UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
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Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
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For the quarterly period ended March 31, 2010
or
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o
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Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
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For the transition period from
to
Commission File Number: 1-11608
WILLIAMS COAL SEAM GAS ROYALTY TRUST
(Exact name of registrant as specified in its charter)
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Delaware
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75-6437433
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(State or other jurisdiction
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(I.R.S. Employer
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of incorporation or organization)
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Identification No.)
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Trust Division
U.S. Trust, Bank of America Private Wealth Management
901 Main Street
17th Floor
Dallas, Texas 75202
(Address of principal executive offices)
(Zip code)
(214) 209-2400
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes
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No
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Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulations S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes
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No
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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act.
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Large accelerated filer
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Accelerated filer
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Non-accelerated filer
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Smaller reporting company
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(Do not check if a smaller reporting company)
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes
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No
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Number
of units of beneficial interest outstanding at May 1, 2010: 9,700,000
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
Item 1. Financial Statements.
The financial statements included herein have been prepared by Bank of America, N.A., as
Trustee (the Trustee) of Williams Coal Seam Gas Royalty Trust (the Trust), pursuant to the
rules and regulations of the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in annual financial statements have been condensed or omitted
pursuant to such rules and regulations, although the Trustee believes that the disclosures are
adequate to make the information presented not misleading. It is suggested that these condensed
financial statements and notes thereto be read in conjunction with the financial statements and
notes thereto included in the Trusts Annual Report on Form 10-K for the year ended December 31,
2009 (the 2009 Annual Report). The December 31, 2009 balance sheet is derived from the audited
balance sheet of that date. In the opinion of the Trustee, all adjustments, consisting only of
normal recurring adjustments, necessary to present fairly the assets, liabilities and trust corpus
of the Trust as of March 31, 2010, and the distributable income and the changes in trust corpus for
the three-month periods ended March 31, 2010 and 2009, have been included. The distributable
income for such interim periods is not necessarily indicative of the distributable income for the
full year.
The financial statements as of March 31, 2010, and for the three-month periods ended March 31,
2010 and 2009 included herein have been reviewed by Ernst & Young LLP, an independent registered
public accounting firm, as stated in their report appearing herein.
2
Report of Independent Registered Public Accounting Firm
The Trustee
Williams Coal Seam Gas Royalty Trust
We have reviewed the condensed statement of assets, liabilities and trust corpus of the Williams
Coal Seam Gas Royalty Trust as of March 31, 2010, and the related condensed statements of
distributable income and changes in trust corpus for the three-month periods ended March 31, 2010
and 2009. These financial statements are the responsibility of the Trustees management.
We conducted our review in accordance with the standards of the Public Company Accounting Oversight
Board (United States). A review of interim financial information consists principally of applying
analytical procedures and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance with the
standards of the Public Company Accounting Oversight Board, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do
not express such an opinion.
As described in Note 2 to the financial statements, these financial statements have been prepared
on a modified cash basis of accounting, which is a comprehensive basis of accounting other than
U.S. generally accepted accounting principles.
Based on our review, we are not aware of any material modifications that should be made to the
condensed financial statements referred to above for them to be in conformity with the basis of
accounting described in Note 2.
We have previously audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the statement of assets, liabilities and trust corpus of the
Williams Coal Seam Gas Royalty Trust as of December 31, 2009, and the related statements of
distributable income and changes in trust corpus for the year then ended not presented herein, and
in our report dated March 31, 2010, we expressed an unqualified opinion on those financial
statements and included explanatory paragraphs regarding the Williams Coal Seam Gas Royalty
Trusts ability to continue as a going concern and regarding the Trusts change in its reserve estimates and related disclosures as a result of adopting new oil and gas reserve estimation and disclosure requirements. In our opinion, the information set forth in the
accompanying condensed statement of assets, liabilities and trust corpus as of December 31, 2009,
is fairly stated, in all material respects, in relation to the statement of assets, liabilities and
trust corpus from which it has been derived.
/s/ Ernst & Young LLP
Tulsa, Oklahoma
May 13, 2010
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WILLIAMS COAL SEAM GAS ROYALTY TRUST
CONDENSED STATEMENTS OF ASSETS, LIABILITIES AND TRUST CORPUS (UNAUDITED)
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March 31,
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December 31,
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2010
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2009
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(Unaudited)
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ASSETS
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Current Assets cash and cash equivalents
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$
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63,598
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$
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52,195
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Royalty interests in oil and gas properties
(less accumulated amortization
of $134,516,989 at
March 31, 2010 and
$134,091,719 at December 31, 2009)
(Note 2)
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4,049,675
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4,474,945
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TOTAL ASSETS
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$
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4,113,273
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$
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4,527,140
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LIABILITIES AND TRUST CORPUS
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Current Liabilities other accounts payable:
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$
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53,596
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$
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116,341
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Contingencies (Note 7)
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Trust corpus
9,700,000 units of beneficial
interest authorized and outstanding
(Note 2)
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4,059,677
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4,410,799
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TOTAL LIABILITIES AND TRUST CORPUS
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$
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4,113,273
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$
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4,527,140
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The accompanying notes are an integral part of these financial statements. See accountants review
report.
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WILLIAMS COAL SEAM GAS ROYALTY TRUST
CONDENSED STATEMENTS OF DISTRIBUTABLE INCOME (UNAUDITED)
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THREE MONTHS
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THREE MONTHS
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ENDED
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ENDED
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March 31, 2010
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March 31, 2009
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Royalty income (Notes 2, 4 and 7)
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$
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764,578
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$
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1,393,653
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Interest income
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67
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619
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Total
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764,645
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1,394,272
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General and administrative expenses (Note 4)
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(525,869
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(372,288
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Distributable income
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$
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238,776
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$
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1,021,984
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Distributable income per unit
(9,700,000 units) (Note 2)
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$
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.02
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$
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.11
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The accompanying notes are an integral part of these financial statements. See
accountants review report.
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WILLIAMS COAL SEAM GAS ROYALTY TRUST
CONDENSED STATEMENTS OF CHANGES IN TRUST CORPUS (UNAUDITED)
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THREE MONTHS
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THREE MONTHS
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ENDED
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ENDED
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March 31, 2010
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March 31, 2009
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Trust corpus, beginning of period
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$
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4,410,799
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$
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5,592,220
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Amortization of royalty interests (Note 2)
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(425,270
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)
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(387,003
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)
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Distributable income
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238,776
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1,021,984
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Distributions to Unitholders (Note 5)
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(164,628
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(1,103,966
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Trust corpus, end of period
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$
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4,059,677
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$
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5,123,235
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Distributions per unit (9,700,000 units) (Note 5)
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$
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.02
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$
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.11
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The accompanying notes are an integral part of these financial statements. See
accountants review report.
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WILLIAMS COAL SEAM GAS ROYALTY TRUST
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
1. TRUST ORGANIZATION AND PROVISIONS
Williams Coal Seam Gas Royalty Trust (the Trust) was formed as a Delaware business trust
pursuant to the terms of the Trust Agreement of Williams Coal Seam Gas Royalty Trust (as amended,
the Trust Agreement) entered into effective as of December 1, 1992, by and among Williams
Production Company, a Delaware corporation (WPC), as trustor; The Williams Companies, Inc., a
Delaware corporation (Williams), as sponsor; Bank of America, N.A. (as successor to NationsBank
of Texas, N.A.), a national banking association (the Trustee); and The Bank of New York Mellon
Trust Company, N.A. (as successor to Chemical Bank Delaware), a Delaware banking corporation (the
Delaware Trustee) (the Trustee and the Delaware Trustee are sometimes referred to
collectively as the Trustees). The Trustees are independent financial institutions. In 2007 the
Bank of America private wealth management group officially became known as U.S. Trust, Bank of
America Private Wealth Management. The legal entity that serves as Trustee of the Trust did not
change, and references in this report on Form 10-Q to U.S. Trust, Bank of America Private Wealth
Management shall describe the legal entity Bank of America, N.A.
The Trust was formed to acquire and hold certain net profits interests (the Royalty
Interests) in proved natural gas properties located in the San Juan Basin of New Mexico and
Colorado (the Underlying Properties) owned by WPC. The Trust was initially created effective as
of December 1, 1992, with a $100 contribution by WPC. On January 21, 1993, the Royalty Interests
were conveyed to the Trust by WPC pursuant to the Net Profits Conveyance (the Conveyance) entered
into effective as of October 1, 1992, by and among WPC, Williams, the Trustee and the Delaware
Trustee, in consideration for all the 9,700,000 authorized units of beneficial interest in the
Trust (Units). WPC transferred its Units by dividend to its parent, Williams, which sold an
aggregate of 5,980,000 Units to the public through various underwriters in January and February
1993 (the Public Offering). Subsequently, Williams sold to the public an additional 151,209
Units. During the second quarter of 1995, Williams transferred its remaining Units to Williams
Holdings of Delaware, Inc. (WHD), a separate holding company for Williams non-regulated
businesses. Effective July 31, 1999, WHD was merged into Williams, and by operation of the merger,
Williams assumed all assets, liabilities and obligations of WHD, including without limitation,
ownership of WHDs Units. Effective August 11, 2000, Williams sold its Units to Quatro Finale IV
LLC, a Delaware limited liability company (QFIV), in a privately negotiated transaction.
Williams retained the voting rights and retained a call option on the transferred Units, and QFIV
was granted a put option on the Units. Through a series of exercises of its call option,
Williams reacquired an aggregate of 3,568,791 Units from December 2001 through June 2003. Williams
has informed the Trustee that it has subsequently sold 2,779,500 of these Units through May 1, 2010
and owned a remaining 789,291 Units as of such date.
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Effective May 1, 1997, WPC sold the Underlying Properties subject to and burdened by the
Royalty Interests to Quatro Finale LLC, an unaffiliated Delaware limited liability company.
Ownership of the Underlying Properties reverted back to WPC effective February 1, 2001, pursuant to the terms of the May 1, 1997 transaction. Pursuant to a Purchase and Sale
Agreement dated March 14, 2001 (the 2001 Transaction Agreement), and effective March 1, 2001, WPC
sold the Underlying Properties subject to and burdened by the Royalty Interests to Quatro Finale V
LLC, an unaffiliated Delaware limited liability company. The sale of the Underlying Properties is
expressly permitted under the Trust Agreement. Effective January 1, 2003, ownership of the
Underlying Properties once again reverted back to WPC after it exercised its right to repurchase
interests in the Underlying Properties from Quatro Finale V LLC pursuant to the 2001 Transaction
Agreement. Unless otherwise dictated by context, references herein to WPC with respect to the
ownership of the Underlying Properties for any period from May 1, 1997 through February 1, 2001,
and for the period from March 1, 2001 through December 31, 2002, shall be deemed to refer to Quatro
Finale.
The Trustee has the power to collect and distribute the proceeds received by the Trust and to
pay Trust liabilities and expenses. The Delaware Trustee has only such powers as are set forth in
the Trust Agreement and is not empowered to otherwise manage or take part in the business of the
Trust. The Royalty Interests are passive in nature, and neither the Delaware Trustee nor the
Trustee has any control over or any responsibility relating to the operation of the Underlying
Properties.
The only assets of the Trust, other than cash and cash equivalents being held for the payment
of expenses and liabilities and for distribution to Unitholders, are the Royalty Interests. The
Royalty Interests consist primarily of a net profits interest (the NPI) in the Underlying
Properties. The NPI generally entitles the Trust to receive 60 percent of the NPI Net Proceeds, as
defined below, attributable to (i) gas produced and sold from WPCs net revenue interests (working
interests less lease burdens) in the properties in which WPC has a working interest (the WI
Properties) and (ii) the revenue stream received by WPC attributable to its 35 percent net profits
interest in 5,348 gross acres in La Plata County, Colorado (the Farmout Properties). NPI Net
Proceeds consists generally of the aggregate proceeds attributable to WPCs net revenue interest,
based on the sale at the wellhead of gas produced from the WI Properties and the revenue stream
received by WPC from its 35 percent net profits interest in the Farmout Properties, less certain
taxes and costs.
The Royalty Interests also include a 20 percent interest in WPCs Infill Net Proceeds from the
sale of production since well spacing rules have been effectively modified and additional wells are
drilled on producing drilling blocks on the WI Properties (the Infill Wells) during the term of
the Trust. Infill Net Proceeds consists generally of the aggregate proceeds after payout, based on the price
at the wellhead, of gas produced from WPCs net revenue interest in any Infill Wells less certain
taxes and costs.
On October 15, 2002, the New Mexico Oil and Gas Commission (NMOCD) revised the field rules for
the Basin Fruitland Coal (Gas) Pool to allow optional second (infill) wells on the standard 320
acre spacing unit in certain designated areas of the pool (the non-fairway wells). On July 17,
2003, the NMOCD further modified the field rules for the Basin Fruitland Coal (Gas) Pool to allow
these infill wells on the standard 320 acre spacing unit in all areas of the
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pool. The WI Properties contain 442 infill locations designated as proved locations according to U.S. Securities
and Exchange Commission (SEC) guidelines. As of December 31, 2009, all of these infill locations represent proved developed producing reserves, while there are no
proved undeveloped locations.
WPC has informed the Trustee that the Infill Wells reached payout in the aggregate during
2008. The Trust has received its 20 percent interest in WPCs Infill Net Proceeds for the periods
after payout. However, during 2009, WPC informed the Trustee that due to the net deficit realized
by the Infill Wells during the third and fourth quarters, the Infill Net Profit Costs exceeded the
Infill Net Profit Gross Proceeds by approximately $32,500. The Trust was not liable for such
excess costs, and such excess costs constituted Excess Infill Net Profit Costs until recovered by
WPC. WPC has informed the Trustee that the excess costs were fully recovered by WPC and the
distribution received during the first quarter of 2010 included an amount for the Infill Net Proceeds
reduced for the excess costs recovered. The complete definitions of Infill Net Proceeds, Infill
Net Profit Costs, Excess Infill Net Profit Costs, and Infill Net Profit Gross Proceeds are set
forth in the Conveyance.
2. BASIS OF ACCOUNTING
The Trust terminated effective March 1, 2010 (the Termination Date), pursuant to the terms
of the Trust Agreement. Accordingly, there exists substantial doubt about the Trusts ability to
continue as a going concern. Cancellation of the Trust will occur following the Termination Date
when all Trust assets have been sold and the net proceeds therefrom distributed to holders of Units
in the Trust (Unitholders).
The Trust Agreement required termination of the Trust in the event that when a computation is
performed as of each December 31, the net present value (discounted at 10 percent) of the estimated
future net revenues (calculated in accordance with criteria established by the SEC) for proved
reserves attributable to the Royalty Interests but using the average monthly Blanco Hub Spot Price
for the past calendar year less certain gathering costs, is equal to or less than $30 million. The
net present value of the estimated future net revenues computed as described above by the
independent petroleum engineers as of December 31, 2009 was approximately $8.4 million. The
results of this computation triggered an early termination of the Trust. Because the Trusts
computed net present value fell below the $30 million stipulated threshold as of December 31, 2009,
the Trust terminated effective March 1, 2010. The accompanying financial statements have been
prepared on a going concern basis and do not include any adjustments, costs and expenses or other
matters that might result from the outcome of this termination. All of these adjustments, costs, and expenses resulting from the outcome of this termination are not presently known;
however, they could be significant.
Following termination of the Trust, the Trustee will continue to act as Trustee of the Trust
until all Trust assets are sold and the net proceeds from such sales distributed to Unitholders.
The Trustee will use best efforts to sell the Trusts assets in accordance with the procedures set
forth in the Trust Agreement.
The Trust has retained Albrecht & Associates, Inc., an investment banking firm (the
Advisor), on behalf of the Trust who will assist the Trustee in selling the remaining Royalty
Interests owned by the Trust (the Remaining Royalty Interests). WPC has the right, but not the
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obligation, to make a cash offer to purchase all Remaining Royalty Interests following termination
of the Trust as described in the following paragraph.
WPC had the right, within 60 days following the Termination Date, to make a cash offer to
purchase all of the Remaining Royalty Interests then held by the Trust. An offer was not made by
WPC during this 60 day period. Under the terms of the Trust Agreement, the Trustee is now required
to use Best Efforts (as defined in the Trust Agreement), assisted by the Advisor to obtain offers
for the Remaining Royalty Interests. At the end of a 120-day period following the Termination
Date, the Trustee is required to notify WPC of the highest of any offers (net of any commissions or
other fees payable by the Trust), acceptable to the Trustee (which must be an all-cash offer),
received during such period (the Highest Acceptable Offer). WPC then has the exclusive right,
but not the obligation, to purchase all Remaining Royalty Interests for a cash purchase price equal
to 105 percent of the Highest Acceptable Offer. If no acceptable offers are received for all
Remaining Royalty Interests, the Trustee may request WPC to submit an offer for consideration by
the Trustee and may accept or reject such offer. Acceptance of an offer by the Trustee shall be
conditioned upon the opinion of the Advisor of the fairness of the offer.
The Trustee may
accept any offer for all or any part (not more than six parts) of the Remaining Royalty Interests
as it deems to be in the best interests of the Trust and Unitholders and may continue, for up to
one calendar year after the Termination Date, to attempt to locate a buyer or buyers of the
Remaining Royalty Interests in order to sell such interests in an orderly fashion not involving a
public auction. If any Remaining Royalty Interests have not been sold or a definitive agreement
for sale has not been entered into by the end of such calendar year, the Trustee is required to
sell the Remaining Royalty Interests at public auction to the highest cash bidder, which sale may
be to WPC or any of its affiliates. Notice of such sale by auction shall be mailed at least 30
days prior to such sale to each Unitholder at his address as it appears on the ownership ledger of
the Trustee.
If a sale of the Remaining Royalty Interests is made or a definitive contract for sale of the
Remaining Royalty Interests is entered into prior to the 150
th
day following the
Termination Date, the buyer of the Remaining Royalty Interests, and not the Trust or Unitholders,
will be entitled to all proceeds of production attributable to the Remaining Royalty Interests
following the Termination Date. All proceeds of production following the Termination Date
attributable to the Remaining Royalty Interests will be deposited into a non-interest bearing
account until they are paid to the buyer or otherwise distributed in accordance with the Trust
Agreement.
After
receipt of royalty income in May 2010, the Trust is withholding
in cash and cash equivalents an additional $300,000 for anticipated
expenses relating to this termination process.
The financial statements of the Trust are prepared on a modified cash basis and are not
intended to present financial position and results of operations in conformity with United States
Generally Accepted Accounting Principles (GAAP). The financial statements do not include any
adjustments that might result from execution of the plan for termination or liquidation of the
Trusts assets. Preparation of the Trusts financial statements on the modified cash basis
on a going concern basis includes the following:
10
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Revenues are recognized in the period in which amounts are received by the
Trust. Routine general and administrative expenses are recognized on an accrual basis.
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Amortization of the Royalty Interests is calculated on a unit-of-production
basis and charged directly to trust corpus.
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Distributions to Unitholders are recorded when declared by the Trustee (See
Note 5).
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Loss contingencies are recognized in the period in which amounts are paid by
the Trust.
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The financial statements of the Trust differ from financial statements prepared in accordance
with GAAP. For example, royalty income is not accrued in the period of production, amortization of
the Royalty Interests is not charged against operating results, and loss contingencies are not
charged to operating results until paid. This comprehensive basis of accounting other than GAAP
corresponds to the accounting permitted for royalty trusts by the SEC, as specified by Staff
Accounting Bulletin Topic 12:E, Financial Statements of Royalty Trusts.
3. FEDERAL AND STATE INCOME TAXES
The Trust is a grantor trust for Federal income tax purposes. As a grantor trust, the Trust
is not required to pay Federal income taxes. Accordingly, no provision for income taxes has been
made in these financial statements.
Because the Trust is treated as a grantor trust, and because a Unitholder is treated as
directly owning an interest in the Royalty Interests, each Unitholder is taxed directly on his per
Unit pro rata share of income attributable to the Royalty Interests consistent with the
Unitholders method of accounting and without regard to the taxable year or accounting method
employed by the Trust.
Some Trust Units are held by middlemen, as such term is broadly defined in U.S. Treasury
Regulations (and includes custodians, nominees, certain joint owners, and brokers holding an
interest for a custodian in a street name, referred to herein collectively as middlemen).
Therefore, the Trustee considers the Trust to be a widely held fixed investment trust (WHFIT) for
U.S. Federal income tax purposes. U.S. Trust, Bank of America Private Wealth Management, EIN
56-0906609, 901 Main Street, 17th Floor, Dallas, Texas 75202, telephone number (214) 209-2400, is
the representative of the Trust that will provide tax information in accordance with applicable
U.S. Treasury Regulations governing the information reporting requirements of the Trust as a WHFIT.
Notwithstanding the foregoing, the middlemen holding Trust Units on behalf of the Unitholders, and
not the Trustee of the Trust, are solely responsible for complying with the information reporting
requirements under the U.S. Treasury Regulations with respect to such Trust Units, including the
issuance of IRS Form 1099 and certain written tax statements. Unitholders whose Trust Units are
held by middlemen should consult with such middlemen regarding the information that will be
reported to them by the middlemen with respect to the Trust Units.
11
In connection with the termination of the Trust and the resulting cancellation of the Trust
pursuant to the provisions of the Trust Agreement, the Trust will not incur any Federal income tax
liability at the Trust level as a result of the sale of the Remaining Royalty Interests or payment to Unitholders of the net proceeds from such sale. However, for Federal income tax
purposes, the sale of the Remaining Royalty Interests will be taxable to the Unitholders. Each
Unitholder will recognize gain or loss on such sale measured by the difference between the
Unitholders share of the amount realized from the sale of the Remaining Royalty Interests and such
Unitholders adjusted basis in his or her Units. The amount realized from the sale of the
Remaining Royalty Interests will be allocated to Unitholders in the same manner as the Trustee
allocates the income received by the Trust.
Prior to determining the gain or loss resulting from the sale of the Remaining Royalty
Interests following the cancellation of the Trust, each Unitholder should reduce his tax basis (but
not below zero) in the Remaining Royalty Interests (and, correspondingly, his Units) by (1) the
amount of depletion allowable with respect to the Remaining Royalty Interests through the date of
the cancellation, and (2) by the amount of any return of capital, including returns of capital
resulting from a reduction to the cash reserve maintained by the Trust during a quarterly period.
Assuming a Unitholder holds his or her Units as a capital asset, gain or loss from the sale of
the Remaining Royalty Interests will be treated as a capital gain or loss. If the Units have been
held for more than one year, the gain or loss will constitute a long-term capital gain or loss;
otherwise, the gain or loss will constitute a short-term capital gain or loss. Notwithstanding the
foregoing, a Unitholder must, upon the sale of the Remaining Royalty Interests, treat as ordinary
income his or her depletion recapture amount, which is an amount equal to the lesser of (i) the
gain on the sale of the Remaining Royalty Interests or (ii) the sum of the prior depletion
deductions taken with respect to the Remaining Royalty Interests (but not in excess of the initial
basis of such Units allocated to the Remaining Royalty Interests).
Following the termination of the Trust, the Trust Agreement provides that any purchaser of the
Remaining Royalty Interests, regardless of the date of closing of the purchase, shall be entitled
to all proceeds of production attributable to the Remaining Royalty Interests after the Termination
Date and neither the Trust nor the Unitholders shall be entitled to any such proceeds (the
Purchaser Allocation Proceeds). However, in the event that all the Remaining Royalty Interests
are not, for any reason, sold or a definitive agreement for sale thereof is not entered into prior
to the 150
th
day following the Termination Date, the Purchaser Allocation Proceeds, and
all amounts thereafter payable to the Trust, shall be distributed instead to the Unitholders in
accordance with the provisions of the Trust Agreement.
The proceeds from the sale of the Remaining Royalty Interests, less liabilities and expenses
of the Trust and amounts used for cash reserves, will be distributed, together with any interest
expected to be earned thereon, to Unitholders of record on the record date established for such
distribution. No assurances can be given as to the amount, or timing, or distributions, if any, to
Unitholders of the Trust, as such amount and timing would depend in part on the amount of expenses
ultimately payable by the Trust and when such expenses become payable and the net sales price of
the Remaining Royalty Interests and when the sale of the Remaining Royalty Interests occurs.
12
The sale of the Remaining Royalty Interests following the termination of the Trust may be
taxable events to the Unitholders for state tax purposes. Unitholders should consult their own tax advisors regarding the state tax consequences of the sale of the Remaining Royalty
Interests following the termination of the Trust.
Each Unitholder should consult his tax advisor regarding Trust tax compliance matters,
including tax consequences resulting from the termination of the Trust on the Termination Date.
4. RELATED PARTY TRANSACTIONS
Williams provides accounting, bookkeeping and informational services to the Trust in
accordance with an Administrative Services Agreement effective December 1, 1992. The fee is
$50,000 per quarter, escalating 3 percent each October 1 commencing October 1, 1993. For the three
month periods ended March 31, 2010 and 2009, the first quarter administration fee included in
general and administrative expenses was $82,642 and $80,235, respectively. Substantially all
production from the WI Properties is sold to a Williams subsidiary. Additionally, all royalty
income is received from Williams.
The interests of Williams and its affiliates and the interests of the Trust and the
Unitholders with respect to the Underlying Properties could at times be different. As a working
interest owner in the WI Properties, WPC could have interests that conflict with the interests of
the Trust and Unitholders. For example, such conflicts could be due to a number of factors
including, but not limited to, future budgetary considerations and the absence of any contractual
obligation on the part of WPC to spend for development of the WI Properties, except as noted
herein. Such decisions may have the effect of changing the amount or timing of future
distributions to Unitholders. WPCs interests may also conflict with those of the Trust and
Unitholders in situations involving the sale or abandonment of Underlying Properties or the
purchase or sale of the Remaining Royalty Interests. WPC has the right at any time to sell any of
the Underlying Properties subject to the Royalty Interests and, under certain circumstances, may
abandon any of the WI Properties. Such sales or abandonment may not be in the best interests of
the Trust. In addition, WPX Gas Resources (hereinafter defined) has the right, exercisable in its
sole discretion, to terminate its Minimum Purchase Price (hereinafter defined) commitment under the
Gas Purchase Contract (hereinafter defined) prior to the expiration of the Gas Purchase Contract
upon the earlier of August 1, 2010 or the closing date of the sale of the Royalty Interests by the
Trust. Williams interest could conflict with those of the Trust and Unitholders to the extent the
interests of WPX Gas Resources, under the Gas Purchase Contract, or Williams Field Services Company
and WPX Gas Resources, under the Gas Gathering Contract, differ from the interests of the Trust and
the Unitholders. Except for amendments to the Gas Gathering Contract or Gas Purchase Contract that
must be approved by the vote of a majority of the Unitholders present at a meeting at which a
quorum is present if such amendment would materially adversely affect Trust revenues, no mechanism
or procedure has been included to resolve potential conflicts of interest between the Trust,
Williams, WPC or their affiliates.
13
5. DISTRIBUTIONS TO UNITHOLDERS
For production through the March 1, 2010 Termination Date, the Trustee determines for each
quarter the amount of cash available for distribution to Unitholders. Such amount (the Quarterly
Distribution Amount) is an amount equal to the excess, if any, of the cash received by the Trust,
on or prior to the last day of the month following the end of each calendar quarter from the Royalty Interests, plus, with certain exceptions, any other cash receipts of the
Trust during such quarter, over the liabilities of the Trust paid or accrued during such quarter,
subject to adjustments for changes made by the Trustee during such quarter in any cash reserves
established for the payment of contingent or future obligations of the Trust.
The Trustee distributes the Quarterly Distribution Amount within 60 days after the end of each
calendar quarter to each person who was a Unitholder of record on the associated record date (i.e.,
the 45th day following the end of each calendar quarter or if such day is not a business day, the
next business day thereafter), together with interest estimated to be earned on such amount from
the date of receipt thereof by the Trustee to the payment date.
6. SUBSEQUENT EVENTS
The Trustee has evaluated events occurring subsequent to the quarter ended March 31, 2010
through May 13, 2010. Subsequent to March 31, 2010, the Trust declared the following
distribution:
|
|
|
|
|
Quarterly
|
|
|
|
|
Record
|
|
Payment
|
|
Distribution
|
Date
|
|
Date
|
|
per Unit
|
May 17, 2010
|
|
May 28, 2010
|
|
$.0111
|
The
distribution per unit was $.0111 attributable to natural gas
production for the months of January and February, 2010, prior to the
Termination Date (payable in the second quarter of 2010) as compared to a distribution of $.016972
paid in the fourth quarter of 2009. The decrease in distributions is mainly the result of
only the two months of production preceding the termination being
included in royalty income received during the second quarter of
2010. Also contributing to the reduced distribution, the Trust is
withholding in cash and cash equivalents an additional $300,000 for
anticipated expenses relating to the termination process.
If
a sale of the Remaining Royalty Interests is made or a definitive
contract for the sale of the Remaining Royalty Interests is entered
into prior to the
150
th
day
following the Termination Date, the buyer of the Remaining
Royalty Interests, and not the Trust or the Unitholders, will be
entitled to all proceeds of production attributable to the Remaining
Royalty Interests following the Termination Date (Note 2).
The proceeds from the sale of the Remaining Royalty Interests, less liabilities and expenses
of the Trust and amounts used for cash reserves, will be distributed, together with any interest
expected to be earned thereon, to Unitholders of record on the record date established for such
distribution. No assurances can be given as to the amount, or timing, or distributions, if any, to
Unitholders of the Trust, as such amount and timing would depend in part on the amount of expenses
ultimately payable by the Trust and when such expenses become payable and the net sales price of
the Remaining Royalty Interests and when the sale of the Remaining Royalty Interests occurs.
14
The Trust is withholding in cash and cash equivalents an additional $100,000 for anticipated
expenses relating to the termination process.
7. CONTINGENCIES
WPX Gas Resources Company (WPX Gas Resources, as successor in interest to Williams Gas
Marketing Company), purchases natural gas produced from the WI Properties (except for certain small
volumes) at the wellhead under the terms of a gas purchase contract dated October 1, 1992, as
amended (the Gas Purchase Contract). The Gas Purchase Contract provides for a pricing mechanism
during an initial 5-year period, which expired on December 31, 1997, and continuing for one or more
consecutive additional 1-year terms unless and until WPX Gas Resources exercises its annual option,
exercisable 15 days prior to the end of each contract year, to discontinue purchasing gas under the
pricing mechanism of the Gas Purchase Contract and instead purchase gas at a monthly market-based
price. WPX Gas Resources has not exercised this option, and therefore, the pricing mechanism will
continue to remain in effect through the expiration of the Gas Purchase Contract upon the earlier
of August 1, 2010 or the closing date of the sale of the Royalty Interests by the Trust.
Under the pricing mechanism of the Gas Purchase Contract, when the market price was less than
$1.70 per MMBtu (the Minimum Purchase Price), the Trust was paid the Minimum Purchase Price for
the gas and an account (the Price Credit Account) was maintained to identify the accrued and
unrecouped amount of payments made to the Trust in excess of the market price. Any amounts in the
Price Credit Account were subject to future recoupment when the market price exceeded the Minimum
Purchase Price. As of March 31, 2010, there were no remaining unrecouped price credits in the
Price Credit Account.
While the terms of the Gas Purchase Agreement pricing mechanism remained in place and no
balance existed in the Price Credit Account, when the market price for natural gas exceeded $1.94
per MMBtu (as was the case during the first three months of 2010), the Trust received only 50
percent of the excess of the market price over the $1.94 price per MMBtu before reduction for
gathering, processing and certain other costs.
In 2008, WPC notified the Trust that certain royalty matters were currently being litigated by
a federal regulatory agency and another producer. WPC learned that this case was decided
unfavorably to the producer in October 2009. Neither WPC nor the Trust was a party to this
litigation; however, given the similarities to the Trusts Underlying Properties, WPC and the
Royalty Interests will more than likely be impacted as well. WPC is currently evaluating the
negative impact to the Trusts NPI. In addition, there are other cases pending against other
producers on related issues that could potentially have a significant negative impact to future
royalty income with respect to the Royalty Interests, natural gas reserves and reserve value.
The majority of the production attributable to the Trust is within Federal Units. Unit
participating areas are formed by pooling production from the participating area. Entitlement to
the pooled production is based on each partys acreage in the participating area divided by the
total participating acreage. Wells drilled outside the participating area may create an
enlargement to the participating area and a revision of the Unit
ownership entitlement. The
15
Bureau of Land Management (BLM) must approve Unit participating area expansions. The effective date for
Unit expansions is retroactive to the date the well creating the expansion was tested.
The royalty income presented in the accompanying statements of distributable income is on an
entitlement basis and reflects WPCs estimated impact of the most recent BLM participating area
approvals through March 31, 2010.
Item 2. Trustees Discussion and Analysis of Financial Condition and Results of Operations.
Termination and Liquidation of the Trust
With respect to the Trust termination provisions as outlined in the Trust Agreement, the net
present value of the estimated future net revenues computed in accordance with the Trust Agreement,
using an average 2009 index price of $3.25, by the independent petroleum engineers as of December
31, 2009 was approximately $8.4 million (which assumed continuation of the Gas Purchase Contract with WPX through 2012). The results of this computation have triggered an early
termination of the Trust. Because the Trusts computed net present value fell below the $30
million stipulated threshold as of December 31, 2009, the Trust terminated effective March 1, 2010
(Termination Date).
Following termination, the Trustee and the Delaware Trustee will continue to act as trustees
of the Trust until all remaining Trust assets have been sold and the net proceeds from such sales,
if any, are distributed to Unitholders.
Upon the termination of the Trust, the Trustee will use Best Efforts (as defined in the Trust
Agreement) to sell any remaining Royalty Interests for cash pursuant to the procedures described in
the Trust Agreement. The Trustee has retained Albrecht & Associates, Inc., an investment banking
firm (the Advisor), on behalf of the Trust who will assist the Trustee in selling the remaining
Royalty Interests then owned by the Trust (the Remaining Royalty Interests). WPC has the right,
but not the obligation, to make a cash offer to purchase all Remaining Royalty Interests following
termination of the Trust as described in the following paragraph.
WPC had the right, within 60 days following the Termination Date, to make a cash offer to
purchase all of the Remaining Royalty Interests then held by the Trust. An offer was not made by
WPC during this 60 day period. Under the terms of the Trust Agreement, the Trustee is now required
to use Best Efforts (as defined in the Trust Agreement), assisted by the Advisor to obtain offers
for the Remaining Royalty Interests. At the end of a 120-day period following the Termination Date,
the Trustee is required to notify WPC of the highest of any offers (net of any commissions or other
fees payable by the Trust), acceptable to the Trustee (which must be an all-cash offer), received
during such period (the Highest Acceptable Offer). WPC then has the exclusive right, but not the
obligation, to purchase all Remaining Royalty Interests for a cash purchase price equal to 105
percent of the Highest Acceptable Offer. If no acceptable offers are received for all Remaining
Royalty Interests, the Trustee may request WPC to submit an offer for consideration by the Trustee
and may accept or reject such offer. Acceptance of an offer by the Trustee shall be conditioned
upon the opinion of the Advisor of the fairness of the offer.
16
The Trustee may
accept any offer for all or any part (not more than six parts) of the Remaining Royalty Interests
as it deems to be in the best interests of the Trust and Unitholders and may continue, for up to
one calendar year after the Termination Date, to attempt to locate a buyer or buyers of the
Remaining Royalty Interests in order to sell such interests in an orderly fashion not involving a
public auction. If any Remaining Royalty Interests have not been sold or a definitive agreement for
sale has not been entered into by the end of such calendar year, the Trustee is required to sell
the Remaining Royalty Interests at public auction to the highest cash bidder, which sale may be to
WPC or any of its affiliates. Notice of such sale by auction shall be mailed at least 30 days prior
to such sale to each Unitholder at his address as it appears on the ownership ledger of the
Trustee.
If a sale of the Remaining Royalty Interests is made or a definitive contract for sale of the
Remaining Royalty Interests is entered into prior to the 150
th
day following the
Termination Date, the buyer of the Remaining Royalty Interests, and not the Trust or Unitholders,
will be entitled to all proceeds of production attributable to the Remaining Royalty Interests
following the Termination Date (Note 2). If no sale is made, and no definitive contract for the sale of the Remaining Royalty Interests is entered into, prior to the 150
th
day following the Termination Date, WPC
will distribute to the Trust the proceeds from production attributable to the Remaining Royalty Interests for this period.
WPCs purchase rights, as described, may be exercised by WPC and each of its
successors-in-interest and assigns. WPCs purchase rights are fully assignable by WPC to any
person. The costs of liquidation, including the fees and expenses of the Advisor, and the Trustees
liquidation fee will be paid by the Trust.
The sale of the Remaining Royalty Interests following the termination of the Trust will be
taxable events to the Unitholders for Federal income tax purposes. Generally, a Unitholder will
realize gain or loss equal to the difference between the amount realized on the sale of the
Remaining Royalty Interests upon termination of the Trust and his adjusted basis in such Units.
Gain or loss realized by a Unitholder who is not a dealer with respect to such Units and who has a
holding period for the Units of more than one year will be treated as long-term capital gain or
loss except to the extent of any depletion recapture amount, which must be treated as ordinary
income. State tax consequences may also result to Unitholders upon the termination of the Trust
and the sale of the Remaining Royalty Interests. Each Unitholder should consult his own tax
advisor regarding Trust tax compliance matters, including Federal and state tax implications
concerning the sale of the Remaining Royalty Interests following the termination of the Trust.
Distributable Income
Prior to the termination of the Trust, when excess cash was available, the Trust made
quarterly cash distributions to Unitholders. The only assets of the Trust, other than cash and
cash equivalents being held for the payment of expenses and liabilities and for distribution to
Unitholders, are the Royalty Interests. The Royalty Interests owned by the Trust burden the
Underlying Properties, which are owned by WPC and not the Trust.
Distributable income of the Trust generally consists of the excess of royalty income plus
interest income over the general and administrative expenses of the Trust. Upon receipt by the
Trust, royalty income is invested in short-term investments in accordance with the Trust Agreement
until its subsequent distribution to Unitholders. Currently, funds are invested in Bank of America
money market accounts which are backed by the good faith of Bank of America, N.A., but are not
insured by the Federal Deposit Insurance Corporation (FDIC). The
17
Trust does not lend money and has limited ability to borrow money, which the Trustee believes
limits the Trusts risk from the current tightening of credit markets. The Trusts future royalty
income, however, may be subject to risks relating to the creditworthiness of the operators of the
Underlying Properties and WPX Gas Resources and other purchasers of the natural gas produced from
the Underlying Properties, as well as risks associated with fluctuations in the price of natural
gas. Additional risks are described in Item 1A Risk Factors of the 2009 Annual Report.
The amount of distributable income of the Trust for any quarter may differ from the amount of
cash available for distribution to Unitholders in such quarter due to differences in the treatment
of the expenses of the Trust in the determination of those amounts. The financial statements of
the Trust are prepared on a modified cash basis pursuant to which general and administrative
expenses of the Trust are recognized when incurred whereas royalty income is recognized when
received. Consequently, the reported distributable income of the Trust for any quarter is
determined by deducting from the income received by the Trust the amount of expenses incurred by
the Trust during such quarter. The amount of cash available for distribution to Unitholders,
however, is determined in accordance with the provisions of the Trust Agreement and reflects the
deduction from the income actually received by the Trust of the amount of expenses actually paid or
accrued by the Trust and adjustments for changes in reserves for unpaid liabilities. See Notes 5
and 6 to the financial statements of the Trust appearing elsewhere in this report on Form 10-Q for
additional information regarding the determination of the amount of cash available for distribution
to Unitholders.
Three Months Ended March 31, 2010 Compared to Three Months Ended March 31, 2009
For the quarter ended March 31, 2010, royalty income received by the Trust amounted to
$764,578 as compared to $1,393,653 received for the same quarter in 2009. The decrease in royalty
income is primarily due to lower production volumes. Also impacting first quarter 2009 production
revenues were lower infill revenues due to deficits in the previous two quarters. Production
volumes are affected by changes in sales prices for natural gas produced and costs that are
deducted in calculating the NPI Net Proceeds. Production related to the royalty income received by
the Trust in the first quarter of 2010 was 540,208 MMBtu as compared to 655,321 MMBtu for the same
quarter in 2009. General and administrative expenses for the quarter ended March 31, 2010 were
higher compared to the same quarter in 2009 due to the preparation for the termination of the
Trust.
Distributable income for the quarter ended March 31, 2010 was $238,776 or $.02 per Unit
compared to $1,021,984 or $.11 per Unit for the same quarter in 2009. This decrease was the result
of lower royalty income as previously described and due to higher
general and administrative expenses. A distribution of $0.016972 per Unit was made on
March 1, 2010 to Unitholders of record on February 16, 2010.
Because the Trust incurs administrative expenses throughout a quarter but receives its royalty
income only once in a quarter, the Trustee established in the first quarter of 1993 a cash reserve
for the payment of expenses and liabilities of the Trust. The Trustee thereafter has adjusted the
amount of such reserve in certain quarters as required for the payment of the Trusts expenses and
liabilities, in accordance with the provisions of the Trust Agreement. The Trustee
18
has maintained for the foreseeable future a cash reserve that will be reduced by Trust
expenses in excess of royalty income. After receipt of royalty income in May 2010, Trust is withholding in cash and cash equivalents an additional $300,000 for anticipated expenses relating
to the termination process. As discussed in Note 2, if a sale of the Remaining Royalty Interests is made or a definitive contract for sale of the Remaining
Royalty Interests is entered into prior to the 150
th
day following the Termination Date,
the buyers of the Remaining Royalty Interests, and not the Trust or the Unitholders, will be entitled to all proceeds of production attributable to the
Remaining Royalty Interests following the Termination Date.
Royalty income received by the Trust in a given calendar quarter will generally reflect the
sum of (i) net proceeds from the sale of gas produced from the WI Properties during the preceding
calendar quarter, plus (ii) cash received by WPC with respect to the Farmout Properties either (a)
during the preceding calendar quarter or (b) if received in sufficient time to be paid to the
Trust, in the month immediately following such calendar quarter. Accordingly, the royalty income
included in distributable income for the quarter ended March 31, 2010, was based on production
volumes and natural gas prices for the period October 2009 through December 2009, as shown in the
table below. The production volumes included in the table below are for production attributable to
net profits of the Underlying Properties, and not for production attributable to the Trusts
Royalty Interests.
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Three Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
December 31, 2009
|
|
|
December 31, 2008
|
|
Production (MMBtu) (1)
|
|
|
|
|
|
|
|
|
WI Properties
|
|
|
533,288
|
(2)
|
|
|
743,506
|
(3)
|
Farmout Properties
|
|
|
216,340
|
|
|
|
240,682
|
|
Infill Properties
|
|
|
452,153
|
(6)
|
|
|
324,040
|
(5)
|
|
|
|
|
|
|
|
|
|
Blanco Hub Spot Price ($/MMBtu) (4)
|
|
$
|
3.99
|
|
|
$
|
3.91
|
|
|
|
|
|
|
|
|
|
|
Net Wellhead Price WI Properties
($/MMBtu)
|
|
$
|
1.54
|
|
|
$
|
1.69
|
|
|
|
|
(1)
|
|
Million British Thermal Units.
|
|
(2)
|
|
Includes retroactive adjustments of (47,526) MMBtu.
|
|
(3)
|
|
Includes retroactive adjustments of (42,364) MMBtu.
|
|
(4)
|
|
Weighted average of estimates for the months included in the period presented.
|
|
(5)
|
|
Includes 127,022 MMBtu Retroactive Adjustment.
|
|
(6)
|
|
Includes (11,188) MMBtu Retroactive Adjustment.
|
Production from the WI Properties is generally sold by WPC to WPX Gas Resources pursuant to
the Gas Purchase Contract that provides certain protections for WPC and Unitholders by providing
that WPX Gas Resources will purchase gas from WPC at a minimum purchase price of $1.70 even when
the applicable index price (which is equal to 97% of the Blanco Hub Spot Price) falls below $1.70
per MMBtu, provided that WPX Gas Resources is entitled to accrue price credits in the amount of any
excess of the minimum price so paid over the applicable index price. When the applicable index
price exceeds $1.70 per MMBtu, WPX Gas Resources is entitled to recoup any price credits previously
accrued. When the applicable index price is greater than $1.94 per MMBtu, the Gas Purchase Contract
protects and benefits WPX Gas Resources by allowing it to purchase gas from WPC at a contract price
equal to $1.94 per
19
MMBtu plus only 50 percent of the difference between the applicable index price and $1.94 per
MMBtu. The Gas Purchase Contract also provides that the price paid for gas by WPX Gas Resources is
reduced by the amount of gathering, processing and certain other costs paid by WPX Gas Resources.
See Item 2 Properties The Royalty Interests Gas Purchase Contract in the 2009 Annual Report
for detailed information about the Gas Purchase Contract and its impact on Trust income.
The initial five-year term of the pricing provision (Primary Term) of the Gas Purchase
Contract expired on December 31, 1997. Following the expiration of the Primary Term, the pricing
provision will continue in effect for one or more consecutive additional one-year terms (each such
term a Contract Year) unless and until WPX Gas Resources exercises its annual option, exercisable
15 days prior to the end of each Contract Year, to discontinue purchasing gas from WPC under the
pricing provision of the Gas Purchase Contract and instead purchase gas at a monthly price equal to
the index price of 97% of the Blanco Hub Spot Price. WPX has not yet exercised this option and the
pricing mechanism of the Primary Term therefore has been and will continue to remain in effect
until the earlier of August 1, 2010 or the closing of the sale of the Royalty Interests by the
Trust.
For the three months ended March 31, 2010, which is based on production volumes and natural
gas prices for the three months ended December 31, 2009, the Blanco Hub Spot Price was above $2.00
per MMBtu, and therefore the applicable index price under the Gas Purchase Contract, which is equal
to 97% of the Blanco Hub Spot Price, was above $1.94 per MMBtu through such period. In general,
under the Gas Purchase Contract, the Trust only receives the benefit of 50 percent of any amount by
which the applicable index price exceeds $1.94 per MMBtu. Consequently, pursuant to the terms of
the Gas Purchase Contract, WPX Gas Resources paid WPC an amount for gas purchased equal to $1.94
per MMBtu, less the costs paid by WPX Gas Resources to gather and process such gas and deliver it
to specified delivery points plus 50 percent of the excess of the applicable index price over $1.94
per MMBtu. The Blanco Hub Spot Price remained above $2.00 per MMBtu in April 2010.
The information in this report on Form 10-Q concerning production and prices relating to the
Underlying Properties is based on information prepared and furnished by WPC to the Trustee. The
Trustee has no control over and no responsibility relating to the operation of the Underlying
Properties.
Forward-Looking Statements
This report on Form 10-Q includes forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of
1934, as amended, which are intended to be covered by the safe harbor created thereby. All
statements other than statements of historical fact included in this report on Form 10-Q,
including, without limitation, statements contained in this Trustees Discussion and Analysis of
Financial Condition and Results of Operations regarding the Trusts financial position and
industry conditions and any sale of the Remaining Royalty Interests upon termination of the Trust,
are forward-looking statements. Although the Trustee believes that the expectations reflected in
such forward-looking statements are reasonable, it can give no assurance that such expectations
will prove to have been correct.
20
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The only assets of and sources of income to the Trust are the Royalty Interests, which, prior
to the termination of the Trust, generally entitled the Trust to receive a share of the net profits
from natural gas production from the Underlying Properties. Consequently, the Trusts financial
results are significantly affected by fluctuations in natural gas prices and the Trust has
commodity price risk exposure associated with the natural gas markets in the United States. The
Trust does not engage in any hedging activities to manage its price risk associated with natural
gas production from the Underlying Properties. The Royalty Interests do not entitle the Trust to
control or influence the operation of the Underlying Properties or the sale of gas produced
therefrom. Natural gas produced from the WI Properties, which comprises the majority of production
attributable to the Royalty Interests, is currently sold by WPC pursuant to the terms of the Gas
Purchase Contract. Although the Trust is not a party to the Gas Purchase Contract, the Gas Purchase
Contract significantly impacted revenues to the Trust. Although the Gas Purchase Contract
mitigates the risk to the Trust of low gas prices, it also limits the ability of the Trust to
benefit from the effects of higher gas prices, particularly to the extent a balance exists in the
Price Credit Account. See Item 2 Properties The Royalty Interests Gas Purchase Contract in
the 2009 Annual Report for detailed information about the Gas Purchase Contract and its impact on
the Trust and Unitholders.
Upon receipt by the Trust, royalty income is invested in short term investments in accordance
with the Trust Agreement until its subsequent distribution to Unitholders. Currently, funds are
invested in Bank of America money market accounts which are backed by the good faith and credit of
Bank of America, N.A., but are not insured by the FDIC. Each Unitholder should independently
assess the creditworthiness of Bank of America, N.A. For more information about the credit rating
of Bank of America, N.A., please refer to its periodic filings with the SEC. The Trust does not
lend money and has limited ability to borrow money, which the Trustee believes limits the Trusts
risk from the current tightening of credit markets. The Trusts future royalty income, however,
may be subject to risks relating to the creditworthiness of the operators of the Underlying
Properties and WPX Gas Resources and other purchasers of the natural gas produced from the
Underlying Properties, as well as risks associated with fluctuations in the price of natural gas.
The market prices of the Units are determined by the buyers and sellers on the New York Stock
Exchange. The Trust does not make market on any Units and is not in any position to advise any
Unitholder on any market position. Unitholders should be aware that any position of the market
concerning the Units is beyond the Trusts control and on any given day, various market conditions
will affect the market of the Units.
The assets of the Trust are passive in nature, and other than the Trusts ability to
periodically borrow money as necessary to pay expenses, liabilities and obligations of the Trust
that cannot be paid out of cash held by the Trust, the Trust is prohibited from engaging in
borrowing transactions. The amount of any such borrowings is unlikely to be material to the Trust.
The Trust periodically holds short-term investments acquired with funds held by the Trust pending
distribution to Unitholders and funds held in reserve for the payment of Trust expenses and
liabilities. Because of the short-term nature of these borrowings and investments and certain
limitations upon the types of such investments that may be held by the Trust, the Trustee
21
believes that the Trust is not subject to any material interest rate risk. The Trust does not
engage in transactions in foreign currencies that could expose the Trust or Unitholders to any
foreign currency related market risk.
Item 4. Controls and Procedures.
The Trust maintains a set of disclosure controls and procedures designed to ensure that
information required to be disclosed by the Trust in reports that it files or submits under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time
periods specified in the SEC rules and forms. In addition, the disclosure controls and procedures
are designed to ensure that the information required to be disclosed by the Trust is accumulated
and communicated to the Trustee to allow timely decisions regarding required disclosure. As of the
end of the period covered by this report on Form 10-Q, the Trustee carried out an evaluation of the
effectiveness of the design and operation of the Trusts disclosure controls and procedures
pursuant to Exchange Act Rule 13a-15 and 15d-15. Based upon that evaluation, the Trustee concluded
that the Trusts disclosure controls and procedures are effective in recording, processing,
summarizing and reporting, on a timely basis, information disclosed by the Trust in the reports
that it files or submits under the Securities Exchange Act of 1934 and are effective in ensuring
that information required to be disclosed by the Trust in the reports that it files or submits
under the Securities Exchange Act of 1934 is accumulated and communicated to the Trustee to allow
timely decisions regarding required disclosure. In its evaluation of disclosure controls and
procedures, the Trustee has relied, to the extent considered reasonable, on information provided by
WPC. There has not been any change in the Trusts internal control over financial reporting during
the period covered by this report on Form 10-Q that has materially affected, or is reasonably
likely to materially affect, the Trusts internal control over financial reporting.
PART II OTHER INFORMATION
Item 1. Legal Proceedings.
Not Applicable.
Items 1A through 5.
Not applicable.
22
Item 6. Exhibits.
The exhibits listed below are filed as part of this report on Form 10-Q:
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EXHIBIT
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NUMBER
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EXHIBIT
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4.1
|
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Trust Agreement of Williams Coal Seam Gas Royalty Trust
effective as of December 1, 1992, by and among Williams
Production Company, The Williams Companies, Inc. and Chemical
Bank Delaware and Bank of America, N.A. (as successor to
NationsBank of Texas, N.A.), as trustees (filed as Exhibit 4.1
to the Registrants Form 10-K for the year ended December 31,
1992 and incorporated herein by reference).
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|
|
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4.2
|
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First Amendment to the Trust Agreement of Williams Coal Seam
Gas Royalty Trust effective as of December 15, 1992, by and
among Williams Production Company, The Williams Companies,
Inc., Chemical Bank Delaware and Bank of America, N.A. (as
successor to NationsBank of Texas, N.A.) (filed as Exhibit 4.2
to the Registrants Form 10-K for the year ended December 31,
1992 and incorporated herein by reference).
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|
|
|
4.3
|
|
Second Amendment to the Trust Agreement of Williams Coal Seam
Gas Royalty Trust effective as of January 12, 1993, by and
among Williams Production Company, The Williams Companies,
Inc., Chemical Bank Delaware and Bank of America, N.A. (as
successor to NationsBank of Texas, N.A.) (filed as Exhibit 4.3
to the Registrants Form 10-K for the year ended December 31,
1992 and incorporated herein by reference).
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|
|
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4.4
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Net Profits Conveyance effective as of October 1, 1992, by and
among Williams Production Company, The Williams Companies,
Inc., and Bank of America, N.A. (as successor to NationsBank
of Texas, N.A.), and Chemical Bank Delaware (filed as Exhibit
4.4 to the Registrants Form 10-K for the year ended December
31, 1992 and incorporated herein by reference).
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|
|
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15.1
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|
Letter regarding unaudited interim financial information dated
May 13, 2010, from the independent Registered Public
Accounting Firm which acknowledges awareness of the use in
registration statement of a report on unaudited interim
financial information.
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|
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31.1
|
|
Certification by Ron E. Hooper, Senior Vice President and
Administrator of Bank of America, Trustee of Williams Coal
Seam Gas Royalty Trust, dated May 13, 2010, and submitted
pursuant to Rule 13a-14(a)/15d-14(a) and pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
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32.1
|
|
Certificate by Bank of America, Trustee of Williams Coal Seam
Gas Royalty Trust, dated May 13, 2010, and submitted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18
U.S.C. Section 1350).
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23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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WILLIAMS COAL SEAM GAS ROYALTY TRUST
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By: BANK OF AMERICA, N.A., Trustee
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By:
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/s/ RON E. HOOPER
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Ron E. Hooper
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Senior Vice President and Administrator
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(The Trust has no directors or executive officers.)
Date: May
13, 2010
24
INDEX TO EXHIBITS
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|
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EXHIBIT
|
|
|
NUMBER
|
|
EXHIBIT
|
4.1
|
|
Trust Agreement of Williams Coal Seam Gas Royalty Trust effective
as of December 1, 1992, by and among Williams Production Company,
The Williams Companies, Inc. and Chemical Bank Delaware and Bank
of America, N.A. (as successor to NationsBank of Texas, N.A.), as
trustees (filed as Exhibit 4.1 to the Registrants Form 10-K for
the year ended December 31, 1992 and incorporated herein by
reference).
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|
|
|
4.2
|
|
First Amendment to the Trust Agreement of Williams Coal Seam Gas
Royalty Trust effective as of December 15, 1992, by and among
Williams Production Company, The Williams Companies, Inc.,
Chemical Bank Delaware and Bank of America, N.A. (as successor to
NationsBank of Texas, N.A.) (filed as Exhibit 4.2 to the
Registrants Form 10-K for the year ended December 31, 1992 and
incorporated herein by reference).
|
|
|
|
4.3
|
|
Second Amendment to the Trust Agreement of Williams Coal Seam Gas
Royalty Trust effective as of January 12, 1993, by and among
Williams Production Company, The Williams Companies, Inc.,
Chemical Bank Delaware and Bank of America, N.A. (as successor to
NationsBank of Texas, N.A.) (filed as Exhibit 4.3 to the
Registrants Form 10-K for the year ended December 31, 1992 and
incorporated herein by reference).
|
|
|
|
4.4
|
|
Net Profits Conveyance effective as of October 1, 1992, by and
among Williams Production Company, The Williams Companies, Inc.,
and Bank of America, N.A. (as successor to NationsBank of Texas,
N.A.), and Chemical Bank Delaware (filed as Exhibit 4.4 to the
Registrants Form 10-K for the year ended December 31, 1992 and
incorporated herein by reference).
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|
|
|
15.1
|
|
Letter regarding unaudited interim
financial information dated May 13, 2010, from the independent Registered Public Accounting
Firm which acknowledges awareness of the use in registration
statement of a report on unaudited interim financial information.
|
|
|
|
31.1
|
|
Certification by Ron E. Hooper, Senior Vice President and
Administrator of Bank of America, Trustee of Williams Coal Seam
Gas Royalty Trust, dated May 13, 2010, and submitted pursuant to
Rule 13a-14(a)/15d-14(a) and pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
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25
|
|
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EXHIBIT
|
|
|
NUMBER
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EXHIBIT
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32.1
|
|
Certificate by Bank of America, Trustee of Williams Coal Seam Gas
Royalty Trust, dated May 13, 2010, and submitted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section
1350).
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26
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