ITEM 1. BUSINESS
Organization. Tidelands Royalty Trust "B" ("Tidelands") is a royalty trust that was created on June 1, 1954, under the laws of the State of Texas. Tidelands is not permitted to engage in any business activity because it was organized for the sole purpose of providing an efficient, orderly, and practical means for the administration and liquidation of rights to interests in any oil, natural gas or other mineral leases obtained by Gulf Oil Corporation ("Gulf") in a designated area of the Gulf of Mexico. These rights are evidenced by a contract between Tidelands' predecessors and Gulf dated April 30, 1951 (the "1951 Contract"), which is binding upon the assignees of Gulf. As a result of various transactions that have occurred since 1951, the Gulf interests that were subject to the 1951 Contract now are held by Chevron Corporation ("Chevron"), Elf Acquitane, Inc. ("Elf"), and their assignees.
The Tidelands Royalty Trust "B" Indenture, effective June 1, 1954, as amended (the "Indenture"), provides that the corporate trustee is to distribute all cash in Tidelands, less an amount reserved for the payment of accrued liabilities and estimated future expenses, to unitholders of record on the last business day of March, June, September, and December of each year. Pursuant to the terms of the Indenture, all distributions will be sent within 15 calendar days of the record date. Bank of America, N.A. serves as corporate trustee.
The Indenture as amended provides that the term of the royalty trust created to hold the rights under the 1951 Contract will expire on April 30, 2021, unless extended by the vote of the holders of a majority of the outstanding units of beneficial interest.
Tidelands' wholly-owned subsidiary, Tidelands Royalty "B" Corporation ("Tidelands Corporation"), holds title to interests in properties subject to the 1951 Contract that are situated offshore of Louisiana. Ninety-five percent of all oil, natural gas, and other mineral royalties collected by this subsidiary are paid to Tidelands. Tidelands Corporation, like Tidelands, is prohibited from engaging in a trade or business and does only those things necessary for the administration and liquidation of its properties.
Tidelands' only industry segment or purpose is the administration and collection of royalties.
The Contract. The 1951 Contract identifies 60 specific tracts in the Gulf of Mexico. These tracts are not all the same size and collectively contain approximately 1,370,000 acres (sometimes referred to herein as the "Royalty Area"). Prior to the expiration of the 50-year lease acquisition period on April 30, 2001 (the "Acquisition Expiration Date"), if Chevron, Elf or their assignees had acquired a lease or leases on one of the 60 tracts before and if oil or natural gas were produced and sold from any such tract, then Chevron, Elf or their assignees had to make production payments to Tidelands, in an amount equal to approximately 12.5% of the value at the wellhead of the oil and natural gas subject to such lease until the sum of $1,500,000 has been paid under the lease. Thereafter, Tidelands' interest in such tract was converted to an overriding royalty and Tidelands received payments equal to approximately 4.17% of the value of the oil and natural gas sold as long as the lease on such tract existed.
Tidelands has eight assigned leases. At December 31, 2002, six of Tidelands' assigned leases contained producing wells and had paid out their $1,500,000 production payments. Tidelands' royalty interest on five of the six leases is 4.17%. On the sixth lease the overriding royalty is 1.0416%. Two recently acquired and assigned leases do not contain any producing wells. These leases have not yet paid $1,500,000 in production payments.
Since the Acquisition Expiration Date, Chevron, Elf and their assignees are no longer obligated to assign an interest to the Trust out of any lease that was acquired after that date. Tidelands will continue to receive payments on the leases acquired by Chevron, Elf or their assignees prior to the Acquisition Expiration Date.
In 2002, approximately 22% of Tidelands' royalty revenues were attributable to oil and approximately 78% were attributable to natural gas. The production payments and royalty revenues received by Tidelands are affected by seasonal fluctuations in demand and by changes in the market price for oil and natural gas. During 2002, Tidelands received royalty payments from eight working interest owners. The following table shows the percentage received each year for the past 3 years from those working interest owners:
Tidelands derives no revenues from foreign sources and has no export sales.
Trust Functions. Tidelands is administered by officers and employees of its Trustee, Bank of America, N.A. and its principal accounting officer who performs certain management, financial and administrative services for Tidelands. See "Management and Principal Unitholders."
Important aspects of Tidelands' operations are conducted by third parties. These include the production and sale of oil and natural gas and the calculation of royalty payments to Tidelands, which are conducted by oil and natural gas companies that lease tracts subject to Tidelands' interests. Similarly, Tidelands' distributions are processed and paid by The Bank of New York as the agent for the trustee of Tidelands.
Marine Petroleum Corporation, a wholly-owned subsidiary of Marine Petroleum Trust ("Marine"), a 32.6% unitholder of Tidelands, leases office space in Dallas, Texas to provide work space and record storage for Marine, Marine Petroleum Corporation, Tidelands and Tidelands Corporation. The cost of this office facility is shared by all four of these entities in proportion to each entity's gross income to the total of such income of all entities.
The ability of Tidelands to receive revenues is entirely dependent upon its entitlement to its rights with respect to the leases held by Chevron, Elf and their assignees in the Gulf of Mexico (as more fully described in "Properties" below). Moreover, no revenues are payable to Tidelands until sales of production commence from any such lease.
The royalty interests held by Tidelands are depleting with each barrel of oil and mcf of natural gas produced. No funds are reinvested by Tidelands; thus, these depleting assets are not being replaced.
ITEM 2.
ITEM 2. PROPERTIES
General. Tidelands is not engaged in oil and natural gas operations. Its income is based on oil and natural gas operations of others. Tidelands' income is derived from contracts that provide for payments in the nature of overriding royalty payments made to Tidelands based on oil and natural gas sales from certain leases in the Gulf of Mexico. Tidelands does not own or directly lease any physical properties.
Reserves. Tidelands is not engaged in the production of oil or natural gas. Tidelands' income is derived from overriding royalty payments that are carved out of working interests in oil and natural gas leases in the Gulf of Mexico. Tidelands does not have the engineering data necessary to make an estimate of the proved oil and natural gas reserves attributable thereto (nor the present value of future net cash flows from such reserves), and is not entitled to receive such data from the owners of the working interests from which Tidelands' interests are derived. See also "Difficulty in Obtaining Certain Data" below.
Since Tidelands does not have access to this reserve information, Tidelands is unable to compute the standardized measure of discounted future net cash flows therefrom.
No reports on oil and natural gas reserves were filed with any federal authority or agency during 2002 by Tidelands.
Production. Information regarding the net quantities of oil and natural gas produced with respect to Tidelands' overriding royalty interests for each of the last three fiscal years, as well as the average sales price per unit of oil and natural gas produced upon which payments to Tidelands are based, is set forth below in the following table:
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(1) The weighted average sales price is based on the market value at the well as determined by the operators.
Information about average production cost (lifting cost) per unit of production has been omitted due to its unavailability and inapplicability to Tidelands. For more recent information regarding crude oil sales prices, see "Management's Discussion and Analysis of Financial Condition and Results of Operations" below.
Interests in Properties. Tidelands' properties consist of production payments and overriding royalty interests in 8 oil and natural gas leases covering 32,312 gross acres in the 1,370,000 acre Royalty Area. These leases are located in the Gulf of Mexico in the Galveston, High Island, Sabine Pass and West Cameron areas.
Productive Properties. Set forth in the table below is certain information as of December 31, 2002, concerning gross productive oil and natural gas wells and gross leased acres in which Tidelands owns its interests:
Information regarding net wells or acres is not included since Tidelands does not own any working interests.
The following table contains information about the average daily production attributable to Tidelands' interest, by field, for the six months ended July 31, 2001 and 2000. The information for 2002 is the average daily production for the month June 2002 and is the most recent production information available to Tidelands from the Petroleum Information Corporation for the year 2002.
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(1) Net oil production is reflected in the amount of its mcf equivalent of natural gas on a btu basis (6 to 1).
Present Activities. Tidelands currently receives royalties from oil and natural gas sold from five leases in the Royalty Area, although delivery quantities are subject to seasonal demand.
Tidelands is not obligated to provide any fixed and determinable quantities of oil or natural gas in the future under any existing contracts or agreements. Tidelands understands from public records that no activity is being undertaken with respect to drilling or workover operations on the five leases from which it receives royalties.
Difficulty in Obtaining Certain Data. Tidelands' only activities are the collection and distribution of revenues from overriding royalties on certain oil and natural gas leases in the Gulf of Mexico, pursuant to purchase agreements between Tidelands' predecessors and Gulf and its transferees. The leasehold working interests that are subject to the rights held by Tidelands were originally owned in whole or in part by Chevron, and, except for two non-producing leases, have been assigned to other oil and natural gas exploration and production companies. Certain information as to reserves, availability of oil and natural gas, average production cost (lifting cost) per unit, undeveloped acreage, net wells and net acres, etc., with respect to the particular leases subject to Tidelands' interests lies solely within the knowledge of these concerns. Engineering data, if any, regarding these leaseholds would have been compiled principally by or for the working interest owners of these leaseholders and Tidelands believes that it will not be provided access to such information. Because of this, it appears that unreasonable efforts and expense would be involved in seeking to obtain all of the information required under Item 102 of Regulation S-K and Securities Exchange Act of 1934 Industry Guide 2.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
On July 8, 2002, Tidelands commenced legal action against Chevron to acquire an assignment of an overriding royalty interest in a lease which we believed we were entitled to. In order to reduce the expense of continuing the lawsuit plus the uncertainty of the outcome in the court, we agreed to accept an assignment of a 1/16th overriding royalty interest until we receive $1,500,000, instead of a 1/8th as provided for in the 1951 Contract, followed by a 1/24th overriding royalty interest. We have received the assignment and are now in the process of filing a motion to dismiss the lawsuit. There is no production on the lease at the present time and no assurance that there ever will be.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the last quarter of 2002, no matters were presented to the unitholders for a vote.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Tidelands is authorized to issue 1,386,525 units of beneficial interest; 1,386,375 units were held by 378 unitholders of record as of January 2, 2003. The remaining 150 units are reserved to be issued to specific parties if and when they decide to transfer their rights under the 1951 Contract to Tidelands. There were no changes in the number of outstanding units of beneficial interest during 2002.
The units of beneficial interest in Tidelands trade in the over-the-counter market and are listed in the NASD's Bulletin Board under the symbol "TIRTZ." There is limited trading in Tidelands' units of beneficial interest. The following table presents information obtained from the National Quotation Bureau, Inc. as to the high and low bid prices and includes distributions to unitholders, by quarter, for the past two years:
Such over-the-counter market quotations reflect interdealer prices without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.
Tidelands must distribute to its unitholders all cash accumulated each quarter, less an amount reserved for accrued liabilities and estimated future expenses. Such distributions have been made since the third quarter of 1977 and will continue so long as the income from oil and natural gas royalties exceeds administrative costs.
The Securities and Exchange Commission has neither approved nor disapproved Tidelands' Annual Report for its year ended December 31, 2002, nor has it passed upon its accuracy or adequacy. While Tidelands' complete Form 10-K (excluding exhibits) for the year ended December 31, 2002, is distributed to unitholders, a copy of such Form 10-K (without exhibits) is available without charge to interested parties. There will be copying and mailing charges for copies of any exhibits requested. Written requests should be directed to Mr. Ron E. Hooper, Bank of America, N.A., P.O. Box 830650, Dallas, Texas 75283-0650.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Capital Resources and Liquidity. Because of the nature of Tidelands as a trust entity, there is no requirement for capital; its only obligation is to distribute to unitholders the net income actually collected. As an administrator of oil and natural gas royalty properties, Tidelands collects income monthly, pays expenses of administration, and disburses all net income collected to its unitholders each quarter. Because all of Tidelands' revenues are invested in liquid funds pending distribution, Tidelands does not experience liquidity problems.
Tidelands' Indenture (and the charter and by-laws of Tidelands Corporation) expressly prohibits the operation of any kind of trade or business. Tidelands' oil and natural gas properties are depleting assets and are not being replaced due to the prohibition against these investments. Because of these restrictions, Tidelands does not require short term or long term capital. These restrictions, along with other factors, allow Tidelands to be treated as a grantor trust; thus all income and deductions, for tax purposes, should flow through to each individual unitholder. Tidelands is not a taxable entity.
Critical Accounting Policies. As an overriding royalty owner, actual production results are not known to Tidelands until reported by the operator, which could be a period of 60-90 days later. As such, Tidelands must estimate earned but unpaid royalties from this production. To estimate this amount, Tidelands utilizes historical information based on the latest production reports from the individual leases and current average prices as reported for the period under report.
Results of Operations. Tidelands' revenues are derived from the oil and natural gas production activities of unrelated parties. Tidelands' revenues and distributions fluctuate from period to period based upon factors beyond Tidelands' control, including without limitation the number of leases subject to Tidelands' interests, the number of productive wells drilled on leases subject to Tidelands' interests, the level of production over time from such wells and the prices at which the oil and natural gas from such wells are sold. Tidelands believes that it will continue to have revenues sufficient to permit distributions to be made to unitholders for the foreseeable future, although no assurance can be made regarding the amounts thereof. The foregoing sentence is a forward-looking statement. Factors that might cause actual results to differ from expected results include reductions in prices or demand for oil and natural gas, which might then lead to decreased production; reductions in production due to depletion of existing wells or disruptions in service, including as the result of storm damage, blowouts or other production accidents, and geological changes such as cratering of productive formations; expiration or release of leases subject to Tidelands' interests.
Tidelands' income consists primarily of oil and natural gas royalties and is based on the value at the well of Tidelands' percentage interest in oil and natural gas sold without reduction for production expenses. Value at the well for oil is the purchasers' posted price at its receiving point onshore, less the cost of transportation from the offshore lease to the onshore receiving point. In general, value at the well is determined on the basis of the selling price of oil, natural gas and other minerals produced, saved and sold, or at wellhead prices determined by industry standards, where the selling price does not reflect value at the well. In the event an agreement is not arms-length in nature, the value is based upon current market prices.
Summary Review. Tidelands' net income in 2002 amounted to $879,197 or $.63 per unit as compared to $1,092,273 or $.79 per unit in 2001 and $1,532,381 or $1.11 per unit in 2000. Distributions per unit were $.48 in 2002, $.96 in 2001 and $.87 in 2000.
Administrative expenses increased approximately $51,000 (47%) in 2002 due primarily to the cost of litigation in connection with a successful claim for an overriding royalty interest in a lease.
Production of oil and natural gas and price received has fluctuated over the past three years. The following table presents the results of these factors for the past three years:
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(1) The weighted average sale price is based on the market value at the well as determined by the operators.
Tidelands retains a funded reserve for possible royalty overpayments received in various years from 1988 through 1993. As of December 31, 2002, Tidelands retained a funded reserve of approximately $127,000 for possible royalty overpayments in the future.
During the year ended December 31, 2000, Tidelands restored to income $251,534 of its contingency reserve that management determined was no longer needed to cover refunds that may be required upon redetermination of natural gas prices for royalty payments in prior periods. Net income per unit was increased $.18 by this decision.
The following table and related discussion and analysis shows the royalty income, the net quantities sold, and the average price received for oil and natural gas during the past three years excluding the $251,534 realized in fiscal 2000 from the reduction of the previously established accounts payable for possible royalty over-payments that management no longer deemed required. The following table presents comparative operating data which reflects these underlying circumstances.
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(1) These amounts are net of the cost of transportation from offshore leases to onshore receiving points.
(2) The average price in 2000 includes $.98 per mcf attributable to the $251,534 reserve reduction for that year.
Oil and Natural Gas Royalties - 2002 and 2001: During fiscal 2002, Tidelands received approximately 22% of its royalty income from the sale of oil and 78% from the sale of natural gas. Income from such oil and natural gas royalties in fiscal 2002 decreased approximately 13% from fiscal 2001.
Oil royalties during fiscal 2002 in the amount of $223,812 were 15% lower than oil royalties received in fiscal 2001 in the amount of $262,623. There was an increase in the average price received that was offset by a decrease in the quantity of oil sold.
Natural gas royalties during fiscal 2002 in the amount of $787,267 were 13% lower than natural gas royalties received in fiscal 2001 in the amount of $903,587. The decrease was due to a decrease in the price received that was offset by an increase in the quantity of natural gas sold.
General and administrative expenses for 2002 amounted to $158,656, an increase of 47% over $107,650 in 2001. The primary cause of this increase was the cost of litigation started on July 8, 2002 against Chevron to acquire an interest in a lease which we believed we were entitled to. See "Legal Proceedings" for further explanation.
Oil and Natural Gas Royalties - 2001 and 2000: During fiscal 2001, Tidelands received approximately 23% of its royalty income from the sale of oil and 77% from the sale of natural gas. Income from such oil and natural gas royalties in fiscal 2001 decreased approximately 26% from fiscal 2000.
Revenue from oil royalties amounted to $262,623 in fiscal 2001, a decrease of 31% as compared to the $379,838 realized in fiscal 2000. The decrease was due to decreases in both production and average price realized during 2001.
Revenue from natural gas royalties amounted to $903,587, a decrease of 25% as compared to the $1,200,083 realized in fiscal 2000. The decrease was due to decreases in both production and average price realized during 2001.
General and administrative expenses for 2001 amounted to $107,650, an increase of 16% over $93,140 in 2000. The primary cause of this increase was due to the cost of soliciting the unitholders vote to extend the life of the trust.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
At December 31, 2002, Tidelands did not have any market risk exposure with regard to any activities in derivative financial instruments, other financial instruments and derivative commodity instruments.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Tidelands' consolidated financial statements listed in the following index, together with the related notes and the report of KPMG LLP, independent certified public accountants, are presented on pages 15 through 22 hereof:
See also "Exhibits, Financial Statement Schedules and Reports on Form 8-K" of this Form 10-K for further information concerning the financial statements of Tidelands and its subsidiaries.
All schedules have been omitted because they are not required or because the required information is shown in the consolidated financial statements or notes thereto.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
During 2002 and 2001 there were no disagreements by Tidelands with its principal accountants on any matter of accounting principles or practices or financial statement disclosure.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Tidelands is a trust created under the laws of the State of Texas. Tidelands' Indenture does not provide for directors or officers or the election of directors or officers. Under the Indenture, Bank of America, N.A. serves as Trustee.
R. Ray Bell may be considered a significant employee of Tidelands. Mr. Bell has been involved in the administration of Tidelands since its inception. He is 75 years old, and since July 1, 1977, Mr. Bell has been employed by Marine Petroleum Corporation, a subsidiary of Marine, as president, vice president and director. Mr. Bell will serve in such capacities until the next annual meeting of directors of Marine Petroleum Corporation or until his successor is elected and qualified. Mr. Bell acts as the principal accounting officer of Tidelands for purposes of Tidelands' filings with the SEC.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
During Tidelands' fiscal year ended December 31, 2002, Tidelands paid or accrued fees of $20,403 to Bank of America, N.A., as corporate trustee. During Tidelands' fiscal year ended December 31, 2002, Tidelands paid $21,659 to Marine Petroleum Corporation as its share of certain administrative expenses. These expenses are shared in the ratio of each of Tidelands' and Marine's gross receipts to the total gross receipts of both trusts.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth the persons known to Tidelands who own beneficially more than five percent of its outstanding units of beneficial interest:
There are no executive officers or directors of Tidelands. Bank of America, N.A. does not beneficially own any units of beneficial interest.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable.
ITEM 14.
ITEM 14. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures. The term "disclosure controls and procedures" is defined in Rule 13a-14(c) of the Securities and Exchange Act of 1934, or the Exchange Act. This term refers to the controls and procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files under the Exchange Act is recorded, processed, summarized and reported within required time periods. Our Principal Accounting Officer and our Trustee have evaluated the effectiveness of our disclosure controls and procedures as of a date within 90 days before the filing of this annual report, and they have concluded that as of that date, our disclosure controls and procedures were effective at ensuring that required information will be disclosed on a timely basis in our reports filed under the Exchange Act.
(b) Changes in Internal Controls. We maintain a system of internal controls that are designed to provide reasonable assurance that our books and records accurately reflect our transactions and that our established
policies and procedures are followed. There were no significant changes to our internal controls or in other factors that could significantly affect our internal controls subsequent to the date of their evaluation by our Principal Accounting Officer and our Trustee, including any corrective actions with regard to significant deficiencies and material weaknesses.
PART IV
ITEM 15.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Financial Statements -- See "Financial Statements and Supplementary Data" above.
The consolidated financial statements, together with the related notes and the reports of KPMG LLP, independent certified public accountants, as contained in the Form 10-K of Marine Petroleum Trust for its fiscal year ended June 30, 2002 and filed with the Securities and Exchange Commission, are hereby incorporated herein by reference for all purposes.
(b) Reports on Form 8-K -- No reports on Form 8-K have been filed during the last quarter of the fiscal year ended December 31, 2002.
(c) Exhibits
21.1 Subsidiaries of Tidelands.
INDEPENDENT AUDITORS' REPORT
The Trustee Tidelands Royalty Trust "B":
We have audited the accompanying consolidated balance sheets of Tidelands Royalty Trust "B" ("Tidelands") and subsidiary as of December 31, 2002 and 2001, and the related consolidated statements of income and undistributed income and cash flows for each of the years in the three-year period ended December 31, 2002. These consolidated financial statements are the responsibility of Tidelands' management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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 management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Tidelands Royalty Trust "B" and subsidiary as of December 31, 2002 and 2001 and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America.
Dallas, Texas March 14, 2003 /s/ KPMG LLP
TIDELANDS ROYALTY TRUST "B" AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2002 AND 2001
See accompanying notes to consolidated financial statements.
TIDELANDS ROYALTY TRUST "B" AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME AND UNDISTRIBUTED INCOME THREE YEARS ENDED DECEMBER 31, 2002
See accompanying notes to consolidated financial statements.
TIDELANDS ROYALTY TRUST "B" AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS THREE YEARS ENDED DECEMBER 31, 2002
See accompanying notes to consolidated financial statements.
TIDELANDS ROYALTY TRUST "B" AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2002
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND GENERAL
(a) General
Tidelands Royalty Trust "B" ("Tidelands") was established on June 1, 1954 with a transfer of contract rights to certain properties to Tidelands in exchange for units of beneficial interest. The contract rights enable Tidelands to receive an interest in any oil, natural gas or other mineral leases obtained by Gulf Oil Corporation, now Chevron U.S.A., Inc. (Chevron) which is a subsidiary of Chevron Corporation, and its assignees in a designated area of the Gulf of Mexico during a 50-year period beginning April 30, 1951.
Tidelands is required under its indenture to distribute all income, after paying its liabilities and obligations, to the unitholders quarterly. Tidelands cannot invest any of its money for any purpose and cannot engage in a trade or business.
Tidelands' wholly-owned subsidiary, Tidelands Royalty "B" Corporation ("Tidelands Corporation"), holds title to interests in properties that are situated offshore of Louisiana. Ninety-five percent of all oil, natural gas, and other mineral royalties collected by this subsidiary are paid to Tidelands. Tidelands Corporation, like Tidelands, is prohibited from engaging in a trade or business and does only those things necessary for the administration and liquidation of its properties. Tidelands is authorized to pay expenses of Tidelands Corporation should it be necessary.
Tidelands and its subsidiary have no employees. Tidelands has entered into an arrangement with Marine Petroleum Corporation (a wholly-owned subsidiary of Marine Petroleum Trust, an affiliate of Tidelands) to share certain administrative expenses. For the years ended 2002, 2001 and 2000 Tidelands paid $22,000, $17,000 and $20,000 to Marine Petroleum Corporation, respectively. The sole purpose of this arrangement is to assist the trustees in the administration of the trusts. At December 31, 2002 and 2001, Marine Petroleum Trust owned 32.6% of Tidelands' outstanding units of beneficial interest.
(b) Unitholder Voting Matters
On March 27, 2001, the unitholders of record at the close of business on February 16, 2001, approved an amendment to the Indenture to extend the life of the trust beyond the original expiration date of April 30, 2001 to April 30, 2021.
(c) Principles of Consolidation
The consolidated financial statements include Tidelands and its wholly-owned subsidiary. All intercompany accounts and transactions have been eliminated in consolidation.
(d) Oil, Natural gas and Other Mineral Properties
At the time Tidelands was established, no determinable market value was available for the assets transferred to Tidelands; consequently, nominal values were assigned. Accordingly, no allowance for depletion has been computed.
TIDELANDS ROYALTY TRUST "B" AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Tidelands' revenues are derived from production payments and overriding royalty interests related to properties located in the Gulf of Mexico.
Net revenues from oil and natural gas royalties related to proved developed oil and natural gas reserves were $1,011,079, $1,166,210 and $1,579,911 in 2002, 2001, and 2000, respectively.
(e) Federal Income Taxes
No provision has been made for Federal income taxes on Tidelands' income since such taxes are the liability of the unitholders. Federal income taxes are provided on the income (if any) of Tidelands Corporation, excluding the 95% of oil and natural gas royalties to be distributed to Tidelands and after deducting statutory depletion. Tidelands had a receivable from overpayment of Tidelands Corporation federal taxes of $12,037 and $10,520 as of December 31, 2002 and 2001, respectively. There were no significant deferred tax assets or liabilities as of December 31, 2002 and 2001. The primary difference between the effective tax rate and the statutory tax rate is due to nontaxable income.
(f) Credit Risk Concentration and Cash Equivalents
Financial instruments which potentially subject Tidelands and its wholly-owned subsidiary to concentrations of credit risk are primarily investments in cash equivalents and unsecured oil and natural gas royalties receivable. Tidelands and its wholly-owned subsidiary place their cash investments with financial institutions that management considers creditworthy and limit the amount of credit exposure from any one financial institution. Royalties receivable are from large creditworthy companies and Tidelands historically has not encountered collection problems. The estimated fair values of cash equivalents and oil and natural gas royalties receivable approximate the carrying values due to the short term nature of these financial instruments.
Cash equivalents of $327,719 and $998,213 at December 31, 2002 and 2001, respectively, consist of cash held in a money market account that invests in U.S. Treasury securities. For purposes of the statements of cash flows, Tidelands considers all investments with original maturities of three months or less to be cash equivalents.
(g) Statements of Cash Flows
Tidelands Corporation paid $1,562, $20,100 and $27,488 in federal income taxes in 2002, 2001, and 2000, respectively. No payments of interest were made in 2002, 2001 and 2000.
(h) Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
(i) Net Income per Unit
Net income per unit is determined by dividing net income by the weighted average number of units of beneficial interest outstanding during the period.
TIDELANDS ROYALTY TRUST "B" AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(j) Significant Royalty Sources
Royalty revenue received by Tidelands from producers is summarized as follows:
(2) UNDISTRIBUTED INCOME
Undistributed income includes $834,167 and $828,185 applicable to the subsidiary corporation at December 31, 2002 and 2001, respectively.
(3) OVERPAID ROYALTIES
Tidelands recorded a liability for possible royalty overpayments received in various years from 1988 through 1993, which is reflected in accounts payable in the accompanying consolidated balance sheets. During 2000, Tidelands determined that $251,534 was no longer required to be reserved, because it was no longer probable that repayment of such amounts actually would be required. Accordingly, accounts payable was reduced and oil and natural gas royalty income was increased by such amount.
(4) LEGAL PROCEEDINGS
On July 8, 2002, Tidelands commenced legal action against Chevron to acquire an assignment of an overriding Royalty interest in a lease which Tidelands believed it was entitled to. In order to reduce the expense of continuing the lawsuit plus the uncertainty of the outcome in court, Tidelands agreed to accept an assignment of a 1/16th overriding royalty interest until it receives $1,500,000, instead of a 1/8th overriding royalty interest as provided for in the 1951 Contract followed by a 1/24th overriding Royalty interest. Tidelands has received the assignment and is now in the process of filing a motion to dismiss the lawsuit.
(5) SUPPLEMENTAL INFORMATION RELATING TO OIL AND NATURAL GAS RESERVES (UNAUDITED)
Oil and natural gas reserve information relating to Tidelands' royalty interests is not presented because such information is not available to Tidelands. Tidelands' share of oil and natural gas produced for its royalty interests was as follows: oil (barrels) - 8,614 in 2002, 10,625 in 2001 and 12,498 in 2000; and natural gas (mcf) - 229,038 in 2002, 201,284 in 2001 and 256,706 in 2000.
(6) SUMMARY OF QUARTERLY FINANCIAL DATA (UNAUDITED)
The following quarterly financial information for the years ended December 31, 2002 and 2001 is unaudited; however, in the opinion of management, all adjustments necessary to present a fair statement of the results of operations for the interim periods have been included.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Annual Report on Form 10-K to be signed by the undersigned thereunto duly authorized.
TIDELANDS ROYALTY TRUST "B" (Registrant)
By: Bank of America, N.A. -------------------------------------- (in its capacity as Corporate Trustee of Tidelands Royalty Trust "B" and not in its individual capacity or otherwise)
Date: March 27, 2003 By: /s/ RON E. HOOPER -------------------------------------- Ron E. Hooper Vice President
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on Form 10-K has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
NAME CAPACITIES DATE - ---------------------- ----------------------- ---------------
Bank of America, N.A. Corporate Trustee March 27, 2003 By: /s/ RON E. HOOPER ------------------ Ron E. Hooper Vice President
/s/ R. RAY BELL Principal Accounting Officer March 27, 2003 - --------------------- R. Ray Bell
CERTIFICATIONS
I, R. Ray Bell, certify that:
1. I have reviewed this annual report on Form 10-K of Tidelands Royalty Trust;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. The registrant's Trustee and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant's Trustee and I have disclosed, based on our most recent evaluation, to the registrant's auditors:
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weakness in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6. The registrant's Trustee and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
In giving the certifications in paragraphs 4, 5 and 6 above, I have relied to the extent I consider reasonable on information provided to me by various working interest owners.
Date: March 27, 2003 /s/ R. Ray Bell ---------------------------- R. Ray Bell Principal Accounting Officer
CERTIFICATIONS
I, Ron E. Hooper, certify that
1. I have reviewed this annual report on Form 10-K of Tidelands Royalty Trust "B" for which Bank of America, N.A. acts as Trustee;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors:
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weakness in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
In giving the certifications in paragraphs 4, 5 and 6 above, I have relied to the extent I consider reasonable on information provided to me by various working interest owners.
Date: March 27, 2003 /s/ RON E. HOOPER ------------------------------------------------- Ron E. Hooper Senior Vice President Royalty Management on behalf of Bank of America Private Bank, not in its individual capacity but solely as the trustee of Tidelands Royalty Trust "B"
EXHIBIT INDEX