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 1998 and 1997:
Sales Price
----------------- Distributions
High Low per Unit
-------- ------- -------------
1998
----------------
First Quarter... $17.250 $13.563 $0.382494
Second Quarter.. 17.688 13.500 0.267899
Third Quarter... 14.250 11.063 0.272882
Fourth Quarter.. 12.688 7.625 0.231280
---------
$1.154555
=========
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
=========
-------------------------------------------------
At December 31, 1998, there were 6,000,000 Units outstanding and approximately
174 Unit holders of record; 5,651,107 of these Units were held by 12 depository
institutions. As of March 1, 1999, 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 Xxxx 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 from the underlying working interest properties in either Texas or
Oklahoma, the 75% Royalty Trust Interests for that state will not
contribute to Trust royalty income, and such excess costs will not reduce
royalty income from the other 75% Royalty Trust Interests or from the 90%
Royalty Trust Interests. Because of excess costs, the Texas 75% Royalty
Trust Interests did not contribute to Trust royalty income from April 1998
through the end of the year, and the Oklahoma 75% Royalty Trust Interests
did not contribute in August and September 1998. Such excess costs
generally occur during periods of higher development activity and lower oil
prices. 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 xxxxx 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 1998 and held
them throughout 1998 would be entitled to a cost depletion deduction of
approximately 8% of his cost. Assuming cost of $14.50 per Unit, cost
depletion would offset 100% of taxable Trust income. After considering the
coal seam tax credit and assuming a 30% tax rate, the 1998 pre-tax return
as a percentage of Unit cost would be 13%. (NOTE- Because the Units are a
depleting asset, a portion of this return is effectively a return of
capital.)
The following summarizes the effect of the above components on distributions per
Unit for the last three years:
1998 1997 1996
---------------- ---------------- ------------------
Monthly Annual Monthly Annual Monthly Annual
Average Total Average Total Average Total
-------- ------- -------- ------- -------- -------
Royalty Income.................
- 90% Royalty Trust Interests.. $ .094 $1.128 $ .121 $1.453 $ .091 $1.095
- 75% Royalty Trust Interests.. .004 .052 .025 .306 .024 .283
Administration expense.........
(net of interest income)..... (.002) (.025) (.002) (.024) (.003) (.032)
------ ------ ------ ------ ------ ------
Total Distribution............. $ .096 $1.155 $ .144 $1.735 $ .112 $1.346
====== ====== ====== ====== ====== ======
Nonconventional Fuel...........
Source Tax Credit......... * $ .162 * $ .212 * $ .189
====== ====== ======
* - Not applicable
2
TO UNIT HOLDERS
---------------
We are pleased to present the 1998 Annual Report of Cross Timbers Royalty Trust
and the Trust's 1998 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, 1998, royalty income totaled $7,079,632 and,
after deducting Trust administration expense, net of interest income,
distributable income was $6,927,338 or $1.154555 per Unit. Royalty income and
distributions for the year were 33% lower than 1997 comparable amounts primarily
because of lower oil sales prices and lower gas sales volumes related to lawsuit
settlement proceeds of $733,000 received in 1997.
Natural gas prices averaged $2.03 per thousand cubic feet ("Mcf") for 1998 sales
from the Underlying Properties, relatively unchanged from the 1997 average price
of $2.04 per Mcf. Gas sales volumes from the Underlying Properties for the year
ended December 31, 1998 totaled 3,502,093 Mcf, a 21% decrease from 1997. Gas
sales volumes in 1997 included 636,000 Mcf attributable to a lawsuit settlement.
Oil sales volumes from the Underlying Properties during 1998 were 392,369 Bbls,
or 7% below 1997 levels, primarily because of temporary disruption of production
related to mechanical complications and initial stages of development projects
on some of the properties underlying the 75% Royalty Interests. The average
Trust oil price decreased to $13.40 per barrel ("Bbl"), down 30% from the 1997
average price of $19.20. Oil prices weakened in December 1997 and continued
their decline to a 20-year low in December 1998. Following news of further
agreed production cuts by OPEC and other oil producers, the posted oil price
climbed above $14 in March 1999. For further information on oil prices, see
"Trustee's Discussion and Analysis - Prices."
Primarily because of lower oil prices, costs exceeded revenues on the 75%
Royalty Trust Interests during 1998. As of March 1999, cumulative excess costs
and accrued interest of $808,361 ($606,271 net to the Trust) must be recovered
from future net proceeds of the Texas 75% Royalty Trust Interests, and
cumulative excess costs and accrued interest of $19,301 ($14,476 net to the
Trust) must be recovered from net proceeds of the Oklahoma 75% Royalty Trust
Interests.
Cross Timbers Oil has advised the Trustee that, with continued improved oil
prices, the Oklahoma 75% Royalty Trust Interests should recover excess costs in
the second quarter of 1999. Cross Timbers Oil has also advised, however, that
until oil prices further improve and a carbon dioxide injection project is
completed on one of the underlying properties, it cannot predict when the Texas
75% Royalty Trust Interests will again contribute to Trust royalty income.
Because costs exceeded revenues for most of 1998, the Texas 75% Royalty Trust
Interests only contributed $0.02 per Unit to 1998 royalty income, or 1% of total
1998 distributions, as compared with $0.18 per Unit, or approximately 10% of
distributions in 1997. For further information, see "Trustee's Discussion and
Analysis - Costs."
Coal seam gas sales volumes from the Underlying Properties were 1,165,736 Mcf in
1998, 21% below 1997 coal seam gas volumes as a result of volumes included in
1997 related to a lawsuit settlement, timing of cash receipts and natural
decline. The resulting 1998 coal seam tax credit was $0.162287 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, 1998, proved reserves of the Royalty Trust Interests were
estimated by independent engineers to be 924,000 Bbls of oil and 36.5 billion
cubic feet ("Bcf") of natural gas. Estimated oil reserves decreased 46% from
year-end 1997 to 1998 primarily as a result of the decrease in year-end oil
prices from $15.50 to $9.50 per Bbl and the resulting reduced allocation of
reserves to the Royalty Trust Interests. Gas reserves decreased 4% from year-
end 1997 to 1998 primarily because of production. 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, 1998 are
$74.3 million or $12.38 per Unit. Using an annual discount factor of 10%, the
present value of estimated future net revenues at December 31, 1998 is $35.8
million or $5.96 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 1999,
Trust distributions are considered portfolio income, rather than passive income.
Unit holders should consult their tax advisors for further information.
NationsBank, N.A., Trustee
By:
Xxx X. Xxxxxxx
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,
1998 is approximately 8 years for oil and 12 years for gas. The reserve-to-
production index is calculated using total proved reserves and estimated 1999
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 13% oil and 87% 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 97% of the discounted future net cash flows from the Trust's
proved reserves at December 31, 1998. Approximately 90% of the discounted
future net cash flows from the 90% Royalty Trust Interests is from gas reserves,
totaling 36.5 Bcf. Oil reserves underlying the 90% Royalty Trust Interests are
primarily located in West Texas and are estimated at December 31, 1998 to be
677,000 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 Xxxx Basin of
northwestern New Mexico, one of the United States' largest natural gas fields.
Royalties underlying the San Xxxx Basin provided approximately 79% of Trust 1998
gas sales volumes and 64% of Trust 1998 royalty income. As of December 31,
1998, the Trust's proved reserves in this region are estimated to be 30.9 Bcf,
or 85% of total Trust gas reserves.
Until January 1, 2003, production from coal seam xxxxx 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.
This credit for 1998 coal seam gas sales from the San Xxxx Basin was
approximately $1.05 per MMBtu or $0.162287 per Unit, while the coal seam credit
for 1997 was $1.05 per MMBtu or $0.212340 per Unit. The lower coal seam tax
credit per Unit is primarily because of lawsuit settlement volumes included in
1997, the timing of cash receipts and natural decline. As of December 31, 1998,
the Trust's proved coal seam reserves are estimated to be 5.9 Bcf, as compared
with 6.7 Bcf at December 31, 1997.
75% Royalty Trust Interests
Underlying the 75% Royalty Trust Interests are working interests in seven large
properties in Texas and Oklahoma operated primarily by established oil
companies. These properties are located in mature fields that are undergoing
secondary or tertiary 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 247,000 Bbls at year-end 1998. Based on year-end
oil and gas prices, proved reserves from these interests represent 3% of the
discounted future net cash flows of the Trust's proved reserves at December 31,
1998.
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.
Total 1998 development costs were $1,143,141, or 32% above 1997 development
costs of $869,051. Budgeted development costs were $1,200,000 for 1998 and
$700,000 for 1997. Most of the increase in 1998 development costs was related to
a carbon dioxide injection project that began in 1998. First quarter 1999
development costs totaled approximately $360,000; these costs are primarily
related to fourth quarter 1998 expenditures. Unit operators have reported to
Cross Timbers Oil that total budgeted costs are approximately $161,000 for 1999
and $91,000 for 2000, net to Cross Timbers Oil's interests. Included in these
amounts are $113,000 in 1999 and $43,000 in 2000 related to the carbon dioxide
injection project.
During 1998, increased development costs and lower oil prices caused costs to
exceed revenues by $505,011 from properties underlying the Texas 75% Royalty
Trust Interests. For information regarding the effect of excess costs on Trust
royalty income, see "Trustee's Discussion and Analysis - Costs."
4
TRUSTEE'S DISCUSSION AND ANALYSIS
---------------------------------
Royalty income for 1998 was $7,079,632, as compared with $10,549,668 for 1997
and $8,269,875 for 1996. The 33% decrease in royalty income from 1997 to 1998
was primarily because of lower oil prices and lower gas volumes related to
lawsuit settlement proceeds of $733,000 received in 1997. The 28% increase in
royalty income from 1996 to 1997 was primarily because of higher gas prices.
During 1998, 1997 and 1996, 80%, 69% and 64%, respectively, of royalty income
was derived from gas sales.
Trust administration expense was $163,151 in 1998 as compared to $158,669 in
1997 and $204,449 for 1996. Interest income was $10,857 in 1998, $16,251 in 1997
and $11,538 in 1996.
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
Underlying oil sales volumes decreased 7% from 1997 to 1998, as compared to a 3%
decrease from 1996 to 1997. Lower 1998 oil volumes were primarily because of a
temporary disruption of production from mechanical complications and initial
downtime of development projects on some of the properties underlying the 75%
Royalty Trust Interests. Lower 1997 oil sales volumes were primarily
attributable to natural decline.
Underlying gas sales volumes decreased 21% from 1997 to 1998, compared with a 1%
increase from 1996 to 1997. Underlying gas sales volumes for 1997 and 1996
included 636,000 Mcf and 609,000 Mcf, respectively, attributable to lawsuit
settlement proceeds received by the Trust. Excluding the effects of volumes
related to lawsuit settlement proceeds, gas sales volumes declined 7% in 1998
primarily because of natural decline and timing of cash receipts.
Prices
The average oil price for 1998 was $13.40, 30% lower than the 1997 average price
of $19.20. The 1997 oil price was 3% higher than the 1996 average price of
$18.60. Because of the two-month interval between oil production and receipt by
the Trust of related royalty income, the 1998 average price includes the effect
of oil prices that began to weaken in December 1997 and continued to decline
--------------------------------------------------------------------------------
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, 1998, 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 Xxxx Basin
Conventional............. 84 24,953 $47,068 $19,772
Coal seam................ - 5,921 8,968 5,822
--- ------ ------- -------
Total................. 84 30,874 56,036 25,594
Other New Mexico........... 127 329 1,639 984
Texas...................... 402 3,539 10,304 5,864
Oklahoma................... 64 1,711 3,827 2,142
--- ------ ------- -------
Total.............. 677 36,453 71,806 34,584
--- ------ ------- -------
75% Royalty Trust Interests
Texas...................... 204 59 2,032 1,152
Oklahoma................... 43 6 419 40
--- ------ ------- -------
Total.............. 247 65 2,451 1,192
--- ------ ------- -------
TOTAL.............. 924 36,518 $74,257 $35,776
=== ====== ======= =======
(a) Based on year-end oil and gas prices. Total estimated proved oil reserves
decreased 46% and discounted estimated future net revenues from proved
reserves decreased 18% from year-end 1997 to 1998, primarily because of a
39% decline in oil prices 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
through 1998. West Texas Intermediate posted crude oil prices dropped to $8.00
per barrel in December 1998, the lowest level since 1978. This decline has been
caused by low demand, as well as OPEC's failure to further reduce production
quotas at its November 1998 meeting. The average West Texas Intermediate posted
price for January and February 1999 was $9.56. In March 1999, the posted price
climbed above $14 upon news of further agreed production cuts by OPEC and other
oil producers.
The 1998 average gas price was $2.03, relatively unchanged from the 1997 average
price of $2.04, which was 35% above the 1996 average price of $1.51. Prices
remained depressed for the first six months of this three-year period,
primarily because of gas oversupplies in California, the primary market for San
Xxxx Basin gas. During third quarter 1996, however, San Xxxx 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 Xxxx 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 and 1998, as demand increased in southwest U.S.
markets for gas-powered electricity generation. The average fourth quarter 1998
price, related to first quarter 1999 Trust royalty income, was $1.73 per Mcf.
Primarily because of a milder than normal winter, first quarter 1999 prices
(related to second quarter 1999 Trust royalty income) have weakened. San Xxxx
Basin prices have recently declined because of an apparent abundance of
hydroelectric energy in West Coast markets following a winter with abnormally
high precipitation.
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. Royalty income is calculated monthly for each
of the five conveyances under which the Royalty Trust Interests were conveyed to
the Trust. If monthly costs exceed revenues for any conveyance, such excess
costs cannot reduce royalty income from other conveyances, but must be
recovered, with accrued interest, from future net proceeds of that conveyance.
Before the reduction for net excess costs (see "Excess Costs" below), total
costs deducted in the calculation of royalty income were $4,919,005 in 1998,
$5,036,713 in 1997 and $5,183,440 in 1996. The 2% decrease in costs from 1997
to 1998 is primarily the result of lower production taxes associated with lower
oil and gas revenues, largely offset by increased development costs associated
with a carbon dioxide injection project on one of the properties underlying the
Texas 75% Royalty Trust Interests. 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.
Excess Costs
During 1998, costs exceeded revenues for the Texas 75% Royalty Trust Interests
by $505,011 and the Oklahoma 75% Royalty Trust Interests by $10,067. Excess
costs were primarily the result of low oil prices and increased development
costs related to the 1998 carbon dioxide injection project. Excess costs for
the Oklahoma 75% Royalty Trust Interests and interest of $117 were fully
recovered during 1998. Excess costs from one conveyance cannot reduce royalty
income computed under another conveyance; therefore, year-end cumulative excess
costs of $505,011 ($378,758 net to the Trust) plus accrued interest of $14,806
must be recovered from the properties underlying the Texas 75% Royalty Trust
Interests before they can again contribute to Trust royalty income. As of March
1999, cumulative excess costs and accrued interest of the Texas 75% Royalty
Trust Interests totaled $808,361 ($606,271 net to the Trust).
Budgeted development costs for 1999 include $113,000 related to the carbon
dioxide injection project. Cross Timbers Oil has advised the Trustee that,
unless oil prices further improve (see "Prices" above), costs are expected to
exceed revenues for the Texas 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. The Texas 75% Royalty Trust Interests
contributed only $0.02 per Unit to 1998 royalty income as compared to
approximately $0.18 per Unit to 1997 royalty income, or 10% of total 1997
distributions.
As a result of lower oil prices received in first quarter 1999, costs exceeded
revenues from the Oklahoma 75% Royalty Trust Interests, resulting in cumulative
excess costs of $19,301 as of March 1999. Cross Timbers Oil has advised the
Trustee that, with continued improved oil prices, the Oklahoma 75% Royalty Trust
Interests should recover excess costs in second quarter 1999.
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)
----------------------------------
1998 1997 1996
---------- ---------- ----------
Oil Sales (Bbls):
Underlying Properties (b).... 392,369 423,981 436,800
Average per day........... 1,075 1,162 1,193
Average price per Bbl..... $ 13.40 $ 19.20 $ 18.60
Royalty Trust Interests (b).. 104,774 177,214 168,415
Gas Sales (Mcf):
Underlying Properties (b).... 3,502,093 4,418,871 4,385,360
Average per day........... 9,595 12,106 11,982
Average price per Mcf..... $ 2.03 $ 2.04 $ 1.51
Royalty Trust Interests (b).. 3,018,666 3,877,500 3,828,947
(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
-----------------------------------------------------------------------------
1998 1997 1996
----------------------- ------------------------ -------------------------
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................. $1,412,415 $3,844,211 $ 1,852,999 $6,288,457 $1,663,559 $6,460,678
Gas sales................. 6,954,471 138,960 8,798,653 225,874 6,413,846 211,960
---------- ---------- ----------- ---------- ---------- ----------
Total.................... 8,366,886 3,983,171 10,651,652 6,514,331 8,077,405 6,672,638
---------- ---------- ----------- ---------- ---------- ----------
Costs
Taxes on production and
property................. 846,489 346,375 954,803 555,996 734,521 534,735
Production and other expenses 2,579 2,580,421 12,080 2,644,783 43,399 2,706,673
Development costs......... - 1,143,141 - 869,051 - 1,164,112
Net excess costs.......... - (504,894) - - - -
---------- ---------- ----------- ---------- ---------- ----------
Total.................... 849,068 3,565,043 966,883 4,069,830 777,920 4,405,520
---------- ---------- ----------- ---------- ---------- ----------
Net Proceeds............... 7,517,818 418,128 9,684,769 2,444,501 7,299,485 2,267,118
Net Profits Percentage..... 90% 75% 90% 75% 90% 75%
---------- ---------- ----------- ---------- ---------- ----------
Royalty Income............. $6,766,036 $ 313,596 $ 8,716,292 $1,833,376 $6,569,536 $1,700,339
========== ========== =========== ========== =========== ==========
TOTAL ROYALTY INCOME....... $7,079,632 $ 10,549,668 $8,269,875
========== ============ ==========
----------------------------------------------------------------------------------------------------------
7
RESULTS OF 4TH QUARTER
----------------------
During the quarter ended December 31, 1998, the Trust received royalty income
totaling $1,417,404, compared with fourth quarter 1997 royalty income of
$2,023,646. Royalty income decreased from fourth quarter 1997 to 1998 primarily
because of decreased gas sales volumes and lower oil prices.
Fourth quarter 1998 distributable income was $1,387,682, or $0.231280 per Unit.
Distributions were $0.062374, $0.080649 and $0.088257 per Unit to Unit holders
of record on October 30, November 30 and December 31, respectively.
Distributable income for fourth quarter 1997 was $2,002,943 or $0.333824 per
Unit. Administration expense and interest income for fourth quarter 1998 were
$31,671 and $1,949, respectively, compared with fourth quarter 1997 amounts of
$23,889 and $3,186, respectively.
Fourth quarter underlying oil sales volumes declined 12% from 1997 to 1998
primarily as a result of one of the Oklahoma underlying working interest
properties being shut-in due to mechanical failures. Natural decline was less
than 1%. Underlying gas sales volumes decreased 18% primarily because of timing
of cash receipts and natural decline. The natural decline rate was
approximately 8%.
The average fourth quarter 1998 oil price was $12.59, or 30% below the fourth
quarter 1997 average price of $17.96. The average fourth quarter gas price was
$1.81 per Mcf in 1998, or 2% lower than the fourth quarter 1997 average price of
$1.85. For further information about oil and gas prices, see "Trustee's
Discussion and Analysis - Prices."
Before the reduction for excess costs, costs deducted in the calculation of
fourth quarter 1998 royalty income decreased $173,300 or 13% from fourth quarter
1997 to 1998. This was primarily the result of a 38% or $136,594 decrease in
production and property tax and a 16% or $113,165 decrease in production expense
related to the timing of maintenance projects and xxxxxxxx by operators. This
was partially offset by a 28% or $76,459 increase in development costs related
to the carbon dioxide injection project on one of the properties underlying the
Texas 75% Royalty Trust Interests.
In calculating Trust royalty income for fourth quarter 1998, costs exceeded
revenues for the Texas 75% Royalty Interests by $150,735, or $113,051 net to the
Trust. Such excess costs are the result of lower oil prices and increased
development costs related to the 1998 carbon dioxide injection project. See
"Trustee's Discussion and Analysis - Costs."
--------------------------------------------------------------------------------
Comparative Oil and Gas Sales
Fourth quarter 1998 and 1997 oil and gas sales attributable to the Underlying
Properties and the Royalty Trust Interests are as follows:
Three Months Ended
December 31 (a)
----------------------------
1998 1997
------------- -------------
Oil Sales (Bbls):
Underlying Properties (b).... 94,599 106,918
Average per day............. 1,028 1,162
Average price per Bbl....... $ 12.59 $ 17.96
Royalty Trust Interests (b).. 23,177 38,060
Gas Sales (Mcf):
Underlying Properties (b).... 774,699 940,900
Average per day............. 8,421 10,227
Average price per Mcf....... $ 1.81 $ 1.85
Royalty Trust Interests (b).. 663,450 817,514
(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.
(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.
8
-------------------------------------------------------------------------------
Cross Timbers Royalty Trust
---------------------------
STATEMENTS OF ASSETS, LIABILITIES AND TRUST CORPUS
December 31
------------------------
1998 1997
----------- -----------
Assets............................................
Cash and short-term investments.................. $ 528,758 $ 662,486
Interest to be received.......................... 781 1,065
Net overriding royalty interests in oil and gas..
properties - net (Notes 1 and 2)................ 36,024,941 38,104,367
------------ -----------
$ 36,554,480 $38,767,918
============ ===========
Liabilities and Trust Corpus......................
Distribution payable to Unit holders............. $ 529,539 $ 663,551
Trust corpus (6,000,000 Units of beneficial......
interest authorized and outstanding)............ 36,024,941 38,104,367
----------- -----------
$ 36,554,480 $38,767,918
============ ===========
-------------------------------------------------------------------------------
STATEMENTS OF DISTRIBUTABLE INCOME
Year Ended December 31
-------------------------------------
1998 1997 1996
----------- ----------- -----------
Royalty income................. $7,079,632 $10,549,668 $8,269,875
Interest income................ 10,857 16,251 11,538
---------- ----------- ----------
Total income.................. 7,090,489 10,565,919 8,281,413
Administration expense........ 163,151 158,669 204,449
---------- ----------- ----------
Distributable income.......... $6,927,338 $10,407,250 $8,076,964
========== =========== ==========
Distributable income per Unit
(6,000,000 Units)............ $1.154555 $1.734541 $ 1.346162
========== =========== ==========
-------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN TRUST CORPUS
Year Ended December 31
-------------------------------------------
1998 1997 1996
------------- ------------- -------------
Trust Corpus,
beginning of year..... $38,104,367 $ 41,337,673 $45,118,209
Amortization of net
overriding royalty
interests............. (2,079,426) (3,233,306) (3,780,536)
Distributable income.... 6,927,338 10,407,250 8,076,964
Distributions declared.. (6,927,338) (10,407,250) (8,076,964)
----------- ------------ -----------
Trust Corpus,
end of year........... $36,024,941 $ 38,104,367 $41,337,673
=========== ============ ===========
-------------------------------------------------------------------------------
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, 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: a) disposition of
all Royalty Trust Interests pursuant to terms of the Trust Indenture, b)
when gross revenue of the Trust is less than $1 million per year for two
successive years, or c) 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:
- Royalty income is recognized in the month received rather than accrued in
the month of production.
- Expenses are recognized when paid rather than when incurred.
- 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, 1998 and 1997 was $25,075,508 and
$22,996,082, 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 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
10
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. As of December 31, 1998, excess
costs under the Texas 75% Royalty Trust Interests totaled $505,011 ($378,758 net
to the Trust) and related accrued interest was $14,806. As of March 1999, excess
costs and accrued interest under the Texas 75% Royalty Trust Interests totaled
$808,361 ($606,271 net to the Trust), and excess costs and accrued interest
under the Oklahoma 75% Royalty Trust Interests totaled $19,301 ($14,476 net to
the Trust).
4. Federal Income Taxes
Tax counsel has advised the Trust that, under current tax laws, the Trust
will be classified as a grantor trust 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 be 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 xxxxx. Production from coal seam gas xxxxx 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
($0.162287 per Unit) in 1998, $1.05 per MMBtu ($0.212340 per Unit) in 1997 and
$1.03 per MMBtu ($0.189374 per Unit) in 1996. 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
may be carried over indefinitely as a credit against the Unit holder's regular
tax liability, subject to the tentative minimum tax limitation.
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, 1998 is $21,440 per month, or $257,280 annually (net to the
Trust of $16,080 per month or $192,960 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 March 1, 1999, Cross Timbers
Oil owned 22.7% of the outstanding Trust Units.
6. 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.
7. Quarterly Financial Data (Unaudited)
The following is a summary of royalty income, distributable income and
distributable income per Unit by quarter for 1998 and 1997:
Distributable
Royalty Distributable Income
Income Income per Unit
----------- ------------- -------------
1998
----
First Quarter... $ 2,335,418 $ 2,294,969 $0.382494
Second Quarter.. 1,654,355 1,607,399 0.267899
Third Quarter... 1,672,455 1,637,288 0.272882
Fourth Quarter.. 1,417,404 1,387,682 0.231280
----------- ----------- ---------
$ 7,079,632 $ 6,927,338 $1.154555
=========== =========== =========
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
=========== =========== =========
11
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
----------------------------------------
NationsBank, 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, 1998 and
1997, and the related statements of distributable income and changes in trust
corpus for each of the three years in the period ended December 31, 1998. 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 the modified cash basis of accounting, which is a comprehensive
basis of accounting other than generally accepted accounting principles.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the assets, liabilities and trust corpus of the Trust as
of December 31, 1998 and 1997 and its distributable income and changes in trust
corpus for each of the three years in the period ended December 31, 1998, on the
modified cash basis of accounting described in Note 2.
XXXXXX XXXXXXXX XXX
Xxxx Xxxxx, Xxxxx
March 16, 1999
12
