UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)

[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended March 31, 2019
OR
[  ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the transition period from ______ to ______
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2019

or

☐ 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: 1-737


Exact name of registrant as specified in its charter:
Texas Pacific Land Trust
(Exact Name
State or other jurisdiction of Registrant as Specified in Its Charter)incorporation or organization:
NOT APPLICABLE

IRS Employer Identification No.:
75-0279735

Address of principal executive offices:
1700 Pacific Avenue, Suite 2900
Dallas, Texas 75201

Registrant’s telephone number, including area code:
(214) 969-5530
NOT APPLICABLE
(State or Other Jurisdiction of Incorporation
or Organization)
75-0279735
(I.R.S. Employer
Identification No.)
1700 Pacific Avenue, Suite 2770, Dallas, Texas
(Address of Principal Executive Offices)
75201
(Zip Code)
(214) 969-5530Former name, former address and former fiscal year, if changed since last report:
(Registrant’s Telephone Number, Including Area Code)Not Applicable

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

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 þ☑   No ¨☐


Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes þ☑    No ¨☐


Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filerþ
☑
 Accelerated filer¨☐
Non-accelerated filer¨ (Do not check if a smaller reporting company)
☐
 Smaller reporting company¨☐
Emerging growth companyo
☐
 


If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    ¨☐


Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Sub-shares in Certificates of Proprietary Interest (par value $0.03-1/3 per share)TPLNew York Stock Exchange



Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ ☐ No þ☑


As of April 30,October 31, 2019, the Registrant had 7,756,156 Sub-share Certificates outstanding.




TEXAS PACIFIC LAND TRUST
Form 10-Q
Quarter Ended March 31,September 30, 2019


Page No.
PART I
FINANCIAL INFORMATION
Page
FINANCIAL INFORMATION
Item 1.
1
1
2
3
4
1011
1418
1418
PART II
OTHER INFORMATION
19
Item 1.1A.
1519
Risk Factors
15
Item 2.
1519
1519
1519
1519
1620
1721





PART I. FINANCIAL INFORMATION

Item 1.
Item 1. Financial Statements

TEXAS PACIFIC LAND TRUST
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except shares and per share amounts)
September 30, 2019December 31, 2018
(Unaudited)
ASSETS
Cash and cash equivalents$249,881  $119,647  
Accrued receivables62,803  48,750  
Tax like-kind exchange escrow—  3,799  
Other assets4,766  3,884  
Prepaid income taxes—  9,398  
Property, plant and equipment, net of accumulated depreciation of $8,006 and $3,012 as of September 30, 2019 and December 31, 2018, respectively87,072  64,802  
Real estate acquired84,902  10,492  
Royalty interests acquired29,320  24,303  
Operating lease right-of-use assets3,250  —  
Real estate and royalty interests assigned through the 1888 Declaration of Trust, no value assigned:
Land (surface rights)—  —  
1/16th nonparticipating perpetual royalty interest—  —  
1/128th nonparticipating perpetual royalty interest—  —  
Total assets$521,994  $285,075  
LIABILITIES AND CAPITAL
Accounts payable and accrued expenses$19,553  $10,505  
Income taxes payable4,364  1,607  
Deferred taxes payable34,996  14,903  
Unearned revenue16,184  13,369  
Operating lease liabilities3,471  —  
Total liabilities78,568  40,384  
Commitments and contingencies—  —  
Capital:
Certificates of Proprietary Interest, par value $100 each; NaN outstanding—  —  
Sub-share Certificates in Certificates of Proprietary Interest, par value $0.0333 each; outstanding 7,756,156 and 7,762,414 Sub-share Certificates as of September 30, 2019 and December 31, 2018, respectively—  —  
Accumulated other comprehensive loss(1,051) (1,078) 
Net proceeds from all sources444,477  245,769  
Total capital443,426  244,691  
Total liabilities and capital$521,994  $285,075  
 March 31,
2019		 December 31,
2018
 (Unaudited)  
ASSETS
   
    
Cash and cash equivalents$113,261
 $119,647
Accrued receivables65,728
 48,750
Tax like-kind exchange escrow61,463
 3,799
Other assets3,397
 3,884
Prepaid income taxes—
 9,398
Property, plant and equipment, net of accumulated depreciation of $4,193 and $3,012 as of March 31, 2019 and December 31, 2018, respectively72,821
 64,802
Real estate acquired57,682
 10,492
Royalty interests acquired27,720
 24,303
Operating lease right-of-use assets2,834
 —
Real estate and royalty interests assigned through the 1888 Declaration of Trust, no value assigned:   
Land (surface rights)—
 —
1/16th nonparticipating perpetual royalty interest—
 —
1/128th nonparticipating perpetual royalty interest—
 —
Total assets$404,906
 $285,075
    
LIABILITIES AND CAPITAL
   
    
Accounts payable and accrued expenses$9,656
 $10,505
Income taxes payable6,760
 1,607
Deferred taxes payable35,903
 14,903
Unearned revenue15,825
 13,369
Operating lease liabilities2,963
 —
Total liabilities71,107
 40,384
    
Commitments and contingencies—
 —
    
Capital:   
Certificates of Proprietary Interest, par value $100 each; none outstanding—
 —
Sub-share Certificates in Certificates of Proprietary Interest, par value $.03 1/3 each; outstanding 7,756,156 and 7,762,414 Sub-share Certificates as of March 31, 2019 and December 31, 2018, respectively—
 —
Accumulated other comprehensive loss(1,069) (1,078)
Net proceeds from all sources334,868
 245,769
Total capital333,799
 244,691
Total liabilities and capital$404,906
 $285,075

See accompanying notes to condensed consolidated financial statements.

1

TEXAS PACIFIC LAND TRUST
CONDENSED CONSOLIDATED STATEMENTS OF INCOMEAND TOTAL COMPREHENSIVE INCOME
(in thousands, except shares and per share amounts)
(Unaudited)
 
 Three Months Ended
March 31,		Three Months Ended
September 30,		Nine Months Ended
September 30,
 2019 20182019201820192018
Revenues:    Revenues:
Oil and gas royalties $33,213
 $26,547
Oil and gas royalties$38,259  $31,253  $111,113  $88,078  
Easements and other surface-related income 31,367
 16,978
Easements and other surface-related income33,911  22,068  87,635  66,845  
Water sales and royalties 22,983
 13,607
Water sales and royalties21,654  18,178  65,067  47,428  
Land sales 103,625
 2,750
Land sales4,621  1,543  113,020  4,293  
Other operating revenue 136
 125
Other operating revenue85  126  329  375  
Total revenues 191,324
 60,007
Total revenues98,530  73,168  377,164  207,019  
    
Expenses:    Expenses:            
Salaries and related employee expenses 6,464
 2,563
Salaries and related employee expenses8,537  4,050  22,742  10,449  
Water service-related expenses 4,578
 1,306
Water service-related expenses5,122  3,707  15,423  7,601  
General and administrative expenses 2,142
 680
General and administrative expenses2,864  1,190  7,102  2,882  
Legal and professional fees 1,783
 647
Legal and professional fees5,558  556  15,198  1,623  
Depreciation and amortization 1,204
 330
Depreciation and amortization2,631  706  5,286  1,519  
Total operating expenses 16,171
 5,526
Total operating expenses24,712  10,209  65,751  24,074  
    
Operating income 175,153
 54,481
Operating income73,818  62,959  311,413  182,945  
    
Other income 393
 130
Other income941  236  1,771  526  
Income before income taxes 175,546
 54,611
Income before income taxes74,759  63,195  313,184  183,471  
Income tax expense    
Income tax expense (benefit):Income tax expense (benefit):
Current 14,548
 10,820
Current9,918  12,433  43,485  36,415  
Deferred 21,000
 —
Deferred4,819  —  20,093  —  
Total income tax expense 35,548
 10,820
Total income tax expense14,737  12,433  63,578  36,415  
Net income $139,998
 $43,791
Net income$60,022  $50,762  $249,606  $147,056  
    
Other comprehensive income — periodic pension costs, net of income taxes of $2 and $3, respectively 9
 13
Other comprehensive income — periodic pension costs, net of income taxes of $2, $3, $7 and $10, respectivelyOther comprehensive income — periodic pension costs, net of income taxes of $2, $3, $7 and $10, respectively9  13  27  39  
Total comprehensive income $140,007
 $43,804
Total comprehensive income$60,031  $50,775  $249,633  $147,095  
    
Weighted average number of Sub-share Certificates outstanding 7,759,808
 7,818,168
Weighted average number of Sub-share Certificates outstanding7,756,156  7,786,692  7,756,643  7,797,262  
    
Net income per Sub-share Certificate — basic and diluted $18.04
 $5.60
Net income per Sub-share Certificate — basic and diluted$7.74  $6.52  $32.18  $18.86  
    
Cash dividends per Sub-share Certificate $6.00
 $4.05
Cash dividends per Sub-share Certificate$—  $—  $6.00  $4.05  
 
See accompanying notes to condensed consolidated financial statements.

2

TEXAS PACIFIC LAND TRUST
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)

Three Months Ended
March 31,		Nine Months Ended
September 30,
2019 2018 20192018
Cash flows from operating activities:   Cash flows from operating activities:  
Net income$139,998
 $43,791
Net income$249,606  $147,056  
Adjustments to reconcile net income to net cash provided by operating activities:   Adjustments to reconcile net income to net cash provided by operating activities:      
Deferred taxes21,000
 —
Deferred taxes20,093  —  
Depreciation and amortization1,204
 330
Depreciation and amortization5,286  1,519  
Changes in operating assets and liabilities:   Changes in operating assets and liabilities:
Operating assets, excluding income taxes(19,331) (10,102)Operating assets, excluding income taxes(18,278) (28,706) 
Prepaid income taxes9,398
 1,202
Prepaid income taxes9,398  1,202  
Operating liabilities, excluding income taxes4,579
 (172)Operating liabilities, excluding income taxes15,361  7,555  
Income taxes payable5,153
 9,622
Income taxes payable2,757  2,208  
Cash provided by operating activities162,001
 44,671
Cash provided by operating activities284,223  130,834  
   
Cash flows from investing activities:   Cash flows from investing activities:      
Proceeds from sale of fixed assets30
 —
Proceeds from sale of fixed assets117  25  
Acquisition of land(47,189) (751)Acquisition of land(74,410) (2,663) 
Acquisition of royalty interests(3,418) —
Acquisition of royalty interests(5,017) —  
Purchase of fixed assets(9,247) (11,841)Purchase of fixed assets(27,579) (40,006) 
Cash used in investing activities(59,824) (12,592)Cash used in investing activities(106,889) (42,644) 
   
Cash flows from financing activities:   Cash flows from financing activities:      
Purchase of Sub-share Certificates in Certificates of Proprietary Interest(4,353) (6,709)Purchase of Sub-share Certificates in Certificates of Proprietary Interest(4,353) (25,501) 
Dividends paid(46,546) (31,652)Dividends paid(46,546) (31,652) 
Cash used in financing activities(50,899) (38,361)Cash used in financing activities(50,899) (57,153) 
   
Net increase in cash, cash equivalents, and restricted cash51,278
 (6,282)Net increase in cash, cash equivalents, and restricted cash126,435  31,037  
Cash, cash equivalents and restricted cash, beginning of period123,446
 79,580
Cash, cash equivalents and restricted cash, beginning of period123,446  79,580  
Cash, cash equivalents, and restricted cash, end of period$174,724
 $73,298
Cash, cash equivalents, and restricted cash, end of period$249,881  $110,617  
   
Supplemental disclosure of cash flow information:   Supplemental disclosure of cash flow information:
Income taxes paid$—
 $—
Income taxes paid$31,337  $34,251  
   
 
See accompanying notes to condensed consolidated financial statements.

3

TEXAS PACIFIC LAND TRUST
NOTES TO CONDENSEDCONSOLIDATEDFINANCIAL STATEMENTS
(UNAUDITED)
  
1. Organization and Description of Business Segments
1.Organization and Description of Business Segments


Texas Pacific Land Trust (which, together with its subsidiaries as the context requires, may be referred to as “Texas Pacific”, the “Trust”, “our”, “we” or “us”) is one of the largest landowners in the State of Texas with approximately 900,000 acres of land in West Texas. Texas Pacific was organized under a Declaration of Trust, dated February 1, 1888, to receive and hold title to extensive tracts of land in the State of Texas, previously the property of the Texas and Pacific Railway Company, and to issue transferable Certificates of Proprietary Interest pro rata to the original holders of certain debt securities of the Texas and Pacific Railway Company.
The Trust is organized to manage land, including royalty interests, for the benefit of its owners. The Trust’s income is derived primarily from oil gas and watergas royalties, sales of water and land, easements and commercial leases of the land.
We operate our business in two2 segments: Land and Resource Management and Water ServiceServices and Operations. Our segments provide management with a comprehensive financial view of our key businesses. The segments enable the alignment of strategies and objectives of the Trust and provide a framework for timely and rational allocation of resources within businesses. See Note 9, “Business Segment Reporting” for further information regarding our segments.


2.Summary of Significant Accounting Policies

2. Summary of Significant Accounting Policies

Interim Unaudited Financial Information


The results for the interim periods shown in this report are not necessarily indicative of future financial results. The accompanying condensed consolidated financial statements include all adjustments necessary to present fairly the financial position of the Trust as of March 31,September 30, 2019 and the results of its operations for the three and nine months ended March 31,September 30, 2019 and 2018, respectively, and its cash flows for the threenine months ended March 31,September 30, 2019 and 2018, respectively. Such adjustments are of a normal recurring nature.


Principles of Consolidation and Basis of Presentation


The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and include our accounts and the accounts of our wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. The accompanying condensed consolidated financial statements should be read in conjunction with the annual financial statements and notes thereto included in the Trust’s Annual Report on Form 10-K for the year ended December 31, 2018, which was filed with the SEC on February 28, 2019. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted from this report.


Use of Estimates in the Preparation of Financial Statements


The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent asset and liabilities at the date of the financial statements and reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates.


Change in Accounting Estimate

Management evaluates its estimates on a routine basis. Effective July 1, 2019, the Trust revised the estimated useful lives of certain water service-related assets after its disaggregation of water service-related projects into sub classifications. The Trust purchased these water service-related assets from July 1, 2017 through June 30, 2019. Based on information gained from operations over this time period, management believes that these water service-related assets will benefit periods ranging from four to 15 years, beginning at the point the water service-related assets were originally placed in service.

The net book value of these water service-related assets at June 30, 2019, was not modified and is depreciated over the revised estimated useful lives of these assets. The effect of the change in estimated useful lives to depreciation expense, net
4

income and earnings per share for the three and nine months ended September 30, 2019 is presented in the table below (in thousands, except earnings per share):

Effect on income statement line items due to change in estimated useful livesThree Months Ended September 30, 2019Nine Months Ended September 30, 2019
Increase in depreciation and amortization expense$916  $916  
Decrease in net income$(723) $(723) 
Decrease in net income per Sub-share Certificate — basic and diluted$(0.09) $(0.09) 

Reclassifications


Certain financial information on the condensed consolidated balance sheets as of December 31, 2018 and condensed consolidated statements of income for the three and nine months ended March 31,September 30, 2018 has been revised to conform to the current year presentation. These revisions affectedinclude, but are not limited to, the classification of the tax like-kind exchange escrow from other assets to a separate balance sheet line item and certain expense items from one expense line item to another expense line item. Total assets and expenses were not affected by these reclassifications.



Cash, Cash Equivalents and Restricted Cash


The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the condensed consolidated balance sheets that sum to the total of the same such amounts shown in the condensed consolidated statements of cash flows (in thousands):

September 30, 2019December 31, 2018
Cash and cash equivalents$249,881  $119,647  
Tax like-kind exchange escrow—  3,799  
Total cash, cash equivalents and restricted cash shown in the statement of cash flows$249,881  $123,446  
  March 31, 2019 December 31, 2018
Cash and cash equivalents $113,261
 $119,647
Tax like-kind exchange escrow 61,463
 3,799
Total cash, cash equivalents and restricted cash shown in the statement of cash flows $174,724
 $123,446
     


Recently Adopted Accounting Guidance


Leases


In February 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, “Leases (Topic 842)”which amended the existing lease accounting guidance to require lessees to recognize a right of use asset and lease liability on the balance sheet for all leases with terms greater than twelve months. We adopted the new leasing standard and all related amendments on January 1, 2019. We elected the optional transition method provided by ASU No. 2018-11, “Leases (Topic 842): Targeted Improvements” and as a result, have not restated our condensed consolidated financial statements for prior periods presented. We also elected the practical expedients permitted under the transition guidance that retain the lease classification and initial direct costs for any leases that existed prior to adoption of the standard. In addition, we have not reassessed the accounting treatment of contracts entered into prior to adoption of the new lease guidance.


Upon adoption,As of September 30, 2019, we have recorded a right-of-use asset for $3.0assets of $3.3 million and a lease liabilityliabilities for $3.0$3.5 million primarily related to operating leases in connection with our administrative offices located in Dallas and Midland, Texas. The office lease agreements require monthly rent payments and expire in MarchDecember 2025 and August 2022, respectively. Operating lease expense is recognized on a straight-line basis over the lease term. Operating lease cost for the three and nine months ended March 31,September 30, 2019 was $0.1 million.$0.2 million and $0.4 million, respectively.



5

Future minimum lease payments under these operating leases are as follows as of March 31,September 30, 2019 (in thousands):

2019 (excluding the three months ended March 31) $344
2019 (excluding the nine months ended September 30)2019 (excluding the nine months ended September 30)$144  
2020 597
2020696  
2021 613
2021796  
2022 597
2022697  
2023 546
2023537  
Thereafter 701
Thereafter1,067  
Total lease payments 3,398
Total lease payments3,937  
Less: imputed interest (435)Less: imputed interest(466) 
Total operating lease liabilities $2,963
Total operating lease liabilities$3,471  
  


3.Recent Accounting Pronouncements

Implementation Costs Incurred in Cloud Computing Arrangements
In August 2018, the FASB issued ASU 2018-14, “Compensation — Retirement Benefits — Defined Benefit Plans — General (Subtopic 715-20): Disclosure Framework — Changes to Disclosure Requirements for Defined Benefit Plans.” The ASU eliminates requirements for certain disclosures and requires additional disclosures under defined benefit pension plans and other post-retirement plans. The ASU is effective for fiscal years ending after December 15, 2020. Early adoption is permitted. The Trust is currently evaluating the impact that ASU 2018-14 will have on our consolidated financial statements and disclosures.

In August 2018, the FASB issued ASU 2018-15, “Intangibles — Goodwill and Other — Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a

Service Contract.” The ASU requires a customer in a cloud computing arrangement that is a service contract to follow existing internal-use software guidance to determine which implementation costs to capitalize as an asset. The ASU is effective for fiscal years and interim periods beginning after December 15, 2019, with early adoption permitted, and may be applied retrospectively or as of the beginning of the period of adoption. The Trust adopted the guidance effective January 1, 2019. The adoption of the guidance did not have a significant impact on our consolidated financial statements.

3. Recent Accounting Pronouncements

In August 2018, the FASB issued ASU 2018-14, “Compensation — Retirement Benefits — Defined Benefit Plans — General (Subtopic 715-20): Disclosure Framework — Changes to Disclosure Requirements for Defined Benefit Plans.” The ASU eliminates requirements for certain disclosures and requires additional disclosures under defined benefit pension plans and other post-retirement plans. The ASU is effective for fiscal years ending after December 15, 2020. Early adoption is permitted. The Trust is currently evaluating the impact that ASU 2018-152018-14 will have on our consolidated financial statements and disclosures.


4.Property, Plant and Equipment

4. Property, Plant and Equipment

Property, plant and equipment, net consisted of the following as of March 31,September 30, 2019 and December 31, 2018 (in thousands):
September 30, 2019December 31, 2018
Property, plant and equipment:
Water service-related assets (1)
$88,625  $62,919  
Furniture, fixtures and equipment5,855  4,297  
Other598  598  
Property, plant and equipment at cost95,078  67,814  
Less: accumulated depreciation(8,006) (3,012) 
Property, plant and equipment, net$87,072  $64,802  
  March 31, 2019 December 31, 2018
Property, plant and equipment:    
Water service-related assets (1)
 $71,593
 $62,919
Furniture, fixtures and equipment 4,823
 4,297
Other 598
 598
Property, plant and equipment at cost 77,014
 67,814
Less: accumulated depreciation (4,193) (3,012)
Property, plant and equipment, net $72,821
 $64,802
     


(1)Water service-related assets reflect assets related to brackish water sourcing and water re-use projects.

(1) Water service-related assets reflect assets related to water sourcing and water treatment projects.

Depreciation expense was $1.2$2.6 million and $0.3$0.7 million for the three months ended March 31,September 30, 2019 and 2018, respectively. Depreciation expense was $5.2 million and $1.5 million for the nine months ended September 30, 2019 and 2018, respectively.



5.Real Estate Activity

6

5. Real Estate Activity

As of March 31,September 30, 2019 and December 31, 2018, the Trust owned the following land and real estate (in thousands, except number of acres):
September 30, 2019December 31, 2018
Number of AcresNet Book ValueNumber of AcresNet Book Value
Land (surface rights)855,476  $—  877,462  $—  
Real estate acquired46,386  84,902  24,715  10,492  
Total real estate situated in 19 counties in Texas901,862  $84,902  902,177  $10,492  
  March 31, 2019 December 31, 2018
  Number of Acres Net Book Value Number of Acres Net Book Value
Land (surface rights) 856,211
 $—
 877,462
 $—
Real estate acquired 36,416
 57,682
 24,715
 10,492
Total real estate situated in 19 counties in Texas 892,627
 $57,682
 902,177
 $10,492
         


No valuation allowance was necessary at March 31,September 30, 2019 and December 31, 2018.


Land Sales


For the threenine months ended March 31,September 30, 2019, the Trust sold approximately 21,25121,986 acres (13,180 acres in Loving County, 5,5985,675 acres in Culberson County, 1,651 acres in Hudspeth County, and 822843 acres in Reeves County, 636 acres in Midland County and approximately 1 acre in Glasscock County) of the Trust’s Assigned land in Texas for an aggregate sales price of approximately $103.6$113.0 million, with an average of approximately $4,876$5,141 per acre.


For the threenine months ended March 31,September 30, 2018, the Trust sold approximately 120167 acres (80 acres in Culberson County, and 40 acres in Loving County, 32 in Reeves County and 15 in El Paso County) of the Trust’s Assigned land in Texas for an aggregate sales price of approximately $2.8$4.3 million, with an average of approximately $22,917$25,734 per acre.



Land Acquisitions


For the threenine months ended March 31,September 30, 2019, the Trust acquired approximately 11,70221,671 acres (Culberson, Glasscock, Loving and Reeves Counties) of land in Texas for an aggregate purchase price of approximately $47.2$74.4 million, with an average of approximately $4,033$3,434 per acre.


For the threenine months ended March 31,September 30, 2018, the Trust acquired approximately 6412,884 acres (all in(Mitchell and Upton County)Counties) of land in Texas for an aggregate purchase price of approximately $0.8$2.7 million, with an average of approximately $1,171$924 per acre.


6.Royalty Interests

6. Royalty Interests

As of March 31,September 30, 2019 and December 31, 2018, the Trust owned the following oil and gas royalty interests (in thousands, except number of interests):
Net Book Value
September 30, 2019December 31, 2018
1/16th nonparticipating perpetual royalty interests$—  $—  
1/128th nonparticipating perpetual royalty interests—  —  
Royalty interests acquired29,320  24,303  
Total royalty interests$29,320  $24,303  
  Net Book Value
  March 31, 2019 December 31, 2018
1/16th nonparticipating perpetual royalty interests $—
 $—
1/128th nonparticipating perpetual royalty interests —
 —
Royalty interests acquired 27,720
 24,303
Total royalty interests $27,720
 $24,303
     


No valuation allowance was necessary at March 31,September 30, 2019 and December 31, 2018.


For the threenine months ended March 31,September 30, 2019, the Trust acquired oil and gas royalty interests in approximately 3011,247 net royalty acres (normalized to 1/8th) for an aggregate purchase price of $3.2$4.7 million, an average price of approximately $10,500$3,800 per net royalty acre.


There were no oil and gas royalty interest transactions for the threenine months ended March 31,September 30, 2018.



7.Income Taxes

7

7. Income Taxes

Effective January 1, 2018, the statutory Federal income tax rate for the Trust decreased from 35% to 21%. The Trust’s effective Federal income tax rate is less than the 21% statutory rate because taxable income is reduced by statutory percentage depletion allowed on mineral royalty income.


The Trust structured the $100.0 million land sale consummated in January 2019 as a §1031exchange§1031 exchange for federal income tax purposes.purposes and recognized temporary tax basis differences related to acquisition of property, plant and equipment for the three and nine months ended September 30, 2019. As a result, the current federal income tax liability and current federal income tax expense were each reduced by approximately $21.0$20.1 million during the threenine months ended March 31, 2019.September 30, 2019, while the deferred federal income tax liability and expense increased by the same amount.



8. Capital
8.Capital


The Sub-share Certificates (“Sub-shares”) and the Certificates of Proprietary Interest are freely interchangeable in the ratio of one Certificate of Proprietary Interest for 3,000 Sub-shares or 3,000 Sub-shares for one Certificate of Proprietary Interest.


Dividends


On March 15, 2019, we paid $46.5 million in dividends representing a regular cash dividend of $1.75 per Sub-share and a special dividend of $4.25 per Sub-share for sub-shareholders of record at the close of business on March 8, 2019.


On March 16, 2018, we paid $31.7 million in dividends representing a regular cash dividend of $1.05 per Sub-share and a special dividend of $3.00 per Sub-share for sub-shareholders of record at the close of business on March 9, 2018.



Repurchases of Sub-shares


During the threenine months ended March 31,September 30, 2019, we purchased and retired 6,258 Sub-shares. During the threenine months ended March 31,September 30, 2018, we purchased and retired 13,14639,768 Sub-shares.



9. Business Segment Reporting
9.Business Segment Reporting

During the periods presented, we reported our financial performance based on the following segments: Land and Resource Management and Water ServiceServices and Operations. Our segments provide management with a comprehensive financial view of our key businesses. The segments enable the alignment of strategies and objectives of the Trust and provide a framework for timely and rational allocation of resources within businesses. We eliminate any inter-segment revenues and expenses upon consolidation.


The Land and Resource Management segment encompasses the business of managing approximately 900,000 acres of land and related resources in West Texas owned by the Trust. The revenue streams of this segment consist primarily of royalties from oil and gas, revenues from easements and commercial leases, and land and material sales.
The Water ServiceServices and Operations segment encompasses the business of providing a full-service water offering to operators in the Permian Basin as well as managing agreements with energy companies and oilfield service businesses to allow such companies to explore for water, drill water wells, construct water-related infrastructure and purchase water sourced from land that we own.Basin. The revenue streams of this segment consist of revenue generated from direct sales of sourced and treated water as well as revenues from royalties on water service-related activity.

8

Segment financial results were as follows for the three and nine months ended March 31,September 30, 2019 and 2018 (in thousands):
Three Months Ended
September 30,		Nine Months Ended
September 30,
20192018  20192018
Revenues:
Land and resource management$65,076  $47,513  $284,223  $142,642  
Water services and operations33,454  25,655  92,941  64,377  
Total consolidated revenues$98,530  $73,168  $377,164  $207,019  
Net income:
Land and resource management$43,911  $36,385  $204,222  $109,700  
Water services and operations16,111  14,377  45,384  37,356  
Total consolidated net income$60,022  $50,762  $249,606  $147,056  
Capital expenditures:
Land and resource management$29  $909  $1,445  $2,464  
Water services and operations4,949  7,533  26,134  37,542  
Total capital expenditures$4,978  $8,442  $27,579  $40,006  
Depreciation and amortization:
Land and resource management$257  $160  $695  $330  
Water services and operations2,374  546  4,591  1,189  
Total depreciation and amortization$2,631  $706  $5,286  $1,519  
  Three Months Ended
March 31,
  2019 2018
Revenues:    
Land and resource management $160,459
 $42,753
Water service and operations 30,865
 17,254
Total consolidated revenues $191,324
 $60,007
     
Net income:    
Land and resource management $123,117
 $32,811
Water service and operations 16,881
 10,980
Total consolidated net income $139,998
 $43,791
     
Capital expenditures    
Land and resource management $534
 $1,252
Water service and operations 8,713
 10,589
Total capital expenditures $9,247
 $11,841
     
Depreciation and amortization:    
Land and resource management $177
 $70
Water service and operations 1,027
 260
Total depreciation and amortization $1,204
 $330
     


The following table presents total assets and property, plant and equipment, net by segment as of March 31,September 30, 2019 and December 31, 2018 (in thousands):
September 30, 2019December 31, 2018
Assets:
Land and resource management$398,120  $198,922  
Water services and operations123,874  86,153  
Total consolidated assets$521,994  $285,075  
Property, plant and equipment, net:
Land and resource management$4,470  $3,720  
Water services and operations82,602  61,082  
Total consolidated property, plant and equipment, net$87,072  $64,802  
  March 31, 2019 December 31, 2018
Assets:    
Land and resource management $297,450
 $198,922
Water service and operations 107,456
 86,153
Total consolidated assets $404,906
 $285,075
     
Property, plant and equipment, net    
Land and resource management $4,052
 $3,720
Water service and operations 68,769
 61,082
Total consolidated property, plant and equipment, net $72,821
 $64,802
     

10. Oil and Gas Producing Activities


There are a number of oil and gas wells that have been drilled but are not yet completed (“DUC”) where the Trust has a royalty interest. Currently,As of September 30, 2019, the Trust has identified 313424 DUC wells subject to our royalty interest. The processBeginning in the third quarter of identifying these wells is ongoing and2019, we anticipate updates going forwardimplemented a new methodology to be affected by aquantify the number of factors including, but not limitedDUC wells. We changed the measurement period for determining a DUC well from waiting a minimum of 120 days to ongoing changes/updates to our identification process, changes/updates by Drilling Info (our main sourceall wells awaiting completion. Additionally, we began using uniform drilling spacing units with pooled interests which yields a higher number of information in identifying these wells) in their identification process, the eventual completion of these DUC wells and additional wells drilled but not completed by companies operating where we haveat a lower net royalty interest. For comparative purposes, the table below presents the number of DUC wells by quarter for current and prior periods utilizing the new methodology discussed above:

9


11.Subsequent EventsNumber of DUC wells
September 30, 2019424
June 30, 2019369
March 31, 2019376
December 31, 2018362
September 30, 2018341
June 30, 2018364
March 31, 2018347
December 31, 2017319


11. Subsequent Events

We evaluate events that occur after the balance sheet date but before consolidated financial statements are, or are available to be issued to determine if a material event requires our amending the consolidated financial statements or disclosing the event. We evaluated subsequent events through the filing date we issued these consolidated financial statements and identified the followingdid not identify any subsequent eventevents requiring disclosure.


Land Transaction

On April 22, 2019, the Trust acquired approximately 3,400 acres of land in Loving County, Texas for an aggregate purchase price of $20.4 million. The Trust utilized proceeds from the land sale in January 2019 to fund the acquisition.



*****


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Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 

Cautionary Statement Regarding Forward-Looking Statements
 
Statements in this Quarterly Report on Form 10-Q that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including statements regarding management’s expectations, hopes, intentions or strategies regarding the future. Forward-looking statements include statements regarding the Trust’s future operations and prospects, the markets for real estate in the areas in which the Trust owns real estate, applicable zoning regulations, the markets for oil and gas, production limits on prorated oil and gas wells authorized by the Railroad Commission of Texas, expected competition, the pending proxy contest, the impacts thereof and other possible changes in composition of the Trustees, management’s intent, beliefs or current expectations with respect to the Trust’s future financial performance and other matters. All forward-looking statements in this Report are based on information available to us as of the date this Report is filed with the Securities and Exchange Commission(the“SEC”), and we assume no responsibility to update any such forward-looking statements, except as required by law. All forward-looking statements are subject to a number of risks, uncertainties and other factors that could cause our actual results, performance, prospects or opportunities to differ materially from those expressed in, or implied by, these forward-looking statements. These risks, uncertainties and other factors include, but are not limited to, the factors discussed in Item 1A. “Risk Factors” of Part I ofour Annual Reporton Form 10-Kfor the year ended December 31, 2018, and in Part I, Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Part II, Item 1A. “Risk Factors” of this Quarterly Report on Form 10-Q.


The following discussion and analysis should be read together with (i) the factors discussed in Item 1A. “Risk Factors” of Part I of our Annual Report on Form 10-K for the year ended December 31, 2018, (ii) the factors discussed in Part II, Item 1A. “Risk Factors,” if any,Factors” of this Quarterly Report on Form 10-Q and (iii) the Financial Statements, including the Notes thereto, and the other financial information appearing elsewhere in this Report. Period-to-period comparisons of financial data are not necessarily indicative, and therefore should not be relied upon as indicators, of the Trust’s future performance. Words or phrases such as “expects” and “believes”, or similar expressions, when used in this Form 10-Q or other filings with the SEC, are intended to identify “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995.


Overview


Texas Pacific Land Trust (which together with its subsidiaries as the context requires, may be referred to as “Texas Pacific”, the “Trust”, “our”, “we” or “us”) is one of the largest landowners in the State of Texas with approximately 900,000 acres of land in West Texas. We were organized under a Declaration of Trust, dated February 1, 1888, to receive and hold title to extensive tracts of land in the State of Texas, previously the property of the Texas and Pacific Railway Company. Our Trustees are empowered under the Declaration of Trust to manage the lands with all the powers of an absolute owner.
Our revenues are derived primarily from oil gas and water-relatedgas royalties, sales of water and land, easements and leases of the land.commercial leases. Due to the nature of our operations, our revenue is subject to substantial fluctuations from quarter to quarter and year to year. We do not actively solicit sales of land. In addition, theThe demand for, and sale price of, particular tracts of land is influenced by many factors beyond our control, including general economic conditions, the rate of development in nearby areas and the suitability of the particular tract for the ranchingcommercial uses prevalent in western Texas.
We are not an oil and gas producer. Rather, our oil and gas revenue is derived from our oil and gas royalty interests. Thus, in addition to being subject to fluctuations in response to the market prices for oil and gas, our oil and gas royalty revenues are also subject to decisions made by the owners and operators of the oil and gas wells to which our royalty interests relate as to investments in and production from those wells. We monitor production reports byfrom the oiloperators, the Texas Railroad Commission, and gas companiesother private data providers to assure that we are being paid the appropriate royalties. We review conditions in the agricultural industry in the areas in which our lands are located and seek to keep as much of our lands as possible under lease to local ranchers.
Our revenue from easements is primarily generated from easement contracts covering activities such aspipelines transporting oil, gas and gas pipelinesrelated hydrocarbons, power line and utility easements, and subsurface wellbore easements. The majoritySince the second quarter of 2016, our easements typically have a ten-year term. We also enter into agreements with operatorsCommercial lease revenue is derived primarily from saltwater disposal royalties, processing, storage and mid-stream companies to lease land from us, primarily forcompression facilities and roads.
In prior years, we entered into agreements with energy companies and oilfield service businesses to allow such companies to explore for water, drill water wells, construct water-related infrastructure and purchase water sourced from land that we own. Energy businesses use water for their oil and gas projects while non-energy businesses (i.e., water management

11

service companies) operate water facilities to produce and sell water to energy businesses. We collect revenue from royalties and water sales under these legacy agreements.
Demand for water solutions is expected to grow as drilling and completion activity in the Permian Basin continues to increase. In response to that anticipated demand, the Trust formed Texas Pacific Water Resources LLC (“TPWR”) in June 2017. TPWR, a single member LLC and wholly owned subsidiary of the Trust, focuses on providing full-service water offerings to operators in the Permian Basin. These services include, but are not limited to, brackish water sourcing, produced-water gathering/treatment/recycling,treatment, infrastructure development/construction,development, disposal solutions, water tracking, analytics and well testing services. TPWR is committed to sustainable water development with significant focus on the large-scale implementation of recycled water operations.


During the threenine months ended March 31,September 30, 2019, the Trust invested approximately $8.7$25.8 million in TPWR projects to develop brackish water sourcing and water re-usetreatment assets.


Results of Operations


We operate our business in two segments: Land and Resource Management and Water ServiceServices and Operations. We eliminate any inter-segment revenues and expenses upon consolidation.


We analyze financial results for each of our reportable segments. The reportable segments presented are consistent with our reportable segments discussed in Note 9, “Business Segment Reporting” in Item 1. Financial Statements in this Quarterly Report on Form 10-Q. We monitor our reporting segments based upon revenue and net income calculated in accordance with accounting principles generally accepted in the United States of America (“GAAP”).


For the three months ended March 31,September 30, 2019 as compared to the three months ended March 31,September 30, 2018


Revenues. Revenues increased $131.3$25.3 million, or 218.8%34.7%, to $191.3$98.5 million for the three months ended March 31,September 30, 2019 compared to $73.2 million for the three months ended September 30, 2018. Net income increased $9.2 million, or 18.2%, to $60.0 million for the three months ended March 31, 2018. Net income increased $96.2 million, or 219.7%,September 30, 2019 compared to $140.0$50.8 million for the three months ended March 31, 2019 compared to $43.8 million for the three months ended March 31,September 30, 2018.


The following is an analysis of our operating results for the comparable periods by reportable segment (in thousands):
Three Months Ended September 30,
20192018  
Revenues:
Land and resource management:
Oil and gas royalties$38,259  39 %$31,253  43 %
Easements and other surface-related income22,111  22 %14,591  20 %
Land sales and other operating revenue4,706  5 %1,669  2 %
65,076  66 %47,513  65 %
Water services and operations:
Water sales and royalties21,654  22 %18,178  25 %
Easements and other surface-related income11,800  12 %7,477  10 %
33,454  34 %25,655  35 %
Total consolidated revenues$98,530  100 %$73,168  100 %
Net income:
Land and resource management$43,911  73 %$36,385  72 %
Water services and operations16,111  27 %14,377  28 %
Total consolidated net income$60,022  100 %$50,762  100 %

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  Three Months Ended March 31,
  2019 2018
Revenues:        
Land and resource management:        
Oil and gas royalties $33,213
 18% $26,547
 44%
Easements and other surface-related income 23,485
 12% 13,331
 22%
Land sales and other operating revenue 103,761
 54% 2,875
 5%
  160,459
 84% 42,753
 71%
Water service and operations:        
Water sales and royalties 22,983
 12% 13,607
 23%
Easements and other surface-related income 7,882
 4% 3,647
 6%
  30,865
 16% 17,254
 29%
Total consolidated revenues $191,324
 100% $60,007
 100%
         
Net income:        
Land and resource management $123,117
 88% $32,811
 75%
Water service and operations 16,881
 12% 10,980
 25%
Total consolidated net income $139,998
 100% $43,791
 100%
         


Land and Resource Management


Land and Resource Management segment revenues increased $117.7$17.6 million, or 275.3%37.0%, to $160.5$65.1 million for the three months ended March 31,September 30, 2019 as compared with $42.8$47.5 million for the comparable period of 2018.
Oil and gas royalties. Oil and gas royalty revenue was $33.2$38.3 million for the three months ended March 31,September 30, 2019 compared to $26.5$31.3 million for the three months ended March 31,September 30, 2018. Oil royalty revenue was $26.4$33.1 million for the three months ended March 31,September 30, 2019, compared to $20.1 million foran increase of 37.2% over the comparable period of 2018.three months ended September 30, 2018 when oil royalty revenue was $24.1 million. This increase in oil royalty revenue is principally due to the combined effect of a 58.5%50.4% increase in crude oil production subject to the Trust’s royalty interest, partially offset by a 16.7%8.8% decrease in the average price per royalty barrel of crude oil received during the three months ended March 31,September 30, 2019 compared to the same period in 2018. Gas royalty revenue was $6.8$5.2 million for the three months ended March 31,September 30, 2019, an increasea decrease of 6.6%27.6% over the three months ended March 31,September 30, 2018 when gas royalty revenue was $6.4$7.1 million. This increaseWhile gas production increased 125.9% in gas royalty revenue resulted from a volume increase of 119.6% for the three months ended March 31,September 30, 2019 as compared to September 30, 2018, the 64.6% decrease in prices received for gas production over the same time period of 2018, partially offset byhad a 46.7% decrease in the average price received.more significant impact on gas royalty revenue.
Easements and other surface-related income. Easements and other surface-related income was $23.5$22.1 million for the three months ended March 31,September 30, 2019, an increase of 76.2%51.5% compared to $13.3$14.6 million for the three months ended March 31,September 30, 2018. Easements and other surface-related income includes pipeline, easement income,power line and utility easements, commercial leases, material sales, and seismic and temporary permit income, lease rental income and income from material sales.permits. The increase in easements and other surface-related income is principally related to thea 39.6% increase in pipeline easement income which increased 115.0% to $16.6$12.8 million for the three months ended March 31,September 30, 2019 from $7.7$9.1 million for the three months ended March 31,September 30, 2018. Additionally, commercial lease revenue was $3.0 million for the three months ended September 30, 2019, more than double the $1.2 million for the three months ended September 30, 2018. Easements and other surface-related income is unpredictable and may vary significantly from period to period.
Land sales and other operating revenue. Land sales and other operating revenue includes revenue generated from land sales and grazing leases. For the three months ended March 31,September 30, 2019, we sold approximately 21,25177 acres of land for total consideration of $103.6$4.6 million, or approximately $4,876$59,960 per acre. ForLand sales revenue was $1.5 million for the three months ended March 31,September 30, 2018, wewhen the Trust sold approximately 12047 acres of land for total considerationan average price of $2.8 million, or approximately $22,917$32,953 per acre.
Net income. Net income for the Land and Resource Management segment was $123.1$43.9 million for the three months ended March 31,September 30, 2019 compared to $32.8$36.4 million for the three months ended March 31,September 30, 2018. As discussed above, revenues for the Land and Resource Management segment increased $117.7$17.6 million for the three months ended March 31,September 30, 2019 compared to the same period of 2018. Expenses, including income tax expense, for the Land and Resource Management segment were $37.4$21.2 million and $10.0$11.1 million for the three months ended March 31,September 30, 2019 and 2018, respectively. The increase in expenses was principally related to increased income tax expense associated with 2019 land sales totaling $103.6 million. Total income tax expenseapproximately $4.9 million of $35.5 millionlegal and professional fees as discussed further below under “Other Financial Data — Consolidated.” No such expenses were incurred for the three months ended March 31, 2019 includes $21.0 million which is eligible for deferral as a result of our classification of the land sale as a §1031 tax exchange.September 30, 2018. The remaining increase was principally related to increased salarysalaries and related employee expenses and general and administrative expenses as discussed further below under “Other Financial Data — Consolidated.”

Water ServiceServices and Operations
Water ServiceServices and Operations segment revenues increased $13.6 million, or 78.9%,30.4% to $30.9$33.5 million for the three months ended March 31,September 30, 2019 as compared with $17.3$25.7 million for the comparable period of 2018.
Water sales and royalties. Water sales and royalty revenuesroyalties revenue was $21.7 million for the three months ended March 31,September 30, 2019, an increase of $23.0 million increased $9.4$3.5 million, or 68.9% over19.1%, compared with the comparable period of 2018.three months ended September 30, 2018 when water sales and royalty revenue was $18.2 million. This increase iswas principally due to increased brackisha 34.0% sales increase in the number of barrels of sourced and treated water sales and,sold in the three months ended September 30, 2019 as compared to a lesser extent, pipeline easement royalties.the same period in 2018.
Easements and other surface-related income. Easements and other surface-related income for the Water ServiceServices and Operations segment includes pipeline easement royalties, commercial lease royalties and income from temporary permits. For the three months ended March 31,September 30, 2019, the combined revenueincome from these revenue streams was $7.9$11.8 million, an increase of 57.8%, as compared to $3.6$7.5 million for the three months ended March 31,September 30, 2018. Pipeline easement royalties increased $4.0 million to $6.5 million for the three months ended September 30, 2019 from $2.5 million for the three months ended September 30, 2018.
13

Net income. Net income for the Water ServiceServices and Operations segment was $16.9$16.1 million for the three months ended March 31,September 30, 2019 compared to $11.0$14.4 million for the three months ended March 31,September 30, 2018. As discussed above, revenues for the Water ServiceServices and Operations segment increased $13.6 million30.4% for the three months ended March 31,September 30, 2019 compared to the same period of 2018. Expenses, including income tax expense, for the Water ServiceServices and Operations segment were $14.0$17.4 million for the three months ended March 31,September 30, 2019 as compared to $6.3$11.3 million for the three months ended March 31,September 30, 2018.

The increase in expenses during 2019 is principally related to increased income taxthe $1.8 million increase in depreciation and amortization expense relatedfor the three months ended September 30, 2019 compared to increased revenues and increasedthe same period of 2018. Additionally, water service operating expenses, principallyprimarily fuel and equipment rentalrepairs and maintenance related to increased sourcing and transfer of water.
water, increased $1.4 million for the three months ended September 30, 2019 compared to the same period of 2018. The remaining increase was principally related to increased salaries and related employee expenses as discussed further below under “Other Financial Data — Consolidated.”
Other Financial Data — Consolidated
 
Salaries and related employee expenses. Salaries and related employee expenses were $6.5$8.5 million for the three months ended March 31,September 30, 2019 compared to $2.6$4.1 million for the comparable period of 2018. The increase in salaries and related employee expenses is directly related to the increase in the number of employees from 3658 employees as of March 31,September 30, 2018 to 7589 as of March 31,September 30, 2019 and additional contract labor expenses for the three months ended March 31,September 30, 2019 compared to the same period of 2018.
Water service-related expenses. Water service-related expenses were $4.6$5.1 million for the three months ended March 31,September 30, 2019 compared to $1.3$3.7 million for the comparable period of 2018. TheseThis increase in expenses include expenses for equipment rental,was principally the result of an increase in fuel and other equipment-relatedrepairs and maintenance expenses associated with sourcingto source and transportingtransfer water. The increase in expenses is directly related to the 34.0% sales increase in the number of barrels of sourced and treated water for our water service and operations segment.sold as previously discussed.
General and administrative expenses. General and administrative expenses increased $1.5$1.7 million to $2.1$2.9 million for the three months ended March 31,September 30, 2019 from $0.7$1.2 million for the same period of 2018. The increase in general and administrative expenses is primarily due to expensesprincipally related to land transactionsincreased expenses associated with our independent contractor service providers, computer-related software and a contribution of $0.3 million to the Texas Parksservices, and Wildlife Foundation to benefit the Balmorhea State Park in West Texas during the three months ended March 31, 2019. No such contributions were made during the three months ended March 31, 2018.additional liability insurance.
Legal and professional expensesfees. Legal and professional fees increased 175.6% to $1.8were $5.6 million for the three months ended March 31,September 30, 2019 fromcompared to $0.6 million for the comparable period of 2018. The increase in legal and professional fees for the three months ended March 31,September 30, 2019 compared to 2018 is principally due to increasedapproximately $4.9 million of legal and professional fees related to land transactions,the proxy contest to elect a new water agreementsTrustee, the entry into and proxy fees.payments made under the settlement agreement dated July 30, 2019 and the conversion exploration committee as disclosed in the Trust's Current Report on Form 8-K filed with the SEC on July 30, 2019. We anticipate receiving a partial reimbursement of these legal and professional fees under coverage provided by our director and officer insurance policy. The amount of the reimbursement has not yet been determined.

Depreciation and amortization. Depreciation and amortization was $1.2$2.6 million for the three months ended March 31,September 30, 2019 compared to $0.3$0.7 million for the three months ended March 31,September 30, 2018. The increase in depreciation and amortization is principally related to the Trust’s investment in water service-related assets placed in service in 2019 and the latter half of 2018.2018, and to a lesser extent, additional depreciation expense related to the change in estimated useful lives of certain water service-related assets as discussed in Note 2, “Summary of Significant Accounting Policies — Change in Accounting Estimate.”



Cash Flow Analysis
14

For the threenine months ended March 31,September 30, 2019 as compared to the threenine months ended March 31,September 30, 2018

Revenues. Revenues increased $170.2 million, or 82.2%, to $377.2 million for the nine months ended September 30, 2019 compared to $207.0 million for the nine months ended September 30, 2018. Net income increased $102.5 million, or 69.7%, to $249.6 million for the nine months ended September 30, 2019 compared to $147.1 million for the nine months ended September 30, 2018.

The following is an analysis of our operating results for the comparable periods by reportable segment (in thousands):
Nine Months Ended September 30,
20192018  
Revenues:
Land and resource management:
Oil and gas royalties$111,113  29 %$88,078  43 %
Easements and other surface-related income59,761  16 %49,896  24 %
Land sales and other operating revenue113,349  30 %4,668  2 %
284,223  75 %142,642  69 %
Water services and operations:
Water sales and royalties65,067  17 %47,428  23 %
Easements and other surface-related income27,874  8 %16,949  8 %
92,941  25 %64,377  31 %
Total consolidated revenues$377,164  100 %$207,019  100 %
Net income:
Land and resource management$204,222  82 %$109,700  75 %
Water services and operations45,384  18 %37,356  25 %
Total consolidated net income$249,606  100 %$147,056  100 %

Land and Resource Management

Land and Resource Management segment revenues increased $141.6 million, or 99.3%, to $284.2 million for the nine months ended September 30, 2019 as compared with $142.6 million for the comparable period of 2018.
Oil and gas royalties. Oil and gas royalty revenue was $111.1 million for the nine months ended September 30, 2019 compared to $88.1 million for the nine months ended September 30, 2018. Oil royalty revenue was $92.6 million for the nine months ended September 30, 2019, an increase of 34.2% over the nine months ended September 30, 2018 when oil royalty revenue was $69.0 million. This increase in oil royalty revenue is principally due to a 49.4% increase in crude oil production subject to the Trust’s royalty interest, partially offset by a 9.8% decrease in the average price per royalty barrel of crude oil received during the nine months ended September 30, 2019 compared to the same period in 2018. Gas royalty revenue was $18.5 million for the nine months ended September 30, 2019, a decrease of 3.0%, over the nine months ended September 30, 2018 when gas royalty revenue was $19.1 million. While gas production increased 122.3% in the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018, the 52.6% decrease in prices received for gas production over the same time period had a more significant impact on gas royalty revenue.
Easements and other surface-related income. Easements and other surface-related income was $59.8 million for the nine months ended September 30, 2019, an increase of 19.8% compared to $49.9 million for the nine months ended September 30, 2018. Easements and other surface-related income includes pipeline, power line and utility easements, commercial leases, material sales, and seismic and temporary permits. The increase in easements and other surface-related income is principally related to the increase in pipeline easement income which increased 16.1% to $39.2 million for the nine months ended September 30, 2019 from $33.8 million for the nine months ended September 30, 2018. Additionally, commercial lease revenue was $5.8 million for the nine months ended September 30, 2019, more than double the $2.1 million for the nine months ended September 30, 2018. Easements and other surface-related income is unpredictable and may vary significantly from period to period.
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Land sales and other operating revenue. Land sales and other operating revenue includes revenue generated from land sales and grazing leases. For the nine months ended September 30, 2019, we sold approximately 21,986 acres of land for total consideration of $113.0 million, or approximately $5,141 per acre. For the nine months ended September 30, 2018, we sold approximately 167 acres of land for total consideration of $4.3 million, or approximately $25,734 per acre.
Net income. Net income for the Land and Resource Management segment was $204.2 million for the nine months ended September 30, 2019 compared to $109.7 million for the nine months ended September 30, 2018. As discussed above, revenues for the Land and Resource Management segment increased $141.6 million for the nine months ended September 30, 2019 compared to the same period of 2018. Expenses, including income tax expense, for the Land and Resource Management segment were $80.0 million and $32.9 million for the nine months ended September 30, 2019 and 2018, respectively. The increase in expenses was principally related to increased income tax expense associated with 2019 land sales totaling $113.0 million. Total consolidated income tax expense of $63.6 million for the nine months ended September 30, 2019 includes $20.1 million which is eligible for deferral as a result of our classification of a land sale in January 2019 as a §1031 tax exchange and recognized temporary tax basis differences related to acquisitions of property, plant and equipment. The remaining increase was principally related to increased legal and professional fees, salaries and related employee expenses and general and administrative expenses as discussed further below under “Other Financial Data — Consolidated.”
Water Services and Operations
Water Services and Operations segment revenues increased $28.5 million, or 44.4%, to $92.9 million for the nine months ended September 30, 2019 as compared with $64.4 million for the comparable period of 2018.
Water sales and royalties. Water sales and royalties revenue was $65.1 million for the nine months ended September 30, 2019, an increase of $17.7 million, or 37.2%, compared with the nine months ended September 30, 2018 when water sales and royalty revenue was $47.4 million. This increase was principally due to a 41.8% sales increase in the number of barrels of sourced and treated water sold in the nine months ended September 30, 2019 as compared to the same period in 2018.
Easements and other surface-related income. Easements and other surface-related income for the Water Services and Operations segment includes pipeline easement royalties, commercial lease royalties and income from temporary permits. For the nine months ended September 30, 2019, the combined income from these revenue streams was $27.9 million as compared to $16.9 million for the nine months ended September 30, 2018, an increase of 64.5%. This increase was principally related to pipeline easement royalties which increased $11.1 million to $14.4 million for the nine months ended September 30, 2019 from $3.3 million for the nine months ended September 30, 2018.
Net income. Net income for the Water Services and Operations segment was $45.4 million for the nine months ended September 30, 2019 compared to $37.4 million for the nine months ended September 30, 2018. As discussed above, revenues for the Water Services and Operations segment increased $28.5 million for the nine months ended September 30, 2019 compared to the same period of 2018. Expenses, including income tax expense, for the Water Services and Operations segment were $47.5 million for the nine months ended September 30, 2019 as compared to $27.0 million for the nine months ended September 30, 2018. The increase in expenses during 2019 is principally related to increased water service-related operating expenses, principally fuel, repairs and maintenance and equipment rental related to sourcing and transfer of water. The remaining increase was principally related to increased salaries and related employee expenses as discussed further below under “Other Financial Data — Consolidated.”
Other Financial Data — Consolidated
Salaries and related employee expenses. Salaries and related employee expenses were $22.7 million for the nine months ended September 30, 2019 compared to $10.4 million for the comparable period of 2018. The increase in salaries and related employee expenses is directly related to the increase in the number of employees from 58 employees as of September 30, 2018 to 89 as of September 30, 2019 and additional contract labor expenses for the nine months ended September 30, 2019 compared to the same period of 2018.
Water service-related expenses. Water service-related expenses were $15.4 million for the nine months ended September 30, 2019 compared to $7.6 million for the comparable period of 2018. This increase in expenses was principally related to an increase in fuel, repairs and maintenance and equipment rental to source and transfer water. The increase in expenses is directly related to the 41.8% sales increase in the number of barrels of sourced and treated water sold as previously discussed.
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General and administrative expenses. General and administrative expenses increased $4.2 million to $7.1 million for the nine months ended September 30, 2019 from $2.9 million for the same period of 2018. The increase in general and administrative expenses is primarily due to increased expenses associated with our independent contractor service providers, computer-related software and services, and a contribution of $0.3 million to the Texas Parks and Wildlife Foundation to benefit the Balmorhea State Park in West Texas during the nine months ended September 30, 2019.
Legal and professional fees. Legal and professional fees were $15.2 million for the nine months ended September 30, 2019 compared to $1.6 million for the comparable period of 2018. The increase in legal and professional fees for the nine months ended September 30, 2019 compared to 2018 is principally due to approximately $12.2 million of legal and professional fees related to the proxy contest to elect a new Trustee, the entry into and payments made under the settlement agreement dated July 30, 2019 and the conversion exploration committee as disclosed in the Trust's Current Report on Form 8-K filed with the SEC on July 30, 2019. We anticipate receiving a partial reimbursement of these legal and professional fees under coverage provided by our director and officer insurance policy. The amount of the reimbursement has not yet been determined.
Depreciation and amortization. Depreciation and amortization was $5.3 million for the nine months ended September 30, 2019 compared to $1.5 million for the nine months ended September 30, 2018. The increase in depreciation and amortization is principally related to the Trust’s investment in water service-related assets placed in service in 2019 and the latter half of 2018 and to a lesser extent, additional depreciation expense related to the change in estimated useful lives of certain water service-related assets as discussed in Note 2, “Summary of Significant Accounting Policies — Change in Accounting Estimate.”

Cash Flow Analysis
For the nine months ended September 30, 2019 as compared to the nine months ended September 30, 2018
Cash flows provided by operating activities for the threenine months ended March 31,September 30, 2019 and 2018 were $162.0$284.2 million and $44.7$130.8 million, respectively. This increase in operating cash flows is principally due to increases in proceeds from land sales, oil and gas royalties, collected, easements and other surface-related payments received and water sales and royalties collected during the threenine months ended March 31,September 30, 2019 compared to the threenine months ended March 31,September 30, 2018.
Cash flows used in investing activities were $59.8$106.9 million compared to $12.6$42.6 million for the threenine months ended March 31,September 30, 2019 and 2018, respectively. The increased use of investing cash flows is principally due to our acquisition of approximately 11,70221,671 acres of land in Culberson, Glasscock, Loving and Reeves Counties, Texas for $47.2approximately $74.4 million during the threenine months ended March 31,September 30, 2019. This increase was partially offset by a $12.4 million reduction in capital expenditures during the nine months ended September 30, 2019 as compared to the same period of 2018.
Cash flows used in financing activities were $50.9 million compared to $38.4$57.2 million for the threenine months ended March 31,September 30, 2019 and 2018, respectively. During the threenine months ended March 31,September 30, 2019, the Trust paid total dividends of $46.5 million consisting of a regular cash dividend of $1.75 per Sub-share Certificate (“Sub-share”) and a special dividend of $4.25 per Sub-share to each sub-shareholder of record at the close of business on March 8, 2019. During the threenine months ended March 31,September 30, 2018, the Trust paid total dividends of $31.7 million consisting of a regular cash dividend of $1.05 per Sub-share and a special dividend of $3.00 per Sub-share to each sub-shareholder of record at the close of business on March 9, 2018.

Liquidity and Capital Resources
 
The Trust’s principal sources of liquidity are its revenues from oil gas and watergas royalties, easements and other surface-related income, and water and land sales.
Our primary liquidity and capital requirements are for capital expenditures related to our water serviceWater Services and operationsOperations segment, working capital and general corporate needs. As of March 31,September 30, 2019, we had cash and cash equivalents of $113.3

$249.9 million that we expect to utilize, along with cash flow from operations, to provide capital to support the growth of our business, particularly the growth of TPWR, to repurchase additional Sub-shares subject to market conditions, and for general corporate purposes. We believe that cash from operations, together with our cash and cash equivalents balances, will be enough to meet ongoing capital expenditures, working capital requirements and other cash needs for the foreseeable future.


Off-Balance Sheet Arrangements


The Trust has not engaged in any off-balance sheet arrangements.


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Critical Accounting Policies and Estimates


This discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make judgments, estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and disclosures of contingent assets and liabilities. For a full discussion of our accounting policies please refer to Note 2 to the Consolidated Financial Statements included in our 2018 Annual Report on Form 10-K filed with the SEC on February 28, 2019. Our most critical accounting policies and estimates include: accrual of oil and gas royalties and gain recognition on land sales. We continually evaluate our judgments, estimates and assumptions. We base our estimates on the terms of underlying agreements, historical experience and other factors that we believe are reasonable based on the circumstances, the results of which form our management’s basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. There have been no material changes to our critical accounting policies and estimates from the information provided in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our 2018 Annual Report on Form 10-K.


New Accounting Pronouncements


For further information regarding recently issued accounting pronouncements, see Note 3, “Recent Accounting Pronouncements” in the notes to the consolidated financial statements included in Item 1. Financial Statements in this Quarterly Report on Form 10-Q.


Item 3. Quantitative and Qualitative Disclosures AboutMarket Risk
 
There have been no material changes in the information related to market risk of the Trust since December 31, 2018.
 
Item 4. Controls and Procedures
 
Pursuant to Rule 13a-15, management of the Trust under the supervision and with the participation of Tyler Glover, the Trust’s Chief Executive Officer, and Robert J. Packer, the Trust’s Chief Financial Officer, carried out an evaluation of the effectiveness of the design and operation of the Trust’s disclosure controls and procedures as of the end of the Trust’s fiscal quarter covered by this Quarterly Report on Form 10-Q. Based upon that evaluation, Mr. Glover and Mr. Packer concluded that the Trust’s disclosure controls and procedures are effective in timely alerting them to material information relating to the Trust required to be included in the Trust’s periodic SEC filings.
 
There have been no changes in the Trust’s internal control over financial reporting during the Trust’s most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Trust’s internal control over financial reporting.



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PART II
OTHER INFORMATION
 
Item 1. Legal Proceedings.


Texas Pacific is not involved in any material pending legal proceedings.


Item 1A. Risk Factors
 
There have been no material changes inThe following risk factor supplements the risk factors previously disclosedcontained in response toPart I, Item 1A. “Risk Factors” of Part I ofset forth in the Trust’s Annual Report on Form 10-K for the year ended December 31, 2018.2018 filed with the SEC on February 28, 2019.

Any governance or structural changes to the Trust could adversely affect the trading price and/or form of our Certificates of Proprietary Interest and Sub-shares.
Our Trustees formed a conversion exploration committee (the "Committee") in June 2019 to evaluate, from a corporate, corporate governance, tax, accounting and business perspective, whether the Trust should be converted into a C-corporation or, in the alternative, whether the Trust should remain a business trust (with potential amendments to the Trust’s Declaration of Trust). The Committee has been tasked with making a non-binding recommendation to the Trustees regarding this matter. We cannot predict whether, or when, any structural or governance change may be made that would affect the securities held by our sub-shareholders, our governance and/or our Declaration of Trust and how our sub-shareholders and investors may view any structural or governance change, if any. There can be no assurance of the terms of such changes or their effect on our securities or trading price. The trading price of our securities may be adversely affected by any decision of the Trustees to convert the Trust to a C-corporation or to remain as a trust.
 
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
DuringThe Trust did not repurchase any Sub-shares during the three months ended March 31, 2019, the Trust repurchased Sub-shares as follows:September 30, 2019.

Period 
Total
Number of
Sub-shares
Purchased
 
Average
Price Paid
per
Sub-share
 
Total Number
of Sub-shares
Purchased as
Part of Publicly
Announced Plans
or Programs
 
Maximum
Number (or
Approximate
Dollar Value) of
Sub-shares that
May Yet Be
Purchased Under
the Plans or
Programs
January 1 through January 31, 2019 2,000
 $624.60
 —
 —
February 1 through February 28, 2019 1,879
 728.54
 —
 —
March 1 through March 31, 2019 2,379
 729.39
 —
 —
Total 6,258
 $695.64
 —
 —
         
(1)The Trust purchased and retired 6,258 Sub-shares in the open market during the three months ended March 31, 2019.


Item 3. Defaults Upon Senior Securities


Not applicable 



Item 4. Mine Safety Disclosures


Not applicable



Item 5. Other Information


None



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Item 6. Exhibits


EXHIBIT INDEX
EXHIBIT
NUMBER
DESCRIPTION
31.1*
31.2*
32.1*
32.2*
101*
101*The following information from the Trust’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2019 formatted in XBRL (eXtensibleiXBRL (Inline eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets; (ii) Condensed Consolidated Statements of Income and Total Comprehensive Income, (iii) Condensed Consolidated Statements of Cash Flows and (iv) Notes to Condensed Consolidated Financial Statements.
104The cover page from the Trust’s Quarterly Report on Form 10-Q formatted in iXBRL.

*Filed or furnished herewith.




* Filed or furnished herewith.

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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.
 
 
TEXAS PACIFIC LAND TRUST
(Registrant)
Date:TEXAS PACIFIC LAND TRUST
(Registrant)
Date:MayNovember 7, 2019By:/s/ Tyler Glover
Tyler Glover, General Agent and
Chief Executive Officer
Date:MayNovember 7, 2019By:/s/ Robert J. Packer
Robert J. Packer, General Agent and
Chief Financial Officer


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