10-Q 1 tpl20170331_10q.htm FORM 10-Q tpl20170331_10q.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_____________________

 

FORM 10-Q 

_____________________

 

(Mark One)

[X]

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

  For the quarterly period ended March 31, 2017

 

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: 1-737

 

Texas Pacific Land Trust
(Exact Name of Registrant as Specified in Its Charter)

 

NOT APPLICABLE

(State or Other Jurisdiction of Incorporation

or Organization)

 

75-0279735

(I.R.S. Employer

Identification No.)

 

1700 Pacific Avenue, Suite 2770, Dallas, Texas

(Address of Principal Executive Offices)

 

75201

(Zip Code)

 

(214) 969-5530

(Registrant’s Telephone Number, Including Area Code) 

_____________________________________________________________________

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

 

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 ☑        No ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☑        No ☐

 

        Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer 

Accelerated filer 

Non-accelerated filer ☐  (Do not check if a smaller reporting company)

Smaller reporting company 

Emerging growth company ☐ 

 

 

       If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    ☐ 

 

               Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐        No ☑

 



 

 
 

 

  

Cautionary Statement Regarding Forward-Looking Statements

 

Statements in this Quarterly Report on Form 10-Q that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including statements regarding management’s expectations, hopes, intentions or strategies regarding the future. Forward-looking statements include statements regarding the Trust’s future operations and prospects, the markets for real estate in the areas in which the Trust owns real estate, applicable zoning regulations, the markets for oil and gas, production limits on prorated oil and gas wells authorized by the Railroad Commission of Texas, expected competition, management’s intent, beliefs or current expectations with respect to the Trust’s future financial performance and other matters. All forward-looking statements in this Report are based on information available to us as of the date this Report is filed with the Securities and Exchange Commission, and we assume no responsibility to update any such forward-looking statements, except as required by law. All forward-looking statements are subject to a number of risks, uncertainties and other factors that could cause our actual results, performance, prospects or opportunities to differ materially from those expressed in, or implied by, these forward-looking statements. These risks, uncertainties and other factors include, but are not limited to, the factors discussed in Item 1A “Risk Factors” of Part I of our Annual Report on Form 10-K for the year ended December 31, 2016, and in Part I, Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Part II, Item 1A “Risk Factors” of this Quarterly Report on Form 10-Q.

 

 
 

 

  

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

TEXAS PACIFIC LAND TRUST

BALANCE SHEETS

 

   

March 31,

   

December 31,

 

 

 

2017

   

2016

 
   

(Unaudited)

         
ASSETS                
                 

Cash and cash equivalents

  $ 52,563,881     $ 49,417,889  

Accrued receivables

    10,340,815       6,550,429  

Other assets

    297,611       232,970  

Deferred tax asset

    3,878,095       3,874,788  

Notes receivable for land sales

    58,010       94,971  

Water wells, vehicles, furniture, and equipment - at cost less accumulated depreciation

    3,037,412       1,168,281  

Real estate acquired: (10,065 acres at March 31, 2017 and 10,065 acres at December 31, 2016)

    1,114,601       1,114,601  

Real estate and royalty interests assigned through the 1888 Declaration of Trust, no value assigned:

               
                 

Land (surface rights) situated in eighteen counties in Texas – 877,644 acres in 2017 and 877,488 acres in 2016

           
                 

1/16 nonparticipating perpetual royalty interest in 373,777 acres in 2017 and 2016

           
                 

1/128 nonparticipating perpetual royalty interest in 85,414 acres in 2017 and 2016

           
    $ 71,290,425     $ 62,453,929  
                 

LIABILITIES AND CAPITAL

               
                 

Accounts payable and accrued expenses

  $ 899,619     $ 826,771  

Income taxes payable

    7,566,625       1,950,774  

Other taxes payable

    365,591       276,813  

Unearned revenue

    19,284,534       11,775,049  

Total liabilities

    28,116,369       14,829,407  
                 

Capital:

               

Certificates of Proprietary Interest, par value $100 each; outstanding 0 Certificates

           

Sub-share Certificates in Certificates of Proprietary Interest, par value $.03 1/3 each; outstanding: 7,897,818 Sub-shares in 2017 and 7,927,314 Sub-shares in 2016

           

Other comprehensive loss

    (942,093

)

    (959,563

)

Net proceeds from all sources

    44,116,149       48,584,085  

Total capital

    43,174,056       47,624,522  
    $ 71,290,425     $ 62,453,929  

 

See accompanying notes to financial statements.

 

 
1

 

 

TEXAS PACIFIC LAND TRUST

STATEMENTS OF INCOME AND TOTAL COMPREHENSIVE INCOME

(Unaudited)

 

   

Three Months Ended
March 31,

 
   

2017

   

2016

 

Income:

               

Oil and gas royalties

  $ 11,192,762     $ 5,610,751  

Land sales

          86,000  

Easements and sundry income

    12,911,778       6,070,973  

Other income

    124,228       124,437  
      24,228,768       11,892,161  

Expenses:

               

Taxes, other than income taxes

    659,759       346,584  

General and administrative expenses

    1,464,944       749,105  
      2,124,703       1,095,689  

Operating income

    22,104,065       10,796,472  

Interest income earned from investments

    9,494       5,942  
                 

Income before income taxes

    22,113,559       10,802,414  

Income taxes

    7,228,137       3,522,363  

Net income

  $ 14,885,422     $ 7,280,051  

Other comprehensive income – periodic pension costs, net of income taxes of $9,407 and $12,307, respectively

    17,470       22,855  

Total comprehensive income

  $ 14,902,892     $ 7,302,906  
                 

Average number of sub-share certificates and equivalent sub-share certificates outstanding

    7,919,085       8,098,106  
                 

Basic and dilutive earnings per sub-share certificate on net income

  $ 1.88     $ .90  
                 

Cash dividends per sub-share certificate

  $ 1.35     $ .31  

  

See accompanying notes to financial statements. 

 

 
2

 

 

TEXAS PACIFIC LAND TRUST

STATEMENTS OF CASH FLOWS

(Unaudited)

 

   

Three Months
Ended March 31,

 
   

2017

   

2016

 

Cash flows from operating activities:

               

Net income

  $ 14,885,422     $ 7,280,051  

Adjustments to reconcile net income to net cash provided by operating activities:

               

Deferred taxes

    (3,307

)

    10,842  

Depreciation and amortization

    19,119       7,274  

(Gain) loss on disposal of fixed assets

    (3,901

)

    8,201  

Changes in operating assets and liabilities:

               

Accrued receivables and other assets

    (3,855,027

)

    (462,709

)

Notes receivable for land sales

    36,961       4,246  

Accounts payable, accrued expenses and other liabilities

    7,688,581       1,111,225  

Income taxes payable

    5,615,851       3,319,078  

Net cash provided by operating activities

    24,383,699       11,278,208  
                 

Cash flows from investing activities:

               

Proceeds from sale of fixed assets

    27,500       18,000  

Purchase of fixed assets

    (1,911,849

)

    (149,683

)

Net cash used in investing activities

    (1,884,349

)

    (131,683

)

                 

Cash flows from financing activities:

               

Purchase of Sub-share Certificates in Certificates of Proprietary Interest

    (8,671,600

)

    (6,931,439

)

Dividends paid

    (10,681,758

)

    (2,507,183

)

Net cash used in financing activities

    (19,353,358

)

    (9,438,622

)

                 

Net increase in cash and cash equivalents

    3,145,992       1,707,903  
                 

Cash and cash equivalents, beginning of period

    49,417,889       45,011,969  
                 

Cash and cash equivalents, end of period

  $ 52,563,881     $ 46,719,872  

 

See accompanying notes to financial statements.

 

 
3

 

  

TEXAS PACIFIC LAND TRUST

 

NOTES TO UNAUDITED FINANCIAL STATEMENTS

 

March 31, 2017

 

(1)

In the opinion of management, the accompanying unaudited financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the financial position of Texas Pacific Land Trust (the “Trust”) as of March 31, 2017 and the results of its operations for the three month periods ended March 31, 2017 and 2016, respectively, and its cash flows for the three month periods ended March 31, 2017 and 2016, respectively. The financial statements and footnotes included herein should be read in conjunction with the Trust’s annual financial statements as of December 31, 2016 and 2015 and for each of the years in the three year period ended December 31, 2016 included in the Trust’s Annual Report on Form 10-K for the year ended December 31, 2016. Beginning with the second quarter of 2015, the Trust updated the format of the revenue section in the Statements of Income and Total Comprehensive Income to provide more detail regarding revenue sources.

 

(2)

We evaluate events that occur after the balance sheet date but before financial statements are, or are available to be, issued to determine if a material event requires our amending the financial statements or disclosing the event. We evaluated subsequent events through May 4, 2017, the date we issued these financial statements.

 

(3)

No value has been assigned to the land held by the Trust other than parcels which have been acquired through foreclosure and a limited number of parcels which have been acquired because they were offered for sale and were contiguous to parcels already owned by the Trust. Consequently, no allowance for depletion is computed, and no charge to income is made, with respect thereto, and no cost is deducted from the proceeds of the land sales in computing gain or loss thereon.

 

(4)

The Sub-shares and the Certificates of Proprietary Interest are freely interchangeable in the ratio of one Certificate of Proprietary Interest for 3,000 Sub-shares or 3,000 Sub-shares for one Certificate of Proprietary Interest.

 

(5)

The Trust’s effective Federal income tax rate is less than the 35% statutory rate because taxable income is reduced by statutory percentage depletion allowed on mineral royalty income.

 

(6)

The results of operations for the three month period ended March 31, 2017 are not necessarily indicative of the results to be expected for the full year.

 

(7)

The Trust invests cash in excess of daily requirements primarily in bank deposit and savings accounts and certificates of deposit with maturities of ninety days or less. Such investments are deemed to be highly liquid debt instruments and classified as cash equivalents for purposes of the statements of cash flows.

 

Supplemental cash flow information for the three month periods ended March 31, 2017 and 2016 is summarized as follows:

 

   

2017

   

2016

 
                 

Income taxes paid

  $ 1,625,000     $ $ 204,749  

  

 
4

 

 

 

(8)

ASC 280, “Segment Reporting,” establishes standards for the way public business enterprises are to report information about operating segments. In accordance with ASC 280, the Trust utilizes the management approach as a basis for identifying reportable segments. The management approach is based on the way that management organizes the segments within the enterprise for making operating decisions and assessing performance. The Trust’s management views its operations as one segment and believes the only significant activity is managing the land which was conveyed to the Trust in 1888 and any other land thereafter acquired. The Trust’s management makes decisions about resource allocation and performance assessment based on the same financial information presented in these financial statements. Managing the land includes sales and leases of such land, and the retention of oil and gas royalties.

 

(9)

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, “Revenue Recognition (Topic 606): Revenue from Contracts with Customers” (“ASU 2014-09”). This ASU introduces a new five-step revenue recognition model in which an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This ASU also requires disclosures sufficient to enable users to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers, including qualitative and quantitative disclosures about contracts with customers, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract. This standard is effective for fiscal years beginning after December 15, 2017, including interim periods within that reporting period. The Trust is reviewing and analyzing the impact that this ASU will have on our financial statements. This review process includes evaluating key accounting policy decisions, judgments, estimates, and disclosures for each significant category of revenue. This ASU will require additional disclosures on revenue and could affect the timing of revenue recognition. Certain categories of revenue may be more impacted than others. The Trust will complete its implementation process during the second and third quarters of 2017, including preparing the quantitative impact on comparable periods, if applicable.

 

(10)

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)” (“ASU 2016-02”). This ASU requires lessees to recognize a right of use asset and lease liability on the balance sheet for all leases, with the exception of short-term leases. The new guidance will also require significant disclosures about the amount, timing, and uncertainty of cash flows from leases. This standard is effective for fiscal years beginning after December 15, 2018, including interim periods within that reporting period. The Trust is currently evaluating the new guidance to determine the impact it will have on our financial statements.

 

(11)

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326)” (“ASU 2016-13”). This ASU modifies the measurement of expected credit losses of certain financial instruments. This standard is effective for fiscal years beginning after December 15, 2019. The Trust is currently evaluating the new guidance to determine the impact it will have on our financial statements.

  

 
5

 

  

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion and analysis should be read together with (i) the factors discussed in Item 1A “Risk Factors” of Part I of our Annual Report on Form 10-K for the year ended December 31, 2016, (ii) the factors discussed in Part II, Item 1A “Risk Factors,” if any, of this Quarterly Report on Form 10-Q and (iii) the Financial Statements, including the Notes thereto, and the other financial information appearing elsewhere in this Report. Period-to-period comparisons of financial data are not necessarily indicative, and therefore should not be relied upon as indicators, of the Trust’s future performance. Words or phrases such as “does not believe” and “believes”, or similar expressions, when used in this Form 10-Q or other filings with the Securities and Exchange Commission, are intended to identify “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995.

 

Results of Operations for the Quarter Ended March 31, 2017 Compared to the Quarter Ended March 31, 2016

 

Earnings per Sub-share certificate were $1.88 for the first quarter of 2017, compared to $.90 for the first quarter of 2016. Total operating and investing revenues were $24,238,262 for the first quarter of 2017 compared to $11,898,103 for the first quarter of 2016, an increase of 103.7%. This increase in revenue and earnings was due primarily to increases in easements and sundry income and oil and gas royalty revenue.

 

Oil and gas royalty revenue was $11,192,762 for the first quarter of 2017, compared to $5,610,751 for the first quarter of 2016, an increase of 99.5%. Oil royalty revenue was $8,078,917 for the first quarter of 2017, an increase of 104.9% from the first quarter of 2016 when oil royalty revenue was $3,942,194. Crude oil production subject to the Trust’s royalty interest increased 38.6% in the first quarter of 2017 compared to the first quarter of 2016. In addition, the average price per royalty barrel of crude oil during the first quarter of 2017 was 47.8% higher than the average price prevailing during the first quarter of 2016. Gas royalty revenue was $3,113,845 for the first quarter of 2017, an increase of 86.6% from the first quarter of 2016 when gas royalty revenue was $1,668,557. This increase in gas royalty revenue resulted from both volume and price increases of 36.4% and 37.0% respectively, in the first quarter of 2017 compared to the first quarter of 2016.

 

No land sales occurred in the first quarter of 2017. In the first quarter of 2016, the Trust sold approximately 8.56 acres of land for a total of $86,000, or approximately $10,047 per acre.

 

Easements and sundry income was $12,911,778 for the first quarter of 2017, an increase of 112.7% compared to the first quarter of 2016 when easements and sundry income was $6,070,973. This increase resulted primarily from an increase in pipeline easement income and water sales, and, to a lesser extent, material sales. Pipeline easement income was $11,123,331 (before deferral of term easements) for the first quarter of 2017, compared to $3,117,537 for the first quarter of 2016, an increase of 256.8%. The Trust is currently moving toward the use of term easements (in lieu of perpetual) which will require us to gradually recognize the income for easements over the life of the agreement, in lieu of recognizing it all at the beginning of the term of the easement. As a result, $6,806,890 of easement income received in the first quarter of 2017 was deferred and therefore not reflected in the statements of income and total comprehensive income. This is also the primary reason for the 63.8% increase in unearned revenue. This category of income is unpredictable and may vary significantly from quarter to quarter.

 

Other income, including interest on investments, was $133,722 for the first quarter of 2017 compared to $130,379 for the first quarter of 2016, an increase of 2.6%. Grazing lease income was $123,152 for the first quarter of 2017, compared to $122,075 for the first quarter of 2016, an increase of 0.9%. Interest on notes receivable for the first quarter of 2017 was $1,076, a decrease of 54.4% compared to the first quarter of 2016 when interest on notes receivable was $2,362. This decrease was primarily due to principal prepayments received on notes due to the Trust. As of March 31, 2017, notes receivable for land sales were $58,010 compared to $134,868 at March 31, 2016, a decrease of 57.0%. Interest income earned from investments was $9,494 for the first quarter of 2017, compared to $5,942 for the first quarter of 2016, an increase of 59.8%. Interest on investments is affected by such variables as cash on hand for investment and the rate of interest on short-term investments.

 

 
6

 

  

Taxes, other than income taxes, were $659,759 for the first quarter of 2017 compared to $346,584 for the first quarter of 2016, an increase of 90.4%. This increase is primarily attributable to an increase in oil and gas production tax which resulted from the increase in oil and gas royalty revenue discussed above.

 

General and administrative expenses were $1,464,944 for the first quarter of 2017 compared to $749,105 for the first quarter of 2016, an increase of 95.6%. This increase was primarily due to increases in professional fees, legal fees, and to a lesser extent, an increase in employment expenses due to the increase in drilling and exploration activity on land owned by the Trust. As of March 31, 2017, the Trust had twelve (12) full-time employees along with several independent contractors. The Trust also incurred additional legal and professional fees related to the Special Meeting of the Holders of Sub-share Certificates of Proprietary Interest (“Sub-share Certificates”) on January 12, 2017 (the “Special Meeting”) where David E. Barry was elected as a Trustee to fill the vacancy created by the death of James K. Norwood.

 

Liquidity and Capital Resources

 

The Trust’s principal sources of liquidity are revenues from oil and gas royalties, easements and sundry income, and land sales. In the past, those sources have generated more than adequate amounts of cash to meet the Trust’s needs and, in the opinion of management, should continue to do so in the foreseeable future.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

There have been no material changes in the information related to market risk of the Trust since December 31, 2016. 

 

 

Item 4. Controls and Procedures

 

Pursuant to Rule 13a-15, management of the Trust under the supervision and with the participation of Tyler Glover, the Trust’s Chief Executive Officer, and Robert J. Packer, the Trust’s Chief Financial Officer, carried out an evaluation of the effectiveness of the design and operation of the Trust’s disclosure controls and procedures as of the end of the Trust’s fiscal quarter covered by this Report on Form 10-Q. Based upon that evaluation, Mr. Glover and Mr. Packer concluded that the Trust’s disclosure controls and procedures are effective in timely alerting them to material information relating to the Trust required to be included in the Trust’s periodic SEC filings.

 

There have been no changes in the Trust’s internal control over financial reporting during the Trust’s most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Trust’s internal control over financial reporting.

 

 
7

 

  

PART II

OTHER INFORMATION

 

 

Item 1A. Risk Factors

 

There have been no material changes in the risk factors previously disclosed in response to Item 1A “Risk Factors” of Part I of the Trust’s Annual Report on Form 10-K for the year ended December 31, 2016.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

(c)

During the first quarter of 2017, the Trust repurchased Sub-share certificates as follows:

 

 

Period

 

Total

Number of

Sub-shares

Purchased

   

Average

Price Paid

per

Sub-share

   

Total Number

of Sub-shares

Purchased as

Part of Publicly

Announced Plans

or Programs

   

Maximum

Number (or

Approximate

Dollar Value) of

Sub-shares that

May Yet Be

Purchased Under

the Plans or

Programs

 

January 1, through January 31, 2017

    4,285       $321.63              

February 1, through February 28, 2017

    9,316       $307.97              

March 1, through March 31, 2017

    15,895        $278.35              

Total

    29,496*       $293.99              

 

* The Trust purchased and retired 29,496 Sub-shares in the open market. 

 

 
8

 

 

Item 6. Exhibits

 

 

31.1

Rule 13a-14(a) Certification of Chief Executive Officer.

     
 

31.2

Rule 13a-14(a) Certification of Chief Financial Officer.

     
 

32.1

Certification of Chief Executive Officer furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

     
 

32.2

Certification of Chief Financial Officer furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

  

 

101.INS 

XBRL Instance

 

 

 

 

101.SCH 

XBRL Taxonomy Extension Schema

 

 

 

 

101.CAL 

XBRL Taxonomy Extension Calculation

 

 

 

 

101.DEF

XBRL Taxonomy Extension Definition

 

 

 

 

101.LAB 

XBRL Taxonomy Extension Labels

 

 

 

 

101.PRE 

XBRL Taxonomy Extension Presentation

 

 
9

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

TEXAS PACIFIC LAND TRUST

 

  (Registrant)  

 

 

 

 

 

 

 

 

Date: May 4, 2017

By:

/s/ Tyler Glover

 

 

 

Tyler Glover, General Agent and

 

 

 

Chief Executive Officer

 

       
       
       
Date: May 4, 2017 By: /s/ Robert J. Packer  
    Robert J. Packer, General Agent and  
    Chief Financial Officer  

  

 
10

 

 

INDEX TO EXHIBITS

 

 

EXHIBIT

NUMBER

 

DESCRIPTION

     

31.1

 

Rule 13a-14(a) Certification of Chief Executive Officer.

     

31.2

 

Rule 13a-14(a) Certification of Chief Financial Officer.

     

32.1

 

Certification of Chief Executive Officer furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

     

32.2

 

Certification of Chief Financial Officer furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

     
101.INS XBRL Instance
     
101.SCH XBRL Taxonomy Extension Schema
     
101.CAL XBRL Taxonomy Extension Calculation
     
101.DEF XBRL Taxonomy Extension Definition
     
101.LAB XBRL Taxonomy Extension Labels
     
101.PRE XBRL Taxonomy Extension Presentation

      

     

 

     

 11