================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1997 [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _________________ TO _________________ COMMISSION FILE NUMBER 1-7884 MESA ROYALTY TRUST (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) TEXAS 74-6284806 (STATE OF INCORPORATION (I.R.S. EMPLOYER OR ORGANIZATION) IDENTIFICATION NO.) TEXAS COMMERCE BANK NATIONAL ASSOCIATION CORPORATE TRUST DIVISION 712 MAIN STREET HOUSTON, TEXAS 77002 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) (713) 216-6369 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date. As of May 12, 1997 -- 1,863,590 Units of Beneficial Interest in Mesa Royalty Trust. ================================================================================ PART I -- FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS MESA ROYALTY TRUST STATEMENTS OF DISTRIBUTABLE INCOME (UNAUDITED) THREE MONTHS ENDED MARCH 31, ---------------------------- 1997 1996 ------------- ------------- Royalty income....................... $ 3,862,915 $ 1,954,563 Interest income...................... 40,775 22,153 General and administrative expense... (6,388) (10,085) ------------- ------------- Distributable income............ $ 3,897,302 $ 1,966,631 ============= ============= Distributable income per unit... $ 2.0912 $ 1.0553 ============= ============= STATEMENTS OF ASSETS, LIABILITIES AND TRUST CORPUS MARCH 31, DECEMBER 31, 1997 1996 ------------ ------------ (UNAUDITED) ASSETS Cash and short-term investments...... $ 3,856,527 $ 1,542,261 Interest receivable.................. 40,775 19,137 Net overriding royalty interest in oil and gas properties............. 42,498,034 42,498,034 Accumulated amortization............. (25,621,136) (25,083,497) ------------ ------------ $ 20,774,200 $ 18,975,935 ============ ============ LIABILITIES AND TRUST CORPUS Distributions payable................ $ 3,897,302 $ 1,561,398 Trust corpus (1,863,590 units of beneficial interest authorized and outstanding)........ 16,876,898 17,414,537 ------------ ------------ $ 20,774,200 $ 18,975,935 ============ ============ (The accompanying notes are an integral part of these financial statements.) 1 MESA ROYALTY TRUST STATEMENTS OF CHANGES IN TRUST CORPUS (UNAUDITED) THREE MONTHS ENDED MARCH 31, ------------------------------ 1997 1996 -------------- -------------- Trust corpus, beginning of period.... $ 17,414,537 $ 19,626,839 Distributable income............ 3,897,302 1,966,631 Distributions to unitholders.... (3,897,302) (1,966,631) Amortization of net overriding royalty interest............. (537,639) (595,243) -------------- -------------- Trust corpus, end of period.......... $ 16,876,898 $ 19,031,596 ============== ============== (The accompanying notes are an integral part of these financial statements.) 2 MESA ROYALTY TRUST NOTES TO FINANCIAL STATEMENTS (UNAUDITED) NOTE 1 -- TRUST ORGANIZATION The Mesa Royalty Trust (the "Trust") was created on November 1, 1979 when Mesa Petroleum Co. conveyed to the Trust a 90% net profits overriding royalty interest (the "Royalty") in certain producing oil and gas properties located in the Hugoton field of Kansas, the San Juan Basin field of New Mexico and Colorado and the Yellow Creek field of Wyoming (collectively, the "Royalty Properties"). Mesa Petroleum Co. was the predecessor to Mesa Limited Partnership ("MLP") which was the predecessor to MESA Inc. On April 30, 1991, MLP sold its interests in the Royalty Properties located in the San Juan Basin field to Conoco Inc. ("Conoco"), a wholly-owned subsidiary of E. I. duPont de Nemours & Company. Conoco sold the portion of its interests in the San Juan Basin Royalty Properties located in Colorado to MarkWest Energy Partners, Ltd. (effective January 1, 1993) and Red Willow Production Company (effective April 1, 1992). On October 26, 1994, MarkWest Energy Partners, Ltd. sold substantially all of its interest in the Colorado San Juan Basin Royalty Properties to Amoco Production Company ("Amoco"), a subsidiary of Amoco Corp. The Hugoton Royalty Properties are operated by Mesa Operating Co., a subsidiary of MESA Inc.. The San Juan Basin Royalty Properties located in New Mexico are operated by Conoco. The San Juan Basin Royalty Properties located in Colorado are operated by Amoco. As used in this report, the term "Mesa" generally refers to the operator of the Hugoton Royalty Properties, Conoco refers to the operator of the San Juan Basin Royalty Properties, other than the portion of such properties located in Colorado, and Amoco refers to the operator of the Colorado San Juan Basin Royalty Properties unless otherwise indicated. The terms "working interest owner" and "working interest owners" generally refer to the operators of the Royalty Properties as described above, unless the context in which such terms are used indicates otherwise. NOTE 2 -- BASIS OF PRESENTATION The accompanying unaudited financial information has been prepared by Texas Commerce Bank National Association ("Trustee") in accordance with the instructions to Form 10-Q, and the Trustee believes such information includes all the disclosures necessary to make the information presented not misleading. The information furnished reflects all adjustments which are, in the opinion of the Trustee, necessary for a fair presentation of the results for the interim periods presented. The financial information should be read in conjunction with the financial statements and notes thereto included in the Trust's 1996 Annual Report on Form 10-K. The Mesa Royalty Trust Indenture was amended in 1985, the effect of which was an overall reduction of approximately 88.56% in the size of the Trust; therefore, the Trust is now entitled each month to receive 90% of 11.44% of the net proceeds for the preceding month. Generally, net proceeds means the excess of the amounts received by the working interest owners from sales of oil and gas from the Royalty Properties over operating and capital costs incurred. The financial statements of the Trust are prepared on the following basis: (a) Royalty income recorded for a month is the amount computed and paid by the working interest owners to the Trustee for such month rather than either the value of a portion of the oil and gas produced by the working interest owners for such month or the amount subsequently determined to be the Trust's proportionate share of the net proceeds for such month; 3 (b) Interest income, interest receivable, and distributions payable to unitholders include interest to be earned from the balance sheet date through the next distribution date; (c) Trust general and administrative expenses, net of reimbursements, are recorded in the month they accrue; (d) Amortization of the net overriding royalty interests, which is calculated on a unit-of-production basis, is charged directly to trust corpus since such amount does not affect distributable income; and (e) Distributions payable are determined on a monthly basis and are payable to unitholders of record as of the last business day of each month or such other day as the Trustee determines is required to comply with legal or stock exchange requirements. However, cash distributions are made quarterly in January, April, July and October, and include interest earned from the monthly record dates to the date of distribution. This basis for reporting royalty income is thought to be the most meaningful because distributions to the unitholders for a month are based on net cash receipts for such month. However, these statements differ from financial statements prepared in accordance with generally accepted accounting principles in several respects. Under such principles, royalty income for a month would be based on net proceeds for such month without regard to when calculated or received and interest income would include interest earned during the period covered by the financial statements and would exclude interest from the period end to the date of distribution. 4 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS NOTE REGARDING FORWARD-LOOKING STATEMENTS This Form 10-Q includes "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical facts included in this Form 10-Q, including without limitation the statements under "Management's Discussion and Analysis of Financial Condition and Results of Operations" regarding the financial position of MESA Inc. and its potential effects on the Trust, are forward-looking statements. Although the Working Interest Owners have advised the Trust that they believe that the expectations reflected in the forward-looking statements contained herein are reasonable, no assurance can be given that such expectations will prove to have been correct. Important factors that could cause actual results to differ materially from expectations ("Cautionary Statements") are disclosed in this Form 10-Q, including without limitation in conjunction with the forward-looking statements included in this Form 10-Q. All subsequent written and oral forward-looking statements attributable to the Trust or persons acting on its behalf are expressly qualified in their entirety by the Cautionary Statements. SUMMARY OF ROYALTY INCOME AND AVERAGE PRICES (UNAUDITED) Royalty income is computed after deducting the Trust's proportionate share of capital costs, operating costs and interest on any cost carryforward from the Trust's proportionate share of "Gross Proceeds," as defined in the Royalty conveyance. The following summary illustrates the net effect of the components of the actual Royalty computation for the periods indicated. THREE MONTHS ENDED MARCH 31, ----------------------------------------------------------- 1997 1996 ---------------------------- ---------------------------- OIL, OIL, CONDENSATE CONDENSATE NATURAL AND NATURAL NATURAL AND NATURAL GAS GAS LIQUIDS GAS GAS LIQUIDS ------------- ------------ ------------- ------------ The Trust's proportionate share of Gross Proceeds(1).................. $ 4,040,974 $ 955,482 $ 2,197,169 $ 678,660 Less the Trust's proportionate share of: Capital costs recovered(2)...... (68,433) -- (104,419) -- Operating costs................. (1,015,291) (40,875) (770,212) (37,788) Interest on cost carryforward... (8,942) -- (8,847) -- ------------- ------------ ------------- ------------ Royalty income....................... $ 2,948,308 $ 914,607 $ 1,313,691 $ 640,872 ============= ============ ============= ============ Average sales price.................. $ 3.21 $ 20.40 $ 1.71 $ 11.98 ============= ============ ============= ============ (Mcf) (Bbls) (Mcf) (Bbls) Net production volumes attributable to the Royalty..................... 919,521 44,844 770,443 53,461 ============= ============ ============= ============ - ------------ (1) Gross Proceeds from natural gas liquids attributable to the Hugoton and San Juan Basin Properties are net of a volumetric in-kind processing fee retained by Mesa and Conoco, respectively. (2) Capital costs recovered represents capital costs incurred during the current or prior periods to the extent that such costs have been recovered by the working interest owners from current period Gross Proceeds. Cost carryforward represents capital costs incurred during the current or prior periods which will be recovered from future period Gross Proceeds. The cost carryforward resulting from the Fruitland Coal drilling program was $446,878 and $488,161 at March 31, 1997 and March 31, 1996, respectively. The cost carryforward at March 31, 1997 and March 31, 1996 relate solely to the San Juan Basin Colorado properties. 5 THREE MONTHS ENDED MARCH 31, 1997 AND 1996 The distributable income of the Trust for each period includes the royalty income received from the working interest owners during such period, plus interest income earned to the date of distribution. Trust administration expenses are deducted in the computation of distributable income. Distributable income for the quarter ended March 31, 1997 was $3,897,302, representing $2.0912 per unit, compared to $1,966,631, representing $1.0553 per unit, in the first quarter ended March 31, 1996. Based on 1,863,590 units outstanding for each of the quarters ended March 31, 1997 and 1996, the per unit distributions were as follows: 1997 1996 --------- --------- January.............................. $ .5321 $ .2976 February............................. .7948 .3738 March................................ .7643 .3839 --------- --------- $ 2.0912 $ 1.0553 ========= ========= HUGOTON FIELD Mesa has advised the Trust that since June 1, 1995 natural gas produced from the Hugoton field has generally been sold under short-term and multi-month contracts at market clearing prices to multiple purchasers including Western Resources, Inc. ("WRI"), Westar Gas Marketing, Inc., Missouri Gas Energy and Noram Energy Services, Inc. During the winter heating season, Mesa sold gas to WRI pursuant to a five month contract. The contract provided for WRI to purchase up to 25 MMcf per day of gas at market clearing prices determined monthly based on third party published index prices, plus five cents per MMBtu. Mesa expects to continue to market gas production from the Hugoton field under short-term and multi-month contracts. Overall market prices received for natural gas from the Hugoton Royalty Properties were substantially higher in the first quarter of 1997 compared to the first quarter of 1996. In June 1994, Mesa entered into a Gas Transportation Agreement with WRI ("Gas Transportation Agreement") for a primary term of five years commencing June 1, 1995 and ending June 1, 2000, but which may be continued in effect year-to-year thereafter. Pursuant to the Gas Transportation Agreement, WRI has agreed to compress and transport up to 160 MMcf per day of gas and redeliver such gas to Mesa at the inlet of Mesa's Satanta Plant. Mesa has agreed to pay WRI a fee of $0.06 per Mcf escalating 4% annually as of June 1, 1996. Royalty income attributable to the Hugoton Royalty increased to $2,470,129 in the first quarter of 1997, from $1,606,589 in the first quarter of 1996 primarily due to higher prices received for production of natural gas from the Hugoton Royalty Properties. The average price received in the first quarter of 1997 for natural gas and natural gas liquids sold from the Hugoton Royalty Properties was $3.42 per Mcf and $20.47 per barrel, respectively, compared to $1.83 per Mcf and $12.04 per barrel, respectively, in the first quarter of 1996. Net production attributable to the Hogoton Royalty was 513,087 Mcf of natural gas and 34,031 barrels of natural gas liquids in the first quarter of 1997 as compared to 585,407 Mcf of natural gas and 44,460 barrels of natural gas liquids in the first quarter of 1996. Allowable rates of production in the Hugoton field are set by the Kansas Corporation Commission (the "KCC") based on the level of market demand. The KCC has set the Hugoton field allowable for the period April 1, 1997 through September 30, 1997, at 223 billion cubic feet of gas, compared with 238 billion cubic feet of gas during the same period last year. 6 On April 6, 1997, MESA Inc. signed a definitive agreement with Parker & Parsley Petroleum Company to merge and create Pioneer Natural Resources Company, the third largest independent oil and gas exploration and production company in the United States. The proposed transaction is subject to MESA Inc. and Parker & Parsley Petroleum Company stockholder approvals. There can be no assurance that this transaction will be completed or what the final terms or timing thereof will be. MESA Inc. has advised the Trust that this merger should have no significant effects on the Trust, although the precise nature of any effects cannot be predicted or quantified at this time. SAN JUAN BASIN Royalty income from the San Juan Basin Royalty Properties is calculated and paid to the Trust on a state-by-state basis. The Royalty income from the San Juan Basin Royalty Properties located in the state of New Mexico was $1,392,786 during the first quarter of 1997 as compared with royalty income of $347,974 in the first quarter of 1996. No royalty income was received from the San Juan Basin Royalty Properties located in Colorado for the first quarter of 1997 or 1996, as costs associated with the Fruitland Coal drilling on such properties have not been fully recovered. Net production attributable to the San Juan Basin Royalty was 625,968 Mcf of natural gas and 12,799 barrels of natural gas liquids in the first quarter of 1997, compared to 185,036 Mcf of natural gas and 9,001 barrels of natural gas liquids in the first quarter of 1996. The average price received in the first quarter of 1997 for natural gas sold from the San Juan Basin Royalty Properties was $2.93 per Mcf, compared to $1.31 per Mcf during the same period in 1996. The Trust's interest in the San Juan Basin was conveyed from Mesa's working interest in 31,328 net producing acres in northwestern New Mexico and southwestern Colorado. The San Juan Basin-New Mexico reserves represent approximately 35% of the Trust's reserves. Mesa completed the sale of its underlying interest in the San Juan Basin Royalty Properties to Conoco on April 30, 1991. Conoco subsequently sold its underlying interest in the Colorado portion of the San Juan Basin Royalty Properties to MarkWest Energy Partners, Ltd. (effective January 1, 1993) and Red Willow Production Company (effective April 1, 1992). On October 26, 1994, MarkWest Energy Partners, Ltd. sold substantially all of its interest in the Colorado San Juan Basin Royalty Properties to Amoco. The San Juan Basin Royalty Properties located in Colorado account for less than 5% of the Trust's reserves. No distributions related to the Colorado portion of the San Juan Basin Royalty have been made since 1990, as the costs of the Fruitland Coal drilling in Colorado have not yet been recovered. The San Juan Basin development drilling program has no effect on Royalty income or distributions relating to the Hugoton Royalty. Conoco has informed the Trust that it believes the production from the Fruitland Coal formation will generally qualify for the tax credits provided under Section 29 of the Internal Revenue Code of 1986, as amended. Thus, unitholders are potentially eligible to claim their share of the tax credit attributable to this qualifying production. Each unitholder should consult his tax advisor regarding the limitations and requirements for claiming this tax credit. 7 PART II -- OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (A) EXHIBITS (Asterisk indicates exhibit previously filed with the Securities and Exchange Commission and incorporated herein by reference.) SEC FILE OR REGISTRATION EXHIBIT NUMBER NUMBER ------------ ------- 4(a) *Mesa Royalty Trust Indenture between Mesa Petroleum Co. and Texas Commerce Bank National Association, as Trustee, dated November 1, 1979.................................................................... 2-65217 1(a) 4(b) *Overriding Royalty Conveyance between Mesa Petroleum Co. and Texas Commerce Bank, as Trustee, dated November 1, 1979....................... 2-65217 1(b) 4(c) *First Amendment to the Mesa Royalty Trust Indenture dated as of March 14, 1985 (Exhibit 4(c) to Form 10-K for year ended December 31, 1984 of Mesa Royalty Trust)..................................................... 1-7884 4(c) 4(d) *Form of Assignment of Overriding Royalty Interest, effective April 1, 1985, from Texas Commerce Bank National Association, as Trustee, to MTR Holding Co. (Exhibit 4(d) to Form 10-K for year ended December 31, 1984 of Mesa Royalty Trust).................................................. 1-7884 4(d) 4(e) *Purchase and Sale Agreement, dated March 25, 1991, by and among Mesa Limited Partnership, Mesa Operating Limited Partnership and Conoco, as amended on April 30, 1991 (Exhibit 4(e) to Form 10-K for year ended December 31, 1991 of Mesa Royalty Trust)................................ 1-7884 4(e) 27 Financial Data Schedule (B) REPORTS ON FORM 8-K No reports on Form 8-K were filed with the Securities and Exchange Commission by the Trust during the first quarter of 1997. 8 SIGNATURES PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED. MESA ROYALTY TRUST TEXAS COMMERCE BANK By NATIONAL ASSOCIATION TRUSTEE By /s/ PETE FOSTER PETE FOSTER SENIOR VICE PRESIDENT & TRUST OFFICER Date: May 13, 1997 The Registrant, Mesa Royalty Trust, has no principal executive officer, principal financial officer, board of directors or persons performing similar functions. Accordingly, no additional signatures are available and none have been provided. 9 EXHIBIT INDEX (Asterisk indicates exhibit previously filed with the Securities and Exchange Commission and incorporated herein by reference.) SEC FILE OR REGISTRATION EXHIBIT NUMBER NUMBER ------------ ------- 4(a) *Mesa Royalty Trust Indenture between Mesa Petroleum Co. and Texas Commerce Bank National Association, as Trustee, dated November 1, 1979.................................................................... 2-65217 1(a) 4(b) *Overriding Royalty Conveyance between Mesa Petroleum Co. and Texas Commerce Bank, as Trustee, dated November 1, 1979....................... 2-65217 1(b) 4(c) *First Amendment to the Mesa Royalty Trust Indenture dated as of March 14, 1985 (Exhibit 4(c) to Form 10-K for year ended December 31, 1984 of Mesa Royalty Trust)..................................................... 1-7884 4(c) 4(d) *Form of Assignment of Overriding Royalty Interest, effective April 1, 1985, from Texas Commerce Bank National Association, as Trustee, to MTR Holding Co. (Exhibit 4(d) to Form 10-K for year ended December 31, 1984 of Mesa Royalty Trust).................................................. 1-7884 4(d) 4(e) *Purchase and Sale Agreement, dated March 25, 1991, by and among Mesa Limited Partnership, Mesa Operating Limited Partnership and Conoco, as amended on April 30, 1991 (Exhibit 4(e) to Form 10-K for year ended December 31, 1991 of Mesa Royalty Trust)................................ 1-7884 4(e) 27 Financial Data Schedule