EXHIBIT 13
THE TRUST
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Cross Timbers Royalty Trust ("the Trust") was created on February 12, 1991 by
conveyance of 90% net overriding royalty interests in certain royalty and
overriding royalty interest properties in Texas, Oklahoma and New Mexico ("90%
Royalty Trust Interests"), and 75% net overriding royalty interests in certain
working interest properties in Texas and Oklahoma ("75% Royalty Trust
Interests"). These net overriding royalty interests (collectively referred to as
"Royalty Trust Interests") were conveyed to the Trust by predecessors of Cross
Timbers Oil Company ("Cross Timbers Oil") which currently owns the properties
underlying the Royalty Trust Interests ("Underlying Properties"). The Royalty
Trust Interests are the only assets of the Trust, other than cash held for
payment of liabilities and for distribution to Unit holders.
Royalty income received by the Trust on the last business day of each month is
calculated and paid by Cross Timbers Oil based on net proceeds received from the
Underlying Properties in the prior month. Distributions, as calculated by the
Trustee, are generally paid to month-end Unit holders of record within ten
business days.
UNITS OF BENEFICIAL INTEREST
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The units of beneficial interest ("Units") in the Trust are listed and traded on
the New York Stock Exchange under the symbol "CRT." The following are the high
and low Unit sales prices and total cash distributions per Unit paid by the
Trust during each quarter of 1997 and 1996:
Sales Price
--------------- Distributions
High Low per Unit
----------- ------------- ---------
1997
----------------
First Quarter................ $15.750 $13.625 $0.511589
Second Quarter............... 16.750 14.250 0.536106
Third Quarter................ 17.750 16.000 0.353022
Fourth Quarter............... 18.500 16.000 0.333824
---------
$1.734541
=========
1996
----------------
First Quarter................ $11.000 $ 9.625 $0.254087
Second Quarter............... 10.750 9.750 0.309984
Third Quarter................ 12.500 10.375 0.299200
Fourth Quarter............... 15.750 11.750 0.482891
---------
$1.346162
=========
At December 31, 1997, there were 6,000,000 Units outstanding and approximately
193 Unit holders of record; 5,333,365 of these Units were held by 12 depository
institutions. As of February 28, 1998, Cross Timbers Oil owned 1,360,000 Units.
1
SUMMARY
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The Trust was created to collect and distribute monthly royalty income to Unit
holders. Trust royalty income is received from two major components, the 90%
Royalty Trust Interests and the 75% Royalty Trust Interests.
- The 90% Royalty Trust Interests were carved from royalty and overriding
royalty interests in producing properties in Texas, Oklahoma and New Mexico
("the underlying royalty interest properties"). Most royalty income is
from long-lived gas properties in the San ▇▇▇▇ Basin of northwestern New
Mexico. Because the 90% Royalty Trust Interests are not subject to
production or development costs, royalty income from these interests
generally only varies because of changes in sales volumes or prices.
- The 75% Royalty Trust Interests were carved from working interests in seven
large, predominantly oil-producing properties in Texas and Oklahoma ("the
underlying working interest properties"). Royalty income from these
properties is reduced by production and development costs. If costs exceed
revenues, the 75% Royalty Trust Interests will not contribute to Trust
royalty income, but such excess costs will not reduce royalty income from
the 90% Royalty Trust Interests. Such excess costs generally occur during
periods of higher development activity and lower oil prices. Excess costs
are expected to occur during 1998; for further information, see "Trustee's
Discussion and Analysis - Costs."
Unit holders may be eligible to receive the following tax benefits but should
consult their tax advisors:
- The Nonconventional Fuel Source Tax Credit is related to coal seam gas
production through the year 2002 from ▇▇▇▇▇ drilled after December 31, 1979
and prior to January 1, 1993 underlying the 90% Royalty Trust Interests.
Unit holders are entitled to this tax credit (also referred to as "coal
seam tax credit") which may be used to reduce the Unit holder's regular
income tax liability.
- Cost Depletion is generally available to Unit holders as a deduction from
royalty income. Available depletion is dependent upon the Unit holder's
cost of Units, purchase date and prior allowable depletion.
As an example, a Unit holder that acquired Units in January 1997 and held
them throughout 1997 would be entitled to a cost depletion deduction of
approximately 9% of his cost. Assuming cost of $15.75 per Unit, cost
depletion would offset 80% of taxable Trust income. After considering the
coal seam tax credit and assuming a 30% tax rate, the 1997 pre-tax yield
of Units would be 16.7%. (NOTE- Because the Units are a depleting asset, a
portion of this yield is effectively a return of capital.)
The following summarizes the effect of the above components on distributions per
Unit for the last three years:
1997 1996 1995
----------------- ----------------- -----------------
Monthly Annual Monthly Annual Monthly Annual
Average Total Average Total Average Total
-------- ------- -------- ------- -------- -------
Royalty Income
- 90% Royalty Trust Interests.. $ .121 $1.453 $ .091 $1.095 $ .064 $ .766
- 75% Royalty Trust Interests.. .025 .306 .024 .283 .016 .191
Administration expense
(net of interest income)..... (.002) (.024) (.003) (.032) (.002) (.027)
------ ------ ------ ------ ------ ------
Total Distribution............. $ .144 $1.735 $ .112 $1.346 $ .078 $ .930
====== ====== ====== ====== ====== ======
Nonconventional Fuel
Source Tax Credit......... * $ .212 * $ .189 * $ .180
====== ====== ======
* - Not applicable
2
TO UNIT HOLDERS
---------------
We are pleased to present the 1997 Annual Report of Cross Timbers Royalty Trust
and the Trust's 1997 Form 10-K. Both of these reports contain important
information about the Royalty Trust Interests, including information provided to
the Trustee by Cross Timbers Oil, and should be read in conjunction with each
other.
For the year ended December 31, 1997, Trust royalty income and distributable
income reached historical highs since the Trust's inception in February 1991.
Royalty income totaled $10,549,668 and, after deducting Trust administration
expense, net of interest income, distributable income was $10,407,250 or
$1.734541 per Unit. Royalty income and distributions for the year were 28%
higher than 1996 comparable amounts primarily because of higher gas sales
prices.
Natural gas prices averaged $2.04 per thousand cubic feet ("Mcf") for 1997 sales
from the Underlying Properties, or 35% above the 1996 average price of $1.51 per
Mcf. San ▇▇▇▇ Basin gas prices were significantly higher throughout 1997
because of increased demand in California and expanded markets provided by
additional eastward bound pipeline capacity out of the San ▇▇▇▇ Basin that was
completed in 1996.
Gas sales volumes from the Underlying Properties for the year ended December 31,
1997 increased 1% from 1996, to a total of 4,418,871 Mcf. Gas sales volumes in
1997 and 1996 include volumes attributable to the settlement of two unrelated
lawsuits.
During 1997, the Trust received approximately $733,000, or $0.122 per Unit, in
royalty income attributable to the settlement of a lawsuit that Cross Timbers
Oil had filed to recover revenues suspended from certain San ▇▇▇▇ Basin ▇▇▇▇▇.
Gas sales volumes from the Underlying Properties related to this settlement were
636,000 Mcf. During 1996, the Trust received $675,000, or $0.113 per Unit, in
royalty income related to the settlement of a lawsuit filed by Cross Timbers Oil
and the Trust, also to recover revenues suspended from certain San ▇▇▇▇ Basin
▇▇▇▇▇. Gas sales volumes attributable to the 1996 lawsuit settlement were
609,000 Mcf. For further information regarding litigation involving the Trust,
see Item 3 of the accompanying Form 10-K.
The average Trust oil price increased to $19.20 per barrel ("Bbl"), up 3% from
the 1996 average price of $18.60. Oil sales volumes from the Underlying
Properties during 1997 were 423,981 Bbls, or 3% below 1996 levels because of
natural decline in production.
Oil prices weakened in December 1997 and continued their decline to a decade-low
level in March 1998. Because of the two-month interval between the time of oil
production and receipt of related royalty income by the Trust, the decline in
prices began to affect Trust royalty income in February 1998. For further
information on prices, see "Trustee's Discussion and Analysis - Prices."
Because of lower oil prices and an expected increase in development costs, Cross
Timbers Oil has advised the Trustee that it anticipates costs to exceed revenues
from the Texas 75% Royalty Trust Interests conveyance during 1998. The Texas
75% Royalty Trust Interests contributed approximately $0.18 per Unit to 1997
royalty income, or approximately 10% of total 1997 distributions. For further
information, see "Trustee's Discussion and Analysis - Costs."
Coal seam gas sales volumes from the Underlying Properties were 1,478,477 Mcf in
1997, 8% above 1996 coal seam gas volumes. The resulting 1997 coal seam tax
credit was $0.212340 per Unit, while the 1996 coal seam tax credit was $0.189374
per Unit. This credit (or a portion thereof, if Units were held less than the
full year) is available to be applied against the Unit holder's regular federal
income tax liability, subject to certain limitations. Unit holders should
consult their tax advisors regarding use of this credit.
As of December 31, 1997, proved reserves of the Royalty Trust Interests were
estimated by independent engineers to be 1,696,000 Bbls of oil and 38.2 billion
cubic feet ("Bcf") of natural gas. Estimated oil reserves decreased 32% from
year-end 1996 to 1997 primarily as a result of the decrease in year-end oil
prices from $24.25 to $15.50 per Bbl and the resulting reduced allocation of
reserves to the Royalty Trust Interests. Gas reserves decreased 5% from year-
end 1996 to 1997 primarily because of production, partially offset by increased
estimates for coal seam gas reserves underlying the 90% Royalty Trust Interests.
All reserve information prepared by independent engineers has been provided to
the Trustee by Cross Timbers Oil.
Estimated future net revenues from proved reserves at December 31, 1997 are $86
million or $14.33 per Unit. Using an annual discount factor of 10%, the present
value of estimated future net revenues at December 31, 1997 is $43.5 million or
$7.25 per Unit. Proved reserve estimates and related future net revenues have
been determined based on year-end oil and gas prices, as well as other
guidelines prescribed by the Financial Accounting Standards Board as further
described under Item 2 of the accompanying Form 10-K. The present value of
estimated future net revenues is not necessarily representative of the market
value of Trust Units.
As discussed in the Tax Instructions provided to Unit holders in February 1998,
Trust distributions are considered portfolio income, rather than passive income.
Unit holders should consult their tax advisors for further information.
NationsBank of Texas, N.A., Trustee
By:
▇▇▇ ▇. ▇▇▇▇▇▇▇
Vice President
3
THE UNDERLYING PROPERTIES
-------------------------
The Underlying Properties include over 2,900 producing properties with
established production histories in Texas, Oklahoma and New Mexico. The average
reserve-to-production index for the Underlying Properties as of December 31,
1997 is approximately 11 years for oil and 12 years for gas. The reserve-to-
production index is calculated using total proved reserves and estimated 1998
production for the Underlying Properties. Based on discounted future net
revenues at year-end oil and gas prices, the proved reserves of the Underlying
Properties are approximately 31% oil and 69% natural gas. Cross Timbers Oil
does not operate or control any of the Underlying Properties, with the exception
of properties from which approximately 20 overriding royalty interests were
carved. The Underlying Properties also include certain non-producing properties
in Texas, Oklahoma and New Mexico. Cross Timbers Oil owns a mineral interest in
most of these non-producing properties.
90% Royalty Trust Interests
Royalty and overriding royalty properties underlying the 90% Royalty Trust
Interests represent 82% of the discounted future net cash flows from the Trust's
proved reserves at December 31, 1997. Approximately 84% of the discounted
future net cash flows from the 90% Royalty Trust Interests is from gas reserves,
totaling 37.9 Bcf. Primarily located in West Texas, oil reserves underlying the
90% Royalty Trust Interests are estimated at December 31, 1997 to be 732,000
Bbls.
Because the properties underlying the 90% Royalty Trust Interests are royalties
and overriding royalties, royalty income from these properties is not reduced by
production and development costs. Additionally, royalty income from these
interests cannot be reduced by any excess costs of the 75% Royalty Trust
Interests. The Trust therefore should generally receive monthly royalty income
from these interests, as determined by oil and gas sales volumes and prices.
Most of the Trust's gas reserves are located in the San ▇▇▇▇ Basin of
northwestern New Mexico, one of the United States' largest natural gas fields.
Royalties underlying the San ▇▇▇▇ Basin provided approximately 83% of Trust 1997
gas sales volumes and 58% of Trust 1997 royalty income. As of December 31,
1997, the Trust's proved reserves in this region are estimated to be 31.7 Bcf,
or 83% of total Trust gas reserves.
Until January 1, 2003, production from coal seam ▇▇▇▇▇ drilled after December
31, 1979 and before January 1, 1993 qualifies for the federal income tax credit
under Section 29 of the Internal Revenue Code for nonconventional fuel sources.
Such credit for 1997 coal seam gas sales from the San ▇▇▇▇ Basin was
approximately $1.05 per MMBtu or $0.212340 per Unit, while the coal seam credit
for 1996 was $1.03 per MMBtu or $0.189374 per Unit. As of December 31, 1997,
the Trust's proved coal seam reserves are estimated to be 6.7 Bcf, a 5% increase
from estimated coal seam reserves at December 31, 1996. Increased coal seam
reserve estimates are the result of lower than anticipated production declines.
Although the drilling eligibility period for the coal seam tax credit expired on
January 1, 1993, major operators have continued to develop coal seam reserves.
It is not known whether this development activity has affected Trust reserves or
production. The most significant recent activity in the San ▇▇▇▇ Basin was the
completion of additional eastward pipeline capacity during 1996, reducing the
dependence on California markets.
75% Royalty Trust Interests
Underlying the 75% Royalty Trust Interests are working interests in seven large
properties in Texas and Oklahoma operated primarily by major oil companies.
Each of these properties is located in mature fields that are undergoing
secondary recovery operations. With its relatively minor working interest,
Cross Timbers Oil generally has little influence or control over operations on
any of these properties.
Proved reserves from the 75% Royalty Trust Interests are almost entirely oil,
estimated to be approximately 965,000 Bbls at year-end 1997. Based on year-end
oil and gas prices, proved reserves from these interests represent 18% of the
discounted future net cash flows of the Trust's proved reserves at December 31,
1997.
Because these Underlying Properties are working interests, production and
development costs are deducted in calculating royalty income from the 75%
Royalty Trust Interests. As a result, royalty income from these interests is
affected by the level of maintenance and development activity on these
Underlying Properties. Royalty income is also subject to reduction for any
prior period excess costs and is dependent upon oil sales volumes and prices.
4
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Total 1997 development costs were $869,051, or 25% below 1996 development costs
of $1,164,112. Most of the decrease in 1997 development costs was related to
the completion of infill drilling projects that began in December 1995.
Budgeted development costs were $700,000 and $800,000 for 1997 and 1996,
respectively. Unit operators have reported to Cross Timbers Oil that total
budgeted costs are approximately $1,200,000 and $930,000, net to Cross Timbers
Oil's interests, for each of 1998 and 1999, respectively. Included in these
amounts are $900,000 and $600,000 in 1998 and 1999, respectively, related to a
carbon dioxide injection project on one of the properties. For information
regarding the effect of increased costs on 1998 Trust royalty income, see
"Trustee's Discussion and Analysis - Costs."
Estimated Proved Reserves and Future Net Revenues
The following are proved reserves and future net revenues from proved reserves
of the Royalty Trust Interests at December 31, 1997, as estimated by independent
engineers (in thousands):
Estimated Proved Reserves (a)(b) Estimated Future Net Revenues
-------------------------------- from Proved Reserves (a)(c)
Oil Gas -----------------------------
(Bbls) (Mcf) Undiscounted Discounted
--------------- -------------- ------------- --------------
90% Royalty Trust Interests
San ▇▇▇▇ Basin
Conventional............ 84 24,942 $ 38,134 $ 15,823
Coal seam............... - 6,750 9,785 6,282
--------------- -------------- ------------- --------------
Total.................. 84 31,692 47,919 22,105
Other New Mexico.......... 143 429 2,853 1,669
Texas..................... 430 3,900 15,773 8,796
Oklahoma.................. 74 1,865 5,326 3,080
--------------- -------------- ------------- --------------
Total............... 731 37,886 71,871 35,650
--------------- -------------- ------------- --------------
75% Royalty Trust Interests
Texas..................... 583 229 8,605 4,475
Oklahoma.................. 382 127 5,523 3,371
--------------- -------------- ------------- --------------
Total............... 965 356 14,128 7,846
--------------- -------------- ------------- --------------
TOTAL............... 1,696 38,242 $ 85,999 $ 43,496
=============== ============== ============= ==============
(a) Based on year-end oil and gas prices. Total estimated proved oil reserves
decreased 32% and discounted estimated future net revenues from proved
reserves decreased 43% from year-end 1996 to 1997, primarily because of a
36% and 33% decline in oil and gas prices, respectively, over these periods.
For further information regarding Trust proved reserves, see Item 2 of the
accompanying Form 10-K.
(b) Since the Trust has defined net profits interests, the Trust does not own a
specific ownership percentage of the oil and gas reserves. Because Trust
reserve quantities are determined using an allocation formula, any
fluctuations in actual or assumed prices or costs will result in revisions
to the estimated reserve quantities allocated to the Royalty Trust
Interests.
(c) Before income taxes (and the tax benefit of the estimated coal seam tax
credit) since future net revenues are not subject to taxation at the trust
level.
5
TRUSTEE'S DISCUSSION AND ANALYSIS
---------------------------------
Royalty income for 1997 was $10,549,668, as compared with $8,269,875 for 1996
and $5,739,704 for 1995. The 28% increase in royalty income from 1996 to 1997
was primarily because of higher gas prices. The 44% increase in royalty income
from 1995 to 1996 was primarily because of higher oil and gas prices and
increased gas sales volumes related to a lawsuit settlement. During 1997, 1996
and 1995, 69%, 64% and 62%, respectively, of royalty income was derived from gas
sales.
Trust administration expense was $158,669 in 1997 as compared to $204,449 in
1996 and $169,501 for 1995. Interest income was $16,251, $11,538 and $8,024
during 1997, 1996 and 1995, respectively.
Royalty income is recorded when received by the Trust, which is the month
following receipt by Cross Timbers Oil, and generally two months after oil
production and three months after gas production. Royalty income is generally
affected by three major factors: 1) oil and gas sales volumes, 2) oil and gas
sales prices and 3) costs deducted in the calculation of royalty income.
Volumes
Primarily because of natural production decline, underlying oil sales volumes
decreased 3% from 1996 to 1997, as compared to a 1% decline from 1995 to 1996.
The decline from 1995 to 1996 was largely offset by production increases related
to infill drilling on some of the underlying working interest properties.
Underlying gas sales volumes for 1997 and 1996 include 636,000 Mcf and 609,000
Mcf, respectively, attributable to lawsuit settlement proceeds received by the
Trust (see Item 3 of the accompanying Form 10-K). Primarily because of these
lawsuit settlement volumes, underlying gas sales volumes increased 1% from 1996
to 1997, compared with a 25% increase from 1995 to 1996. Increased gas volumes
from 1995 to 1996 also include the effect of partially curtailed production in
1995 because of lower prices.
Prices
The 1997 average oil price of $19.20 was 3% higher than the 1996 average price
of $18.60, which was 22% higher than the 1995 average price of $15.25. Because
of the two-month interval between oil production and receipt by the Trust of
related royalty income, the 1997 average price includes the effect of higher oil
prices in November and December 1996, and excludes the effect of lower December
1997 prices. Increased global production and reduced consumption caused oil
prices to further decline in first quarter 1998, with an average posted West
Texas Intermediate price of $14.22 per barrel for January and February. After
hitting a decade-low of $11.00, prices in late March began to increase upon news
that some of the major oil exporting countries planned to meet regarding
curtailment of production.
The 1997 average gas price was $2.04, or 35% above the 1996 average price of
$1.51, which was 16% above the 1995 average price of $1.30. Prices remained
depressed for the first half of this three-year period, primarily because of
gas oversupplies in California, the primary market for San ▇▇▇▇ Basin gas.
During third quarter 1996, however, San ▇▇▇▇ Basin prices rose to two-year
highs, reflecting increased demand and reduced supplies in California, as well
as the effects of additional eastward bound pipeline capacity from the San ▇▇▇▇
Basin. Increased weather-related demand caused prices to further improve in
late 1996 and early 1997. Because of the three-month interval between
production and the Trust's receipt of royalty income, higher fourth quarter 1996
prices were received in 1997. Gas prices remained relatively higher through
1997 as compared to 1996 and 1995. The average fourth quarter 1997 price,
related to first quarter 1998 Trust royalty income, was $2.51. Primarily because
of a milder than normal winter, the average first quarter 1998 price (related to
Trust royalty income to be received in second quarter 1998) is estimated at
$1.87.
Costs
Because properties underlying the 90% Royalty Trust Interests are royalty and
overriding royalty interests, the calculation of royalty income from these
interests only includes deductions for production and property taxes, legal
costs, and marketing and transportation charges. In addition to these costs,
the calculation of royalty income from the 75% Royalty Trust Interests includes
deductions for production and development costs since the related Underlying
Properties are working interests. If monthly costs exceed revenues for any of
the five conveyances under which the Royalty Trust Interests were conveyed to
the Trust, such excess costs cannot reduce royalty income from other
conveyances, but must be recovered, with accrued interest, from future net
proceeds of that conveyance.
Total costs deducted in the calculation of royalty income were $5,036,713,
$5,183,440 and $4,651,132 during 1997, 1996 and 1995, respectively. The 3%
decrease in costs from 1996 to 1997 was primarily the result of decreased
development costs after completion of infill drilling on some of the properties
underlying the 75% Royalty Trust Interests. Partially offsetting decreased
development costs were increased production taxes resulting from higher oil and
gas sales. The 11% increase in costs from 1995 to 1996 was primarily the result
of increased development and production costs related to infill drilling that
began in December 1995 on certain properties underlying the 75% Royalty Trust
Interests, partially offset by decreased charges from a 1995 waterflood project.
Production taxes also increased because of higher oil and gas sales.
Budgeted development costs for 1998 and 1999 include $900,000 and $600,000,
respectively, related to a carbon dioxide injection project on one of the Texas
properties underlying the 75% Royalty Trust Interests. Cross Timbers Oil has
advised the Trustee that, unless oil prices significantly increase (see "Prices"
above), costs are expected to exceed revenues for the Texas conveyance of the
75% Royalty Trust Interests until this project has been completed. Any such
excess costs plus accrued interest must be recovered from future net proceeds of
the Texas 75% Royalty Trust Interests before it can again contribute to royalty
income. Cross Timbers Oil anticipates such increased costs in the second quarter
of 1998. The Texas 75% Royalty Trust Interests contributed approximately $0.18
per Unit to 1997 royalty income, or 10% of total 1997 distributions.
For Trust year 2000 compliance considerations, see Item 7 of the accompanying
Form 10-K.
6
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Comparative Oil and Gas Sales
Oil and gas sales attributable to the Underlying Properties and the Royalty
Trust Interests are as follows:
Year Ended December 31 (a)
----------------------------------
1997 1996 1995
---------- ---------- ----------
Oil Sales (Bbls):
Underlying Properties (b).... 423,981 436,800 440,568
Average per day........... 1,162 1,193 1,207
Average price per Bbl..... $ 19.20 $ 18.60 $ 15.25
Royalty Trust Interests (b).. 177,214 168,415 149,124
Gas Sales (Mcf):
Underlying Properties (b).... 4,418,871 4,385,360 3,512,954
Average per day........... 12,106 11,982 9,625
Average price per Mcf..... $ 2.04 $ 1.51 $ 1.30
Royalty Trust Interests (b).. 3,877,500 3,828,947 2,991,504
(a) Because of the interval between time of production and receipt of royalty
income by the Trust, oil and gas sales for the year ended December 31
generally relate to oil production from November through October and gas
production from October through September.
(b) Oil and gas sales volumes are allocated to the Royalty Trust Interests
based upon a formula that considers oil and gas prices and the total amount
of production expenses and development costs. Changes in any of these
factors may result in disproportionate fluctuations in volumes allocated to
the Royalty Trust Interests. Therefore, comparative analysis of oil and gas
sales is based on the Underlying Properties.
------------------------------------------------------------------------------
Calculation of Royalty Income
The following is a summary of the calculation of royalty income received by the
Trust:
Year Ended December 31
-----------------------------------------------------------------------------
1997 1996 1995
------------------------ --------------------- ----------------------
90% 75% 90% 75% 90% 75%
Royalty Royalty Royalty Royalty Royalty Royalty
Trust Trust Trust Trust Trust Trust
Interests Interests Interests Interests Interests Interests
----------- ---------- ---------- ---------- ---------- ---------
Revenues
Oil sales................. $ 1,852,999 $6,288,457 $1,663,559 $6,460,678 $1,379,926 $5,339,255
Gas sales................. 8,798,653 225,874 6,413,846 211,960 4,409,674 153,689
----------- ---------- ---------- ---------- ---------- ----------
Total.................... 10,651,652 6,514,331 8,077,405 6,672,638 5,789,600 5,492,944
----------- ---------- ---------- ---------- ---------- ----------
Costs
Taxes on production and
property................. 954,803 555,996 734,521 534,735 619,914 599,120
Production and other
expenses................. 12,080 2,644,783 43,399 2,706,673 62,051 2,619,732
Development costs......... - 869,051 - 1,164,112 - 750,315
----------- ---------- ---------- ---------- ---------- ----------
Total.................... 966,883 4,069,830 777,920 4,405,520 681,965 3,969,167
----------- ---------- ---------- ---------- ---------- ----------
Net Proceeds............... 9,684,769 2,444,501 7,299,485 2,267,118 5,107,635 1,523,777
Net Profits Percentage..... 90% 75% 90% 75% 90% 75%
----------- ---------- ---------- ---------- ---------- ----------
Royalty Income............. $ 8,716,292 $1,833,376 $6,569,536 $1,700,339 $4,596,871 $1,142,833
=========== ========== ========== ========== ========== ==========
7
RESULTS OF 4TH QUARTER
----------------------
During the quarter ended December 31, 1997, the Trust received royalty income
totaling $2,023,646 and reported distributable income of $2,002,943, or
$0.333824 per Unit. Distributions were $0.111941, $0.111291 and $0.110592 per
Unit to Unit holders of record on October 31, November 28 and December 31,
respectively. Fourth quarter 1996 royalty income was $2,928,035 and
distributable income was $2,897,347 or $0.482891 per Unit.
Royalty income decreased from fourth quarter 1996 to 1997 primarily because of
lawsuit settlement proceeds of $675,000 received during fourth quarter 1996 (see
Item 3 of the accompanying 10-K). The decrease in fourth quarter royalty income
was also attributable to lower oil prices. Administration expense and interest
income for fourth quarter 1997 were $23,889 and $3,186, respectively, compared
with fourth quarter 1996 amounts of $34,846 and $4,158, respectively.
Fourth quarter underlying oil sales volumes declined 1% from 1996 to 1997 as a
result of natural decline. Underlying gas sales volumes decreased 546,281 Mcf
or 37%, primarily because of 609,000 Mcf related to the fourth quarter 1996
lawsuit settlement.
The average fourth quarter 1997 oil price was $17.96 or 16% below the fourth
quarter 1996 average price of $21.28. The average fourth quarter gas price was
$1.85 per Mcf in 1997, or 13% higher than the fourth quarter 1996 average price
of $1.64. For further discussion of oil and gas prices, see "Trustee's
Discussion and Analysis - Prices."
Total costs deducted in the calculation of royalty income decreased $19,014 or
1% from fourth quarter 1996 to 1997, as decreased production taxes resulting
from lower oil and gas sales were largely offset by increased property taxes.
Production expenses and development costs remained relatively constant over
these periods.
--------------------------------------------------------------------------------
Comparative Oil and Gas Sales
Fourth quarter 1997 and 1996 oil and gas sales attributable to the Underlying
Properties and the Royalty Trust Interests are as follows:
Three Months Ended
December 31 (a)
--------------------
1997 1996
-------- ----------
Oil Sales (Bbls):
Underlying Properties.............. 106,918 108,158
Average per day.................. 1,162 1,176
Average price per Bbl............ $17.96 $21.28
Royalty Trust Interests............ 38,060 48,117
Gas Sales (Mcf):
Underlying Properties.............. 940,900 1,487,181
Average per day.................. 10,227 16,165
Average price per Mcf............ $1.85 $1.64
Royalty Trust Interests............ 817,514 1,315,680
(a) Because of the interval between time of production and receipt of royalty
income by the Trust, oil and gas sales for the quarter ended December 31
generally relate to oil production from August through October and gas
production from July through September.
8
Cross Timbers Royalty Trust
--------------------------------------------------------------------------------
STATEMENTS OF ASSETS, LIABILITIES AND TRUST CORPUS
December 31
-------------------------
1997 1996
------------ -----------
Assets
Cash and short-term investments.................. $ 662,486 $ 1,376,687
Interest to be received.......................... 1,065 1,924
Net overriding royalty interests in oil and gas
properties - net (Notes 1 and 2).............. 38,104,367 41,337,673
----------- -----------
$38,767,918 $42,716,284
=========== ===========
Liabilities and Trust Corpus
Distribution payable to Unit holders............. $ 663,551 $ 1,378,611
Trust corpus (6,000,000 Units of beneficial
interest authorized and outstanding).......... 38,104,367 41,337,673
----------- -----------
$38,767,918 $42,716,284
=========== ===========
--------------------------------------------------------------------------------
STATEMENTS OF DISTRIBUTABLE INCOME
Year Ended December 31
-------------------------------------
1997 1996 1995
------------ ---------- -----------
Royalty income....................... $10,549,668 $8,269,875 $5,739,704
Interest income...................... 16,251 11,538 8,024
----------- ---------- ----------
Total income................... 10,565,919 8,281,413 5,747,728
Administration expense............... 158,669 204,449 169,501
----------- ---------- ----------
Distributable income........... $10,407,250 $8,076,964 $5,578,227
=========== ========== ==========
Distributable income per Unit
(6,000,000 Units)......... $1.734541 $1.346162 $ 0.929705
=========== ========== ==========
--------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN TRUST CORPUS
Year Ended December 31
------------------------------------------
1997 1996 1995
------------- ------------ -------------
Trust Corpus, beginning of year.. $ 41,337,673 $45,118,209 $48,731,991
Amortization of net
overriding royalty interests... (3,233,306) (3,780,536) (3,613,782)
Distributable income............. 10,407,250 8,076,964 5,578,227
Distributions declared........... (10,407,250) (8,076,964) (5,578,227)
------------ ----------- -----------
Trust Corpus, end of year........ $ 38,104,367 $41,337,673 $45,118,209
============ =========== ===========
--------------------------------------------------------------------------------
See Accompanying Notes to Financial Statements.
9
Cross Timbers Royalty Trust
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
1. Trust Organization and Provisions
Cross Timbers Royalty Trust ("Trust") was created on February 12, 1991 by
predecessors of Cross Timbers Oil Company ("Cross Timbers Oil"), when the
following interests ("Royalty Trust Interests") were conveyed under five
separate conveyances to the Trust effective October 1, 1990, in exchange for
6,000,000 units of beneficial interest in the Trust ("Units"):
- net overriding royalty interests equivalent to 90% defined net profits
interests in certain producing and nonproducing royalty interest properties
in Texas, Oklahoma and New Mexico ("90% Royalty Trust Interests"), and
- net overriding royalty interests equivalent to 75% defined net profits
interests in certain non-operated working interest properties in Texas and
Oklahoma ("75% Royalty Trust Interests").
The properties from which the Royalty Trust Interests were carved
("Underlying Properties") are currently owned by Cross Timbers Oil. NationsBank
of Texas, N.A. is the Trustee of the Trust. The Trust Indenture provides, among
other provisions, that:
- the Trust shall not engage in any business or commercial activity or acquire
any asset other than the Royalty Trust Interests;
- the Trust may not sell or otherwise dispose of all or any part of the
Royalty Trust Interests unless approved by at least 80% of the Unit
holders, or upon termination of the Trust, and any such sale must be for
cash with the proceeds promptly distributed to the Unit holders;
- the Trustee may establish a cash reserve for payment of any liability which
is contingent, uncertain in amount or that is not currently payable;
- the Trustee is authorized to borrow funds required to pay liabilities of the
Trust, provided that such borrowings are repaid in full prior to further
distributions to Unit holders;
- the Trustee will make monthly cash distributions to Unit holders as provided
in the Trust Indenture (Note 3); and
- the Trust will terminate upon the first occurrence of: i) disposition of all
Royalty Trust Interests pursuant to terms of the Trust Indenture, ii) when
gross revenue of the Trust is less than $1 million per year for two
successive years, or iii) a vote of at least 80% of the Trust Unit holders
to terminate the Trust in accordance with provisions of the Trust Indenture.
2. Basis of Accounting
The financial statements of the Trust are prepared on the following basis and
are not intended to present financial position and results of operations in
conformity with generally accepted accounting principles:
- Royalty income is recorded in the month received by the Trustee (Note 3).
- Interest income, interest to be received and distribution payable to Unit
holders include interest to be earned on royalty income from the monthly
record date (last business day of the month) through the date of the next
distribution.
- Trust expenses are recorded based on liabilities paid and cash reserves
established by the Trustee.
- Distributions to Unit holders are recorded when declared by the Trustee
(Note 3).
The most significant differences between the Trust's financial statements and
those prepared in accordance with generally accepted accounting principles are
i) royalty income is recognized in the month received rather than accrued in the
month of production, ii) expenses are recognized when paid rather than when
incurred and iii) cash reserves may be established by the Trustee for certain
contingencies which would not be recorded under generally accepted accounting
principles.
The initial carrying value of the Royalty Trust Interests of $61,100,449 was
Cross Timbers Oil's historical net book value on February 12, 1991, the date of
the transfer to the Trust. Amortization of the Royalty Trust Interests is
calculated on a unit-of-production basis and charged directly to trust corpus.
Accumulated amortization as of December 31, 1997 and 1996 was $22,996,082 and
$19,762,776, respectively.
3. Distributions to Unit Holders
The Trustee determines the amount to be distributed to Unit holders each
month by totaling royalty income and other cash receipts, and subtracting
liabilities paid and adjustments in cash reserves established by the Trustee.
The resulting amount (with estimated interest to be received on such amount
through the distribution date) is distributed to Unit holders of record
generally record generally within ten business days after the monthly record
date, the last business day of the month.
Royalty income received by the Trustee consists of the amounts received by
owners of the Underlying Properties from the sale of production, less applicable
costs, multiplied by 90% or 75% for the 90% or 75% Royalty Trust Interests. For
the 90% Royalty Trust Interests, such costs generally include applicable taxes,
transportation, legal and marketing charges, and do not include other production
and development costs. For the 75% Royalty Trust Interests, such costs include
production costs, development and drilling costs, applicable taxes, operating
charges and other costs.
Cross Timbers Oil, as owner of the Underlying Properties, computes royalty
income separately for each of the five conveyances based on revenues received
less costs paid in the prior month. If costs exceed receipts ("excess costs")
for any conveyance, such excess costs cannot be used to reduce the amounts to be
received under the other conveyances. The Trust is not liable for excess costs;
however, future royalty income from the Royalty Trust Interests created by that
conveyance will be reduced by such excess costs plus interest.
4. Federal Income Taxes
Tax counsel has advised the Trust that, under current tax laws, the Trust
will be classified as a grantor trust
10
for federal income tax purposes and therefore is not subject to taxation at the
trust level. However, the opinion of tax counsel is not binding on the Internal
Revenue Service.
For federal income tax purposes, Unit holders are considered to own the
Trust's income and principal as though no trust were in existence. The income
of the Trust is deemed to have been received or accrued by the Unit holders at
the time such income is received or accrued by the Trust, rather than when
distributed by the Trust.
Cross Timbers Oil has advised the Trustee that the Trust receives royalty
income from coal seam gas ▇▇▇▇▇. Production from coal seam gas ▇▇▇▇▇ drilled
after December 31, 1979, and prior to January 1, 1993, qualifies for the federal
income tax credit for producing nonconventional fuels under Section 29 of the
Internal Revenue Code. This tax credit was approximately $1.05 per MMBtu
($0.212340 per Unit), $1.03 per MMBtu ($0.189374 per Unit) and $1.01 per MMBtu
($0.180246 per Unit) in 1997, 1996 and 1995, respectively. Such credit, based
on the Unit holder's pro rata share of qualifying production, may not reduce the
Unit holder's regular tax liability (after the foreign tax credit and certain
other non-refundable credits) below his tentative minimum tax. Any part of the
Section 29 credit not allowed for the tax year solely because of this limitation
is subject to certain carryover provisions.
5. Cross Timbers Oil Company
In computing royalty income paid to the Trust for the 75% Royalty Trust
Interests (Note 3), Cross Timbers Oil deducts an overhead charge as
reimbursement for costs associated with monitoring these interests. This charge
at December 31, 1997 is $19,440 per month, or $233,280 annually (net to the
Trust of $14,580 per month or $174,960 annually), and is subject to annual
adjustment based on an oil and gas industry index.
Cross Timbers Oil does not operate or control any of the Underlying
Properties, with the exception of properties from which approximately 20
overriding royalty interests were carved. As of February 28, 1998, Cross
Timbers Oil owned 22.7% of the outstanding Trust Units.
6. Litigation
In May 1997, the Trustee announced the settlement of a lawsuit filed in
December 1991 by Cross Timbers Oil and its predecessor-in-title seeking to
recover revenues suspended by a working interest owner and to obtain a judgment
confirming their interests. As part of the settlement, Cross Timbers Oil
received suspended revenues attributable to certain San ▇▇▇▇ Basin overriding
royalty interests underlying the 90% Royalty Trust Interests and distributed to
the Trust proceeds of approximately $733,000, net to the Trust's interest.
Cross Timbers Oil agreed that on the subject properties, it will reduce its
overriding royalty interest by one-half on any newly drilled ▇▇▇▇▇ and will
reduce its overriding royalty interest in existing ▇▇▇▇▇ on the subject
properties under certain circumstances.
In November 1996, the Trust and Cross Timbers Oil settled a lawsuit with
working interest owners that had suspended revenues from certain ▇▇▇▇▇ in the
San ▇▇▇▇ Basin. As a result of this settlement, Cross Timbers Oil received
$750,000 in exchange for reducing its 7.5% overriding royalty interest in these
properties to a 1.875% interest. The Trust received $675,000 as its portion of
this settlement. Because revenues from these properties had been suspended
since 1990, Trust distributions after this settlement have not been and will not
be reduced from prior historical levels. The settlement's estimated impact on
the discounted future net cash flows from the Trust's proved reserves was not
material.
For further information regarding legal proceedings of the Trust, see Item 3
of the Trust's annual report on Form 10-K, which is included in this report.
7. Supplemental Oil and Gas Reserve Information (Unaudited)
Proved oil and gas reserve information is included in Item 2 of the Trust's
annual report on Form 10-K which is included in this report.
8. Quarterly Financial Data (Unaudited)
The following is a summary of royalty income, distributable income and
distributable income per Unit by quarter for 1997 and 1996:
Distributable
Royalty Distributable Income
Income Income per Unit
----------- ------------- ----------
1997
----------------
First Quarter ................. $ 3,114,590 $ 3,069,535 $0.511589
Second Quarter ................ 3,252,445 3,216,639 0.536106
Third Quarter ................. 2,158,987 2,118,133 0.353022
Fourth Quarter ................ 2,023,646 2,002,943 0.333824
----------- ----------- ---------
$10,549,668 $10,407,250 $1.734541
=========== =========== =========
1996
----------------
First Quarter ................. $ 1,557,678 $ 1,524,518 $0.254087
Second Quarter ................ 1,910,966 1,859,900 0.309984
Third Quarter ................. 1,873,196 1,795,199 0.299200
Fourth Quarter ................ 2,928,035 2,897,347 0.482891
----------- ----------- ---------
$ 8,269,875 $ 8,076,964 $1.346162
=========== =========== =========
11
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
NationsBank of Texas, N.A., as Trustee for the Cross Timbers Royalty Trust:
We have audited the accompanying statements of assets, liabilities and trust
corpus of the Cross Timbers Royalty Trust ("Trust") as of December 31, 1997 and
1996, and the related statements of distributable income and changes in trust
corpus for each of the three years in the period ended December 31, 1997. These
financial statements are the responsibility of the Trustee. Our responsibility
is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by the
Trustee, as well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
As described in Note 2 to the financial statements, these financial
statements were prepared on a modified cash basis, which is a comprehensive
basis of accounting other than generally accepted accounting principles.
In our opinion, such financial statements present fairly, in all material
respects, the assets, liabilities and trust corpus of the Trust as of December
31, 1997 and 1996 and the distributable income and changes in trust corpus for
each of the three years in the period ended December 31, 1997, on the modified
cash basis of accounting described in Note 2.
▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇ ▇▇▇
▇▇▇▇ ▇▇▇▇▇, ▇▇▇▇▇
March 18, 1998
12
CROSS TIMBERS ROYALTY TRUST
---------------------------
▇▇▇ ▇▇▇▇ ▇▇▇▇▇▇▇ ▇▇▇▇▇▇, ▇▇▇▇▇ ▇▇▇▇
▇.▇. ▇▇▇ ▇▇▇▇
▇▇▇▇ ▇▇▇▇▇, ▇▇▇▇▇ ▇▇▇▇▇-▇▇▇▇
(▇▇▇) ▇▇▇-▇▇▇▇
NationsBank of Texas, N.A., Trustee
A copy of the Cross Timbers Royalty Trust Form 10-K
has been provided with this Annual Report. Additional copies
of this Annual Report and Form 10-K will be provided to
Unit holders without charge upon request.
AUDITORS
--------
▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇ LLP
Fort Worth, Texas
LEGAL COUNSEL
-------------
▇▇▇▇▇▇▇ & ▇▇▇▇▇, P.C.
Fort Worth, Texas
TAX COUNSEL
-----------
▇▇▇▇▇▇ & ▇▇▇▇▇▇, L.L.P.
Houston, Texas
TRANSFER AGENT AND REGISTRAR
----------------------------
ChaseMellon Shareholder Services, L.L.C.
Dallas, Texas
▇▇▇.▇▇▇▇▇▇▇▇▇▇▇.▇▇▇
13