing acres. A majority of the proved reserves are attributable to six fields: Dune, Sand Hills (Judkins), Sand Hills (McKnight), Sand Hills (Tubb), University-Waddell (Devonian) and Waddell. At December 31, 1997, the Waddell Ranch properties contained 834 gross (344 net) productive oil wells, 160 gross (67 net) productive gas wells and 347 gross (137 net) injection wells. BROG is operator of record of the Waddell Ranch properties. All field, technical and accounting operations have been contracted by an agreement between the working interest owners and Coastal Management Corporation ("CMC") but remain under the direction of BROG. The Waddell Ranch properties are mature producing properties, and all of the major oil fields are currently being waterflooded. Proved reserves and estimated future net revenues attributable to the properties are included in the reserve reports summarized below. BROG does not own the full working interest in any of the tracts constituting the Waddell Ranch properties and, therefore, implementation of any development programs will require approvals of other working interest holders as well as BROG. In addition, implementation of any development programs will be dependent upon oil and gas prices currently being received and anticipated to be received in the future. During 1997 there were 23 gross (9.25 net) wells drilled on the Waddell Ranch properties. At December 31, 1997 there were 19 gross (7.875 net) wells in progress on the Waddell Ranch properties. During 1996 there were 22 gross (8.375 net) oil wells drilled on the Waddell Ranch properties. At December 31, 1996 there were no wells in progress on the Waddell Ranch properties. During 1995 there were 32 gross (14.075 net) oil wells drilled on the Waddell Ranch properties. At December 31, 1995 there were 3 gross (.8 net) wells in progress on the Waddell Ranch properties. During 1994 there were 22 gross (9.875 net) wells drilled on the Waddell Ranch properties. At December 31, 1994 there were no wells in progress on the Waddell Ranch properties. BROG has advised the Trustee that the total amount of capital expenditures for 1997 with regard to the Waddell Ranch properties totalled $11,789,849. Capital expenditures include the cost of the 1997 drilling program and remedial and maintenance activities. BROG has advised the Trustee that the capital expenditures budget for 1998 totals approximately $17,639,000, of which approximately $9,736,000 is attributable to the 1998 drilling program, $4,561,000 to workovers and recompletions, $2,320,000 to facility upgrades and replacements and $1,022,000 to a seismic project. Accordingly, there is an estimated 50% increase in capital expenditures for 1998 as compared with the 1997 capital expenditures. Texas Royalty Properties. The Texas Royalty properties consist of royalty interests in mature producing oil fields, such as Yates, Wasson, Sand Hills, East Texas, Kelly-Snyder, Panhandle Regular, N. Cowden, Todd, Keystone, Kermit, McElroy, Howard-Glasscock, Seminole and others. The Texas Royalty properties contain approximately 303,000 gross (approximately 51,000 net) producing acres. Detailed information concerning the number of wells on royalty properties is not generally available to the owners of royalty interests. Consequently, an accurate count of the number of wells located on the Texas Royalty properties cannot readily be obtained. 3 5 Approximately $1.3 million in ad valorem taxes related to 1991 through 1994 for the Texas Royalty properties that Southland Royalty did not previously charge to gross proceeds attributable to the Trust was charged to the Trust over 12 months beginning March 1995. Such amount was charged by deducting $87,000 per month from gross proceeds attributable to the Texas Royalty properties in calculating royalty income from such properties. To the extent charges were made to gross proceeds, the amount of funds available for distribution to Unit holders was reduced. As of November 1996, the Trustee was advised that this original charge of $1.3 million and all subsequent adjustments to that charge had been paid. In the fourth quarter of 1996, BROG notified the Trustee that, pursuant to an ongoing divestiture program, BROG intended to sell its interests in the Texas Royalty properties that are subject to the Net Overriding Royalty Conveyance to the Trust dated effective November 1, 1980 ("Conveyance"). A Purchase and Sale Agreement was executed between BROG and Riverhill Energy Corporation ("Riverhill Energy"), a wholly owned subsidiary of Riverhill Capital Corporation ("Riverhill Capital") and an affiliate of CMC. CMC currently conducts all field, technical and accounting operations on behalf of BROG with regard to the Waddell Ranch properties. Riverhill Capital is a privately owned Texas corporation with offices in Bryan and Midland, Texas. The Trustee was advised by BROG that the transaction closed on February 14, 1997. The Trustee has been further informed by BROG that, as required by the Conveyance, Riverhill Energy has succeeded to all of the requirements upon and the responsibilities of BROG under the Conveyance with regard to the Texas Royalty properties. BROG and Riverhill Energy have further advised the Trustee that all accounting operations pertaining to the Texas Royalty properties are being performed by CMC under the direction of Riverhill Energy. BROG had indicated to the Trustee that BROG will work together with CMC and Riverhill Energy in an effort to assure that various administrative functions and reporting requirements assumed by Riverhill Energy are met. The Trustee has been advised that independent auditors representing Riverhill Energy and CMC will be Arthur Andersen LLP. The Trustee has been advised that the shareholders of Riverhill Capital have executed a term sheet with Schlumberger Technology Corporation ("STC"), whereby, subject to the satisfaction of certain conditions, all of the shares of Riverhill Capital will be purchased by and sold to STC. As stated above, Riverhill Energy and CMC are wholly owned subsidiaries of Riverhill Capital. The Trustee has been further advised that, as part of this contemplated transaction, ownership of Riverhill Energy's interests in the Texas Royalty properties referenced above will remain in Riverhill Energy which will be owned by the current shareholders of Riverhill Capital. In the event the sale to and purchase by STC is consummated, it is anticipated that CMC will continue to perform its field, technical and accounting operations on behalf of BROG with regard to the Waddell Ranch properties and all accounting operations pertaining to the Texas Royalty properties which will remain under the direction of Riverhill Energy. The Trustee has been advised by Riverhill Energy that it will assure that the various administrative functions and reporting requirements are met. 4 6 OIL AND GAS PRODUCTION The Trust recognizes production during the month in which the related distribution is received. Production of oil and gas attributable to the Royalties and the properties from which the Royalties were carved and the related average sales prices attributable to the properties from which the Royalties were carved for the three years ended December 31, 1997, excluding portions attributable to the adjustments discussed below, were as follows:
WADDELL TEXAS RANCH ROYALTY PROPERTIES PROPERTIES TOTAL --------------------------------- --------------------------- --------------------------------- 1997 1996 1995 1997 1996 1995 1997 1996 1995 --------- --------- --------- ------- ------- ------- --------- --------- --------- ROYALTIES: Production Oil (barrels)........... 426,127 418,991 262,221 391,665 352,833 330,922 817,792 771,824 593,143 Gas (Mcf)............... 1,875,965 1,915,649 1,289,005 840,790 724,732 616,294 2,716,755 2,640,381 1,905,299 PROPERTIES FROM WHICH THE ROYALTIES WERE CARVED: Production Oil (barrels)........... 1,387,056 1,338,340 1,229,822 438,963 450,397 440,649 1,826,019 1,788,737 1,670,471 Gas (Mcf)............... 6,409,242 6,376,201 6,744,271 945,920 932,205 827,343 7,355,162 7,308,406 7,571,614 Average Price Oil/barrel.............. $19.54 $19.97 $16.84 $19.20 $18.32 $15.71 $19.46 $19.55 $16.55 Gas/Mcf................. $ 2.67 $ 2.20 $ 1.59 $ 2.45 $ 2.04 $ 1.55 $ 2.64 $ 2.18 $ 1.58
PRICING INFORMATION Reference is made to "Regulation" for information as to federal regulation of prices of natural gas. The following paragraphs provide information regarding sales of oil and gas from the Waddell Ranch properties. As a royalty owner, Southland Royalty is not furnished detailed information regarding sales of oil and gas from the Texas Royalty properties. Oil. The Trustee has been advised by BROG that for the period August 1, 1993 through June 30, 1998, the oil from the Waddell Ranch properties is being sold under a competitive bid to independent third parties. Gas. The gas produced from the Waddell Ranch properties is processed through a natural gas processing plant and sold at the tailgate of the plant. Plant products are marketed by Burlington Resources Hydrocarbons Inc., an indirect subsidiary of BRI. The processor of the gas (Warren Petroleum Company, L.P.) receives 15% of the liquids and residue gas as a fee for gathering, compression, treating and processing the gas. OIL AND GAS RESERVES The following are definitions adopted by the Securities and Exchange Commission ("SEC") and the Financial Accounting Standards Board which are applicable to terms used within this Item: "Proved reserves" are those estimated quantities of crude oil, natural gas and natural gas liquids, which, upon analysis of geological and engineering data, appear with reasonable certainty to be recoverable in the future from known oil and gas reservoirs under existing economic and operating conditions. "Proved developed reserves" are those proved reserves which can be expected to be recovered through existing wells with existing equipment and operating methods. "Proved undeveloped reserves" are those proved reserves which are expected to be recovered from new wells on undrilled acreage, or from existing wells where a relatively major expenditure is required. "Estimated future net revenues" are computed by applying current prices of oil and gas (with consideration of price changes only to the extent provided by contractual arrangements and allowed by federal regulation) to estimated future production of proved oil and gas reserves as of the date of the latest balance sheet presented, less estimated future expenditures (based on current costs) to be incurred in developing and producing the proved reserves, and assuming continuation of existing economic 5 7 conditions. "Estimated future net revenues" are sometimes referred to herein as "estimated future net cash flows". "Present value of estimated future net revenues" is computed using the estimated future net revenues and a discount factor of 10%. The independent petroleum engineers' reports as to the proved oil and gas reserves attributable to the Royalties conveyed to the Trust were obtained from Cawley, Gillespie & Associates, Inc. The following table presents a reconciliation of proved reserve quantities from December 31, 1994 through December 31, 1997 (in thousands):
WADDELL RANCH TEXAS ROYALTY PROPERTIES PROPERTIES TOTAL --------------- -------------- --------------- OIL GAS OIL GAS OIL GAS (Bbls) (Mcf) (Bbls) (Mcf) (Bbls) (Mcf) ------ ------ ------ ----- ------ ------ December 31, 1994........................................... 6,037 25,080 4,703 4,825 10,740 29,905 Extensions, discoveries and other additions................. 49 28 -0- -0- 49 28 Revisions of previous estimates............................. 128 1,024 205 664 333 1,688 Production.................................................. (262) (1,289) (331) (616) (593) (1,905) ------ ------ ----- ----- ------ ------ December 31, 1995........................................... 5,952 24,843 4,577 4,873 10,529 29,716 Extensions, discoveries and other additions................. 24 24 -0- -0- 24 24 Revisions of previous estimates............................. 1,746 11,560 448 642 2,194 12,202 Production.................................................. (419) (1,916) (353) (725) (772) (2,641) ------ ------ ----- ----- ------ ------ December 31, 1996........................................... 7,303 34,511 4,672 4,790 11,975 39,301 Extensions, discoveries and other additions................. 48 52 -0- -0- 48 52 Revisions of previous estimates............................. (1,902) (8,512) 161 680 (1,741) (7,832) Production.................................................. (426) (1,876) (392) (841) (818) (2,717) December 31, 1997........................................... 5,023 24,175 4,441 4,629 9,464 28,804 ====== ====== ===== ===== ====== ======
Estimated quantities of proved developed reserves of crude oil and natural gas as of December 31, 1997, 1996 and 1995 were as follows (in thousands):
CRUDE OIL NATURAL GAS (Bbls) (Mcf) --------- ----------- 1997........................................................ 8,116 23,054 1996........................................................ 10,154 32,008 1995........................................................ 9,061 23,467
The Financial Accounting Standards Board requires supplemental disclosures for oil and gas producers based on a standardized measure of discounted future net cash flows relating to proved oil and gas reserve quantities. Under this disclosure, future cash inflows are computed by applying year-end prices of oil and gas relating to the enterprise's proved reserves to the year-end quantities of those reserves. Future price changes are only considered to the extent provided by contractual arrangements in existence at year-end. The standardized measure of discounted future net cash flows is achieved by using a discount rate of 10% a year to reflect the timing of future cash flows relating to proved oil and gas reserves. 6 8 Estimates of proved oil and gas reserves are by their very nature imprecise. Estimates of future net revenue attributable to proved reserves are sensitive to the unpredictable prices of oil and gas and other variables. The 1997, 1996 and 1995 change in the standardized measure of discounted future net cash flows related to future royalty income from proved reserves discounted at 10% is as follows (in thousands):
WADDELL RANCH PROPERTIES TEXAS ROYALTY PROPERTIES TOTAL ----------------------------- --------------------------- ------------------------------ 1997 1996 1995 1997 1996 1995 1997 1996 1995 -------- -------- ------- ------- ------- ------- -------- -------- -------- January 1........................ $150,170 $ 74,070 $64,730 $52,457 $36,324 $33,660 $202,627 $110,394 $ 98,390 Extensions, discoveries and other additions...................... 619 447 457 -0- -0- -0- 619 447 457 Accretion of discount............ 15,017 7,407 6,473 5,246 3,632 3,366 20,263 11,039 9,839 Revisions of prior year estimates, changes in price and other.......................... (89,235) 80,524 8,548 (7,540) 20,153 5,175 (96,775) 100,677 13,723 Royalty income................... (13,392) (12,278) (6,138) (9,207) (7,652) (5,877) (22,599) (19,930) (12,015) -------- -------- ------- ------- ------- ------- -------- -------- -------- December 31...................... $ 63,179 $150,170 $74,070 $40,956 $52,457 $36,324 $104,135 $202,627 $110,394 ======== ======== ======= ======= ======= ======= ======== ======== ========
Oil and gas prices of $15.79 and $16.75 per barrel and $2.28 and $3.14 per Mcf were used to determine the estimated future net revenues from the Waddell Ranch properties and the Texas Royalty properties at December 31, 1997. The downward revision of the estimated oil reserves and the related decrease in the discounted future net cash flow for the Waddell Ranch properties was primarily due to the decrease in oil prices from 1996 to 1997. The downward revision in the estimated gas reserves for the Waddell Ranch properties was primarily due to the decrease in gas prices from 1996 to 1997. Oil and gas prices of $23.88 and $22.32 per barrel and $4.00 and $2.64 per Mcf were used to determine the estimated future net revenues from the Waddell Ranch properties and the Texas Royalty properties at December 31, 1996. The extension, discoveries and other additions for the Waddell Ranch properties are reserves added as a result of remedial activity in the Waddell Ellenberger Field. The upward revision of the estimated oil and gas reserves and the related increase in the discounted future net cash flow for the Waddell Ranch properties was due to the increase in oil and gas prices from 1995 to 1996, as well as production response from drilling and remedial activity. The largest increase in oil reserves due to drilling and remedial activity occurred in the Waddell Field. The revisions in the oil and gas reserves and related discounted cash flow for the Texas Royalty properties are mainly due to the increase in oil and gas prices at December 31, 1996. Oil and gas prices of $18.02 and $16.19 per barrel and $1.94 and $1.75 per Mcf were used to determine the estimated future net revenues from the Waddell Ranch properties and the Texas Royalty properties at December 31, 1995. The extension, discoveries and other additions for the Waddell Ranch properties are proved undeveloped reserves related to field extension development for the Waddell Field. The upward revisions of both reserves and discounted future net cash flows for the Waddell Ranch properties are due to the increases in oil prices as well as production response from drilling and remedial activities on the Dune Field, Sand Hills (Judkins) Field, Sand Hills (Tubb) Field and the Waddell Field. The upward revisions of reserves and discounted future net cash flows for the Texas Royalty properties are due to the increase in oil prices at December 31, 1995. 7 9 The following presents estimated future net revenue and the present value of estimated future net revenue, for each of the years ended December 31, 1997, 1996 and 1995 (in thousands except amounts per Unit):
1997 1996 1995 --------------------- --------------------- --------------------- ESTIMATED ESTIMATED ESTIMATED FUTURE PRESENT FUTURE PRESENT FUTURE PRESENT NET VALUE NET VALUE NET VALUE REVENUE AT 10% REVENUE AT 10% REVENUE AT 10% --------- -------- --------- -------- --------- -------- Total Proved Waddell Ranch properties................. $126,924 $ 63,179 $294,653 $150,170 $147,068 $ 74,070 Texas Royalty properties................. 85,254 40,956 111,181 52,457 78,586 36,324 -------- -------- -------- -------- -------- -------- Total.............................. $212,178 $104,135 $405,834 $202,627 $225,654 $110,394 ======== ======== ======== ======== ======== ======== Total Proved Per Unit...................... $ 4.55 $ 2.23 $ 8.71 $ 4.35 $ 4.84 $ 2.37 ======== ======== ======== ======== ======== ======== Proved Developed Waddell Ranch properties................. $ 94,493 $ 55,150 $226,174 $124,395 $110,611 $ 60,600 Texas Royalty properties................. 85,254 40,956 111,181 52,457 78,586 36,324 -------- -------- -------- -------- -------- -------- Total.............................. $179,747 $ 96,106 $337,355 $176,852 $189,197 $ 96,924 ======== ======== ======== ======== ======== ========
Reserve quantities and revenues shown in the preceding tables for the Royalties were estimated from projections of reserves and revenue attributable to the combined Southland Royalty and Trust interests in the Waddell Ranch properties and Texas Royalty properties. Reserve quantities attributable to the Royalties were estimated by allocating to the Royalties a portion of the total estimated net reserve quantities of the interests, based upon gross revenue less production taxes. Because the reserve quantities attributable to the Royalties are estimated using an allocation of the reserves, any changes in prices or costs will result in changes in the estimated reserve quantities allocated to the Royalties. Therefore, the reserve quantities estimated will vary if different future price and cost assumptions occur. Proved reserve quantities are estimates based on information available at the time of preparation and such estimates are subject to change as additional information becomes available. The reserves actually recovered and the timing of production of those reserves may be substantially different from the original estimate. Moreover, the present values shown above should not be considered as the market values of such oil and gas reserves or the costs that would be incurred to acquire equivalent reserves. A market value determination would include many additional factors. REGULATION Many aspects of the production, pricing and marketing of crude oil and natural gas are regulated by federal and state agencies. The Federal Energy Regulatory Commission ("FERC") is primarily responsible for federal regulation of natural gas. Natural Gas Regulation The interstate transportation and sale for resale of natural gas is subject to federal governmental regulation, including regulation of tariffs charged and various other matters, by FERC. The Natural Gas Wellhead Decontrol Act of 1989 terminated federal price controls on wellhead sales of domestic natural gas on January 1, 1993. In 1992, FERC issued Orders Nos. 636 and 636-A, which generally opened access to interstate gas pipelines by requiring such pipelines to "unbundle" their transportation services and allow shippers to choose and pay for only the services they require, regardless of whether the shipper purchases gas from such pipelines or from other suppliers. These orders also require upstream pipelines to permit downstream pipelines to assign upstream capacity to their shippers and place analogous, unbundled access requirements on the downstream pipelines. Although these orders should generally have the effect of facilitating the transportation of gas produced from the properties from which the Royalties were carved, as well as to facilitate the direct access to end-user markets, the impact of these orders on marketing production from the properties from which the Royalties were carved cannot be predicted at this time. 8 10 While natural gas prices are currently unregulated, Congress historically has been active in the area of natural gas regulation. It is impossible to predict whether new legislation to regulate natural gas might be proposed, what proposals, if any, might actually be enacted by Congress or the various state legislatures, and what effect, if any, such proposals might have on the operations of the properties from which the Royalties were carved. State Regulation The various states regulate the production and sale of oil and natural gas, including imposing requirements for obtaining drilling permits, the method of developing new fields, the spacing and operation of wells and the prevention of waste of oil and gas resources. The rates of production may be regulated and the maximum daily production allowables from both oil and gas wells may be established on a market demand or conservation basis, or both. Other Regulation The petroleum industry is also subject to compliance with various other federal, state and local regulations and laws, including, but not limited to, environmental protection, occupational safety, resource conservation and equal employment opportunity. The Trustee does not believe that compliance with these laws by the operating parties will have any material adverse effect on the Unit holders. 9 11 ITEM 3. LEGAL PROCEEDINGS The Trustee has been notified of the settlement of a class action lawsuit pending in the 270th District Court of Harris County, Texas (the "Court") Cause No. 92-026182 styled Caroline Altheide and Langdon Harrison v. Meridian Oil Inc., Meridian Oil Holding Inc., Meridian Oil Trading Inc., Meridian Oil Production Inc., Southland Royalty Company, El Paso Production Company, Meridian Oil Hydrocarbons Inc., Meridian Oil Gathering Inc., Meridian Oil Services Inc. and Edward Parker filed in June 1992 ("Class Action"). The defendants in this lawsuit are collectively referred to herein as "Meridian." The members of the class ("Class Members") involved in the Class Action that was certified by the Court are all persons or entities who (i) at any time between December 1, 1986 and July 1, 1996 received payments directly from Meridian, (ii) the payments from Meridian were attributable to interests in natural gas that was sold at the wellhead to Meridian Oil Trading Inc., and (iii) the interests were either royalty interests, overriding royalty interests or interests of a similar nature that burdened the working interests of Meridian, or working interests in properties operated by Meridian, or royalty interests, overriding royalty interests or interests of a similar nature that burdened working interests in properties operated by Meridian. Meridian, the San Juan Basin Royalty Trust, the Burlington Resources Coal Seam Royalty Trust and the Commissioner of Public Lands of the New Mexico State Lands Office are not Class Members. In summary, the claims asserted in the Class Action ("Class Claims") are those asserted in Plaintiffs' Second Amended Original Petition filed in the Class Action which are based upon the manner in which Meridian calculated payments to its royalty owners and its joint working interest owners in natural gas-producing properties. It is alleged that those payments were based on wellhead prices that were set by a marketing affiliate, rather than upon the net prices that Meridian received for the gas and liquid components in arm's-length sales to non-affiliated purchasers. More specifically, such claims are based on Meridian's conduct in basing its payments to Class Members, for natural gas sold at the wellhead to Meridian Oil Trading Inc., on wellhead prices that resulted from one or more of the following: (i) Meridian's use of allegedly depressed prices for gas set by Meridian Oil Trading Inc.; (ii) Meridian's use of allegedly inflated cost factors for transportation services set by Meridian Oil Trading Inc.; (iii) Meridian's use of allegedly depressed net prices for liquids set by Meridian Oil Hydrocarbons Inc.; and (iv) Meridian's use of allegedly inflated rates for coal seam gathering and treating services set by Meridian Oil Gathering Inc. It was alleged that Meridian's conduct violated applicable legal principles. Meridian denied that its conduct had been unlawful or otherwise wrongful. The Court has not ruled on the merits of the Class Claims or on Meridian's defenses to such claims. The settlement reached by the parties in the Class Action provides for the payment of up to $42 million together with interest thereon beginning on July 17, 1996 until the date the settlement checks are initially mailed to the Class Members participating in the settlement. Such settlement amount is subject to reduction for certain adjustments such as (i) fees, costs and expenses awarded by the Court to the Class Counsel (Susman Godfrey L.L.P. and Dick Watt), (ii) extra compensation awarded by the Court to the named Plaintiffs (Caroline D. Altheide and Langdon D. Harrison), and (iii) the expense incurred in giving notice and administering the proposed settlement ("Net Settlement Fund"). Concurrently with Meridian's payment of the Net Settlement Fund to Class Members who did not timely and validly elect to be excluded from the Class ("Settlement Class Members"), Meridian is obligated under the settlement to advise its then current recipients of royalty payments that Meridian intends (i) to commence calculating royalty payments based upon the net prices received by Meridian from non-affiliated third parties for natural gas and the liquids extracted therefrom, and (ii) in calculating royalty payments on gas produced from coal seam gas wells using the Val Verde Gathering System, to commence using a deduction for gathering and treating the gas produced from such wells that does not exceed 75% of the fee charged by Meridian Oil Gathering Inc. for similar 10 12 services to the five largest (by volume) non-affiliated third-party shippers. Meridian is not obligated to calculate royalty payments in such method in the future but, if it changes such method of calculation, it is obligated to provide notice of such change in method of calculation to the then-current recipients of royalty payments. Of the Net Settlement Fund, (i) 48% thereof will be distributed among Class Members whose interests bear on "conventional" gas-producing properties (specifically, gas not gathered on the Val Verde Gathering System) that are located in Meridian's Farmington operating division (which is roughly coextensive with the San Juan Basin of New Mexico and Colorado), (ii) 42% thereof will be distributed among the Class Members whose interests bear on the coal seam gas producing properties located in Meridian's Farmington operating division (specifically, gas gathered on the Val Verde Gathering System), and (iii) 10% thereof will be distributed among those Class Members whose interests bear on gas-producing properties located in areas other than Meridian's Farmington operating division. The Trust would fall into the last of these three classifications. It is estimated that the Trust's share of the Net Settlement Fund will be between $560,000 and $850,000, the exact amount of which cannot be determined at this time. Upon final judicial approval of the settlement, the settlement provides that a judgment be entered in the Class Action dismissing the Class Action with prejudice to its refiling. As a result of the settlement, Settlement Class Members release and discharge the Released Parties, and each of them, from and with respect to the Class Claims and such Class Members will not be able to pursue the Class Claims against the Released Parties. "Released Parties" as used herein means, severally and collectively, the Defendants and Meridian Oil Inc. and all Affiliates of Burlington Resources Inc. since December 1, 1986, collectively, and all past and present agents, employees, officers, directors, shareholders, representatives, attorneys, predecessors, successors, assigns and affiliates of each of the Defendants and of Meridian Oil Inc. and all Affiliates of Burlington Resources Inc. since December 1, 1986, collectively. "Released Parties" also includes all other persons or entities who are liable or become liable for the conduct of any person or entity that is identified in the preceding sentence. "Affiliates" as used herein means Burlington Resources Inc.'s direct and indirect subsidiaries. It was determined by the Trustee that the Trust is part of the Class that was certified by the Court in the Class Action and that it was in the best interest of the Trust to elect to remain as part of the Class and share in the Net Settlement Fund. The Trustee believes that the Class Claims, if true, had little, if any, detrimental effect on the Trust and the Trust is being adequately compensated as a result of this settlement. A judgment has been signed by the Court approving the settlement. However, a Notice of Appeal was filed by San Juan 1990-A, L.P., K&W Gas Partners, L.P., MAP 1992-A Partners, L.P. and The Board of Trustees of Leland Stanford Junior University, Non-Profit Corporation (Stanford University) ("Objectors") on February 7, 1997. Class Counsel has notified the Trustee that on July 24, 1997 the Court of Appeals issued its judgment dismissing such appeal on procedural grounds and that in early September 1997 the Court of Appeals denied a motion for rehearing filed in such proceeding. The Trustee has been further advised that a petition for review has been filed with the Texas Supreme Court by the Objectors and is currently pending. One of the conditions set forth in the settlement agreement for the distribution of settlement proceeds related to the Class Action is that there will be no distribution of the settlement proceeds unless and until such judgment is no longer subject to further appeal and, if there is an appeal, not unless and until such judgment is affirmed or such appeal is dismissed and the time for any further proceedings in the appellate court of last resort has expired. As a result of such appeal, no distribution of settlement proceeds has been made to the Trust and the Trustee does not know if or when the Trust will receive proceeds of such settlement. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of Unit holders, through the solicitation of proxies or otherwise, during the fourth quarter ended December 31, 1997. 11 13 PART II ITEM 5. MARKET FOR UNITS OF THE TRUST AND RELATED SECURITY HOLDER MATTERS The information under "Units of Beneficial Interest" at page 1 of the Trust's Annual Report to security holders for the year ended December 31, 1997, is herein incorporated by reference. ITEM 6. SELECTED FINANCIAL DATA
FOR THE YEAR ENDED DECEMBER 31, ----------------------------------------------------------------------- 1997 1996 1995 1994 1993 ----------- ----------- ----------- ----------- ----------- Royalty income................................ $22,598,873 $19,930,354 $12,014,623 $16,646,903 $19,407,568 Distributable income.......................... 22,190,115 19,488,574 11,632,463 16,174,570 18,759,882 Distributable income per Unit................. 0.476092 0.418131 0.249574 0.347027 0.402496 Distributions per Unit........................ 0.476092 0.418131 0.249574 0.347027 0.402496 Total assets, December 31..................... 5,220,786 5,913,931 5,252,922 6,002,283 6,284,735
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION The "Trustee's Discussion and Analysis for the Three Year Period Ended December 31, 1997" and "Results of the 4th Quarters of 1997 and 1996" at pages 6 through 10 of the Trust's Annual Report to security holders for the year ended December 31, 1997 is herein incorporated by reference. Year 2000 Issue Many existing computer programs use only two digits to identify a year in the date field. These programs were designed and developed without considering the impact of the upcoming change in the century. If not corrected, many computer applications could fail or create erroneous results by or at the Year 2000. The Year 2000 issue affects virtually all companies and organizations. If a company or organization does not successfully address its Year 2000 issues, it may face material adverse consequences. The Trust is reliant on the performance of BROG and third party vendors for the receipt of Royalty income, payment of expenses and disbursement of distributable income. The Trustee can provide no assurance as to whether BROG and third party vendors will successfully address the Year 2000 issue. Failing to successfully address the Year 2000 issue by BROG and third party vendors could have a material adverse impact on the Trust and its Unit holders. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not Applicable. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Financial Statements of the Trust and the notes thereto at page 11 et seq. of the Trust's Annual Report to security holders for the year ended December 31, 1997, are herein incorporated by reference. ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There have been no changes in accountants and no disagreements with accountants on any matter of accounting principles or practices or financial statement disclosures during the twenty-four months ended December 31, 1997. 12 14 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The Trust has no directors or executive officers. The Trustee is a corporate trustee which may be removed, with or without cause, at a meeting of the Unit holders, by the affirmative vote of the holders of a majority of all the Units then outstanding. ITEM 11. EXECUTIVE COMPENSATION During the years ended December 31, 1997, 1996 and 1995, the Trustee received total remuneration as follows:
NAME OF INDIVIDUAL CAPACITIES OR NUMBER OF IN WHICH CASH PERSONS IN GROUP SERVED COMPENSATION YEAR ------------------ ---------- ------------ ---- NationsBank of Texas, N.A............................ Trustee $60,575(1) 1995 $65,338(1) 1996 $44,735(1) 1997
- --------------- (1) Under the Trust Indenture, the Trustee is entitled to an administrative fee for its administrative services, preparation of quarterly and annual statements with attention to tax and legal matters of: (i) 1/20 of 1% of the first $100 million of annual gross revenue of the Trust and 1/30 of 1% in excess of $100 million and (ii) Trustee's standard hourly rate in excess of 300 hours annually. The administrative fee is subject to reduction by a credit for funds provision. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT (a) Security Ownership of Certain Beneficial Owners. The following table sets forth as of December 31, 1997, information with respect to each person known to own beneficially more than 5% of the outstanding Units of the Trust:
AMOUNT AND NATURE OF PERCENT NAME AND ADDRESS BENEFICIAL OWNERSHIP(1) OF CLASS ---------------- ----------------------- -------- Burlington Resources Oil & Gas Company(1) 27,577,741 Units 59.17% 5051 Westheimer Suite 1400 Houston, Texas 77056-2124
- --------------- (1) This information was provided to the Securities and Exchange Commission and to the Trust in a Form 4 dated January 6, 1994, filed with the Securities and Exchange Commission by Southland Royalty, a wholly-owned subsidiary of BRI, and in Amendment 5 to Schedule 13D and Schedule 13E-3 dated December 28, 1993, filed with the Securities and Exchange Commission by Southland Royalty and BRI. Such Units were reported to be owned directly by Southland Royalty, now BROG. The Form 4 filed by Southland Royalty and the Schedule 13D and Schedule 13E-3 filed by Southland Royalty and BRI with the Securities and Exchange Commission may be reviewed for more detailed information concerning the matters summarized herein. 13 15 (b) Security Ownership of Management. The Trustee owns beneficially no securities of the Trust. In various fiduciary capacities, NationsBank of Texas, N.A. owned as of March 2, 1998, an aggregate of 316,893 Units with no right to vote 106,000 of these Units, shared right to vote 27,946 of these Units and sole right to vote 182,947 of these Units. Such Bank disclaims any beneficial interests in these Units. The number of Units reflected in this paragraph includes Units held by all branches of NationsBank of Texas, N.A. (c) Change In Control. The Trustee knows of no arrangements which may subsequently result in a change in control of the Trust. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The Trust has no directors or executive officers. See Item 11 for the remuneration received by the Trustee during the years ended December 31, 1997, 1996 and 1995 and Item 12(b) for information concerning Units owned by NationsBank of Texas, N.A. in various fiduciary capacities. 14 16 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K The following documents are filed as a part of this Report: FINANCIAL STATEMENTS Included in Part II of this Report by reference to the Annual Report of the Trust for the year ended December 31, 1997: Independent Auditors' Report Statements of Assets, Liabilities and Trust Corpus Statements of Distributable Income Statements of Changes in Trust Corpus Notes to Financial Statements FINANCIAL STATEMENT SCHEDULES Financial statement schedules are omitted because of the absence of conditions under which they are required or because the required information is given in the financial statements or notes thereto. EXHIBITS
EXHIBIT NUMBER DESCRIPTION ------- ----------- (4)(a) -- Permian Basin Royalty Trust Indenture dated November 3, 1980, between Southland Royalty Company and The First National Bank of Fort Worth (now NationsBank of Texas, N.A.), as Trustee, heretofore filed as Exhibit (4)(a) to the Trust's Annual Report on Form 10-K to the Securities and Exchange Commission for the fiscal year ended December 31, 1980, is incorporated herein by reference.* (b) -- Net Overriding Royalty Conveyance (Permian Basin Royalty Trust) from Southland Royalty Company to The First National Bank of Fort Worth (now NationsBank of Texas, N.A.), as Trustee, dated November 3, 1980 (without Schedules), heretofore filed as Exhibit (4)(b) to the Trust's Annual Report on Form 10-K to the Securities and Exchange Commission for the fiscal year ended December 31, 1980, is incorporated herein by reference.* (c) -- Net Overriding Royalty Conveyance (Permian Basin Royalty Trust -- Waddell Ranch) from Southland Royalty Company to The First National Bank of Fort Worth (now NationsBank of Texas, N.A.), as Trustee, dated November 3, 1980 (without Schedules), heretofore filed as Exhibit (4)(c) to the Trust's Annual Report on Form 10-K to the Securities and Exchange Commission for the fiscal year ended December 31, 1980, is incorporated herein by reference.* (13) -- Registrant's Annual Report to security holders for fiscal year ended December 31, 1997.** (23) -- Consent of Cawley, Gillespie & Associates, Inc., reservoir engineer.** (27) -- Financial Data Schedule.**
- --------------- * A copy of this Exhibit is available to any Unit holder, at the actual cost of reproduction, upon written request to the Trustee, NationsBank of Texas, N.A., P.O. Box 1317, Fort Worth, Texas 76101. ** Filed herewith. REPORTS ON FORM 8-K During the last quarter of the Trust's fiscal year ended December 31, 1997, there were no reports on Form 8-K filed by the Trust. 15 17 SIGNATURE PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) 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. NATIONSBANK OF TEXAS, N.A. TRUSTEE OF THE PERMIAN BASIN ROYALTY TRUST By /s/ ERIC F. HYDEN ----------------------------------- (Eric F. Hyden) Vice President Date: March 30, 1998 (The Trust has no directors or executive officers.) 16 18 INDEX TO EXHIBITS
SEQUENTIALLY EXHIBIT NUMBERED NUMBER EXHIBIT PAGE ------- ------- ------------ (4)(a) -- Permian Basin Royalty Trust Indenture dated November 3, 1980, between Southland Royalty Company and The First National Bank of Fort Worth (now NationsBank of Texas, N.A.), as Trustee, heretofore filed as Exhibit (4)(a) to the Trust's Annual Report on Form 10-K to the Securities and Exchange Commission for the fiscal year ended December 31, 1980, is incorporated herein by reference.* (b) -- Net Overriding Royalty Conveyance (Permian Basin Royalty Trust) from Southland Royalty Company to The First National Bank of Fort Worth (now NationsBank of Texas, N.A.), as Trustee, dated November 3, 1980 (without Schedules), heretofore filed as Exhibit (4)(b) to the Trust's Annual Report on Form 10-K to the Securities and Exchange Commission for the fiscal year ended December 31, 1980, is incorporated herein by reference.* (c) -- Net Overriding Royalty Conveyance (Permian Basin Royalty Trust -- Waddell Ranch) from Southland Royalty Company to The First National Bank of Fort Worth (now NationsBank of Texas, N.A.), as Trustee, dated November 3, 1980 (without Schedules), heretofore filed as Exhibit (4)(c) to the Trust's Annual Report on Form 10-K to the Securities and Exchange Commission for the fiscal year ended December 31, 1980, is incorporated herein by reference.* (13) -- Registrant's Annual Report to security holders for fiscal year ended December 31, 1997.** (23) -- Consent of Cawley, Gillespie & Associates, Inc., reservoir engineer.** (27) -- Financial Data Schedule.**
- --------------- * A copy of this Exhibit is available to any Unit holder, at the actual cost of reproduction, upon written request to the Trustee, NationsBank of Texas, N.A., P.O. Box 1317, Fort Worth, Texas 76101. ** Filed herewith. EX-13 2 ANNUAL REPORT TO SHAREHOLDERS 1 PERMIAN BASIN ROYALTY TRUST 1997 ANNUAL REPORT AND FORM 10-K PERMIAN BASIN ROYALTY TRUST 1997 ANNUAL REPORT AND FORM 10-K 2 TEXAS ROYALTY PROPERTIES ARE LOCATED IN 33 TEXAS COUNTIES. [MAP OF TEXAS WITH CERTAIN COUNTIES IDENTIFIED] WADDELL RANCH PROPERTIES ARE LOCATED IN CRANE COUNTY, TEXAS. 3 THE TRUST The Permian Basin Royalty Trust's principal assets are comprised of a 75% net overriding royalty interest carved out by Southland Royalty Company ("Southland") from its fee mineral interest in the Waddell Ranch properties in Crane County, Texas ("Waddell Ranch properties"), and a 95% net overriding royalty interest carved out by Southland from its major producing royalty properties in Texas ("Texas Royalty properties"). The interests out of which the Trust's net overriding royalty interests were carved were in all cases less than 100%. The Trust's net overriding royalty interests represent burdens against the properties in favor of the Trust without regard to ownership of the properties from which the overriding royalty interests were carved. The net overriding royalties above are collectively referred to as "Royalties." The Permian Basin Royalty Trust (the "Trust") has been advised that effective January 1, 1996, Southland was merged with and into Meridian Oil Inc. ("Meridian"), a Delaware corporation, with Meridian being the surviving corporation. Meridian succeeded to the ownership of all the assets, has the rights, powers, and privileges, and assumed all of the liabilities and obligations of Southland. Effective July 11, 1996, Meridian changed its name to Burlington Resources Oil and Gas Company ("BROG"). Any reference to BROG hereafter may also be construed as a reference to Meridian and Southland. Further, BROG notified the Trust that, on February 14, 1997, its interests in the "Texas Royalty properties" that are subject to the Net Overriding Royalty Conveyance dated November 1, 1980 ("Conveyance"), were sold to Riverhill Energy Corporation ("Riverhill Energy") of Midland, Texas. UNITS OF BENEFICIAL INTEREST Units of Beneficial Interest ("Units") of the Trust are traded on the New York Stock Exchange with the symbol PBT. Quarterly high and low sales prices and the aggregate amount of monthly distributions paid each quarter during the Trust's two most recent years were as follows:
- ----------------------------------------------------------------------------------------------- Distributions 1997 High Low Paid - ---- --------- --------- ----------- First Quarter ..................... $ 4.750 $ 4.000 $ .183907 Second Quarter .................... 4.500 4.000 .086304 Third Quarter ..................... 5.500 4.188 .093186 Fourth Quarter .................... 5.688 4.125 .112695 --------- Total for 1997 ................ $ .476092 ========= 1996 - ---- First Quarter ..................... $ 3.750 $ 3.125 $ .052637 Second Quarter .................... 4.000 3.125 .079382 Third Quarter ..................... 4.250 3.125 .149395 Fourth Quarter .................... 4.875 4.000 .136717 --------- Total for 1996 ................ $ .418131 ========= - ----------------------------------------------------------------------------------------------
Approximately 2,521 Unit holders of record held the 46,608,796 Units of the Trust at December 31, 1997. Distributions of ownership of Units is presented in the following table:
- ------------------------------------------------------------------------------------- Number of TYPE OF UNIT HOLDERS Unit Holders Units Held - -------------------- ------------ ---------- Nominee ..................................... 1 65,353 Individuals ................................. 2,062 2,873,359 Institutions ................................ 55 43,044,642 Fiduciaries ................................. 402 620,642 Brokers ..................................... 1 4,800 ----- ---------- Total ................................... 2,521 46,608,796 ===== ========== - -------------------------------------------------------------------------------------
1 4 TO UNIT HOLDERS We are pleased to present the eighteenth Annual Report of the Trust. The report includes a copy of the Trust's Annual Report on Form 10-K to the Securities and Exchange Commission for the year ended December 31, 1997, without exhibits. Both the report and accompanying Form 10-K contain important information concerning the Trust's properties, including the oil and gas reserves attributable to the Royalties owned by the Trust. Production figures, drilling activity and certain other information included in this report have been provided to the Trust by BROG. As more particularly explained in the Notes to the Financial Statements appearing in this report and in Item 1 of the accompanying Form 10-K, NationsBank of Texas, N.A., as Trustee, has the primary function under the Trust Indenture of collecting the monthly net proceeds attributable to the Royalties and making monthly distributions to the Unit holders, after deducting Trust administrative expenses and any amounts necessary for cash reserves. Royalty income received by the Trustee for the year ended December 31, 1997, was $22,598,873 and interest income earned for the same period was $42,665. General and administrative expenses amounted to $451,423. A total of $22,190,115 or $.476092 per Unit, was distributed to Unit holders during 1997. A discussion of factors affecting the distributions for 1997 may be found in the Trustee's Discussion and Analysis section of this report. In March 1998, BROG and Coastal Management Corporaton ("CMC") notified the Trustee that distributable income for March 1998 includes approximately $1.1 million which represents the Trust's portion of an approximate $1.5 million severance tax refund received by BROG from the State of Texas. With regard to the source of such payment, BROG advised the Trustee that BROG, along with other working interest owners in the Waddell Ranch, engaged an independent severance tax consultant to analyze severance taxes incurred on gas production for the period June 1991 to March 1997. As a result of their analysis, a refund was requested and subsequently received in March 1998 for approximately $1.3 million. Further, the State of Texas refunded approximately $200,000 to BROG for severance taxes related to gas production for the period April 1997 to November 1997, based on the results of an analysis for the period June 1991 to March 1997. This resulted in a total refund of approximately $1.5 million to BROG, out of which the Trust received $1.1 million, referenced above. As of December 31, 1997, the Trust's proved reserves were estimated at 9,463,928 Bbls of oil and 28,804,066 Mcf of gas. The estimated future net revenues from proved reserves at December 31, 1997, amount to $212,178,000 or $4.55 per Unit. The present value of estimated future net revenues discounted at 10% at December 31, 1997, was $104,135,000 or $2.23 per Unit. The computation of future net revenues is made following guidelines prescribed by the Financial Accounting Standard Board (explained in Item 2 of the accompanying Form 10-K) based on year-end prices and costs. As has been previously reported, Southland advised the Trustee that it became operator of record of the Waddell Ranch properties on May 1, 1991. Meridian, as successor by merger, became the operator of record. Meridian changed its name to Burlington Resources Oil and Gas Company in 1996. All field, technical and accounting operations, however, have been carried out by CMC, a wholly owned subsidiary of Riverhill Capital Corporation ("Riverhill Capital"), but remain under the direction of BROG. In the fourth quarter of 1996, BROG notified the Trustee that, pursuant to an ongoing divestiture program, BROG intended to sell its interests in the Texas Royalty properties that are subject to the Conveyance. A Purchase and Sale Agreement was executed between BROG and Riverhill Energy, a wholly owned subsidiary of Riverhill Capital. The Trustee has been advised by BROG that the transaction closed on February 14, 1997. The Trustee has further been informed by BROG that, as required by the Conveyance, Riverhill Energy succeeded to all of the requirements upon and the responsibilities of BROG under the Conveyance with regard to the Texas Royalty properties. BROG and Riverhill Energy have further advised the Trustee that all accounting operations pertaining to the Texas Royalty properties are being performed by CMC under the direction of Riverhill Energy. The Trustee has further been advised that the shareholders of Riverhill Capital have executed a term sheet with Schlumberger Technology Corporation ("STC"), whereby, subject to the satisfaction of certain conditions, all of the shares of Riverhill Capital will be purchased by and sold to STC. As stated above, Riverhill Energy and CMC are wholly owned subsidiaries of Riverhill Capital. The Trustee has further been advised that, as part of this contemplated transaction, ownership of Riverhill Energy's interests in the Texas Royalty properties referenced above, will remain in 2 5 Riverhill Energy, which will be owned by the current shareholders of Riverhill Capital. In the event the sale to and purchase by STC is consummated, it is anticipated that CMC will continue to perform its field, technical and accounting operations on behalf of BROG with regard to the Waddell Ranch properties and all accounting operations pertaining to the Texas Royalty properties which will remain under the direction of Riverhill Energy. The Trustee has been advised that Riverhill Energy will assure that the various administrative functions and reporting requirements are met. The Omnibus Budget Reconciliation Act of 1990 allows percentage depletion on proven properties acquired after October 11, 1990. For Units acquired after such date, Unit holders would normally compute both percentage depletion and cost depletion from each property, and claim the larger amount as a deduction on their income tax returns. However, the Trustee and its accountants have estimated the percentage depletion for January through December 1997, and it appears that cost depletion will exceed percentage depletion for all Unit holders. Therefore, the Trust will not provide percentage depletion factors for 1997. Royalty income is generally considered portfolio income under the passive loss rules enacted by the Tax Reform Act of 1986. Therefore, in general, it appears that Unit holders should not consider the taxable income from the Trust to be passive income in determining net passive income or loss. Unit holders should consult their tax advisors for further information. Unit holders of record will continue to receive an individualized tax information letter for each of the quarters ending March 31, June 30 and September 30, 1998, and for the year ending December 31, 1998. Unit holders owning Units in nominee name may obtain monthly tax information from the Trustee upon request. NationsBank of Texas, N.A. By: /s/ ERIC F. HYDEN Eric F. Hyden Vice President 3 6 DESCRIPTION OF THE PROPERTIES The net overriding royalty interests held by the Trust are carved out of high-quality producing oil and gas properties located primarily in West Texas. A production index for oil and gas properties is the number of years derived by dividing remaining reserves by current production. The production index for the Trust properties based on the reserve report prepared by independent petroleum engineers as of December 31, 1997, is approximately 11 years. The net overriding royalty interest in the Waddell Ranch properties is the largest asset of the Trust. The mineral interests in the Waddell Ranch, from which such net overriding royalty interest was carved, vary from 37.5% to 50.0% in 78,175 gross (34,205 net) acres, containing 834 gross (344 net) productive oil wells, 160 gross (67 net) productive gas wells and 347 gross (137 net) injection wells. The Texas Royalty properties, out of which the other net overriding royalty was carved, are located in 33 counties across Texas. The Texas Royalty properties consist of approximately 125 separate royalty interests containing approximately 303,000 gross (51,000 net) producing acres. 39.8% of the future net revenues discounted at 10% attributable to Texas Royalty properties are located in the Wasson and Yates fields. WADDELL RANCH Six major fields on the Waddell Ranch account for more than 90% of the total production. In the six fields, there are 12 producing zones ranging in depth from 2,800 to 10,600 feet. Most prolific of these zones are the Grayburg and San Andres, which produce from depths between 2,800 and 3,400 feet. Productive from the San Andres are the Sand Hills (Judkins) gas field and the Sand Hills (McKnight) oil field. The Dune and Waddell oil fields are productive from both the Grayburg and San Andres formations. The Sand Hills (Tubb) oil fields produce from the Tubb formation at depths averaging 4,300 feet, and the University Waddell (Devonian) oil field is productive from the Devonian formation between 8,400 and 9,200 feet. All of the major oil fields on the Waddell Ranch are currently being water flooded. Engineering studies and 3-D seismic evaluations on these fields indicate the potential for increased production through infill drilling, modifications of existing water flood techniques, installation of larger capacity pumping equipment and tertiary recovery projects. Capital expenditures for drilling, remedial and maintenance activities during 1997 totaled approximately $11.8 million. A substantial portion of the capital expenditures was related to the drilling of productive oil wells as part of an infill drilling program. The success of this program is reflected in an increase in both production and the producing reserves. Successful infill drilling and various production well workovers in the Sand Hills (Tubb), Waddell and Sand Hills (McKnight) fields are mainly responsible for the increased monthly production and producing reserves. The Trustee has been advised by BROG that 1997 oil production levels from all fields increased 3.6% above the 1996 oil production level. BROG has informed the Trustee that the 1998 capital expenditures budget should total approximately $17.6 million, of which $9.7 million is attributable to the drilling program, $4.6 million to workovers and recompletions, $2.3 million to facility upgrades and replacements and $1 million to a seismic project. The budgeted amount represents an estimated 50% increase in capital expenditures for 1998 as compared with the actual 1997 capital expenditures. 4 7 COMPUTATION OF ROYALTY INCOME RECEIVED BY THE TRUST The Trust's royalty income is computed as a percentage of the net profit from the operation of the properties in which the Trust owns net overriding royalty interests. The percentages of net profits are 75% and 95% in the cases of the Waddell Ranch properties and the Texas Royalty properties, respectively. Royalty income received by the Trust for the five years ended December 31, 1997, was computed as shown in the table below.
- -------------------------------------------------------------------------------------------------------- Year Ended December 31, ---------------------------------------------------------------------------- 1997 1996 1995 ---------------------------- --------------------------- ---------- Gross Proceeds of Sales Waddell Texas Waddell Texas Waddell From Properties From Ranch Royalty Ranch Royalty Ranch Which the Net Overriding Properties Properties Properties Properties Properties Royalties Were Carved: ----------- ----------- ----------- ----------- ----------- Oil Proceeds .......... $27,099,891 $ 8,427,062 $26,720,538 $ 8,249,254 $20,714,309 Gas Proceeds .......... 17,105,677 2,318,393 14,056,885 1,898,423 10,707,104 Other Payments ........ ----------- ----------- ----------- ----------- ----------- Total ............... 44,205,568 10,745,455 40,777,423 10,147,677 31,421,413 ----------- ----------- ----------- ----------- ----------- Less: Severance Tax Oil ................. 1,037,862 320,447 1,103,059 315,491 874,011 Gas ................. 1,232,298 135,717 1,041,208 114,812 761,787 Other ............... 63,954 24,970 Lease Operating Expense and Property Tax Oil and Gas ......... 12,239,689 597,508 12,209,663 1,637,143 11,096,563 Other Payments ...... 50,297 Capital Expenditures .. 11,789,849 -- 9,989,064 -- 10,504,989 ----------- ----------- ----------- ----------- ----------- Total ............... 26,349,995 1,053,672 24,406,948 2,092,416 23,237,350 ----------- ----------- ----------- ----------- ----------- Net Profits ............. 17,855,573 9,691,783 16,370,475 8,055,261 8,184,063 Net Overriding Royalty Interest .... 75% 95% 75% 95% 75% ----------- ----------- ----------- ----------- ----------- Royalty Income .......... $13,391,679 $ 9,207,194 $12,277,856 $ 7,652,498 $ 6,138,047 =========== =========== =========== =========== ===========
- -------------------------------------------------------------------------------------------------------- Year Ended December 31, --------------------------------------------------------------------------- 1995 1994 1993 ----------- ---------------------------- -------------------------- Gross Proceeds of Sales Texas Waddell Texas Waddell Texas From Properties From Royalty Ranch Royalty Ranch Royalty Which the Net Overriding Properties Properties Properties Properties Properties Royalties Were Carved: ----------- ----------- ----------- ----------- ----------- Oil Proceeds .......... $ 6,924,595 $17,573,518 $ 6,197,125 $19,648,107 $ 7,019,561 Gas Proceeds .......... 1,284,464 12,073,447 1,426,979 12,972,379 1,643,334 Other Payments ........ 1,133,334 3,687,064 ----------- ----------- ----------- ----------- ----------- Total ............... 8,209,059 30,780,299 11,311,168 32,620,486 8,662,895 ----------- ----------- ----------- ----------- ----------- Less: Severance Tax Oil ................. 277,759 786,101 282,966 905,785 320,710 Gas ................. 88,206 906,543 104,697 1,001,106 122,296 Other ............... 153,909 Lease Operating Expense and Property Tax Oil and Gas ......... 1,657,225 10,633,720 487,728 10,502,602 535,158 Other Payments ...... 105,881 Capital Expenditures .. -- 9,147,647 -- 4,068,228 -- ----------- ----------- ----------- ----------- ----------- Total ............... 2,023,190 21,474,011 1,135,181 16,477,721 978,164 ----------- ----------- ----------- ----------- ----------- Net Profits ............. 6,185,869 9,306,288 10,175,987 16,142,765 7,684,731 Net Overriding Royalty Interest .... 95% 75% 95% 75% 95% ----------- ----------- ----------- ----------- ----------- Royalty Income .......... $ 5,876,576 $ 6,979,716 $ 9,667,188 $12,107,074 $ 7,300,494 =========== =========== =========== =========== =========== - --------------------------------------------------------------------------------------------------------
5 8 DISCUSSION AND ANALYSIS TRUSTEE'S DISCUSSION AND ANALYSIS FOR THE THREE-YEAR PERIOD ENDED DECEMBER 31, 1997 Royalty income received by the Trust for the three-year period ended December 31, 1997, is reported in the following table:
- --------------------------------------------------------------------------------------- Year Ended December 31, --------------------------------------------------- ROYALTIES 1997 1996 1995 - --------- ----------- ----------- ----------- Total Revenue .............. $22,598,873 $19,930,354 $12,014,623 100% 100% 100% Oil Revenue ................ 15,582,132 14,489,263 9,209,821 69% 73% 77% Gas Revenue ................ 7,016,741 5,441,091 2,804,802 31% 27% 23% Total Revenue/Unit ......... $ .484863 $ .427609 $ .257776 - ---------------------------------------------------------------------------------------
Royalty income of the Trust for the calendar year is associated with actual oil and gas production for the period November of the prior year through October of the current year. Oil and gas sales for 1997, 1996 and 1995 for the Royalties and the properties from which the Royalties were carved, excluding portions attributable to the adjustments discussed hereafter, are presented in the following table:
- --------------------------------------------------------------------------------------------------- Year Ended December 31, -------------------------------------------- ROYALTIES 1997 1996 1995 - --------- --------- --------- --------- Oil Sales (Bbls) .............................. 817,792 771,824 593,143 Gas Sales (Mcf) ............................... 2,716,755 2,640,381 1,905,299 PROPERTIES FROM WHICH THE ROYALTIES WERE CARVED - ----------------------------------------------- Oil Total Oil Sales (Bbls) ........................ 1,826,019 1,788,737 1,670,471 Average Per Day (Bbls) ........................ 5,003 4,887 4,577 Average Price/Bbl ............................. $ 19.46 $ 19.55 $ 16.55 Gas Total Gas Sales (Mcf) ......................... 7,355,162 7,308,406 7,571,614 Average Per Day (Mcf) ......................... 20,151 19,968 20,744 Average Price/Mcf ............................. $ 2.64 $ 2.18 $ 1.58 - ---------------------------------------------------------------------------------------------------
The average price of oil increased from 1995 to 1996 as the posted price fluctuated. In 1997, the average price of oil remained relatively unchanged as the posted price fluctuated. The average price of gas increased from 1995 to 1997. Since the oil and gas sales attributable to the Royalties are based on an allocation formula that is dependent on such factors as price and cost (including capital expenditures), the production amounts do not provide a meaningful comparison. Oil production attributable to the properties from which the Royalties were carved increased approximately 9.3% from 1995 to 1997 primarily due to increased production efforts. Total gas sales decreased approximately 2.9% from 1995 to 1997 primarily due to natural decline in the deliverability of the wells. Total capital expenditures in 1997 included in the net overriding royalty calculation were approximately $11.8 million compared to $10.0 million in 1996 and $10.5 6 9 million in 1995. Lease operating expense and property tax increased from 1995 to 1996 on the Waddell Ranch properties. In 1997, lease operating expense and property taxes amounted to slightly over $12.2 million, which is relatively unchanged from 1996. In the fourth quarter of 1996, BROG notified the Trust that, pursuant to an ongoing divestiture program, the company intended to sell the interests referred to as "Texas Royalty properties" that are subject to the Net Overriding Royalty Conveyance dated November 1, 1980. A Purchase and Sale Agreement was executed with Riverhill Energy, a wholly owned subsidiary of Riverhill Capital and an affiliate of CMC. As previously mentioned, CMC currently conducts all field, technical and accounting operations on behalf of BROG with regard to the Waddell Ranch properties. Riverhill Capital is a privately owned Texas corporation with offices in Bryan and Midland, Texas. The transaction was closed on February 14, 1997. The Trustee has further been informed by BROG that, as required by the Conveyance, Riverhill Energy agreed to perform all of the requirements upon and the responsibilities of BROG, under the Conveyance, with regard to the Texas Royalty properties. BROG and Riverhill Energy have further advised the Trustee that all field, technical and accounting operations are being performed by CMC under the direction of Riverhill Energy. BROG has indicated to the Trustee that BROG will work together with CMC and Riverhill Energy in an effort to assure that the various administrative functions and reporting requirements assumed by the buyer are met. Independent auditors representing Riverhill Energy and CMC and ultimately, the Texas Royalty properties, will be Arthur Andersen LLP. The Trustee has been advised that the shareholders of Riverhill Capital have executed a term sheet with STC, whereby, subject to the satisfaction of certain conditions, all of the shares of Riverhill Capital will be purchased by and sold to STC. As stated above, Riverhill Energy and CMC are wholly owned subsidiaries of Riverhill Capital. The Trustee has further been advised that, as part of this contemplated transaction, ownership of Riverhill Energy's interests in the Texas Royalty properties referenced above, will remain in Riverhill Energy, which will be owned by the current shareholders of Riverhill Capital. In the event the sale to and purchase by STC is consummated, it is anticipated that CMC will continue to perform its field, technical and accounting operations on behalf of BROG with regard to the Waddell Ranch properties and all accounting operations pertaining to the Texas Royalty properties, which will remain under the direction of Riverhill Energy. The Trustee has been advised that Riverhill Energy will assure that the various administrative functions and reporting requirements are met. The Trustee was previously advised by BROG that approximately $1.3 million in ad valorem taxes related to 1991 through 1994 for the Texas Royalty properties that BROG did not previously charge to gross proceeds attributable to the Trust would be charged to the Trust over 12 months beginning in March 1995. This charge was made by BROG deducting $87,000 per month from the gross proceeds attributable to the Texas Royalty properties until the full amount of the ad valorem taxes was recovered. As of November 1996, the Trustee was advised that this original charge of $1.3 million and all subsequent adjustments to that charge were paid. The Trust has been advised by BROG that for the period August 1, 1993, through June 30, 1998, the oil from the Waddell Ranch is being sold under a competitive bid to the third party. In the third quarter of 1996, the Trust was notified of the settlement of a class action lawsuit pending in the 270th District Court of Harris County, Texas ("the Court") styled Caroline Altheide and Langdon Harrison vs. Meridian Oil Inc., Meridian Oil Holding Inc., Meridian Oil Trading Inc., Meridian Oil Production Inc., Southland Royalty Company, El Paso Production Company, Meridian Oil Hydrocarbons Inc., Meridian Oil Gathering Inc., Meridian Oil Services Inc. and Edward Parker ("Class Action"). The defendants in this lawsuit are collectively referred to as "Meridian." The members of the class ("Class Members") involved in the Class Action that was certified by the Court are all persons or entities who (i) at any time between December 1, 1986 and July 1, 1996 received payments directly from Meridian, (ii) the payments from Meridian were attributable to interests in natural gas that was sold at the wellhead to Meridian Oil Trading Inc., and (iii) the interests were either royalty interests, overriding royalty interests or interests of a similar nature that burdened the working interests of Meridian, or working interests in properties operated by Meridian, or royalty interests, overriding royalty interests or interests of a similar nature that burdened working interests 7 10 in properties operated by Meridian. Meridian, the San Juan Basin Royalty Trust, the Burlington Resources Coal Seam Royalty Trust and the Commissioner of Public Lands of the New Mexico State Lands Office are not Class Members. In summary, the claims asserted in the Class Action ("Class Claims") are those asserted in Plaintiffs' Second Amended Original Petition filed in the Class Action which are based upon the manner in which Meridian calculated payments to its royalty owners and its joint working interest owners in natural gas-producing properties. It is alleged that those payments were based on wellhead prices that were set by a marketing affiliate, rather than upon the net prices that Meridian received for the gas and liquid components in arm's-length sales to non-affiliated purchasers. More specifically, such claims are based on Meridian's conduct in basing its payments to Class Members, for natural gas sold at the wellhead to Meridian Oil Trading Inc., on wellhead prices that resulted from one or more of the following: (i) Meridian's use of allegedly depressed prices for gas set by Meridian Oil Trading Inc.; (ii) Meridian's use of allegedly inflated cost factors for transportation services set by Meridian Oil Trading Inc.; (iii) Meridian's use of allegedly depressed net prices for liquids set by Meridian Oil Hydrocarbons Inc.; and (iv) Meridian's use of allegedly inflated rates for coal seam gathering and treating services set by Meridian Oil Gathering Inc. It was alleged that Meridian's conduct violated applicable legal principles. Meridian denied that its conduct had been unlawful or otherwise wrongful. The Court has not ruled on the merits of the Class Claims or on Meridian's defenses to such claims. The settlement reached by the parties in the Class Action provides for the payment of up to $42 million together with interest thereon beginning on July 17, 1996 until the date the settlement checks are initially mailed to the Class Members participating in the settlement. Such settlement amount is subject to reduction for certain adjustments such as (i) fees, costs and expenses awarded by the Court to the Class Counsel (Susman Godfrey L.L.P. and Dick Watt), (ii) extra compensation awarded by the Court to the named Plaintiffs (Caroline D. Altheide and Langdon D. Harrison), and (iii) the expense incurred in giving notice and administering the proposed settlement ("Net Settlement Fund"). Concurrently with Meridian's payment of the Net Settlement Fund to Class Members who did not timely and validly elect to be excluded from the Class ("Settlement Class Members"), Meridian is obligated under the settlement to advise its then-current recipients of royalty payments that Meridian intends (i) to commence calculating royalty payments based upon the net prices received by Meridian from non-affiliated third parties for natural gas and the liquids extracted therefrom, and (ii) in calculating royalty payments on gas produced from coal seam gas wells using the Val Verde Gathering System, to commence using a deduction for gathering and treating the gas produced from such wells that does not exceed 75% of the fee charged by Meridian Oil Gathering Inc. for similar services to the five largest (by volume) non-affiliated third-party shippers. Meridian is not obligated to calculate royalty payments in such method in the future but, if it changes such method of calculation, it is obligated to provide notice of such change in method of calculation to the then-current recipients of royalty payments. Of the Net Settlement Fund, (i) 48% thereof will be distributed among Class Members whose interests bear on "conventional" gas-producing properties (specifically, gas not gathered on the Val Verde Gathering System) that are located in Meridian's Farmington operating division (which is roughly coextensive with the San Juan Basin of New Mexico and Colorado), (ii) 42% thereof will be distributed among the Class Members whose interests bear on the coal seam gas-producing properties located in Meridian's Farmington operating division (specifically, gas gathered on the Val Verde Gathering System), and (iii) 10% thereof will be distributed among those Class Members whose interests bear on gas-producing properties located in areas other than Meridian's Farmington operating division. The Trust would fall in the last of these three classifications. It is estimated that the Trust's share of the Net Settlement Fund will be between $560,000 and $850,000, the exact amount of which cannot be determined at this time. Upon final judicial approval of the settlement, the settlement provides that a judgment be entered in the Class Action dismissing the Class Action with prejudice to its refiling. As a result of the settlement, Settlement Class Members release and discharge the Released Parties, and 8 11 each of them, from and with respect to the Class Claims and such Class Members will not be able to pursue the Class Claims against the Released Parties. "Released Parties" as used herein means, severally and collectively, the Defendants and Meridian Oil Inc. and all Affiliates of Burlington Resources Inc. since December 1, 1986, collectively, and all past and present agents, employees, officers, directors, shareholders, representatives, attorneys, predecessors, successors, assigns and affiliates of each of the Defendants and of Meridian Oil Inc. and all Affiliates of Burlington Resources Inc. since December 1, 1986, collectively. "Released Parties" also includes all other persons or entities who are liable or become liable for the conduct of any person or entity that is identified in the preceding sentence. "Affiliates" as used herein means Burlington Resources Inc.'s direct and indirect subsidiaries. It was determined by the Trustee that the Trust is part of the Class that was certified by the Court in the Class Action and that it was in the best interest of the Trust to elect to remain as part of the Class and share in the Net Settlement Fund. The Trustee believes that the Class Claims, if true, had little, if any, detrimental effect on the Trust and the Trust is being adequately compensated as a result of this settlement. A judgment has been signed by the Court approving the settlement. However, a Notice of Appeal was filed by San Juan 1990-A, L.P., K&W Gas Partners, L.P., MAP 1992-A Partners, L.P. and The Board of Trustees of Leland Stanford Junior University, Non-Profit Corporation (Stanford University) ("Objectors") on February 7, 1997. Class Counsel has notified the Trustee that on July 24, 1997, the Court of Appeals issued its judgment dismissing such appeal on procedural grounds and that in early September 1997, the Court of Appeals denied a motion for rehearing filed in such proceeding. The Trustee has further been advised that a petition for review has been filed with the Texas Supreme Court by the Objectors and is currently pending. One of the conditions set forth in the settlement agreement for the distribution of proceeds related to the Class Action is that there will be no distribution of the settlement proceeds unless and until such judgment is affirmed or such appeal is dismissed and the time for any further proceedings in the appellate court of last resort has expired. As a result of such appeal, no distribution of settlement proceeds has been made to the Trust and the Trustee does not know if or when the Trust will receive proceeds of such settlement. During 1997, the monthly royalty receipts were invested by the Trustee in U.S. Treasury securities until the monthly distribution date, and earned interest totaled $42,665. Interest income for 1996 and 1995 was $33,848 and $25,243, respectively. The increase in interest income from 1995 to 1997 can be attributed primarily to an increase in the funds available for investment. General and administrative expenses in 1997 were $451,423 compared to $475,628 in 1996 and $407,403 in 1995. The increase in general and administrative expenses from 1995 to 1996 is primarily due to administrative and legal fees for providing counsel to the Trust with respect to the sale of the Texas Royalty properties to Riverhill Energy and analysis of the settlement announced in the Class Action. The decrease in general and administrative expenses from 1996 to 1997 is primarily due to higher administrative, accounting and legal fees incurred in 1996. As previously mentioned, these fees were applicable to the review performed on the impact of the sale of the Texas Royalty properties to Riverhill Energy and the analysis of the settlement announced in the Class Action. Distributable income for 1997 was $22,190,115 or $.476092 per Unit. Distributable income for 1996 was $19,488,574 or $.418131 per Unit. Distributable income for 1995 was $11,632,463 or $.249574 per Unit. 9 12 RESULTS OF THE 4TH QUARTERS OF 1997 AND 1996 Royalty income received by the Trust for the fourth quarter of 1997 amounted to $5,315,656 or $.114048 per Unit. For the fourth quarter of 1996, the Trust received royalty income of $6,459,134 or $.138582 per Unit. Interest income for the fourth quarter of 1997 amounted to $8,742 compared to $14,063 for the fourth quarter of 1996. The decrease in interest income can be attributed primarily to a decrease in funds available for investment. General and administrative expenses totaled $71,816 for the fourth quarter of 1997 compared to $100,974 for the fourth quarter of 1996. The decrease in general and administrative expenses is primarily due to higher administrative, accounting and legal fees incurred in the fourth quarter of 1996. These fees were applicable to the review performed on the impact of the sale of the Texas Royalty properties to Riverhill and the analysis of the Settlement announced in the Class Action. Royalty income for the Trust for the fourth quarter is associated with actual oil and gas production during August through October from the properties from which the Trust's net overriding royalty interests were carved. Oil and gas sales attributable to the Royalties and the properties from which the Royalties were carved for the quarter and the comparable period for 1996 are as follows:
- ---------------------------------------------------------------------- Fourth Quarter 1997 1996 - -------------- --------- --------- ROYALTIES Oil Sales (Bbls) .................. 211,660 224,592 Gas Sales (Mcf) ................... 739,489 826,407
Fourth Quarter 1997 1996 - -------------- --------- --------- PROPERTIES FROM WHICH THE ROYALTIES WERE CARVED Total Oil Sales (Bbls) ............ 460,729 430,057 Average Per Day (Bbls) ............ 5,008 4,675 Average Price/Bbls ................ $ 17.77 $ 22.00 Total Gas Sales (Mcf) ............. 1,897,192 1,824,394 Average Per Day (Mcf) ............. 20,622 19,830 Average Price/Mcf ................. $ 2.51 $ 2.36 - ----------------------------------------------------------------------
The posted price of oil decreased for the fourth quarter of 1997 compared to the fourth quarter of 1996, resulting in an average price per barrel of $17.77 compared to $22.00 in the same period of 1996. The average price of gas increased for the fourth quarter of 1997 compared to the same period in 1996, resulting in an average price per Mcf of $2.51 compared to $2.36 in the fourth quarter of 1996. Gas sales from the properties from which the Royalties were carved increased slightly in the fourth quarter of 1997 compared to the same period in 1996. The Trustee was advised that oil sales increased in 1997 compared to the same period in 1996 primarily due to increased production efforts. The Trustee has been advised that there were 4 gross (1.75 net) wells drilled and completed during the three months ended December 31, 1997, and there were 19 gross (7.875 net) wells in progress. 10 13 PERMIAN BASIN ROYALTY TRUST STATEMENTS OF ASSETS, LIABILITIES AND TRUST CORPUS DECEMBER 31, 1997 AND 1996 - -------------------------------------------------------------------------------
ASSETS 1997 1996 - ------ ---------- ---------- Cash and Short-term Investments ...................... $1,724,192 $2,152,992 Net Overriding Royalty Interests in Producing Oil and Gas Properties - Net (Notes 2 and 3) ............. 3,496,594 3,760,939 ---------- ---------- $5,220,786 $5,913,931 ========== ========== LIABILITIES AND TRUST CORPUS - ---------------------------- Distribution Payable to Unit Holders ................. $1,724,192 $2,152,992 Trust Corpus - 46,608,796 Units of Beneficial Interest Authorized and Outstanding ....................... 3,496,594 3,760,939 ---------- ---------- $5,220,786 $5,913,931 ========== ==========
- ------------------------------------------------------------------------------- STATEMENTS OF DISTRIBUTABLE INCOME FOR THE THREE YEARS ENDED DECEMBER 31, 1997 - -------------------------------------------------------------------------------
1997 1996 1995 ----------- ----------- ----------- Royalty Income (Notes 2 and 3) ................. $22,598,873 $19,930,354 $12,014,623 Interest Income ................................ 42,665 33,848 25,243 ----------- ----------- ----------- 22,641,538 19,964,202 12,039,866 Expenditures - General and Administrative ...... 451,423 475,628 407,403 ----------- ----------- ----------- Distributable Income ........................... $22,190,115 $19,488,574 $11,632,463 =========== =========== =========== Distributable Income per Unit (46,608,796 Units) $ .476092 $ .418131 $ .249574 =========== =========== ===========
- ------------------------------------------------------------------------------- STATEMENTS OF CHANGES IN TRUST CORPUS FOR THE THREE YEARS ENDED DECEMBER 31, 1997 - -------------------------------------------------------------------------------
1997 1996 1995 ------------ ------------ ------------ Trust Corpus, Beginning of Period .............. $ 3,760,939 $ 4,057,628 $ 4,296,056 Amortization of Net Overriding Royalty Interests (Notes 2 and 3) ............................ (264,345) (296,689) (238,428) Distributable Income ........................... 22,190,115 19,488,574 11,632,463 Distributions Declared ......................... (22,190,115) (19,488,574) (11,632,463) ============ ============ ============ Trust Corpus, End of Period .................... $ 3,496,594 $ 3,760,939 $ 4,057,628 ============ ============ ============
- ------------------------------------------------------------------------------- The accompanying Notes to Financial Statements are an integral part of this statement. 11 14 NOTES TO FINANCIAL STATEMENTS 1. TRUST ORGANIZATION AND PROVISIONS The Permian Basin Royalty Trust ("Trust") was established as of November 1, 1980. NationsBank of Texas, N.A. ("Trustee") is Trustee for the Trust. Southland Royalty Company ("Southland") conveyed to the Trust (1) a 75% net overriding royalty in Southland's fee mineral interest in the Waddell Ranch in Crane County, Texas ("Waddell Ranch properties") and (2) a 95% net overriding royalty carved out of Southland's major producing royalty properties in Texas ("Texas Royalty properties"). The net overriding royalties above are collectively referred to as "Royalties." On November 3, 1980, Units of Beneficial Interest ("Units") in the Trust were distributed to the Trustee for the benefit of Southland shareholders of record as of November 3, 1980, who received one Unit in the Trust for each share of Southland common stock held. The Units are traded on the New York Stock Exchange. The terms of the Trust Indenture provide, among other things, that: o The Trust shall not engage in any business or commercial activity of any kind or acquire any assets other than those initially conveyed to the Trust; o the Trustee may not sell all or any part of the Royalties unless approved by holders of 75% of all Units outstanding in which case the sale must be for cash and the proceeds promptly distributed; o the Trustee may establish a cash reserve for the payment of any liability which is contingent or uncertain in amount; o the Trustee is authorized to borrow funds to pay liabilities of the Trust; and o the Trustee will make monthly cash distributions to Unit holders (see Note 2). 2. NET OVERRIDING ROYALTY INTERESTS AND DISTRIBUTION TO UNIT HOLDERS The amounts to be distributed to Unit holders ("Monthly Distribution Amounts") are determined on a monthly basis. The Monthly Distribution Amount is an amount equal to the sum of cash received by the Trustee during a calendar month attributable to the Royalties, any reduction in cash reserves and any other cash receipts of the Trust, including interest, reduced by the sum of liabilities paid and any increase in cash reserves. If the Monthly Distribution Amount for any monthly period is a negative number, then the distribution will be zero for such month. To the extent the distribution amount is a negative number, that amount will be carried forward and deducted from future monthly distributions until the cumulative distribution calculation becomes a positive number, at which time a distribution will be made. Unit holders of record will be entitled to receive the calculated Monthly Distribution Amount for each month on or before ten business days after the monthly record date, which is generally the last business day of each calendar month. The cash received by the Trustee consists of the amounts received by owners of the interest burdened by the Royalties from the sale of production less the sum of applicable taxes, accrued production costs, development and drilling costs, operating charges and other costs and deductions, multiplied by 75% in the case of the Waddell Ranch properties and 95% in the case of the Texas Royalty properties. The initial carrying value of the Royalties ($10,975,216) represented Southland's historical net book value at the date of the transfer to the Trust. Accumulated amortization as of December 31, 1997 and 1996 aggregated $7,478,622 and $7,214,277, respectively. 3. BASIS OF ACCOUNTING The financial statements of the Trust are prepared on the following basis: o Royalty income recorded is the amount computed and paid by the working interest owner to the Trustee on behalf of the Trust. o Trust expenses recorded are based on liabilities paid and cash reserves established out of cash received or borrowed funds for liabilities and contingencies. o Distributions to Unit holders are recorded when declared by the Trustee. The financial statements of the Trust differ from financial statements prepared in accordance with generally accepted accounting principles ("GAAP") because revenues are not accrued in the month of production and certain cash reserves may be established for contingencies which would not be accrued in financial statements prepared in accordance with GAAP. Amortization of the Royalties calculated on a unit-of-production basis is charged directly to trust corpus. 12 15 4. FEDERAL INCOME TAX For Federal income tax purposes, the Trust constitutes a fixed investment trust which is taxed as a grantor trust. A grantor trust is not subject to tax at the trust level. The Unit holders are considered to own the Trust's income and principal as though no trust were in existence. The income of the Trust is deemed to have been received or accrued by each Unit holder at the time such income is received or accrued by the Trust rather than when distributed by the Trust. The Royalties constitute "economic interests" in oil and gas properties for Federal income tax purposes. Unit holders must report their share of the revenues of the Trust as ordinary income from oil and gas royalties and are entitled to claim depletion with respect to such income. The Trust has on file technical advice memoranda confirming the tax treatment described above. The classification of the Trust's income for purposes of the passive loss rules may be important to a Unit holder. As a result of the Tax Reform Act of 1986, royalty income will generally be treated as portfolio income and will not offset passive losses. 5. SIGNIFICANT CUSTOMERS Information as to significant purchasers of oil and gas production attributable to the Trust's economic interests is included in Item 2 of the Trust's Annual Report on Form 10-K which is included in this report. 6. PROVED OIL AND GAS RESERVES (UNAUDITED) Proved oil and gas reserve information is included in Item 2 of the Trust's Annual Report on Form 10-K which is included in this report. 7. QUARTERLY SCHEDULE OF DISTRIBUTABLE INCOME (UNAUDITED) The following is a summary of the unaudited quarterly schedule of distributable income for the two years ended December 31, 1997 (in thousands, except per Unit amounts):
Distributable Income and Royalty Distributable Distribution Income Income Per Unit ------- ------- --------------- 1997 - ---- First Quarter .......... $ 8,704 $ 8,572 $ .183907 Second Quarter ......... 4,186 4,022 .086304 Third Quarter .......... 4,393 4,343 .093186 Fourth Quarter ......... 5,316 5,253 .112695 ------- ------- --------------- Total ............... $22,599 $22,190 $ .476092 ======= ======= =============== 1996 - ---- First Quarter .......... $ 2,570 $ 2,454 $ .052637 Second Quarter ......... 3,839 3,700 .079382 Third Quarter .......... 7,062 6,963 .149395 Fourth Quarter ......... 6,459 6,372 .136717 ------- ------- --------------- Total ............... $19,930 $19,489 $ .418131 ======= ======= ===============
8. SUBSEQUENT EVENT In March 1998, Burlington Resources Oil and Gas Company ("BROG") and Coastal Management Corporation ("CMC") notified the Trustee that distributable income for March 1998 includes approximately $1.1 million which represents the Trust's portion of an approximate $1.5 million severance tax refund received by BROG from the State of Texas. With regard to the source of such payment, BROG advised the Trustee that BROG, along with other working interest owners in the Waddell Ranch, engaged an independent severance tax consultant to analyze severance taxes incurred on gas production for the period June 1991 to March 1997. As a result of their analysis, a refund was requested and subsequently received in March 1998 for approximately $1.3 million. Further, the State of Texas refunded approximately $200,000 to BROG for severance taxes related to gas production for the period April 1997 to November 1997, based on the results of the analysis for the period June 1991 to March 1997. This resulted in a total refund of approximately $1.5 million to BROG, out of which the Trust received $1.1 million, referenced above. 13 16 INDEPENDENT AUDITORS' REPORT NATIONSBANK OF TEXAS, N.A., AS TRUSTEE FOR THE PERMIAN BASIN ROYALTY TRUST: We have audited the accompanying statements of assets, liabilities and trust corpus of the Permian Basin Royalty Trust as of December 31, 1997 and 1996, and the related statements of distributable income and changes in trust corpus for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Trustee. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by the Trustee, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. As described in Note 3 to the financial statements, these financial statements were prepared on a modified cash basis, which is a comprehensive basis of accounting other than generally accepted accounting principles. In our opinion, such financial statements present fairly, in all material respects, the assets, liabilities and trust corpus of the Permian Basin Royalty Trust as of December 31, 1997 and 1996, and the distributable income and changes in trust corpus for each of the three years in the period ended December 31, 1997, on the basis of accounting described in Note 3. /s/ DELOITTE & TOUCHE LLP Deloitte & Touche LLP Fort Worth, Texas March 20, 1998 14 17 PERMIAN BASIN ROYALTY TRUST 500 West Seventh Street, Suite 1300 Post Office Box 1317 Fort Worth, Texas 76101 NationsBank of Texas, N.A., Trustee AUDITORS Deloitte & Touche LLP Fort Worth, Texas LEGAL COUNSEL Wallach & Moore, P.C. Fort Worth, Texas TAX COUNSEL Butler & Binion, L.L.P. Houston, Texas TRANSFER AGENT ChaseMellon Shareholder Services, L.L.C. Ridgefield Park, New Jersey Design: Witherspoon & Associates, Fort Worth, Texas 15 18 PERMIAN BASIN ROYALTY TRUST o 500 WEST SEVENTH STREET, SUITE 1300 o POST OFFICE BOX 1317 o FORT WORTH, TEXAS 76101 19 ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------------- FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 1-8033 PERMIAN BASIN ROYALTY TRUST (Exact Name of Registrant as Specified in the Permian Basin Royalty Trust Indenture) TEXAS 75-6280532 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) NATIONSBANK OF TEXAS, N.A. TRUST DEPARTMENT P.O. BOX 1317 FORT WORTH, TEXAS 76101 (Address of Principal Executive Offices) (Zip Code)
(817) 390-6905 (Registrant's Telephone Number, Including Area Code) Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED ------------------- ----------------------------------------- UNITS OF BENEFICIAL INTEREST NEW YORK STOCK EXCHANGE
Securities registered pursuant to Section 12(g) of the Act: NONE (Title of Class) 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 X No ____ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] At March 18, 1998, there were 46,608,796 Units of Beneficial Interest of the Trust outstanding with an aggregate market value on that date of $215,565,682. DOCUMENTS INCORPORATED BY REFERENCE "Units of Beneficial Interest" at page 1; "Trustee's Discussion and Analysis for the Three-Year Period Ended December 31, 1997" at pages 6 through 9; "Results of the 4th Quarters of 1997 and 1996" at page 10; and "Statements of Assets, Liabilities and Trust Corpus," "Statements of Distributable Income," "Statements of Changes in Trust Corpus," "Notes to Financial Statements" and "Independent Auditors' Report" at page 11 et seq., in registrant's Annual Report to security holders for fiscal year ended December 31, 1997 are incorporated herein by reference for Item 5 (Market for Units of the Trust and Related Security Holder Matters), Item 7 (Management's Discussion and Analysis of Financial Condition and Results of Operation) and Item 8 (Financial Statements and Supplementary Data) of Part II of this Report. ================================================================================ 20 FORWARD LOOKING INFORMATION Certain information included in this report contains, and other materials filed or to be filed by the Trust with the Securities and Exchange Commission (as well as information included in oral statements or other written statements made or to be made by the Trust) may contain or include, forward looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended. Such forward looking statements may be or may concern, among other things, capital expenditures, drilling activity, development activities, production efforts and volumes, hydrocarbon prices and the results thereof, and regulatory matters. Such forward looking statements generally are accompanied by words such as "estimate," "expect," "anticipate," "goal," "should," "assume," "believe," or other words that convey the uncertainty of future events or outcomes. PART I ITEM 1. BUSINESS The Permian Basin Royalty Trust (the "Trust") is an express trust created under the laws of the state of Texas by the "Permian Basin Royalty Trust Indenture" (the "Trust Indenture") entered into on November 3, 1980, between Southland Royalty Company ("Southland Royalty") and The First National Bank of Fort Worth, as Trustee. NationsBank of Texas, N.A. (formerly known as NCNB Texas National Bank), a banking association organized under the laws of the United States, as the successor of The First National Bank of Fort Worth, is now the Trustee of the Trust. The principal office of the Trust (sometimes referred to herein as the "Registrant") is located at 500 West Seventh Street, Fort Worth, Texas (telephone number 817/390-6905). On October 23, 1980, the stockholders of Southland Royalty approved and authorized that company's conveyance of net overriding royalty interests (equivalent to net profits interests) to the Trust for the benefit of the stockholders of Southland Royalty of record at the close of business on the date of the conveyance consisting of a 75% net overriding royalty interest carved out of that company's fee mineral interests in the Waddell Ranch properties in Crane County, Texas and a 95% net overriding royalty interest carved out of that company's major producing royalty properties in Texas. The conveyance of these interests (the "Royalties") was made on November 3, 1980, effective as to production from and after November 1, 1980 at 7:00 a.m. The function of the Trustee is to collect the income attributable to the Royalties, to pay all expenses and charges of the Trust, and then distribute the remaining available income to the Unit holders. The Trust is not empowered to carry on any business activity and has no employees, all administrative functions being performed by the Trustee. The Royalties were carved out of and now burden those properties and interests as are more particularly described under "Item 2. PROPERTIES" herein. The Royalties constitute the principal asset of the Trust and the beneficial interests in the Royalties are divided into that number of Units of Beneficial Interest (the "Units") of the Trust equal to the number of shares of the common stock of Southland Royalty outstanding as of the close of business on November 3, 1980. Each stockholder of Southland Royalty of record at the close of business on November 3, 1980, received one Unit for each share of the common stock of Southland Royalty then held. In 1985, Southland Royalty became a wholly-owned subsidiary of Burlington Northern Inc. ("BNI"). In 1988, BNI transferred its natural resource operations to Burlington Resources Inc. ("BRI") as a result of which Southland Royalty became a wholly-owned indirect subsidiary of BRI. As a result of these transactions, El Paso Natural Gas Company ("El Paso") also became an indirect subsidiary of BRI. In March 1992, El Paso completed an initial public offering of 5,750,000 newly issued shares of El Paso common stock, thereby decreasing BRI's ownership of El Paso to approximately eighty-five percent (85%). On June 30, 1992, BRI distributed all of the shares of El Paso common stock owned by BRI to BRI's stockholders of record as of June 15, 1992. See "Pricing Information" under "Item 2. PROPERTIES" herein. 1 21 Effective January 1, 1996, Southland Royalty, a wholly-owned subsidiary of Meridian Oil Inc. ("MOI") was merged with and into MOI, by which action the separate corporate existence of Southland Royalty ceased and MOI survived and succeeded to the ownership of all of the assets, has the rights, powers and privileges and assumed all of the liabilities and obligations of Southland Royalty. In 1996, MOI changed its name to Burlington Resources Oil & Gas Company ("BROG"). The term "net proceeds" as used in the above conveyance means the excess of "gross proceeds" received by BROG during a particular period over "production costs" for such period. "Gross proceeds" means the amount received by BROG (or any subsequent owner of the interests from which the Royalties were carved) from the sale of the production attributable to the properties and interests from which the Royalties were carved, subject to certain adjustments. "Production costs" means, generally, costs incurred on an accrual basis in operating the properties and interests out of which the Royalties were carved, including both capital and non-capital costs; for example, development drilling, production and processing costs, applicable taxes, and operating charges. If production costs exceed gross proceeds in any month, the excess is recovered out of future gross proceeds prior to the making of further payment to the Trust, but the Trust is not liable for any production costs or liabilities attributable to these properties and interests or the minerals produced therefrom. If at any time the Trust receives more than the amount due from the Royalties, it shall not be obligated to return such overpayment, but the amounts payable to it for any subsequent period shall be reduced by such amount, plus interest, at a rate specified in the conveyance. To the extent it has the legal right to do so, BROG is responsible for marketing the production from such properties and interests, either under existing sales contracts or under future arrangements at the best prices and on the best terms it shall deem reasonably obtainable in the circumstances. BROG also has the obligation to maintain books and records sufficient to determine the amounts payable to the Trustee. BROG, however, can sell its interests in the properties from which the Royalties were carved. Proceeds from production in the first month are generally received by BROG in the second month, the net proceeds attributable to the Royalties are paid by BROG to the Trustee in the third month and distribution by the Trustee to the Unit holders is made in the fourth month. The identity of Unit holders entitled to a distribution will generally be determined as of the last business day of each calendar month (the "monthly record date"). The amount of each monthly distribution will generally be determined and announced ten days before the monthly record date. Unit holders of record as of the monthly record date will be entitled to receive the calculated monthly distribution amount for each month on or before ten business days after the monthly record date. The aggregate monthly distribution amount is the excess of (i) net revenues from the Trust properties, plus any decrease in cash reserves previously established for contingent liabilities and any other cash receipts of the Trust over (ii) the expenses and payments of liabilities of the Trust plus any net increase in cash reserves for contingent liabilities. Cash held by the Trustee as a reserve for liabilities or contingencies (which reserves may be established by the Trustee in its discretion) or pending distribution is placed, at the Trustee's discretion, in obligations issued by (or unconditionally guaranteed by) the United States or any agency thereof, repurchase agreements secured by obligations issued by the United States or any agency thereof, or certificates of deposit of banks having a capital surplus and undivided profits in excess of $50,000,000, subject, in each case, to certain other qualifying conditions. The income to the Trust attributable to the Royalties is not subject in material respects to seasonal factors nor in any manner related to or dependent upon patents, licenses, franchises or concessions. The Trust conducts no research activities. The Trust has no employees since all administrative functions are performed by the Trustee. BROG has advised the Trustee that it believes that comparable revenues could be obtained in the event of a change in purchasers of production. 2 22 ITEM 2. PROPERTIES The net overriding royalties conveyed to the Trust include: (1) a 75% net overriding royalty carved out of Southland Royalty's fee mineral interests in the Waddell Ranch in Crane County, Texas (the "Waddell Ranch properties"); and (2) a 95% net overriding royalty carved out of Southland Royalty's major producing royalty interests in Texas (the "Texas Royalty properties"). The net overriding royalty for the Texas Royalty properties is subject to the provisions of the lease agreements under which such royalties were created. References below to "net" wells and acres are to the interests of Southland Royalty (from which the Royalties were carved) in the "gross" wells and acres. The following information in Item 2 is based upon data and information furnished to the Trustee by Southland Royalty or BROG. PRODUCING ACREAGE, WELLS AND DRILLING Waddell Ranch Properties. The Waddell Ranch properties consist of 78,175 gross (34,205 net) producing acres. A majority of the proved reserves are attributable to six fields: Dune, Sand Hills (Judkins), Sand Hills (McKnight), Sand Hills (Tubb), University-Waddell (Devonian) and Waddell. At December 31, 1997, the Waddell Ranch properties contained 834 gross (344 net) productive oil wells, 160 gross (67 net) productive gas wells and 347 gross (137 net) injection wells. BROG is operator of record of the Waddell Ranch properties. All field, technical and accounting operations have been contracted by an agreement between the working interest owners and Coastal Management Corporation ("CMC") but remain under the direction of BROG. The Waddell Ranch properties are mature producing properties, and all of the major oil fields are currently being waterflooded. Proved reserves and estimated future net revenues attributable to the properties are included in the reserve reports summarized below. BROG does not own the full working interest in any of the tracts constituting the Waddell Ranch properties and, therefore, implementation of any development programs will require approvals of other working interest holders as well as BROG. In addition, implementation of any development programs will be dependent upon oil and gas prices currently being received and anticipated to be received in the future. During 1997 there were 23 gross (9.25 net) wells drilled on the Waddell Ranch properties. At December 31, 1997 there were 19 gross (7.875 net) wells in progress on the Waddell Ranch properties. During 1996 there were 22 gross (8.375 net) oil wells drilled on the Waddell Ranch properties. At December 31, 1996 there were no wells in progress on the Waddell Ranch properties. During 1995 there were 32 gross (14.075 net) oil wells drilled on the Waddell Ranch properties. At December 31, 1995 there were 3 gross (.8 net) wells in progress on the Waddell Ranch properties. During 1994 there were 22 gross (9.875 net) wells drilled on the Waddell Ranch properties. At December 31, 1994 there were no wells in progress on the Waddell Ranch properties. BROG has advised the Trustee that the total amount of capital expenditures for 1997 with regard to the Waddell Ranch properties totalled $11,789,849. Capital expenditures include the cost of the 1997 drilling program and remedial and maintenance activities. BROG has advised the Trustee that the capital expenditures budget for 1998 totals approximately $17,639,000, of which approximately $9,736,000 is attributable to the 1998 drilling program, $4,561,000 to workovers and recompletions, $2,320,000 to facility upgrades and replacements and $1,022,000 to a seismic project. Accordingly, there is an estimated 50% increase in capital expenditures for 1998 as compared with the 1997 capital expenditures. Texas Royalty Properties. The Texas Royalty properties consist of royalty interests in mature producing oil fields, such as Yates, Wasson, Sand Hills, East Texas, Kelly-Snyder, Panhandle Regular, N. Cowden, Todd, Keystone, Kermit, McElroy, Howard-Glasscock, Seminole and others. The Texas Royalty properties contain approximately 303,000 gross (approximately 51,000 net) producing acres. Detailed information concerning the number of wells on royalty properties is not generally available to the owners of royalty interests. Consequently, an accurate count of the number of wells located on the Texas Royalty properties cannot readily be obtained. 3 23 Approximately $1.3 million in ad valorem taxes related to 1991 through 1994 for the Texas Royalty properties that Southland Royalty did not previously charge to gross proceeds attributable to the Trust was charged to the Trust over 12 months beginning March 1995. Such amount was charged by deducting $87,000 per month from gross proceeds attributable to the Texas Royalty properties in calculating royalty income from such properties. To the extent charges were made to gross proceeds, the amount of funds available for distribution to Unit holders was reduced. As of November 1996, the Trustee was advised that this original charge of $1.3 million and all subsequent adjustments to that charge had been paid. In the fourth quarter of 1996, BROG notified the Trustee that, pursuant to an ongoing divestiture program, BROG intended to sell its interests in the Texas Royalty properties that are subject to the Net Overriding Royalty Conveyance to the Trust dated effective November 1, 1980 ("Conveyance"). A Purchase and Sale Agreement was executed between BROG and Riverhill Energy Corporation ("Riverhill Energy"), a wholly owned subsidiary of Riverhill Capital Corporation ("Riverhill Capital") and an affiliate of CMC. CMC currently conducts all field, technical and accounting operations on behalf of BROG with regard to the Waddell Ranch properties. Riverhill Capital is a privately owned Texas corporation with offices in Bryan and Midland, Texas. The Trustee was advised by BROG that the transaction closed on February 14, 1997. The Trustee has been further informed by BROG that, as required by the Conveyance, Riverhill Energy has succeeded to all of the requirements upon and the responsibilities of BROG under the Conveyance with regard to the Texas Royalty properties. BROG and Riverhill Energy have further advised the Trustee that all accounting operations pertaining to the Texas Royalty properties are being performed by CMC under the direction of Riverhill Energy. BROG had indicated to the Trustee that BROG will work together with CMC and Riverhill Energy in an effort to assure that various administrative functions and reporting requirements assumed by Riverhill Energy are met. The Trustee has been advised that independent auditors representing Riverhill Energy and CMC will be Arthur Andersen LLP. The Trustee has been advised that the shareholders of Riverhill Capital have executed a term sheet with Schlumberger Technology Corporation ("STC"), whereby, subject to the satisfaction of certain conditions, all of the shares of Riverhill Capital will be purchased by and sold to STC. As stated above, Riverhill Energy and CMC are wholly owned subsidiaries of Riverhill Capital. The Trustee has been further advised that, as part of this contemplated transaction, ownership of Riverhill Energy's interests in the Texas Royalty properties referenced above will remain in Riverhill Energy which will be owned by the current shareholders of Riverhill Capital. In the event the sale to and purchase by STC is consummated, it is anticipated that CMC will continue to perform its field, technical and accounting operations on behalf of BROG with regard to the Waddell Ranch properties and all accounting operations pertaining to the Texas Royalty properties which will remain under the direction of Riverhill Energy. The Trustee has been advised by Riverhill Energy that it will assure that the various administrative functions and reporting requirements are met. 4 24 OIL AND GAS PRODUCTION The Trust recognizes production during the month in which the related distribution is received. Production of oil and gas attributable to the Royalties and the properties from which the Royalties were carved and the related average sales prices attributable to the properties from which the Royalties were carved for the three years ended December 31, 1997, excluding portions attributable to the adjustments discussed below, were as follows:
WADDELL TEXAS RANCH ROYALTY PROPERTIES PROPERTIES TOTAL --------------------------------- --------------------------- --------------------------------- 1997 1996 1995 1997 1996 1995 1997 1996 1995 --------- --------- --------- ------- ------- ------- --------- --------- --------- ROYALTIES: Production Oil (barrels)........... 426,127 418,991 262,221 391,665 352,833 330,922 817,792 771,824 593,143 Gas (Mcf)............... 1,875,965 1,915,649 1,289,005 840,790 724,732 616,294 2,716,755 2,640,381 1,905,299 PROPERTIES FROM WHICH THE ROYALTIES WERE CARVED: Production Oil (barrels)........... 1,387,056 1,338,340 1,229,822 438,963 450,397 440,649 1,826,019 1,788,737 1,670,471 Gas (Mcf)............... 6,409,242 6,376,201 6,744,271 945,920 932,205 827,343 7,355,162 7,308,406 7,571,614 Average Price Oil/barrel.............. $19.54 $19.97 $16.84 $19.20 $18.32 $15.71 $19.46 $19.55 $16.55 Gas/Mcf................. $ 2.67 $ 2.20 $ 1.59 $ 2.45 $ 2.04 $ 1.55 $ 2.64 $ 2.18 $ 1.58
PRICING INFORMATION Reference is made to "Regulation" for information as to federal regulation of prices of natural gas. The following paragraphs provide information regarding sales of oil and gas from the Waddell Ranch properties. As a royalty owner, Southland Royalty is not furnished detailed information regarding sales of oil and gas from the Texas Royalty properties. Oil. The Trustee has been advised by BROG that for the period August 1, 1993 through June 30, 1998, the oil from the Waddell Ranch properties is being sold under a competitive bid to independent third parties. Gas. The gas produced from the Waddell Ranch properties is processed through a natural gas processing plant and sold at the tailgate of the plant. Plant products are marketed by Burlington Resources Hydrocarbons Inc., an indirect subsidiary of BRI. The processor of the gas (Warren Petroleum Company, L.P.) receives 15% of the liquids and residue gas as a fee for gathering, compression, treating and processing the gas. OIL AND GAS RESERVES The following are definitions adopted by the Securities and Exchange Commission ("SEC") and the Financial Accounting Standards Board which are applicable to terms used within this Item: "Proved reserves" are those estimated quantities of crude oil, natural gas and natural gas liquids, which, upon analysis of geological and engineering data, appear with reasonable certainty to be recoverable in the future from known oil and gas reservoirs under existing economic and operating conditions. "Proved developed reserves" are those proved reserves which can be expected to be recovered through existing wells with existing equipment and operating methods. "Proved undeveloped reserves" are those proved reserves which are expected to be recovered from new wells on undrilled acreage, or from existing wells where a relatively major expenditure is required. "Estimated future net revenues" are computed by applying current prices of oil and gas (with consideration of price changes only to the extent provided by contractual arrangements and allowed by federal regulation) to estimated future production of proved oil and gas reserves as of the date of the latest balance sheet presented, less estimated future expenditures (based on current costs) to be incurred in developing and producing the proved reserves, and assuming continuation of existing economic 5 25 conditions. "Estimated future net revenues" are sometimes referred to herein as "estimated future net cash flows". "Present value of estimated future net revenues" is computed using the estimated future net revenues and a discount factor of 10%. The independent petroleum engineers' reports as to the proved oil and gas reserves attributable to the Royalties conveyed to the Trust were obtained from Cawley, Gillespie & Associates, Inc. The following table presents a reconciliation of proved reserve quantities from December 31, 1994 through December 31, 1997 (in thousands):
WADDELL RANCH TEXAS ROYALTY PROPERTIES PROPERTIES TOTAL --------------- -------------- --------------- OIL GAS OIL GAS OIL GAS (Bbls) (Mcf) (Bbls) (Mcf) (Bbls) (Mcf) ------ ------ ------ ----- ------ ------ December 31, 1994........................................... 6,037 25,080 4,703 4,825 10,740 29,905 Extensions, discoveries and other additions................. 49 28 -0- -0- 49 28 Revisions of previous estimates............................. 128 1,024 205 664 333 1,688 Production.................................................. (262) (1,289) (331) (616) (593) (1,905) ------ ------ ----- ----- ------ ------ December 31, 1995........................................... 5,952 24,843 4,577 4,873 10,529 29,716 Extensions, discoveries and other additions................. 24 24 -0- -0- 24 24 Revisions of previous estimates............................. 1,746 11,560 448 642 2,194 12,202 Production.................................................. (419) (1,916) (353) (725) (772) (2,641) ------ ------ ----- ----- ------ ------ December 31, 1996........................................... 7,303 34,511 4,672 4,790 11,975 39,301 Extensions, discoveries and other additions................. 48 52 -0- -0- 48 52 Revisions of previous estimates............................. (1,902) (8,512) 161 680 (1,741) (7,832) Production.................................................. (426) (1,876) (392) (841) (818) (2,717) December 31, 1997........................................... 5,023 24,175 4,441 4,629 9,464 28,804 ====== ====== ===== ===== ====== ======
Estimated quantities of proved developed reserves of crude oil and natural gas as of December 31, 1997, 1996 and 1995 were as follows (in thousands):
CRUDE OIL NATURAL GAS (Bbls) (Mcf) --------- ----------- 1997........................................................ 8,116 23,054 1996........................................................ 10,154 32,008 1995........................................................ 9,061 23,467
The Financial Accounting Standards Board requires supplemental disclosures for oil and gas producers based on a standardized measure of discounted future net cash flows relating to proved oil and gas reserve quantities. Under this disclosure, future cash inflows are computed by applying year-end prices of oil and gas relating to the enterprise's proved reserves to the year-end quantities of those reserves. Future price changes are only considered to the extent provided by contractual arrangements in existence at year-end. The standardized measure of discounted future net cash flows is achieved by using a discount rate of 10% a year to reflect the timing of future cash flows relating to proved oil and gas reserves. 6 26 Estimates of proved oil and gas reserves are by their very nature imprecise. Estimates of future net revenue attributable to proved reserves are sensitive to the unpredictable prices of oil and gas and other variables. The 1997, 1996 and 1995 change in the standardized measure of discounted future net cash flows related to future royalty income from proved reserves discounted at 10% is as follows (in thousands):
WADDELL RANCH PROPERTIES TEXAS ROYALTY PROPERTIES TOTAL ----------------------------- --------------------------- ------------------------------ 1997 1996 1995 1997 1996 1995 1997 1996 1995 -------- -------- ------- ------- ------- ------- -------- -------- -------- January 1........................ $150,170 $ 74,070 $64,730 $52,457 $36,324 $33,660 $202,627 $110,394 $ 98,390 Extensions, discoveries and other additions...................... 619 447 457 -0- -0- -0- 619 447 457 Accretion of discount............ 15,017 7,407 6,473 5,246 3,632 3,366 20,263 11,039 9,839 Revisions of prior year estimates, changes in price and other.......................... (89,235) 80,524 8,548 (7,540) 20,153 5,175 (96,775) 100,677 13,723 Royalty income................... (13,392) (12,278) (6,138) (9,207) (7,652) (5,877) (22,599) (19,930) (12,015) -------- -------- ------- ------- ------- ------- -------- -------- -------- December 31...................... $ 63,179 $150,170 $74,070 $40,956 $52,457 $36,324 $104,135 $202,627 $110,394 ======== ======== ======= ======= ======= ======= ======== ======== ========
Oil and gas prices of $15.79 and $16.75 per barrel and $2.28 and $3.14 per Mcf were used to determine the estimated future net revenues from the Waddell Ranch properties and the Texas Royalty properties at December 31, 1997. The downward revision of the estimated oil reserves and the related decrease in the discounted future net cash flow for the Waddell Ranch properties was primarily due to the decrease in oil prices from 1996 to 1997. The downward revision in the estimated gas reserves for the Waddell Ranch properties was primarily due to the decrease in gas prices from 1996 to 1997. Oil and gas prices of $23.88 and $22.32 per barrel and $4.00 and $2.64 per Mcf were used to determine the estimated future net revenues from the Waddell Ranch properties and the Texas Royalty properties at December 31, 1996. The extension, discoveries and other additions for the Waddell Ranch properties are reserves added as a result of remedial activity in the Waddell Ellenberger Field. The upward revision of the estimated oil and gas reserves and the related increase in the discounted future net cash flow for the Waddell Ranch properties was due to the increase in oil and gas prices from 1995 to 1996, as well as production response from drilling and remedial activity. The largest increase in oil reserves due to drilling and remedial activity occurred in the Waddell Field. The revisions in the oil and gas reserves and related discounted cash flow for the Texas Royalty properties are mainly due to the increase in oil and gas prices at December 31, 1996. Oil and gas prices of $18.02 and $16.19 per barrel and $1.94 and $1.75 per Mcf were used to determine the estimated future net revenues from the Waddell Ranch properties and the Texas Royalty properties at December 31, 1995. The extension, discoveries and other additions for the Waddell Ranch properties are proved undeveloped reserves related to field extension development for the Waddell Field. The upward revisions of both reserves and discounted future net cash flows for the Waddell Ranch properties are due to the increases in oil prices as well as production response from drilling and remedial activities on the Dune Field, Sand Hills (Judkins) Field, Sand Hills (Tubb) Field and the Waddell Field. The upward revisions of reserves and discounted future net cash flows for the Texas Royalty properties are due to the increase in oil prices at December 31, 1995. 7 27 The following presents estimated future net revenue and the present value of estimated future net revenue, for each of the years ended December 31, 1997, 1996 and 1995 (in thousands except amounts per Unit):
1997 1996 1995 --------------------- --------------------- --------------------- ESTIMATED ESTIMATED ESTIMATED FUTURE PRESENT FUTURE PRESENT FUTURE PRESENT NET VALUE NET VALUE NET VALUE REVENUE AT 10% REVENUE AT 10% REVENUE AT 10% --------- -------- --------- -------- --------- -------- Total Proved Waddell Ranch properties................. $126,924 $ 63,179 $294,653 $150,170 $147,068 $ 74,070 Texas Royalty properties................. 85,254 40,956 111,181 52,457 78,586 36,324 -------- -------- -------- -------- -------- -------- Total.............................. $212,178 $104,135 $405,834 $202,627 $225,654 $110,394 ======== ======== ======== ======== ======== ======== Total Proved Per Unit...................... $ 4.55 $ 2.23 $ 8.71 $ 4.35 $ 4.84 $ 2.37 ======== ======== ======== ======== ======== ======== Proved Developed Waddell Ranch properties................. $ 94,493 $ 55,150 $226,174 $124,395 $110,611 $ 60,600 Texas Royalty properties................. 85,254 40,956 111,181 52,457 78,586 36,324 -------- -------- -------- -------- -------- -------- Total.............................. $179,747 $ 96,106 $337,355 $176,852 $189,197 $ 96,924 ======== ======== ======== ======== ======== ========
Reserve quantities and revenues shown in the preceding tables for the Royalties were estimated from projections of reserves and revenue attributable to the combined Southland Royalty and Trust interests in the Waddell Ranch properties and Texas Royalty properties. Reserve quantities attributable to the Royalties were estimated by allocating to the Royalties a portion of the total estimated net reserve quantities of the interests, based upon gross revenue less production taxes. Because the reserve quantities attributable to the Royalties are estimated using an allocation of the reserves, any changes in prices or costs will result in changes in the estimated reserve quantities allocated to the Royalties. Therefore, the reserve quantities estimated will vary if different future price and cost assumptions occur. Proved reserve quantities are estimates based on information available at the time of preparation and such estimates are subject to change as additional information becomes available. The reserves actually recovered and the timing of production of those reserves may be substantially different from the original estimate. Moreover, the present values shown above should not be considered as the market values of such oil and gas reserves or the costs that would be incurred to acquire equivalent reserves. A market value determination would include many additional factors. REGULATION Many aspects of the production, pricing and marketing of crude oil and natural gas are regulated by federal and state agencies. The Federal Energy Regulatory Commission ("FERC") is primarily responsible for federal regulation of natural gas. Natural Gas Regulation The interstate transportation and sale for resale of natural gas is subject to federal governmental regulation, including regulation of tariffs charged and various other matters, by FERC. The Natural Gas Wellhead Decontrol Act of 1989 terminated federal price controls on wellhead sales of domestic natural gas on January 1, 1993. In 1992, FERC issued Orders Nos. 636 and 636-A, which generally opened access to interstate gas pipelines by requiring such pipelines to "unbundle" their transportation services and allow shippers to choose and pay for only the services they require, regardless of whether the shipper purchases gas from such pipelines or from other suppliers. These orders also require upstream pipelines to permit downstream pipelines to assign upstream capacity to their shippers and place analogous, unbundled access requirements on the downstream pipelines. Although these orders should generally have the effect of facilitating the transportation of gas produced from the properties from which the Royalties were carved, as well as to facilitate the direct access to end-user markets, the impact of these orders on marketing production from the properties from which the Royalties were carved cannot be predicted at this time. 8 28 While natural gas prices are currently unregulated, Congress historically has been active in the area of natural gas regulation. It is impossible to predict whether new legislation to regulate natural gas might be proposed, what proposals, if any, might actually be enacted by Congress or the various state legislatures, and what effect, if any, such proposals might have on the operations of the properties from which the Royalties were carved. State Regulation The various states regulate the production and sale of oil and natural gas, including imposing requirements for obtaining drilling permits, the method of developing new fields, the spacing and operation of wells and the prevention of waste of oil and gas resources. The rates of production may be regulated and the maximum daily production allowables from both oil and gas wells may be established on a market demand or conservation basis, or both. Other Regulation The petroleum industry is also subject to compliance with various other federal, state and local regulations and laws, including, but not limited to, environmental protection, occupational safety, resource conservation and equal employment opportunity. The Trustee does not believe that compliance with these laws by the operating parties will have any material adverse effect on the Unit holders. 9 29 ITEM 3. LEGAL PROCEEDINGS The Trustee has been notified of the settlement of a class action lawsuit pending in the 270th District Court of Harris County, Texas (the "Court") Cause No. 92-026182 styled Caroline Altheide and Langdon Harrison v. Meridian Oil Inc., Meridian Oil Holding Inc., Meridian Oil Trading Inc., Meridian Oil Production Inc., Southland Royalty Company, El Paso Production Company, Meridian Oil Hydrocarbons Inc., Meridian Oil Gathering Inc., Meridian Oil Services Inc. and Edward Parker filed in June 1992 ("Class Action"). The defendants in this lawsuit are collectively referred to herein as "Meridian." The members of the class ("Class Members") involved in the Class Action that was certified by the Court are all persons or entities who (i) at any time between December 1, 1986 and July 1, 1996 received payments directly from Meridian, (ii) the payments from Meridian were attributable to interests in natural gas that was sold at the wellhead to Meridian Oil Trading Inc., and (iii) the interests were either royalty interests, overriding royalty interests or interests of a similar nature that burdened the working interests of Meridian, or working interests in properties operated by Meridian, or royalty interests, overriding royalty interests or interests of a similar nature that burdened working interests in properties operated by Meridian. Meridian, the San Juan Basin Royalty Trust, the Burlington Resources Coal Seam Royalty Trust and the Commissioner of Public Lands of the New Mexico State Lands Office are not Class Members. In summary, the claims asserted in the Class Action ("Class Claims") are those asserted in Plaintiffs' Second Amended Original Petition filed in the Class Action which are based upon the manner in which Meridian calculated payments to its royalty owners and its joint working interest owners in natural gas-producing properties. It is alleged that those payments were based on wellhead prices that were set by a marketing affiliate, rather than upon the net prices that Meridian received for the gas and liquid components in arm's-length sales to non-affiliated purchasers. More specifically, such claims are based on Meridian's conduct in basing its payments to Class Members, for natural gas sold at the wellhead to Meridian Oil Trading Inc., on wellhead prices that resulted from one or more of the following: (i) Meridian's use of allegedly depressed prices for gas set by Meridian Oil Trading Inc.; (ii) Meridian's use of allegedly inflated cost factors for transportation services set by Meridian Oil Trading Inc.; (iii) Meridian's use of allegedly depressed net prices for liquids set by Meridian Oil Hydrocarbons Inc.; and (iv) Meridian's use of allegedly inflated rates for coal seam gathering and treating services set by Meridian Oil Gathering Inc. It was alleged that Meridian's conduct violated applicable legal principles. Meridian denied that its conduct had been unlawful or otherwise wrongful. The Court has not ruled on the merits of the Class Claims or on Meridian's defenses to such claims. The settlement reached by the parties in the Class Action provides for the payment of up to $42 million together with interest thereon beginning on July 17, 1996 until the date the settlement checks are initially mailed to the Class Members participating in the settlement. Such settlement amount is subject to reduction for certain adjustments such as (i) fees, costs and expenses awarded by the Court to the Class Counsel (Susman Godfrey L.L.P. and Dick Watt), (ii) extra compensation awarded by the Court to the named Plaintiffs (Caroline D. Altheide and Langdon D. Harrison), and (iii) the expense incurred in giving notice and administering the proposed settlement ("Net Settlement Fund"). Concurrently with Meridian's payment of the Net Settlement Fund to Class Members who did not timely and validly elect to be excluded from the Class ("Settlement Class Members"), Meridian is obligated under the settlement to advise its then current recipients of royalty payments that Meridian intends (i) to commence calculating royalty payments based upon the net prices received by Meridian from non-affiliated third parties for natural gas and the liquids extracted therefrom, and (ii) in calculating royalty payments on gas produced from coal seam gas wells using the Val Verde Gathering System, to commence using a deduction for gathering and treating the gas produced from such wells that does not exceed 75% of the fee charged by Meridian Oil Gathering Inc. for similar 10 30 services to the five largest (by volume) non-affiliated third-party shippers. Meridian is not obligated to calculate royalty payments in such method in the future but, if it changes such method of calculation, it is obligated to provide notice of such change in method of calculation to the then-current recipients of royalty payments. Of the Net Settlement Fund, (i) 48% thereof will be distributed among Class Members whose interests bear on "conventional" gas-producing properties (specifically, gas not gathered on the Val Verde Gathering System) that are located in Meridian's Farmington operating division (which is roughly coextensive with the San Juan Basin of New Mexico and Colorado), (ii) 42% thereof will be distributed among the Class Members whose interests bear on the coal seam gas producing properties located in Meridian's Farmington operating division (specifically, gas gathered on the Val Verde Gathering System), and (iii) 10% thereof will be distributed among those Class Members whose interests bear on gas-producing properties located in areas other than Meridian's Farmington operating division. The Trust would fall into the last of these three classifications. It is estimated that the Trust's share of the Net Settlement Fund will be between $560,000 and $850,000, the exact amount of which cannot be determined at this time. Upon final judicial approval of the settlement, the settlement provides that a judgment be entered in the Class Action dismissing the Class Action with prejudice to its refiling. As a result of the settlement, Settlement Class Members release and discharge the Released Parties, and each of them, from and with respect to the Class Claims and such Class Members will not be able to pursue the Class Claims against the Released Parties. "Released Parties" as used herein means, severally and collectively, the Defendants and Meridian Oil Inc. and all Affiliates of Burlington Resources Inc. since December 1, 1986, collectively, and all past and present agents, employees, officers, directors, shareholders, representatives, attorneys, predecessors, successors, assigns and affiliates of each of the Defendants and of Meridian Oil Inc. and all Affiliates of Burlington Resources Inc. since December 1, 1986, collectively. "Released Parties" also includes all other persons or entities who are liable or become liable for the conduct of any person or entity that is identified in the preceding sentence. "Affiliates" as used herein means Burlington Resources Inc.'s direct and indirect subsidiaries. It was determined by the Trustee that the Trust is part of the Class that was certified by the Court in the Class Action and that it was in the best interest of the Trust to elect to remain as part of the Class and share in the Net Settlement Fund. The Trustee believes that the Class Claims, if true, had little, if any, detrimental effect on the Trust and the Trust is being adequately compensated as a result of this settlement. A judgment has been signed by the Court approving the settlement. However, a Notice of Appeal was filed by San Juan 1990-A, L.P., K&W Gas Partners, L.P., MAP 1992-A Partners, L.P. and The Board of Trustees of Leland Stanford Junior University, Non-Profit Corporation (Stanford University) ("Objectors") on February 7, 1997. Class Counsel has notified the Trustee that on July 24, 1997 the Court of Appeals issued its judgment dismissing such appeal on procedural grounds and that in early September 1997 the Court of Appeals denied a motion for rehearing filed in such proceeding. The Trustee has been further advised that a petition for review has been filed with the Texas Supreme Court by the Objectors and is currently pending. One of the conditions set forth in the settlement agreement for the distribution of settlement proceeds related to the Class Action is that there will be no distribution of the settlement proceeds unless and until such judgment is no longer subject to further appeal and, if there is an appeal, not unless and until such judgment is affirmed or such appeal is dismissed and the time for any further proceedings in the appellate court of last resort has expired. As a result of such appeal, no distribution of settlement proceeds has been made to the Trust and the Trustee does not know if or when the Trust will receive proceeds of such settlement. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of Unit holders, through the solicitation of proxies or otherwise, during the fourth quarter ended December 31, 1997. 11 31 PART II ITEM 5. MARKET FOR UNITS OF THE TRUST AND RELATED SECURITY HOLDER MATTERS The information under "Units of Beneficial Interest" at page 1 of the Trust's Annual Report to security holders for the year ended December 31, 1997, is herein incorporated by reference. ITEM 6. SELECTED FINANCIAL DATA
FOR THE YEAR ENDED DECEMBER 31, ----------------------------------------------------------------------- 1997 1996 1995 1994 1993 ----------- ----------- ----------- ----------- ----------- Royalty income................................ $22,598,873 $19,930,354 $12,014,623 $16,646,903 $19,407,568 Distributable income.......................... 22,190,115 19,488,574 11,632,463 16,174,570 18,759,882 Distributable income per Unit................. 0.476092 0.418131 0.249574 0.347027 0.402496 Distributions per Unit........................ 0.476092 0.418131 0.249574 0.347027 0.402496 Total assets, December 31..................... 5,220,786 5,913,931 5,252,922 6,002,283 6,284,735
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION The "Trustee's Discussion and Analysis for the Three Year Period Ended December 31, 1997" and "Results of the 4th Quarters of 1997 and 1996" at pages 6 through 10 of the Trust's Annual Report to security holders for the year ended December 31, 1997 is herein incorporated by reference. Year 2000 Issue Many existing computer programs use only two digits to identify a year in the date field. These programs were designed and developed without considering the impact of the upcoming change in the century. If not corrected, many computer applications could fail or create erroneous results by or at the Year 2000. The Year 2000 issue affects virtually all companies and organizations. If a company or organization does not successfully address its Year 2000 issues, it may face material adverse consequences. The Trust is reliant on the performance of BROG and third party vendors for the receipt of Royalty income, payment of expenses and disbursement of distributable income. The Trustee can provide no assurance as to whether BROG and third party vendors will successfully address the Year 2000 issue. Failing to successfully address the Year 2000 issue by BROG and third party vendors could have a material adverse impact on the Trust and its Unit holders. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not Applicable. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Financial Statements of the Trust and the notes thereto at page 11 et seq. of the Trust's Annual Report to security holders for the year ended December 31, 1997, are herein incorporated by reference. ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There have been no changes in accountants and no disagreements with accountants on any matter of accounting principles or practices or financial statement disclosures during the twenty-four months ended December 31, 1997. 12 32 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The Trust has no directors or executive officers. The Trustee is a corporate trustee which may be removed, with or without cause, at a meeting of the Unit holders, by the affirmative vote of the holders of a majority of all the Units then outstanding. ITEM 11. EXECUTIVE COMPENSATION During the years ended December 31, 1997, 1996 and 1995, the Trustee received total remuneration as follows:
NAME OF INDIVIDUAL CAPACITIES OR NUMBER OF IN WHICH CASH PERSONS IN GROUP SERVED COMPENSATION YEAR ------------------ ---------- ------------ ---- NationsBank of Texas, N.A............................ Trustee $60,575(1) 1995 $65,338(1) 1996 $44,735(1) 1997
- --------------- (1) Under the Trust Indenture, the Trustee is entitled to an administrative fee for its administrative services, preparation of quarterly and annual statements with attention to tax and legal matters of: (i) 1/20 of 1% of the first $100 million of annual gross revenue of the Trust and 1/30 of 1% in excess of $100 million and (ii) Trustee's standard hourly rate in excess of 300 hours annually. The administrative fee is subject to reduction by a credit for funds provision. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT (a) Security Ownership of Certain Beneficial Owners. The following table sets forth as of December 31, 1997, information with respect to each person known to own beneficially more than 5% of the outstanding Units of the Trust:
AMOUNT AND NATURE OF PERCENT NAME AND ADDRESS BENEFICIAL OWNERSHIP(1) OF CLASS ---------------- ----------------------- -------- Burlington Resources Oil & Gas Company(1) 27,577,741 Units 59.17% 5051 Westheimer Suite 1400 Houston, Texas 77056-2124
- --------------- (1) This information was provided to the Securities and Exchange Commission and to the Trust in a Form 4 dated January 6, 1994, filed with the Securities and Exchange Commission by Southland Royalty, a wholly-owned subsidiary of BRI, and in Amendment 5 to Schedule 13D and Schedule 13E-3 dated December 28, 1993, filed with the Securities and Exchange Commission by Southland Royalty and BRI. Such Units were reported to be owned directly by Southland Royalty, now BROG. The Form 4 filed by Southland Royalty and the Schedule 13D and Schedule 13E-3 filed by Southland Royalty and BRI with the Securities and Exchange Commission may be reviewed for more detailed information concerning the matters summarized herein. 13 33 (b) Security Ownership of Management. The Trustee owns beneficially no securities of the Trust. In various fiduciary capacities, NationsBank of Texas, N.A. owned as of March 2, 1998, an aggregate of 316,893 Units with no right to vote 106,000 of these Units, shared right to vote 27,946 of these Units and sole right to vote 182,947 of these Units. Such Bank disclaims any beneficial interests in these Units. The number of Units reflected in this paragraph includes Units held by all branches of NationsBank of Texas, N.A. (c) Change In Control. The Trustee knows of no arrangements which may subsequently result in a change in control of the Trust. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The Trust has no directors or executive officers. See Item 11 for the remuneration received by the Trustee during the years ended December 31, 1997, 1996 and 1995 and Item 12(b) for information concerning Units owned by NationsBank of Texas, N.A. in various fiduciary capacities. 14 34 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K The following documents are filed as a part of this Report: FINANCIAL STATEMENTS Included in Part II of this Report by reference to the Annual Report of the Trust for the year ended December 31, 1997: Independent Auditors' Report Statements of Assets, Liabilities and Trust Corpus Statements of Distributable Income Statements of Changes in Trust Corpus Notes to Financial Statements FINANCIAL STATEMENT SCHEDULES Financial statement schedules are omitted because of the absence of conditions under which they are required or because the required information is given in the financial statements or notes thereto. EXHIBITS
EXHIBIT NUMBER DESCRIPTION ------- ----------- (4)(a) -- Permian Basin Royalty Trust Indenture dated November 3, 1980, between Southland Royalty Company and The First National Bank of Fort Worth (now NationsBank of Texas, N.A.), as Trustee, heretofore filed as Exhibit (4)(a) to the Trust's Annual Report on Form 10-K to the Securities and Exchange Commission for the fiscal year ended December 31, 1980, is incorporated herein by reference.* (b) -- Net Overriding Royalty Conveyance (Permian Basin Royalty Trust) from Southland Royalty Company to The First National Bank of Fort Worth (now NationsBank of Texas, N.A.), as Trustee, dated November 3, 1980 (without Schedules), heretofore filed as Exhibit (4)(b) to the Trust's Annual Report on Form 10-K to the Securities and Exchange Commission for the fiscal year ended December 31, 1980, is incorporated herein by reference.* (c) -- Net Overriding Royalty Conveyance (Permian Basin Royalty Trust -- Waddell Ranch) from Southland Royalty Company to The First National Bank of Fort Worth (now NationsBank of Texas, N.A.), as Trustee, dated November 3, 1980 (without Schedules), heretofore filed as Exhibit (4)(c) to the Trust's Annual Report on Form 10-K to the Securities and Exchange Commission for the fiscal year ended December 31, 1980, is incorporated herein by reference.* (13) -- Registrant's Annual Report to security holders for fiscal year ended December 31, 1997.** (23) -- Consent of Cawley, Gillespie & Associates, Inc., reservoir engineer.** (27) -- Financial Data Schedule.**
- --------------- * A copy of this Exhibit is available to any Unit holder, at the actual cost of reproduction, upon written request to the Trustee, NationsBank of Texas, N.A., P.O. Box 1317, Fort Worth, Texas 76101. ** Filed herewith. REPORTS ON FORM 8-K During the last quarter of the Trust's fiscal year ended December 31, 1997, there were no reports on Form 8-K filed by the Trust. 15 35 SIGNATURE PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) 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. NATIONSBANK OF TEXAS, N.A. TRUSTEE OF THE PERMIAN BASIN ROYALTY TRUST By /s/ ERIC F. HYDEN ----------------------------------- (Eric F. Hyden) Vice President Date: March 30, 1998 (The Trust has no directors or executive officers.) 16 EX-23 3 CONSENT OF CAWLEY, GILLESPIE & ASSOCIATES 1 EXHIBIT 23 [CAWLEY, GILLESPIE & ASSOCIATES, INC. LETTERHEAD] March 20, 1998 Permian Basin Royalty Trust 500 West 7th Street, Suite 1300 P.O. Box 1317 Fort Worth, Texas 76101 Gentlemen: Cawley, Gillespie & Associates, Inc. hereby consents to the use of the oil and gas reserve information in the Permian Basin Royalty Trust Securities and Exchange Commission Form 10-K for the year ending December 31, 1997 and in the Permian Basin Royalty Trust Annual Report for the year ending December 31, 1997, based on reserve reports dated March 20, 1998 prepared by Cawley, Gillespie & Associates, Inc. Sincerely, /s/ CAWLEY, GILLESPIE & ASSOCIATES, INC. ---------------------------------------- CAWLEY, GILLESPIE & ASSOCIATES, INC. EX-27 4 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE UNAUDITED CONDENSED STATEMENTS OF ASSETS, LIABILITIES AND TRUST CORPUS OF PERMIAN BASIN ROYALTY TRUST AS OF DECEMBER 31, 1997, AND THE RELATED CONDENSED STATEMENTS OF DISTRIBUTABLE INCOME AND CHANGES IN TRUST CORPUS FOR THE 12 MONTH PERIOD ENDED DECEMBER 31, 1997. 12-MOS DEC-31-1997 DEC-31-1997 1,724,192 0 0 0 0 1,724,192 10,975,216 7,478,622 5,220,786 1,724,192 0 0 0 0 3,496,594 5,220,786 0 22,641,538 0 0 451,423 0 0 22,190,115 0 22,190,115 0 0 0 22,190,115 0 0
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