Please wait
August
23, 2006
United
States Securities and Exchange Commission
Division
of Corporation Finance
100
F
Street, N.E.
Washington,
D.C. 20549-7010
Attention:
Ms. April Sifford, Branch Chief
| Re: |
Cross Timbers Royalty Trust
Form 10-K for the Fiscal Year Ended December 31, 2005
Filed March 16, 2006
Form 10-Q for Fiscal Quarter Ended March 31, 2006
Filed April 28, 2006
File No. 001-10982
|
Dear
Ms.
Sifford:
The
following are our responses to your above-referenced comment letter, dated
August 9, 2006. Your comments and our responses thereto are set forth
below, numbered as such comments were numbered in your comment
letter.
Form
10-K for the Fiscal Year Ended December 31, 2005
Annual
Report to Unitholders
| 1. |
You disclose the estimated future net cash flows from proved
reserves
and the present value of estimated future net cash flows at December
31,
2005 on a per unit basis. Such presentation raises questions as
to
relevance because the staff believes such figures cannot logically
be
related to the unitholders without adjustment, and implies that
such
measures are more meaningful than net income per unit. Please remove
such
references to per unit amounts in your filing. Refer to Financial
Reporting Codification Section 202.04. |
United
States Securities and Exchange Commission
August
23, 2006
Page
2
of 5
Response:
Estimated
future net cash flows and the present value of estimated future net cash flows
from proved oil and gas reserves are disclosures required under Statement of
Financial Accounting Standards No. 69 as of the trust’s balance sheet date.
These disclosures are distinguished from GAAP cash flow statement disclosures,
which appear to be the topic of Financial Reporting Codification Section
202.
Like
other royalty trusts, the trust has disclosed these amounts on a per unit basis
as a balance sheet date measurement, based on year-end oil and gas prices.
While
we believe this disclosure provides useful information that unitholders can
compare with other trusts, we agree to remove such per unit amounts in future
filings to preclude any inference that this is a performance
measurement.
Trustee’s
Discussion and Analysis
Years
Ended December 31, 2005, 2004 and 2003
Other
Proceeds
| 2. |
We
note the amount received in the fourth quarter 2005 from
the recalculation of royalties and related interest. With regard
to these
items, tell us:
|
-
the
facts and circumstances leading to it,
-
when
you were initially notified of such adjustment,
-
why
you
believe this is a one-time adjustment, and
-
why
your accounting treatment is appropriate.
| |
We
may have further
comment.
|
Response:
In
August
2005, XTO Energy received a letter from BP America Production Company, a
subsidiary of BP America Inc., stating that XTO Energy and other overriding
royalty interest owners would be receiving principal and interest related to
production periods prior to February 2002 on certain San Juan New Mexico Basin
properties. BP determined these amounts were payable following its review and
recalculation of the overriding royalty due to language in the originating
document creating the override. XTO Energy received $750,233 principal in August
2005 and $1,081,178 interest in September and October 2005. In the month
following receipt,
United
States Securities and Exchange Commission
August
23, 2006
Page 3
of 5
XTO
Energy remitted 90% of these amounts ($675,210 in principal and $973,060
in
interest) to the trust as part of the net profits income
calculation.
XTO
Energy advised the trustee that this was a one-time adjustment, based on
BP’s
written statement that these principal and interest payments would complete
the
adjustment process related to the overriding royalty recalculation for these
prior periods. While net profits income received by the trust often includes
amounts related to purchaser adjustments, due to the size and nature of this
adjustment, XTO Energy believes it is effectively nonrecurring. Because most
of
the properties in the Cross Timbers Royalty Trust are royalty interest
properties not operated by XTO Energy, such adjustments are generally not
known
to XTO Energy or the trustee until reported by the purchaser.
As
disclosed in Note 3 to the Financial Statements included in the 2005 Annual
Report, net profits income consists of net proceeds received in the prior
month
by XTO Energy. Net proceeds consist of gross proceeds received from the sale
of
production, less applicable costs. In accordance with the trust’s cash basis of
accounting (as disclosed in Note 2 to the Financial Statements and specified
by
Staff Accounting Bulletin Topic 12:E), these adjustments were included and
reported in net profits income in the month received by the trust.
|
3.
|
Disclose
your accounting policy for such recalculations and its effect on
your
unitholder distributions in the notes to your financial
statements.
|
Response:
As
indicated in our response to Comment 2 above, we believe that the accounting
policy for recalculations and other adjustments is comprehended in Notes
2 and 3
of the Financial Statements included in the 2005 Annual Report. We note that,
in
addition to disclosure of the effect of this recalculation in the Trustee’s
Discussion and Analysis in the 2005 Annual Report (in the year-to-year and
fourth quarter analysis, and the footnotes to the calculation of net profits
income), the approximate effect was also disclosed in the third quarter 2005
Form 10-Q and unitholder letter, as well as the related monthly cash
distribution news releases furnished to the Commission on Form 8-K. We
respectfully propose to add disclosure in the notes to financial statements
in
future filings, as applicable.
Reversion
Agreement
|
4.
|
We
noted your disclosure as to the reasons why monthly payouts may
be reduced
in fiscal 2006 due to the reversion agreement. We also note
your accounting policies, in accordance with Staff Accounting
Bulletin Topic 12:E, do differ from U.S.
Generally
|
United
States Securities and Exchange Commission
August
23, 2006
Page 4
of 5
Accepted
Accounting Principles. However, Regulation S-X Rule 4-01(a) requires financial
statements to include such further information as is necessary to make the
required statements, in the light of the circumstances under which they are
made, not misleading. Please revise your footnotes to the financial statements
to disclose the potential effects of the reversion agreement on your unitholder
distributions, or tell us why you do not believe this disclosure is
necessary.
Response:
We
agree
this disclosure should be added to the notes to the financial statements,
as was
done in the trust’s Form 10-Q for the quarterly period ended June 30, 2006 which
was filed on July 28, 2006.
We
note
that this disclosure was included in the 2005 Annual Report Summary, the
Trustee’s Discussion and Analysis and in Item 2. Properties of Form 10-K for the
fiscal year ended December 31, 2005. In addition to inclusion in the Trustee’s
Discussion and Analysis in each of Form 10-Qs for the quarterly periods ended
March 31, 2006 and June 30, 2006, this disclosure was included in the first
quarter 2006 letter to unitholders mailed in mid-May 2006 and the second
quarter
letter to unitholders recently mailed.
We
agree
to continue to include an updated disclosure of this matter in the notes
to the
financial statements in future filings, as applicable.
Notes
to Financial Statements
Note
8
- Quarterly Financial Data (Unaudited)
|
5.
|
We
note from the Trustee’s discussion and analysis that the
Trust received a significant remittance of prior period royalties
in the
fourth quarter of 2005. Your presentation of quarterly data should
describe the effects of such infrequent or unusual items. Refer
to
Regulation S-K Item 302 (a)(3) for
guidance.
|
Response:
We
agree
the presentation of quarterly data should include disclosure of the effects
of
the recalculation and remittance of royalties and related interest included
in
third and fourth quarter 2005 amounts. We note the other disclosures of this
matter included in the 2005 Annual Report and other filings, as provided
in our
response to comment 3.
United
States Securities and Exchange Commission
August
23, 2006
Page 5
of 5
We
respectfully propose to add the following footnotes to the quarterly
financial
data disclosure filed in the 2006 Form 10-K, with footnote (a) keyed
to third
quarter 2005 and footnote (b) keyed to fourth quarter 2005:
| (a) |
Net
profits income and distributable income include a one-time
purchaser
adjustment for prior period royalties of $675,210, or approximately
$0.12
distributable income per unit.
|
| (b) |
Net
profits income and distributable income include a one-time
purchaser
adjustment for interest income of $973,060, or approximately
$0.16
distributable income per unit. This interest income is related
to the
prior period royalty adjustment described in (a)
above.
|
In
accordance with your request, we hereby acknowledge that:
-
the
trustee is responsible for the adequacy and accuracy of the disclosures
in the
filing;
-
staff
comments or changes to disclosure in response to staff comments
do not
foreclose the Commission from taking any action with respect to
the
filing;
-
the
trustee may not assert staff comments as a defense in any proceeding
initiated
by the Commission or any person under the federal securities laws
of the
United States.
Please
let me know if you need any further information.
Very
truly yours,
Cross
Timbers Royalty Trust
By:
Bank of America, N.A., Trustee
By: /s/ Nancy
G. Willis
Nancy
G. Willis
Vice
President