SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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[ü] |
QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE |
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SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30,
2010
OR
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[ ] |
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE |
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SECURITIES
EXCHANGE ACT OF 1934
Commission file number 1-8518
LL&E
ROYALTY TRUST
(Exact name of registrant as
specified in its charter)
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Texas
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76-6007940
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(State or other jurisdiction of
Incorporation
or organization)
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(I.R.S. Employer
Identification No.)
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The Bank of New
York Mellon
Trust Company, N.A.,
Trustee
Global Corporate Trust
919 Congress Avenue
Austin, Texas
(Address of principal
executive offices)
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78701
(Zip Code)
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Registrants telephone number, including area code:
(800) 852-1422
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 ü No
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files).
Yes No ü
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act.
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Large
Accelerated
Filer
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Accelerated
Filer
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Non-Accelerated
Filer
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Smaller
reporting
company ü
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(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange Act).
Yes ü No
At June 30, 2010, 18,991,304 Units of Beneficial Interest
in the registrant were outstanding.
TABLE OF
CONTENTS
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EX-31 |
EX-32 |
-1-
Special
Note
LL&E Royalty Trust is concurrently filing its quarterly
reports on
Form 10-Q
for the first, second and third quarters of 2009 and 2010 and
its annual reports on
Form 10-K
for the years ended December 31, 2009 and December 31.
2010 (collectively, the Delayed Filings). These
reports were delayed due to the previously reported difficulties
the Trust encountered with the calculation of the Jay Field
royalties furnished to the Trust by Quantum Resources Management
LLC (Quantum), which is the operator of the Jay
Field and the owner of the working interest owner from which the
Trusts royalty interest was created. You should review all
of the Delayed Filings concurrently, and should not rely on any
of the Delayed Filings without having reviewed the most recent
filings made by the Trust.
As previously disclosed, the Trustee engaged an independent
joint interest auditing firm (the Consultant), to
review Quantums computation of the amounts payable to the
Trust with respect to its interest in the Jay Field from the
time of the sale by The Louisiana Land and Exploration Company
(LL&E) of its working interest to Quantum
Resources Management LLC in 2007 through August 2008 (the
First Review Period). Also as previously disclosed,
the Consultant completed its review of the First Review Period
and Quantum and the Trustee reached agreement on the issues the
Consultant had raised relating to the computation of expenses
properly chargeable in the calculation of amounts payable to the
Trust for the First Review Period.
Also as previously disclosed, the Trustee subsequently engaged
the Consultant to review the computation of the amounts payable
to the Trust with respect to its interest in the Jay Field for
the production months September 2008 through March 2010 (the
Second Review Period). The Consultant concluded its
review of the Second Review Period, and Quantum and the Trustee
resolved all significant issues raised by the Consultant.
As previously disclosed in the Trusts filings, the Trust
is now required by the terms of the Trust Agreement to sell
its assets and to liquidate. As previously disclosed, the
Trustee engaged Stifel, Nicolaus & Company,
Incorporated, a nationally-recognized investment banking firm
(the Financial Advisor) to market the Trusts
assets in anticipation of a sale in accordance with the terms of
the Trust Agreement. The Financial Advisor marketed the
Trusts assets and had received preliminary indications of
interest in late 2010, and the Trustee intended to sell the
assets in accordance with the terms of the Trust Agreement.
However, as previously announced, in November 2010, the Trust
and Trustee were named as defendants in a Complaint for Legal
and Equitable Relief (the Complaint) filed by Jeff
Beckett in the United States District Court for the Eastern
District of Michigan. Mr. Becketts Complaint seeks a
judicial modification of the terms of the Trust Agreement
governing the Trust, a judgment declaring that the termination
provisions of the Trust Agreement do not apply and an order
preventing the sale of the Trusts assets. The Complaint
also makes a number of other allegations and seeks removal of
the Trustee and other relief.
As a result of Mr. Becketts lawsuit, certain bidders
who had submitted preliminary indications of interest to the
Financial Advisor indicated that they were unwilling to proceed
with the purchase of the Jay Field interest from the Trust until
the Beckett lawsuit was resolved. Consequently, as previously
disclosed, the Trustee suspended the sale process pending a
resolution of the lawsuit.
The Trustee has been requested by a holder of more than 10% of
the Units to call a meeting of the Unitholders for the purpose
of voting to remove The Bank of New York Mellon
Trust Company, N.A. as Trustee and to appoint a successor
trustee of the Trust. The Trustee called the meeting and filed
proxy materials with the SEC. On August 9,
-2-
2011 the proposed successor informed the Trustee that it was no
longer willing to serve as successor trustee. The meeting was
convened as scheduled on August 12, 2011, but was adjourned
until August 24, 2011 as a result of the withdrawal of the
successor. In connection with the calling of the meeting, the
parties to the Beckett lawsuit entered into a settlement
agreement as described in this report.
Additional information regarding the status of the Beckett
lawsuit, the status of the sale of the Trusts assets, the
computation of the Jay Field Royalties and other matters is
included in the Trusts Annual Report on
Form 10-K
for the year ended December 31, 2010.
-3-
PART I
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Item 1.
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Financial
Statements.
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LL&E
ROYALTY TRUST
Presentation
of Financial Information
The accompanying unaudited financial statements of LL&E
Royalty Trust (the Trust) have been prepared in
accordance with the instructions to
Form 10-Q.
The financial statements were prepared on the basis of cash
receipts and disbursements and are not intended to be a
presentation in conformity with accounting principles generally
accepted in the United States of America. The information
reflects all adjustments which, in the opinion of the Trustee,
are necessary for a fair presentation of the results for the
interim periods presented. The financial information should be
read in conjunction with the financial statements and notes
thereto included in the Trusts Annual Report on
Form 10-K
for the year ended December 31, 2009 as well as the
Trusts Annual Report on
Form 10-K
for the year ended December 31, 2010. The cash earnings and
distributions for the three and six months ended June 30,
2010 are not necessarily indicative of the results to be
expected for the year ending December 31, 2010. Please see
the Annual Report on
Form 10-K
for the year ended December 31, 2010.
-4-
LL&E
ROYALTY TRUST
Statements
of Cash Earnings and Distributions
(Unaudited)
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Three Months Ended
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Six Months Ended
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June 30,
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June 30,
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2010
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2009
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2010
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2009
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Royalty revenues
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$
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224,725
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$
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46,585
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$
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233,924
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$
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569,483
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Trust administrative expenses
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(25,313
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(160,102
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(439,216
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(567,442
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Cash earnings (loss)
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199,412
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(113,517
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(205,292
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2,041
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Changes in undistributed cash
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(199,412
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113,517
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205,292
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(2,041
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Cash distributions
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$
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$
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$
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$
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Cash distributions per Unit
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$
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$
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$
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$
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Units outstanding
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18,991,304
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18,991,304
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18,991,304
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18,991,304
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Statements
of Assets, Liabilities and Trust Corpus
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June 30,
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December 31,
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2010
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2009
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ASSETS
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Cash
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$
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239,449
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$
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3,741
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Net overriding royalty interests in productive oil and gas
properties
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76,282,000
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76,282,000
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Less: accumulated amortization (note 2)
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(76,282,000
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(76,282,000
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Total assets
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$
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239,449
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$
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3,741
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LIABILITIES AND TRUST CORPUS
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Advances payable
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$
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441,000
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$
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Trust Corpus (18,991,304 Units of Beneficial Interest
authorized, issued and outstanding)
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(201,551
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3,741
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Contingencies (note 7)
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Total liabilities and trust corpus
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$
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239,449
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$
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3,741
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Statements
of Changes in Trust Corpus
(Unaudited)
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Six Months Ended
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June 30,
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2010
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2009
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Trust Corpus, beginning of period (note 4)
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$
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3,741
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$
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62
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Cash earnings
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(205,292
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2,041
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Cash distributions
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Amortization of royalty interest (note 4)
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Trust Corpus, end of period
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$
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(201,551
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$
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2,103
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The accompanying notes are an integral part of these financial
statements.
-5-
LL&E
ROYALTY TRUST
NOTES TO
FINANCIAL STATEMENTS
June 30, 2010
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(1)
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Formation
of the Trust
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On June 28, 1983, The Louisiana Land and Exploration
Company (herein Working Interest Owner or Company) created
LL&E Royalty Trust (Trust) and distributed Units of
Beneficial Interest (Units) in the Trust to the holders of
record of capital stock of the Company on the basis of one Unit
for each two shares of capital stock held on June 22, 1983.
On October 22, 1997, the shareholders of the Company
approved a definitive agreement to merge with Burlington
Resources Inc. (BR). Effective on that date, the Company became
a wholly owned subsidiary of BR. The merger has had no
significant effects on the Trust. On March 31, 2006,
ConocoPhillips acquired BR via merger into Cello Acquisition
Corp., a wholly owned subsidiary of ConocoPhillips. The
surviving entity of the merger was Cello Acquisition Corp.,
which changed its name to Burlington Resources Inc. (New BR)
Consequently, New BR (including the Company) is a wholly owned
subsidiary of ConocoPhillips. The merger has had no significant
effects on the Trust. In December 2006, the Company, as working
interest owner, and ExxonMobil, as the operator of the Jay
Field, sold their respective interests in the Jay Field
properties located in Florida and Alabama to Quantum Resource
Management LLC (Quantum). Quantum began operating
the Jay Field properties in April 2007. As used in this report,
the terms Working Interest Owner and Working
Interest Owners refer to The Louisiana Land and
Exploration Company for the South Pass 89 and Offshore Louisiana
properties and, after its December 2006 acquisition of the Jay
Field interest, Quantum, for the Jay Field properties.
Upon creation of the Trust, the Company conveyed to the Trust
(a) net overriding royalty interests (Overriding
Royalties), which are equivalent to net profits interests, in
certain productive oil and gas properties located in Alabama,
Florida and in federal waters offshore Louisiana (Productive
Properties) and (b) 3 percent royalty interests (Fee
Lands Royalties) in approximately 400,000 acres of the
Companys then unleased, undeveloped south Louisiana fee
lands (Fee Lands). The Overriding Royalties and the Fee Lands
Royalties are referred to collectively as the
Royalties. Title to the Royalties is held by a
partnership (Partnership) of which the Trust and the Company are
the only partners, holding 99 percent and 1 percent
interests, respectively.
The Trust is passive, with The Bank of New York Mellon
Trust Company, N.A., (the Trustee), having only such powers
as are necessary for the collection and distribution of revenues
resulting from the Royalties, the payment of Trust liabilities
and the conservation and protection of the Trust estate. The
Units were listed on the New York Stock Exchange (NYSE
SYMBOL LRT) through November 19, 2009 and are
now traded over the counter.
The accompanying financial statements should be read in
conjunction with the Trusts most recent Annual Reports on
Form 10-K.
Termination
of the Trust
The Trust Agreement provides that the Trust will terminate
in the event that the net revenues fall below $5,000,000 for two
successive years (the Termination Threshold). Net
revenues are calculated as royalty revenues after administrative
expenses of the Trust and as if the Trust had received its pro
rata portion of any amounts being
-6-
LL&E
ROYALTY TRUST
NOTES TO
FINANCIAL STATEMENTS (Continued)
withheld by the Working Interest Owners or the Partnership under
escrow arrangements or to make refund payments pursuant to the
Conveyances (the Trusts pro rata portion of escrowed
amounts relating to the future dismantlement of platforms are
included in the net revenue calculation for this purpose).
Net revenues to the Trust for the years ended December 31,
2007 and 2006 calculated as described above, were approximately
$1,600,000 and $2,100,000, respectively. Consequently, the Trust
is required to terminate and is required to sell the assets of
the Trust for cash by means of a public auction. After paying or
making provision for all actual and contingent liabilities of
the Trust, including fees of the Trustee, the Trustee will
distribute any remaining cash as promptly as practicable.
Despite the termination of the Trust, the Trustee is continuing
to act as Trustee for purposes of liquidating and winding up the
affairs of the Trust. The Trustee does not expect to make any
further monthly distributions to Unit holders in the interim
period prior to any distribution resulting from the sale of the
Trusts assets. See Managements Discussion and
Analysis.
The Trustee has retained Stifel, Nicolaus & Company,
Incorporated (Stifel Nicolaus), a nationally
recognized investment banking firm, to market the Trusts
assets. However, as announced by the Trustee on October 22,
2008, the Trustee has determined that, in light of market
conditions at that time, it is in the best interests of the
Trust unit holders to postpone the sale of the Trusts
assets for an indefinite period of time. The Trustee recommenced
the marketing efforts in 2010. The Financial Advisor marketed
the Trusts assets and had received preliminary indications
of interest in late 2010, and the Trustee intended to sell the
assets in accordance with the terms of the Trust Agreement.
However, as previously announced, in November 2010 the Trust and
Trustee were named as defendants in a Complaint for Legal and
Equitable Relief (the Complaint) filed by Jeff
Beckett in the United States District Court for the Eastern
District of Michigan. Mr. Becketts Complaint sought a
judicial modification of the terms of the Trust Agreement
governing the Trust, a judgment declaring that the termination
provisions of the Trust Agreement do not apply and an order
preventing the sale of the Trusts assets. The Complaint
also made a number of other allegations and sought removal of
the Trustee and other relief.
However, on July 7, 2011, Mr. Beckett and the Trust
entered into a settlement agreement pursuant to which
Mr. Beckett agreed to dismiss his lawsuit with prejudice
within ten days after the Trust holds a meeting of the Unit
holders for the purpose of voting on a proposal to remove the
Trustee and to appoint a successor trustee of the Trust,
provided that notice of the meeting is mailed by August 1,
2011 and the meeting occurs by September 1, 2011. Notice of
the meeting was mailed prior to August 1, 2011, and the
meeting was convened on August 12, 2011. Because the
proposed successor trustee withdrew its consent to serve shortly
prior to the meeting, the meeting has been adjourned until
August 24, 2011.
The Trust Agreement provides that if any asset required to
be sold has not been sold by December 31, 2010, the Trustee
is to cause the asset to be sold at public auction to the
highest cash bidder. Consequently, unless replaced or prevented
from doing so by the Beckett lawsuit or otherwise, the Trustee
will mail notice of a public auction to all Unit holders at
least 30 days prior to an such auction in accordance with
the Trust Agreement. No approval of the Unit holders will
be required in connection with the sale of the Trusts
assets.
-7-
LL&E
ROYALTY TRUST
NOTES TO
FINANCIAL STATEMENTS (Continued)
As of June 30, 2010, the Trust had $239,449 in cash
reserved for Trust expenses and unpaid invoices for
administrative services totaling approximately $613,736. Based
on current general and administrative expenditures, in the
absence of Royalty Revenues the Trustee expects that it will be
required to borrow money in accordance with the
Trust Agreement to fund future Trust expenses. However, no
assurance can be given that the Trustee will be able to borrow
money on terms the Trustee considers reasonable or at all. The
Trust Agreement permits, but does not require, The Bank of
New York Mellon Trust Company, N.A. or an affiliate to lend
funds to the Trustee. In the event any loans are made to the
Trust, the Trust Agreement will prohibit the Trustee from
making any distributions to unitholders until those loans are
repaid in full.
For the first six months of 2010, the Trust did not receive any
royalty revenue associated with the South Pass or Offshore
Louisiana properties. During the first six months of 2010, the
Trust received a royalty income of $10,014 with respect to the
Fee Land property. Excess production costs must be recovered by
the Working Interest Owners before any distribution of royalty
revenues will be made to the Trust. In the second quarter 2010,
the Trust received a single payment of approximately $223,910
with respect to the Jay Field property as a result of a review
conducted by an independent oil and gas accounting firm retained
by the Trustee to review the Working Interest Owners
calculation of amounts relevant to the determination of the net
proceeds properly payable to the Trust under the Conveyances.
For the first six months of 2010, the Trust did not receive any
insurance recovery proceeds. For the first six months of 2009,
the Trust received insurance recovery proceeds of $927,814 for
South Pass 89, a portion of which was applied to accumulated
excess production costs and current production costs. The
remaining insurance proceeds combined with royalty revenues
resulted in net royalty income of $526,448 to the Trust for
South Pass 89 for the first six months of 2009. In addition, the
Working Interest Owner received insurance proceeds of $9,113,272
for Offshore Louisiana which was applied to reduce a portion of
the Trusts accumulated excess production costs for this
property. The Trust received no royalties for Offshore Louisiana
or Jay Field during the first six months of 2009. For the Fee
Land property, the Trust received no insurance recovery proceeds
but received a royalty revenue of $43,045 for the first six
months of 2009.
Recent
Developments
A meeting of the unit holders has been called by the Trustee at
the request of a unit holder. The purpose of the meeting is to
vote on the unit holders proposal to remove The Bank of
New York Mellon Trust Company, N.A. as Trustee and to
appoint a successor trustee of the Trust. The meeting was
convened on August 12, 2011. Because the proposed successor
trustee withdrew its consent to serve shortly prior to the
meeting, the meeting has been adjourned until August 24,
2011. All statements in this report regarding the intentions or
future actions of the Trustee depend on the Trustee remaining
the trustee of the Trust. However, the Trustee may be replaced
at the meeting.
The Trust Agreement provides that the Trust will terminate
in the event that the net revenues fall below $5,000,000 for two
successive years (the Termination Threshold). Net
revenues to the Trust for the years ended
-8-
LL&E
ROYALTY TRUST
NOTES TO
FINANCIAL STATEMENTS (Continued)
December 31, 2007 and 2006 calculated in accordance with
the Trust Agreement were $1,634,740 and $2,094,226,
respectively. Consequently, the Trust is required to terminate
and is now required to sell the assets of the Trust for cash in
a public auction. After paying or making provision for all
actual and contingent liabilities of the Trust, including fees
of the Trustee, the Trustee will distribute any remaining cash
as promptly as practicable. Despite the termination of the
Trust, the Trustee is continuing to act as Trustee for purposes
of liquidating and winding up the affairs of the Trust. The
Trustee does not expect to make any further monthly
distributions to Unit holders in the interim period prior to any
distribution resulting from the sale of the Trusts assets.
The Trustee has retained the Financial Advisor to market the
Trusts assets. However, as announced by the Trustee on
October 22, 2008, the Trustee previously determined that,
in light of market conditions at that time, it was in the best
interests of the Trust Unit holders to postpone the sale of
the Trusts assets for an indefinite period of time. The
Trustee recommenced the marketing efforts in 2010. The Financial
Advisor marketed the Trusts assets and had received
preliminary indications of interest in late 2010, and the
Trustee intended to sell the assets in accordance with the terms
of the Trust Agreement. However, as previously announced,
in November 2010 the Trust and Trustee were named as defendants
in a Complaint for Legal and Equitable Relief (the
Complaint) filed by Jeff Beckett in the United
States District Court for the Eastern District of Michigan.
Mr. Becketts Complaint seeks a judicial modification
of the terms of the Trust Agreement governing the Trust, a
judgment declaring that the termination provisions of the
Trust Agreement do not apply and an order preventing the
sale of the Trusts assets. The Complaint also makes a
number of other allegations and seeks removal of the Trustee and
other relief.
As a result of Mr. Becketts lawsuit, certain bidders
who had submitted preliminary indications of interest to the
Financial Advisor indicated that they were unwilling to proceed
with the purchase of the Jay Field interest from the Trust until
the Beckett lawsuit was resolved. Consequently, as previously
disclosed, the Trustee suspended the sale process pending
resolution of the lawsuit. On March 4, 2011 the Court
entered a stipulated order in which the Trust voluntarily agreed
that the Trust would not sell any assets of the Trust until at
least such time as the Court entered an order dismissing or
transferring the case or preliminarily enjoining the sale of the
assets. The Trustee has filed a Motion to Dismiss for Failure to
Join Required Parties, or, in the Alternative, to Transfer Venue
with the Court seeking dismissal of the suit
and/or
transfer of the suit to the United States District Court for the
Western District of Texas. However, on July 7, 2011,
Mr. Beckett and the Trust entered into a settlement
agreement pursuant to which Mr. Beckett agreed to dismiss
his lawsuit with prejudice within ten days after the Trust holds
a meeting of the Unit holders for the purpose of voting on a
proposal to remove the Trustee and to appoint a successor
trustee of the Trust, provided that notice of the meeting is
mailed by August 1, 2011 and the meeting occurs by
September 1, 2011. Notice of the meeting was mailed prior
to August 1 and the meeting was convened on August 12,
2011. Because the proposed successor trustee withdrew its
consent to serve shortly prior to the meeting, the meeting has
been adjourned until August 24, 2011. If the suit is not
dismissed, the pending suit could adversely affect the price the
Trust might receive in any sale that may be possible.
As a result of the Beckett lawsuit, the Trust was unable to
complete the sale of its assets prior to December 31, 2010,
and is now required by the terms of the Trust Agreement to
sell the assets by means of a public auction. The
-9-
LL&E
ROYALTY TRUST
NOTES TO
FINANCIAL STATEMENTS (Continued)
Trustee is unable to predict whether the persons who had
submitted preliminary indications of interest in acquiring the
Trusts assets in 2010 will be interested in bidding for
them in a public auction, or, if they are willing to bid,
whether they will bid more or less than the amounts they
indicated they would consider on a preliminary basis. The
preliminary indications of interest the Financial Advisor
received when it marketed the Jay Field interest in 2010 ranged
from $500,000 to $3,500,000. None of the preliminary indications
of interest were firm offers, and all of them remained subject
to further review.
The Trust Agreement provides that if any asset required to
be sold has not been sold by December 31, 2010, the Trustee
is to cause the asset to be sold at public auction to the
highest cash bidder. Consequently, unless removed or prevented
from doing so by a court order, the Trustee will auction the
Trusts assets. In connection with the auction, the Trustee
will mail notice of a public auction to all Unit holders at
least 30 days prior to any such auction. No approval of the
Unit holders will be required in connection with the sale of the
Trusts assets.
As of June 30, 2010, the Trust had $239,449 in cash
reserved for Trust expenses and unpaid invoices for
administrative services totaling $613,736.
As of December 31, 2009, the Trust had $3,741 in cash and
was holding unpaid invoices for administrative services totaling
$393,577. See Managements Discussion and
Analysis.
As of August 19, 2011, the Trust had no cash except for the
cash advanced to the Trust by BNY Mellon, as affiliate of the
Trustee, as an interest-free advance to enable the Trust to pay
administrative expenses. As of August 19, 2011, the total
amount advanced to the Trust (the Bank Advance) by
the Bank was $2,255,520, of which $161,217 remained available to
pay expenses. However, at August 19, 2011, in addition to
the amount owed to the Bank, the Trust was also holding unpaid
invoices for administrative services totaling $443,492. See
Managements Discussion and Analysis. The entire amount of
the Bank Advance and all other liabilities and expenses of the
Trust must be repaid before any distributions can be made to
Unit holders.
If the Trust is unable to sell its assets and liquidate
promptly, the Trust may attempt to borrow additional funds in
accordance with the Trust Agreement to fund Trust
expenses. However, the Trust will be prohibited from borrowing
additional funds unless the Trustee determines that the total
amount the Trust would then have borrowed is less than 50% of
the amount of revenues the Trustee estimates will be received by
the Trust during the immediately following six months.
Consequently, unless the Trustee determines that the
Trusts assets will be sold within six months, no further
borrowings appear reasonably possible. Even if the Trust is able
to proceed with the sale of its assets, the Trust may not be
able to borrow funds. The Trust Agreement permits, but does
not require, The Bank of New York Mellon Trust Company,
N.A. or an affiliate to lend funds to the Trustee. In the event
any loans are made to the Trust, the Trust Agreement will
prohibit the Trustee from making any distributions to Unit
holders until those loans are repaid in full. If the Trust is
unable to sell its assets or borrow additional funds, the Trust
would probably have to be liquidated in bankruptcy.
For the first six months of 2010, the Trust did not receive any
royalty revenue associated with the South Pass or Offshore
Louisiana properties. During the first six months of 2010, the
Trust received a royalty income of $10,014
-10-
LL&E
ROYALTY TRUST
NOTES TO
FINANCIAL STATEMENTS (Continued)
with respect to the Fee Land property. Excess production costs
must be recovered by the Working Interest Owners before any
distribution of royalty revenues will be made to the Trust. In
the second quarter 2010, the Trust received a single payment of
approximately $223,910 with respect to the Jay Field property as
a result of a review conducted by an independent oil and gas
accounting firm retained by the Trustee to review the Working
Interest Owners calculation of amounts relevant to the
determination of the net proceeds properly payable to the Trust
under the Conveyances.
During the entire year for 2010, the Trust did not receive any
royalty revenue except for $10,014 from the Fee Lands (which
were sold in November 2009) and for $223,910 received in
2010 as an adjustment resulting from a review conducted by an
independent oil and gas accounting firm retained by the Trustee
to review the Working Interest Owners calculation of the
net proceeds properly payable to the Trust with respect to the
Jay Field Property. The adjustment related to the Working
Interest Owners calculation of the net proceeds from the
acquisition of the Jay Field working interest by Quantum
Resources Management, LLC in 2007 through August 2008. The
portion of the adjustment related to 2007, even if received in
2007, would not have affected the termination of the Trust in
accordance with the terms of the Trust Agreement.
During 2009, the only royalty revenue the Trust received was
$737,199 with respect to the South Pass 89 property and $70,905
from the Fee Lands. In addition, on November 11, 2009, the
Trust sold its interest in the south Louisiana acreage described
in the Trusts public filings as the Fee Lands.
The sale resulted in cash proceeds to the Trust, net of fees of
$24,828 paid to the auction company that conducted the sale, of
approximately $500,000.
During 2008, the Trust received a single payment of
approximately $437,000 as a result of a review conducted by an
independent oil and gas accounting firm retained by the Trustee
to review the Working Interest Owners calculation of
amounts relevant to the determination of the net proceeds
properly payable to the Trust with respect to the inadvertent
inclusion of sulfur extraction processing costs at the Jay and
Little Escambia Creek Field Unit desulfurization plant in the
calculation of Jay Field Gross Proceeds. The only other royalty
revenue the Trust received in 2008 was $204,741 attributable to
the Fee Lands Royalties and $37,239 attributable to South Pass
89.
As previously described in the Trusts filings, in addition
to the Working Interest Owners rights to recover Excess
Production Costs prior to making payments to the Trust, the
Working Interest Owners have the right under the Conveyances to
escrow or withhold amounts for certain anticipated future
expenses, and the Working Interest Owners have done so and
expect to continue doing so in the future. The Working Interest
Owners are not required to fund actual escrow accounts and
neither has done so. However, they must calculate the royalties
as though they had done so.
Unit holders should review the reserve reports as of
September 30, 2009 and 2010 filed as exhibits to this
Form 10-Q
but should note, as previously disclosed in the Trusts
filings, that the reserve reports are not necessarily indicative
of the market value of the interests, and the value of the
Trusts assets will be determined solely by the amount a
buyer is willing to pay for the assets.
-11-
LL&E
ROYALTY TRUST
NOTES TO
FINANCIAL STATEMENTS (Continued)
As previously disclosed, the administrative expenses of the
Trust are approximately $1,000,000 annually, but have increased
as a result of the Beckett lawsuit. As described above, the
Trusts unpaid invoices at August 19, 2011 were
approximately $443,492, and the Trust owed an additional
$2,255,520 to the Bank, of which $161,217 remained available to
pay expenses. All additional expenses, including expenses
incurred by the Trust but for which no invoices had been
received at August 19, 2011, and including fees that will
become payable to the Financial Advisor upon the sale of the
assets and all other fees the Trust incurs, whether in
connection with the Beckett lawsuit or as a result of the delays
caused by the Beckett lawsuit, must be paid prior to any
distribution to Unit holders. It is increasingly likely that the
sale of the Trusts assets will not generate sufficient
proceeds to pay the Trusts liabilities. If the sale of the
Trusts assets does not generate sufficient proceeds to pay
the Trusts liabilities, there will be no further
distributions to Trust Unit holders. As noted above,
however, all Trust Unit holders will be mailed a notice of
the public auction of the Trusts assets, and any Unit
holder who desires to do so may submit a bid for some or all of
the assets.
As described in the Trusts prior filings, the Trustee
engaged an independent joint interest auditing firm (the
Consultant), to review the computation of the
amounts payable to the Trust with respect to its interest in the
Jay Field from the time of the sale by The Louisiana Land and
Exploration Company (LL&E) of its working
interest to Quantum Resources Management LLC in 2007 through
August 2008 (the First Review Period). Also as
previously reported, the Consultant completed its review of the
First Review Period, Quantum and the Trustee reached agreement
on the issues the Consultant had raised relating to the
computation of expenses properly chargeable in the calculation
of amounts payable to the Trust for the First Review Period, and
Quantum paid the Trust an additional $223,910 in 2010 as an
adjustment relating to the First Review Period.
As further described in the Trusts prior filings, the
Trustee subsequently engaged the Consultant to review the
computation of the amounts payable to the Trust with respect to
its interest in the Jay Field for the production months
September 2008 through March 2010 (the Second Review
Period). Quantum and the Trustee have reached agreement on
the material issues raised by the Consultant with respect to the
Second Review Period.
As previously disclosed, and as permitted by the conveyances
creating the Trusts interest in the Jay Field net profits
interest, Quantum has informed the Trusts independent
petroleum engineers that Quantum has determined to escrow (or
otherwise deduct from any payments otherwise due to the Trust)
125% of the estimated abandonment and related costs it expects
to incur in connection with the working interest from which the
Trusts interest was created. At June 30, 2010
Quantums estimate of the abandonment and related costs it
expects to incur in connection with the working interest was
approximately $15.8 million, of which approximately
$4.5 million had previously been withheld by the working
interest owner for estimated abandonment and related costs (the
Trusts interests in each of these figures is 50%). At
December 31, 2010 Quantums estimate of the
abandonment and related costs it expects to incur in connection
with the working interest was approximately $16.1 million,
of which approximately $4.5 million had previously been
withheld by the working interest owner for estimated abandonment
and related costs (the Trusts interests in each of these
figures is 50%). As previously disclosed, Quantum has recently
indicated that it intends to withhold 125% of the estimated
abandonment and related costs it expects to incur in connection
-12-
LL&E
ROYALTY TRUST
NOTES TO
FINANCIAL STATEMENTS (Continued)
with the working interest before making additional distributions
to the Trusts interest. Subject to the payment of the
Excess Production Costs, the holder of the Trusts interest
would be entitled to 50% of the escrowed (or unpaid) amount
remaining in excess of actual abandonment and related costs
(whether the actual costs are more or less than the estimates).
As previously disclosed, the conveyances do not require Quantum
to place the escrowed funds into an actual escrow
account or to segregate funds in any other manner, and neither
Quantum nor the prior working interest owner has done so.
However, under the conveyances, Quantum (or any successor owner
of the working interest) is required to calculate Gross Proceeds
as though such funds had been escrowed and then subsequently
utilized for purposes of paying actual abandonment and related
costs. Quantum began withholding additional funds under these
provisions in the Trusts accounting month of December
2010. Information furnished by Quantum to the Trust for
production month April 2011 and Trust accounting month July 2011
indicates that 125% of Quantums current estimate of these
costs is approximately $26,500,000 and that the amount withheld
in escrow is $8,900,000.
As previously disclosed, the Working Interest Owner of the
Trusts interests in South Pass 89 and Offshore Louisiana
also has been escrowing funds (or otherwise deducting from any
payments otherwise due to the Trust) funds for the estimated
abandonment and related costs it expects to incur in connection
with the working interest from which the Trusts interest
was created relating to those properties.
During 2005, Hurricanes Katrina and Rita affected the
operational status of properties included in the Offshore
Louisiana and South Pass 89 groups of properties, and Hurricane
Dennis and Tropical Storm Cindy affected the operational status
of the gas plant at Jay Field. The gas plant at Jay Field
returned to full operating status on April 13, 2006.
However, distributions to the Trust will be reduced
significantly for a period of time as a result of the damage
from these storms to the production facilities for properties in
which the Trust has an interest. As a result of the uncertainty
of future proceeds from these properties, the Trustee as of
June 30, 2010 has reserved $239,449 that otherwise would
have been distributed to the unitholders for the payment of the
Trusts likely expenses in the foreseeable future. The
Trustee intends to hold these funds for use in the payment of
future Trust expenses until it becomes reasonably clear that
they are no longer necessary.
Following is a description of the damage caused by Hurricanes
Katrina and Rita to production facilities for properties in
which the Trust has an interest. This information is based on
assessments of damage the Working Interest Owners have received
regarding damage from Hurricanes Katrina and Rita to the
Offshore Louisiana and South Pass 89 properties. All of the
information in this Report on
Form 10-Q
relating to the operational status of the properties was
provided to the Working Interest Owners by the various operators
of the properties in which the Trust has an interest, and was
provided to the Trust by the Working Interest Owners. The
Working Interest Owners are not the operator of any of these
properties, and rely on the various operators for information
regarding the operational status of the various properties.
Consequently, all of the information provided herein is based on
preliminary and sometimes informal information provided by the
operators of the Properties. The Information provided herein is
based on the respective operators preliminary assessments
of the damage to the production facilities. The Trustee has been
informed that the assessments are ongoing, and that the
assessments of damages, the predictions of the
-13-
LL&E
ROYALTY TRUST
NOTES TO
FINANCIAL STATEMENTS (Continued)
likelihood of repairs and time necessary to complete such
repairs, the decisions to repair or abandon facilities, and all
other estimates are subject to change.
South
Pass 89
Repairs due to Hurricane Katrina damage (August 2005) were
completed in the fourth quarter of 2006 and the field was
substantially restored to production in December 2006. The
operator, Marathon Oil Company, had provided a cost estimate of
$6,000,000 ($1,500,000 net to the Trust) to repair the
South Pass 89 B platform, however the operator has
indicated the actual cost to date is estimated at $6,500,000
($1,600,000 net to the Trust).
Offshore
Properties:
East
Cameron 336
The Working Interest Owner had previously elected not to
participate in proposed well work and remained responsible only
for field abandonment costs. The lease expired in 2007 and the
operator, Apache, informed the Working Interest Owner that it
had abandoned the wells in the first half of 2008. The platform
removal was anticipated for 2010, due to a
3rd party
production pipeline located on the platform that requires
abandonment prior to removal. It is estimated that the platform
removal and abandonment will cost an additional $4,000,000
($800,000 net to the Trust).
East
Cameron 195
The East Cameron 195 platform was heavily damaged during
Hurricane Rita; however, it was not a significant producer, had
been shut in by the operator, Maritech, and had been approved
for abandonment prior to Hurricane Rita. The operators
early estimate of the wells-only abandonment for East Cameron
195 was $27,000,000 ($9,100,000 net to the Trust), however
costs to date are estimated at $55,400,000 ($18,400,000 net
to the Trust). These costs are for well abandonment only and do
not include platform abandonment and debris removal costs. Well
abandonment work began in February 2006 and was substantially
finished in December 2006 (7 wells were plugged and
abandoned and 3 wells have remaining plugging work that
will be completed as part of the platform and debris removal
process). Significant difficulty was observed during the
abandonment of these final three wells in 2009 and 2010 as a
result of the damage from Hurricane Rita and completing final
plug and abandon well work and platform abandonment proved
costly. To complete final site clearance and debris removal an
additional $2,100,000 ($709,000 net to the trust) is
estimated to be required.
South
Marsh Island 76
The South Marsh Island 76 platform was heavily damaged during
Hurricane Rita in 2005. The operator, Mariner, abandoned the
wells in 2008 for a cost of $13,343,824 ($3,335,956 net to
the Trust). It is estimated an
-14-
LL&E
ROYALTY TRUST
NOTES TO
FINANCIAL STATEMENTS (Continued)
additional $4,500,000 ($1,100,000 net to the trust) will be
required for final platform abandonment, debris removal and site
clearance. Reefing the platform in place is being evaluated.
Eugene
Island 261
The Eugene Island 261 platform was damaged during Hurricane Rita
but was repaired and returned to production in November 2005.
The estimated repair cost was $220,000 (resulting in costs
attributable to the Trusts interest of $44,000).
Vermillion
331
The Vermillion 331 platform was damaged during Hurricane Rita.
The operator, Energy Resources Technology, repaired the platform
and returned it to production in November 2006. The estimated
repair cost was $1,200,000 (resulting in costs attributable to
the Trusts interest of approximately $150,000).
Jay
Field
In December 2006, the Working Interest Owner and ExxonMobil, as
the operator of the Jay Field, sold their respective interests
in the field to Quantum Resource Management LLC (Quantum).
Quantum became the operator in April 2007. As described above
under Recent Developments, Quantum suspended
production from the Jay Field on December 22, 2008.
Production resumed in December 2009
Other
The Working Interest Owner has advised the Trustee that the
Working Interest Owner has completed its analysis of the scope
and applicability of the insurance policies carried by the
Working Interest Owner to the damages that resulted from
Hurricanes Katrina and Rita to properties in which the Trust has
an interest. The Working Interest Owner has advised the Trustee
that the Working Interest Owner believes it has received all of
the insurance reimbursements it will receive for damages to the
South Pass 89 and Offshore Louisiana properties, and has applied
the amounts to the respective properties in which the Trust has
an interest, to the extent permitted by the Trusts
governing documents, to offset existing Excess Production Costs
and to fund the Special Cost Escrows for Offshore Louisiana and
South Pass 89.
During the first six months of 2010, the Working Interest Owner
received no insurance recovery proceeds for Offshore Louisiana,
Jay Field or South Pass 89. For the first six months of 2009,
the working interest owner received insurance recovery proceeds
of $927,814 for South Pass 89, a portion of which was applied to
accumulated excess production costs and current production
costs. The remaining insurance proceeds combined with royalty
revenues resulted in net royalty income of $526,448 to the Trust
for South Pass 89 for the first six months of 2009. In addition,
the Working Interest Owner received insurance proceeds of
$9,113,272 for Offshore Louisiana which was applied
-15-
LL&E
ROYALTY TRUST
NOTES TO
FINANCIAL STATEMENTS (Continued)
to reduce a portion of the Trusts accumulated excess
production costs for this property. The Trust received no
insurance proceeds for the Fee Land Property, Offshore Louisiana
or Jay Field during the first six months of 2009.
The Working Interest Owner has further informed the Trustee that
although the work to secure and repair or replace damaged
equipment and restore production at properties the operators
have determined to repair has now been completed, work
nevertheless remains ongoing to secure, plug, abandon and
dismantle other properties in which the Trust has an interest
and that the operators have determined to abandon. In
particular, the work and expenses to plug, abandon and dismantle
the facilities at South Marsh Island 76 and East Cameron 195 are
expected to continue. The Working Interest Owner has informed
the Trustee that these ongoing expenses are not insured.
The abandonment and repair costs estimated by the Working
Interest Owner have had and are expected to have a material
adverse effect on royalties payable from the South Pass 89 and
Offshore Louisiana properties to the Trust, and from the Trust
to Unit holders. As previously disclosed, the Working Interest
Owner began escrowing funds otherwise distributable to the Trust
from the South Pass 89 property and Offshore Louisiana
properties, beginning with the April 2006 monthly
distribution. Consequently, distributions from the Trust to the
Unit holders have been eliminated for a period of time. The
Trustee does not expect to make any further distribution prior
to a final liquidating distribution (if any) after the sale of
the Trusts interests. As described herein, the Working
Interest Owners are not required to fund actual escrow accounts,
and neither has done so.
|
|
(2)
|
Basis of
Presentation
|
The financial statements were prepared on the basis of cash
receipts and disbursements and are not intended to be a
presentation in conformity with accounting principles generally
accepted in the United States of America that may require a
liquidation basis of accounting. The cash basis of reporting
revenues and expenses is considered to be the most meaningful
because monthly distributions to the Unit holders are based on
net cash receipts.
The financial statements of the Trust do not include any
adjustments as a result of the termination of the Trust as
described in notes 1 and 3 and are prepared on the
following basis:
(a) Royalties are recorded on a cash basis and are
generally received by the Trustee in the third month following
the month of production of oil and gas attributable to the
Trusts interest.
(b) Trust expenses, which include accounting, engineering,
legal and other professional fees, Trustees fees and
out-of-pocket
expenses, are recorded on a cash basis.
(c) The carrying value of the Trusts royalty
interests as of June 30, 2010 is not necessarily indicative
of the fair market value of the interests held by the Trust.
This basis for reporting distributable income is considered to
be the most meaningful because distributions to the unitholders
for a month are based on net cash receipts for such month.
However, it will differ from the basis used for financial
statements prepared in accordance with accounting principles
generally accepted in the United States of America because,
under such accounting principles, royalty income for a month
would be based on net proceeds
-16-
LL&E
ROYALTY TRUST
NOTES TO
FINANCIAL STATEMENTS (Continued)
from sales for such month without regard to when calculated or
received and interest income for a month would be calculated
only through the end of such month, and accounting principles
generally accepted in the United States would require a
liquidation basis of accounting.
The preparation of the financial statements requires 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 revenue and expenses during the reporting period. Actual
results could differ from those estimates.
The financial information furnished herein should be read in
conjunction with the financial statements and notes thereto
included in the Trusts Annual Report on
Form 10-K
for the years ended December 31, 2009 and 2010. The
information furnished reflects all adjustments which are, in the
opinion of the Trustee, necessary for a fair presentation of the
results for the interim periods presented.
The accompanying financial statements have been prepared under
the assumption the Trust will continue as a going concern. As
discussed in note 1, the Trusts net revenues did not
exceed the $5,000,000 Termination Threshold stipulated by the
Trust Agreement for the second consecutive year, thus
requiring the Trust to terminate effective December 31,
2007. The accompanying financial statements do not include any
adjustments as a result of the termination of the Trust.
As of June 30, 2010, The Trust had $239,449 in cash
reserved for Trust expenses and had unpaid expenses of
approximately $613,736. Based on current general and
administrative expenditures, in the absence of Royalty Revenues
the Trustee expects that it will be required to borrow money in
accordance with the Trust Agreement to fund future Trust
expenses. However, no assurance can be given that the Trustee
will be able to borrow money on terms the Trustee considers
reasonable or at all. The Trust Agreement permits, but does
not require, The Bank of New York Mellon Trust Company,
N.A. or an affiliate to lend funds to the Trustee. See
Note 1. The Trust Agreement prohibits the Trustee from
making any distributions to unit holders until all advances and
any loans are repaid in full. See the Trusts Annual Report
on
Form 10-K
for the year ended December 31, 2010.
|
|
(4)
|
Net
Overriding Royalty Interests and Fee Lands Royalties
|
The instruments conveying the Overriding Royalties generally
provide that the Working Interest Owners or any successor
Working Interest Owners will calculate and pay to the Trust each
month an amount equal to various percentages of the Net Proceeds
(as defined) from the Productive Properties. For purposes of
computing Net Proceeds, the Productive Properties have been
grouped geographically into three groups of leases, each of
which has been defined as a separate Property.
Generally, Net Proceeds are computed on a
Property-by-Property
basis and consist of the aggregate proceeds to the Working
Interest Owners or any successor working interest owners from
the sale of oil, gas and other hydrocarbons (but not sulfur)
from each of the Productive Properties less: (a) all direct
-17-
LL&E
ROYALTY TRUST
NOTES TO
FINANCIAL STATEMENTS (Continued)
costs, charges, and expenses incurred by the Working Interest
Owners in exploration, production, development and other
operations on the Productive Properties (including secondary and
tertiary recovery operations), including abandonment costs;
(b) all applicable taxes, including severance and ad
valorem taxes, but excluding income taxes except as described in
note 5 below; (c) all operating charges directly
associated with the Productive Properties; (d) an allowance
for costs if costs and expenses for any Productive Property have
exceeded proceeds of production from such Productive Property in
a preceding month; and (e) charges for certain overhead
expenses.
As noted previously, on November 11, 2009, the Trust sold
its interest in the south Louisiana acreage described in the
Trusts public filings as the Fee Lands. The
sale resulted in cash proceeds to the Trust, net of fees of
$24,828 paid to the auction company that conducted the sale, of
approximately $500,000.
The Trustee engaged an independent joint venture auditor to
review payments to the Trust for a portion of the Trust
properties as part of the termination of the Trust. The joint
venture auditor reviewed the period from January 2004 through
December 2007. As a result of the review, one of the Working
Interest Owners made a payment of approximately $437,000 in
March 2008 to the Trust to settle certain issues identified.
In May and June 1983, the Company applied to the Internal
Revenue Service (IRS) for certain rulings, including the
following: (a) the Trust would be classified for federal
income tax purposes as a trust and not as an association taxable
as a corporation, (b) the Trust would be characterized as a
grantor trust as to the Unit holders and not as a
simple or complex trust (a
non-grantor trust), (c) the Partnership would
be classified as a partnership and not as an association taxable
as a corporation, (d) the Company would not recognize gain
or loss upon the transfer of the Royalties to the Trust or upon
the distribution of the Units to its stockholders, (e) each
Royalty would be considered an economic interest in oil and gas
in place, and each Overriding Royalty would constitute a single
property within the meaning of Section 614(a) of the
Internal Revenue Code, (f) the steps taken to create the
Trust and the Partnership and to distribute the Units would be
viewed for federal income tax purposes as a distribution of the
Royalties by the Company to its stockholders, followed by the
contribution of the Royalties by the stockholders to the
Partnership in exchange for interests therein, which in turn was
followed by the contribution by the stockholders of the
interests in the Partnership to the Trust in exchange for Units,
and (g) the transfer of a Unit of the Trust would be
considered for federal income tax purposes to be the transfer of
the proportionate part of the Partnership interest attributable
to such Unit.
Subsequent to the distribution of the Units, the IRS ruled
favorably on all requested rulings except (d). Because the
rulings were issued after the distribution of the Units,
however, the rulings could be revoked by the IRS if it changes
its position on the matters they address. If the IRS changed its
position on these issues, challenged the Trust and the Unit
holders and was successful, the result could be adverse.
The Company withdrew its requested ruling (d) that the
Company did not recognize gain or loss upon the transfer of the
Royalties to the Trust or upon distribution of the Units to its
stockholders because the IRS proposed to
-18-
LL&E
ROYALTY TRUST
NOTES TO
FINANCIAL STATEMENTS (Continued)
rule that the transfer and distribution resulted in the
recapture of ordinary income attributable to intangible drilling
and development costs under Section 1254 of the Code (IDC
Recapture Income). Counsel for the Company expressed no opinion
on this issue. The Company and the IRS subsequently litigated
the issue, and in 1989 the Tax Court rendered an opinion
favorable to the Company. The Tax Court held that the
Companys transfer of the Royalties to the Trust and its
distribution of the Units to its stockholders did not constitute
a disposition of oil, gas, or geothermal property
within the meaning of Section 1254 of the Code.
Consequently the Company was not required to recognize IDC
Recapture Income on the disposition of the Royalties. The
opinion of the Tax Court has become final and nonappealable.
The Trustee assumes that some Trust Units are held by a
middleman, as such term is broadly defined in U.S. Treasury
Regulations (and includes custodians, nominees, certain joint
owners, and brokers holding an interest for a custodian in
street name). Therefore, the Trustee considers the Trust to be a
non-mortgage widely held fixed investment trust
(WHFIT) for U.S. federal income tax purposes.
Bank of New York Mellon Trust Company, N.A., 919 Congress
Avenue, Austin, Texas 78701, telephone number
1-800-852-1422,
is the representative of the Trust that will provide tax
information in accordance with applicable U.S. Treasury
Regulations governing the information reporting requirements of
the Trust as a WHFIT.
These financial statements are prepared on the basis that the
Trust will be treated as a grantor trust and that
the Partnership will be treated as a partnership for federal
income tax purposes. Accordingly, no income taxes are provided
in the financial statements. In addition, there is no state
income tax liability for the period.
According to the reserve report as of September 30, 2009,
dated May 24, 2011, filed as an exhibit to this
Form 10-Q,
the total future dismantlement costs to the Working Interest
Owners are estimated to be $15,800,00 for the Jay Field
property, $12,700,000 for the South Pass 89 property, and
$22,900,000 for the Offshore Louisiana property. The
Trusts interests in these properties are equivalent to 50%
of the net proceeds from Jay Field and South Pass 89 properties
and 90% of the net proceeds from the Offshore Louisiana property.
According to the reserve report as of September 30, 2010,
dated June 8, 2011, filed as an exhibit to this
Form 10-Q,
the total future dismantlement costs to the Working Interest
Owners are estimated to be $16,100,000 for the Jay Field
property, $11,300,000 for the South Pass 89 property, and
$10,600,000 for the Offshore Louisiana property. The
Trusts interests in these properties are equivalent to 50%
of the net proceeds from Jay Field and South Pass 89 properties
and 90% of the net proceeds from the Offshore Louisiana property.
The Working Interest Owners, under the terms of the
Trust Conveyances, are permitted to escrow funds from the
Productive Properties for estimated future costs such as
dismantlement costs and capital expenditures. Beginning with the
April 2006 distribution, the Working Interest Owner elected to
escrow funds from the South Pass 89 and Offshore properties due
to significant increases in estimated dismantlement costs for
the Offshore Louisiana property and capital expenditures for the
South Pass 89 properties due to damage caused by Hurricanes
-19-
LL&E
ROYALTY TRUST
NOTES TO
FINANCIAL STATEMENTS (Continued)
Katrina and Rita. During the first six months of 2010, the
Working Interest Owner withheld $2,139,408 and $1,316,484 in
escrow from the Offshore Louisiana and South Pass 89 Properties,
respectively. The Working Interest Owner expended $856,535 and
$1,004,183 from the escrow funds for dismantlement costs
incurred during the first six months of 2010 for the Offshore
Louisiana and South Pass 89 properties, respectively.
The cumulative escrow balance as of June 30, 2010 was
$4,543,402 for the Jay Field property and $9,249,224 for the
South Pass 89 property, 50 percent of which would otherwise
have been distributable to the Trust after recovery of excess
production costs and payment of all abandonment, dismantlement
and related costs in accordance with the conveyances. The
cumulative escrow balance as of June 30, 2010 for the
Offshore Louisiana property was $10,140,589, 90 percent of
which would otherwise have been distributable to the Trust after
recovery of excess production costs. The Conveyances prohibit
the Working Interest Owner from escrowing additional funds for
estimated future Special Costs with respect to a particular
Productive Property once the amount escrowed exceeds 125% of the
aggregate estimated future Special Costs for that Property. The
Conveyances permit the Working Interest Owner to release funds
from any of the Special Costs escrows at any time if it
determines in its sole discretion that there no longer exists a
need for escrowing all or any portion of such funds. However,
the Working Interest Owner is not required to do so.
The Working Interest Owners have advised the Trustee that based
on current estimates, the Working Interest Owners are permitted
to place additional funds in escrow from each of the properties.
Commencing with the April 2006 monthly distribution, the
Working Interest Owner began escrowing all amounts otherwise
distributable to the Trust from the Offshore Louisiana and South
Pass 89 properties. The Working Interest Owners have advised the
Trustee that they anticipate escrowing all additional funds from
all of the properties.
As previously disclosed, the conveyances do not require the
Working Interest Owners to place the escrowed funds
into an actual escrow account or to segregate funds in any other
manner, and none of the working interest owners has done so.
However, under the conveyances, each Working Interest Owner (or
any successor owner of the working interest) is required to
calculate Gross Proceeds as though such funds had been escrowed
and then subsequently utilized for purposes of paying actual
abandonment and related costs.
The Working Interest Owner informed the Trustee that the Working
Interest Owner has been named as one of many defendants in
certain lawsuits alleging the underpayment of royalties on the
production of natural gas and natural gas liquids through the
use of below-market prices, improper deductions, improper
measurement techniques and transactions with affiliated
companies. Plaintiffs in some of the lawsuits allege that the
underpayment of royalties, among other things, resulted in false
forms being filed by the Working Interest Owner with the
Minerals Management Service, thereby violating the civil False
Claims Act. The Working Interest Owner has informed the Trustee
that at this time, the Working Interest Owner is not able to
reasonably estimate the amount of any potential loss or
settlement allocable to the Trusts interest.
-20-
LL&E
ROYALTY TRUST
NOTES TO
FINANCIAL STATEMENTS (Continued)
As previously disclosed in the Trusts filings, the Trust
is now required by the terms of the Trust Agreement to sell
its assets and to liquidate. As previously disclosed, the
Trustee engaged the Financial Advisor to market the Trusts
assets in anticipation of a sale in accordance with the terms of
the Trust Agreement. The Financial Advisor marketed the
Trusts interest in the Jay Field and had received
preliminary indications of interest in late 2010, and the
Trustee intended to sell the Jay Field interest in accordance
with the terms of the Trust Agreement. However, also as
previously announced, in November 2010 the Trust and Trustee
were named as defendants in a Complaint for Legal and Equitable
Relief (the Complaint) filed by Jeff Beckett in the
United States District Court for the Eastern District of
Michigan (the Court). Mr. Becketts
Complaint seeks a judicial modification of the terms of the
Trust Agreement governing the Trust, a judgment declaring
that the termination provisions of the Trust Agreement do
not apply and an order preventing the sale of the Trusts
assets. The Complaint also makes a number of other allegations
and seeks removal of the Trustee and other relief.
As a result of Mr. Becketts lawsuit, certain bidders
who had submitted preliminary indications of interest to the
Financial Advisor indicated that they were unwilling to proceed
with the purchase of the Jay Field interest from the Trust until
the Beckett lawsuit was resolved. Consequently, as previously
disclosed, the Trustee suspended the sale process pending
resolution of the lawsuit. On July 7, 2011,
Mr. Beckett and the Trust entered into a settlement
agreement pursuant to which Mr. Beckett agreed to dismiss
his lawsuit with prejudice within ten days after the Trust holds
a meeting of the Unit holders for the purpose of voting on a
proposal to remove the Trustee and to appoint a successor
trustee of the Trust, provided that notice of the meeting is
mailed by August 1, 2011 and the meeting occurs by
September 1, 2011. Notice of the meeting was mailed prior
to August 1, 2011, and the meeting was convened on
August 12, 2011. Because the proposed successor trustee
withdrew its consent to serve shortly prior to the meeting, the
meeting has been adjourned until August 24, 2011.
|
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(9)
|
Recently
Issued Pronouncements
|
In December 2008, the SEC announced that it had approved
revisions designed to modernize the oil and gas company reserve
reporting requirements. The most significant amendments to the
requirements include the following:
|
|
|
|
|
commodity prices economic producibility of reserves
and discounted cash flows will be based on a
12-month
average commodity price unless contractual arrangements
designate the price to be used;
|
|
|
|
disclosure of unproved reserves probable and
possible reserves may be disclosed separately on a voluntary
basis;
|
|
|
|
proved undeveloped reserve guidelines reserves may
be classified as proved undeveloped if there is a high degree of
confidence that the quantities will be recovered;
|
-21-
LL&E
ROYALTY TRUST
NOTES TO
FINANCIAL STATEMENTS (Continued)
|
|
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|
|
reserve estimation using new technologies reserves
may be estimated through the use of reliable technology in
addition to flow tests and production history; and
|
|
|
|
nontraditional resources the definition of oil and
gas producing activities will expand and focus on the marketable
product rather than the method of extraction.
|
The rules are effective for fiscal years ending on or after
December 31, 2009, and early adoption is not permitted. The
Trust has adopted the new rules and the impact was immaterial to
its reported oil and gas reserves.
-22-
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|
Item 2.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations.
|
The following discussion and analysis of the Trusts
financial condition and results of operations should be read in
conjunction with the financial statements and notes thereto.
Unless otherwise indicated, information presented or discussed
herein is as of June 30, 2010.
Note
Regarding Forward-looking Statements
This
Form 10-Q
includes forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of
1934, as amended. All statements other than statements of
historical fact included in this
Form 10-Q,
including without limitation the statements under
Managements Discussion and Analysis of Financial
Condition and Results of Operations, are forward-looking
statements. Although the Working Interest Owners have advised
the Trust that they believe that the expectations reflected in
the forward-looking statements contained herein are reasonable,
no assurance can be given that such expectations will prove to
have been correct. Important factors that could cause actual
results to differ materially from expectations (Cautionary
Statements) are disclosed in this
Form 10-Q
and in the Trusts Annual Reports on
Form 10-K
for the years ended December 31, 2009 and 2010, including
without limitation in conjunction with the forward-looking
statements included in this
Form 10-Q.
All subsequent written and oral forward-looking statements
attributable to the Trust or persons acting on its behalf are
expressly qualified in their entirety by the Cautionary
Statements.
The unaudited data included in the financial statements and
notes thereto in Item 1 are an integral part of this
discussion and analysis and should be read in conjunction
herewith. The information contained herein regarding operations
and exploration and development activities on the properties
burdened by the Royalties, and certain other matters, has been
furnished by the Working Interest Owners.
Critical
Accounting Policies
The financial statements of the Trust are prepared on the
following basis:
(a) Royalties are recorded on a cash basis and are
generally received by the Trustee in the third month following
the month of production of oil and gas attributable to the
Trusts interest.
(b) Trust expenses, which include accounting, engineering,
legal and other professional fees, Trustees fees and
out-of-pocket
expenses, are recorded on a cash basis.
(c) The carrying value of the Trusts royalty
interests at June 30, 2010 is not necessarily indicative of
the fair market value of the interests held by the Trust.
This basis for reporting distributable income is considered to
be the most meaningful because distributions to the unitholders
for a month are based on net cash receipts for such month.
However, it will differ from the basis used for financial
statements prepared in accordance with accounting principles
generally accepted in the United States of America because,
under such accounting principles, royalty income for a month
would be based on net proceeds from sales for such month without
regard to when calculated or received and interest income for a
month would be calculated only through the end of such month,
and accounting principles generally accepted in the United
States would require a liquidation basis of accounting.
-23-
The preparation of the financial statements requires 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 revenue and expenses during the reporting period. Actual
results could differ from those estimates.
The unaudited data included in the financial statements and
notes thereto in Item 1 are an integral part of this
discussion and analysis and should be read in conjunction
herewith. The information contained herein regarding operations
and exploration and development activities on the properties
burdened by the Royalties, and certain other matters, has been
furnished by the Working Interest Owners.
Termination
of the Trust
The Trust Agreement provides that the Trust will terminate
in the event that the net revenues fall below $5,000,000 for two
successive years (the Termination Threshold). Net
revenues to the Trust for the years ended December 31, 2007
and 2006 calculated in accordance with the Trust Agreement
were $1,634,740 and $2,094,226, respectively. Consequently, the
Trust is required to terminate and is now required to sell the
assets of the Trust for cash in a public auction. After paying
or making provision for all actual and contingent liabilities of
the Trust, including fees of the Trustee, the Trustee will
distribute any remaining cash as promptly as practicable.
Despite the termination of the Trust, the Trustee is continuing
to act as Trustee for purposes of liquidating and winding up the
affairs of the Trust. The Trustee does not expect to make any
further monthly distributions to Unit holders in the interim
period prior to any distribution resulting from the sale of the
Trusts assets.
The Trustee has retained Stifel, Nicolaus & Company,
Incorporated, a nationally recognized investment banking firm,
(the Financial Advisor), to market the Trusts
assets. However, as announced by the Trustee on October 22,
2008, the Trustee previously determined that, in light of market
conditions at that time, it was in the best interests of the
Trust Unit holders to postpone the sale of the Trusts
assets for an indefinite period of time. The Trustee recommenced
the marketing efforts in 2010. The Financial Advisor marketed
the Trusts assets and had received preliminary indications
of interest in late 2010, and the Trustee intended to sell the
assets in accordance with the terms of the Trust Agreement.
However, as previously announced, in November 2010 the Trust and
Trustee were named as defendants in a Complaint for Legal and
Equitable Relief (the Complaint) filed by Jeff
Beckett in the United States District Court for the Eastern
District of Michigan. Mr. Becketts Complaint seeks a
judicial modification of the terms of the Trust Agreement
governing the Trust, a judgment declaring that the termination
provisions of the Trust Agreement do not apply and an order
preventing the sale of the Trusts assets. The Complaint
also makes a number of other allegations and seeks removal of
the Trustee and other relief. On July 7, 2011,
Mr. Beckett and the Trust entered into a settlement
agreement pursuant to which Mr. Beckett agreed to dismiss
his lawsuit with prejudice within ten days after the Trust holds
a meeting of the Unit holders for the purpose of voting on a
proposal to remove the Trustee and to appoint a successor
trustee of the Trust, provided that notice of the meeting is
mailed by August 1, 2011 and the meeting occurs by
September 1, 2011. Notice of the meeting was mailed prior
to August 1, 2011, and the meeting was convened on
August 12, 2011. Because the proposed successor trustee
withdrew its consent to serve shortly prior to the meeting, the
meeting has been adjourned until August 24, 2011.
The Trust Agreement provides that if any asset required to
be sold has not been sold by December 31, 2010, the Trustee
is to cause the asset to be sold at public auction to the
highest cash bidder. Consequently, except to the extent that the
Trustee is removed or is prevented from doing so by a court
order, the Trustee will auction the Trusts assets.
-24-
In connection with the auction, the Trustee will mail notice of
a public auction to all Unit holders at least 30 days prior
to any such auction. No approval of the Unit holders will be
required in connection with the sale of the Trusts assets.
As of June 30, 2010, the Trust had $239,449 in cash
reserved for Trust expenses and unpaid invoices for
administrative services totaling approximately $614,000.
As of August 19, 2011, the Trust had no cash except for the
cash advanced to the Trust by BNY Mellon, as affiliate of the
Trustee, as an interest-free advance to enable the Trust to pay
administrative expenses. As of August 19, 2011, the total
amount advanced to the Trust (the Bank Advance) by
the Bank was $2,255,520, of which $161,217 remained available to
pay expenses at August 19, 2011. However, at
August 19, 2011, in addition to the amount owed to the
Bank, the Trust was also holding unpaid invoices for
administrative services totaling $443,492. See Managements
Discussion and Analysis.
The entire amount of the Bank Advance and all other liabilities
and expenses of the Trust must be repaid before any
distributions can be made to Unit holders.
During 2010 the Trust did not receive any royalty revenue except
for $10,014 from the Fee Lands (which were sold in November
2009) and for $223,910 received in 2010 as an adjustment
resulting from a review conducted by an independent oil and gas
accounting firm retained by the Trustee to review the Working
Interest Owners calculation of the net proceeds properly
payable to the Trust with respect to the Jay Field Property. The
adjustment related to the Working Interest Owners
calculation of the net proceeds from the acquisition of the Jay
Field working interest by Quantum Resources Management, LLC in
2007 through August 2008. The portion of the adjustment related
to 2007, even if received in 2007, would not have affected the
termination of the Trust in accordance with the terms of the
Trust Agreement.
During 2009, the only royalty revenue the Trust received was
$737,199 with respect to the South Pass 89 property and $70,905
from the Fee Lands. In addition, on November 11, 2009, the
Trust sold its interest in the south Louisiana acreage described
in the Trusts public filings as the Fee Lands.
The sale resulted in cash proceeds to the Trust, net of fees of
$24,828 paid to the auction company that conducted the sale, of
approximately $500,000.
For the first six months of 2010, the Trust did not receive any
royalty revenue associated with the South Pass and Offshore
Louisiana properties. During the first six months of 2010, the
Trust received a royalty income of $10,014 with respect to the
Fee Land property. The Jay Field, South Pass 89 and Offshore
Louisiana properties excess production costs as of June 30,
2010 were approximately $14,127,000, $417,000 and $2,473,000,
respectively. The excess production costs must be recovered by
the Working Interest Owners before any distribution of royalty
revenues will be made to the Trust. In the second quarter 2010,
the Trust received a single payment of approximately $223,910
with respect to the Jay Field property as a result of a review
conducted by an independent oil and gas accounting firm retained
by the Trustee to review the Working Interest Owners
calculation of amounts relevant to the determination of the net
proceeds properly payable to the Trust under the Conveyances.
For the first six months of 2009, the Trust did not receive any
royalty revenue associated with the Jay Field and Offshore
Louisiana properties. The Trust received $526,448 of royalty
revenue from the South Pass 89 property and $43,035 of royalty
income from the Fee Land property.
-25-
During the first six months of 2010, the Working Interest Owner
did not receive any insurance recovery proceeds. For the first
six months of 2009, the Working Interest Owner received
insurance recovery proceeds of $927,814 for South Pass 89, a
portion of which was applied to accumulated excess production
costs and current production costs. The remaining insurance
proceeds combined with royalty revenues resulted in net royalty
income of $526,448 to the Trust for South Pass 89 for the first
six months of 2009. In addition, the Working Interest Owner
received insurance proceeds of $9,113,272 for Offshore Louisiana
which was applied to reduce a portion of the Trusts
accumulated excess production costs for this property. The Trust
received no royalties for Offshore Louisiana Fee Land property
or Jay Field during the first six months of 2009.
The Jay Field, South Pass 89 and Offshore Louisiana properties
excess production costs as of June 30, 2010 were
approximately $14,127,000, $417,000 and $2,473,000,
respectively. The excess production costs as of
December 31, 2009 were approximately $12,889,000, $373,000
and $3,226,000, respectively. The excess production costs as of
December 31, 2010 were approximately $13,588,000, $868,000,
and $2,171,000 respectively. The excess production costs
relating to each property must be recovered by the Working
Interest Owners before any the Working Interest Owners are
required to pay any royalty revenues to the Trust with respect
to the particular property.
As previously described in the Trusts filings, in addition
to the Working Interest Owners rights to recover Excess
Production Costs prior to making payments to the Trust, the
Working Interest Owners have the right under the Conveyances to
escrow or withhold amounts for certain anticipated future
expenses, and the Working Interest Owners have done so and
expect to continue doing so in the future. Under the Conveyance,
the Working Interest Owners may compute the Royalties without
establishing actual third party escrows of withheld funds.
As previously announced, in early February 2009 the Trust
received a letter from Quantum Resources Management LLC
addressed to all Jay Field royalty interest owners stating that
Quantum had temporarily suspended production from the Jay Field
on December 22, 2008. The letter stated that Quantums
decision to suspend production resulted from the dramatic
decline in oil prices coupled with high operating expenses. The
letter from Quantum notes that as operator of the Jay Field,
Quantum is facing three major issues: declining production,
increased costs, and significantly lower oil prices. The letter
also states that Quantums long term goal for the Jay Field
is to economically produce the maximum amount of reserves, and
notes that when Quantum temporarily suspended production, it
maintained the capability to reestablish production at a future
date. Quantum noted that to produce and sell the oil, it needs a
combination of higher product prices and lower costs, and
further noted that it is analyzing alternative production
scenarios that might result in improved economics. Quantum also
informed royalty interest owners that Quantum is analyzing all
options to reduce operational costs in the Jay Field, and that,
if its efforts are successful, Quantum expects to be able to
reestablish production from the field. While production from the
field is temporarily suspended, Quantum stated that it will
continue to conduct Unit Operations in the Jay Field in
accordance with the Unit Agreement.
As a result of a review by an independent oil and gas accounting
firm retained by the Trustee to review the Working Interest
Owners calculation of amounts relevant to the
determination of the net proceeds properly payable to the Trust
under the Conveyances, the Trustee and the Working Interest
Owner concluded that the Working Interest Owner had
inadvertently included sulfur extraction processing costs at the
Jay and Little Escambia Creek Field Unit desulfurization plant
in the calculation of Jay Field Gross Proceeds. Because neither
the Trustees oil and gas accounting firm nor the Working
Interest Owner was able to quantify the amount of the sulfur
extraction costs
-26-
inadvertently included, the Trustee requested that the Working
Interest Owner pay to the Trust royalties on the revenue
generated by the sale of the sulfur in lieu of refunding the
amount charged to the Trusts interest. The Trustee engaged
an independent joint venture auditor to review payments to the
Trust for a portion of the Trust properties as part of the
termination of the Trust. The joint venture auditor reviewed the
period from January 2004 through December 2007. As a result of
the review, one of the Working Interest Owners made a payment of
approximately $437,000 in March 2008 to the Trust to settle
certain issues identified. In addition, the independent joint
interest auditor has recently completed reviews of the working
interest owners calculations relating to the Trusts
interest in the Jay Field. See Recent Developments.
Hurricane
Damages
During 2005, Hurricanes Katrina and Rita affected the
operational status of properties included in the Offshore
Louisiana and South Pass 89 groups of properties, and Hurricane
Dennis and Tropical Storm Cindy affected the operational status
of the gas plant at Jay Field. The gas plant at Jay Field
returned to full operating status on April 13, 2006.
However, distributions to the Trust have been reduced
significantly as a result of the damage from these storms to the
production facilities for properties in which the Trust has an
interest. As a result of the uncertainty of future proceeds from
these properties, the Trustee as of June 30, 2010 has
reserved $239,449 that otherwise would have been distributed to
the unitholders for the payment of the Trusts likely
expenses in the foreseeable future. The Trustee intends to hold
these funds for use in the payment of future Trust expenses
until it becomes reasonably clear that they are no longer
necessary.
Following is a description of the damage caused by Hurricanes
Katrina and Rita to production facilities for properties in
which the Trust has an interest. This information is based on
assessments of damage the Working Interest Owner has received
regarding damage from Hurricanes Katrina and Rita to the
Offshore Louisiana and South Pass 89 properties. All of the
information in this Report on
Form 10-K
relating to the operational status of the properties provided to
the Working Interest Owner by the various operators of the
properties in which the Trust has an interest, and was provided
to the Trust by the Working Interest Owner. The Working Interest
Owner is not the operator of any of these properties, and relies
on the various operators for information regarding the
operational status of the various properties. Consequently, all
of the information provided herein is based on preliminary and
sometimes informal information provided by the operators of the
Properties. The information provided herein is based on the
respective operators assessments of the damage to the
production facilities.
South
Pass 89
Repairs due to Hurricane Katrina damage (August 2005) were
completed in the fourth quarter of 2006 and the field was
substantially restored to production in December 2006. The
operator, Marathon Oil Company, had provided a cost estimate of
$6,000,000 ($1,500,000 net to the Trust) to repair the
South Pass 89 B platform, however the operator has
indicated the actual cost to date is estimated at $6,500,000
($1,600,000 net to the Trust).
-27-
Offshore
Louisiana Properties:
East
Cameron 336
The Working Interest Owner had previously elected not to
participate in proposed wellwork and remained responsible only
for field abandonment costs. The lease expired in 2007 and the
operator, Apache, informed the Working Interest Owner that it
had abandoned the wells in the first half of 2008. The platform
has not been abandoned yet due to a
3rd part
production pipeline located on the platform that requires
abandonment prior to removal. It is estimated that the platform
removal and abandonment will cost an addition $4,000,000
($800,000 net to the Trust).
East
Cameron 195
The East Cameron 195 platform was heavily damaged during
Hurricane Rita; however, it was not a significant producer, had
been shut in by the operator, Maritech, and had been approved
for abandonment prior to Hurricane Rita. The operators
early estimate of the wells-only abandonment for East Cameron
195 was $27,000,000 ($9,100,000 net to the Trust), however
costs to date are estimated at $55,400,000 ($18,400,000 net
to the Trust). These costs are for well abandonment only and do
not include platform abandonment and debris removal costs. Well
abandonment work began in February 2006 and was substantially
finished in December 2006 (7 wells were plugged and
abandoned and 3 wells have remaining plugging work that
will be completed as part of the platform and debris removal
process). Significant difficulty was observed during the
abandonment of these final three wells in 2009 and 2010 as a
result of the damage from Hurricane Rita and completing final
plug and abandon well work and platform abandonment proved
costly. To complete final site clearance and debris removal an
additional $2,100,000 ($709,000 net to the trust) is
estimated to be required.
South
Marsh Island 76
The South Marsh Island 76 platform was heavily damaged during
Hurricane Rita in 2005. The operator, Mariner, abandoned the
wells in 2008 for a cost of $13,343,824 ($3,335,956 net to
the Trust). It is estimated an additional $4,500,000
($1,100,000 net to the trust) will be required for final
platform abandonment, debris removal and site clearance. Reefing
the platform in place is being evaluated.
Eugene
Island 261
The Eugene Island 261 platform was damaged during Hurricane Rita
but was repaired and returned to production in November 2005.
The estimated repair cost was $220,000 (resulting in costs
attributable to the Trusts interest of $44,000).
Vermillion
331
The Vermillion 331 platform was damaged during Hurricane Rita.
The operator, Energy Resources Technology, repaired the platform
and returned it to production in November 2006. The estimated
repair cost was $1,200,000 (resulting in costs attributable to
the Trusts interest of approximately $150,000).
-28-
Jay
Field
In December 2006, the Working Interest Owner and ExxonMobil, as
the operator of the Jay Field, sold their respective interests
in the field to Quantum Resource Management LLC (Quantum).
Quantum became the operator in April 2007. As described above
under Recent Developments, Quantum suspended
production from the Jay Field on December 22, 2008.
Production resumed in December 2009.
Other
The Working Interest Owner has advised the Trustee that the
Working Interest Owner has completed its analysis of the scope
and applicability of the insurance policies carried by the
Working Interest Owner to the damages that resulted from
Hurricanes Katrina and Rita to properties in which the Trust has
an interest. The Working Interest Owner has advised the Trustee
that the Working Interest Owner believes it has received all of
the insurance reimbursements it will receive for damages to the
South Pass 89 and Offshore Louisiana properties, and has applied
the amounts to the respective properties in which the Trust has
an interest, to the extent permitted by the Trusts
governing documents, to offset existing Excess Production Costs
and to fund the Special Cost Escrows for Offshore Louisiana and
South Pass 89.
The Working Interest Owner has further informed the Trustee that
although the work to secure and repair or replace damaged
equipment and restore production at properties the operators
have determined to repair has now been completed, work
nevertheless remains ongoing to secure, plug, abandon and
dismantle other properties in which the Trust has an interest
and that the operators have determined to abandon. In
particular, the work and expenses to plug, abandon and dismantle
the facilities at South Marsh Island 76 and East Cameron 195 are
expected to continue. The Working Interest Owner has informed
the Trustee that these ongoing expenses are not insured.
The abandonment and repair costs have had a material adverse
effect on royalties payable from the South Pass 89 and Offshore
Louisiana properties to the Trust, and from the Trust to Unit
holders. As previously disclosed, the Working Interest Owner
began escrowing funds otherwise distributable to the Trust from
the South Pass 89 property and Offshore Louisiana properties,
beginning with the April 2006 monthly distribution.
Consequently, distributions from the Trust to the Unit holders
have been eliminated for a period of time. The Trustee does not
expect to make any further distribution prior to a final
liquidating distribution after the sale of the Trusts
interests.
Liquidity
and Capital Resources
As stipulated in the Trust Agreement, the Trust is intended
to be passive and the Trustees activities are limited to
the receipt of revenues attributable to the Royalties, which
revenues are to be distributed currently (after payment of or
provision for Trust expenses and liabilities) to the owners of
the Units. Except for the bank advance described in this report,
the Trust has no source of liquidity or capital resources other
than the revenue, if any, attributable to the Royalties.
The Working Interest Owners, under the terms of the
Trust Conveyances, are permitted to escrow funds (or to
calculate the royalties as though they had done so) from the
Productive Properties for estimated future costs such as
dismantlement costs and capital expenditures. According to the
reserve report as of September 30, 2010, dated June 8,
2011, included in the Trusts Annual Report on
Form 10-K
for the year ended December 31, 2010, the total future
dismantlement costs to the Working Interest Owners are estimated
to be $16,100,000 for the Jay Field
-29-
property, $11,300,000 for the South Pass 89 property, and
$10,600,000 for the Offshore Louisiana property. These estimates
are provided to the independent engineers by the Working
Interest Owners. The Trusts interests in these properties
are equivalent to 50% of the net proceeds from Jay Field and
South Pass 89 properties and 90% of the net proceeds from the
Offshore Louisiana property. Please see the reserve report as of
September 30, 2010 filed as an exhibit to this
Form 10-Q
for more recent information. The Trusts interests in these
properties are equivalent to 50% of the net proceeds from Jay
Field and South Pass 89 properties and 90% of the net proceeds
from the Offshore Louisiana property.
The cumulative Offshore Louisiana escrow balance (which is held
by the Working Interest Owner and is not segregated) as of
June 30, 2010 was $10,140,589. The Offshore Louisiana
Working Interest Owner expects to utilize all such amount in
payment of a portion of the Trusts share of Offshore
Louisiana dismantlement costs. Under the conveyances, the
Offshore Louisiana Working Interest Owner was and remains
entitled to escrow or otherwise set aside substantially more
than it has for Offshore Louisiana dismantlement costs. If the
amounts escrowed or otherwise set aside are inadequate to pay
the Trusts share of the dismantlement costs, the Trust is
not liable for the additional amounts. Assuming that the
Offshore Louisiana Working Interest Owner has recovered all
excess production costs, then, after the payment of the
dismantlement costs, 90 percent of any funds remaining in
escrow would be distributable to the Trust. However,
the estimated Offshore Louisiana dismantlement costs exceed the
escrowed amounts substantially, and no such distributions are
likely.
The cumulative escrow balance (which is held by the Working
Interest Owner and is not segregated) as of June 30, 2010
was $4,543,402 for the Jay Field property. The Jay Field Working
Interest Owner expects to utilize all such amount in payment of
a portion of the Trusts share of Jay Field dismantlement
costs. Under the conveyances, the Jay Field Working Interest
Owner was and remains entitled to escrow or otherwise set aside
substantially more than it has for Jay Field dismantlement
costs. If the amounts escrowed or otherwise set aside are
inadequate to pay the Trusts share of the dismantlement
costs, the Trust is not liable for the additional amounts.
Assuming that the Jay Field Working Interest Owner has recovered
all excess production costs, then, after the payment of the
dismantlement costs, 50 percent of any funds remaining in
escrow would be distributable to the Trust. However,
the estimated Jay Field dismantlement costs exceed the escrowed
amounts substantially, and no such distributions are likely.
The cumulative escrow balance (which is held by the Working
Interest Owner and is not segregated) as of June 30, 2010
was $9,249,224 for the South Pass 89 property. The South
Pass 89 Working Interest Owner expects to utilize all such
amount in payment of a portion of the Trusts share of
South Pass 89 dismantlement costs. Under the conveyances,
the South Pass Working Interest Owner was and remains entitled
to escrow or otherwise set aside substantially more than it has
for South Pass 89 dismantlement costs. If the amounts
escrowed or otherwise set aside are inadequate to pay the
Trusts share of the dismantlement costs, the Trust is not
liable for the additional amounts. Assuming that the South
Pass 89 Working Interest Owner has recovered all excess
production costs, then, after the payment of the dismantlement
costs, 50 percent of any funds remaining in
escrow would be distributable to the Trust. However,
the estimated South Pass 89 dismantlement costs exceed the
escrowed amounts substantially, and no such distributions are
likely.
The Conveyances prohibit the Working Interest Owners from
escrowing additional funds for estimated future Special Costs
with respect to a particular Productive Property once the amount
escrowed exceeds 125% of the aggregate estimated future Special
Costs for that Property. The Conveyances permit the Working
Interest Owners to
-30-
release funds from any of the Special Costs escrows at any time
if it determines in its sole discretion that there no longer
exists a need for escrowing all or any portion of such funds.
However, the Working Interest Owners are not required to do so.
The conveyances do not require the Working Interest Owners to
place the escrowed funds into an actual escrow
account or to segregate funds in any other manner, and none of
the working interest owners has done so. However, under the
conveyances, each Working Interest Owner (or any successor owner
of the working interest) is required to calculate Gross Proceeds
as though such funds had been escrowed and then subsequently
utilized for purposes of paying actual abandonment and related
costs. Quantum began withholding additional funds under these
provisions in the Trusts accounting month of December
2010. Information furnished by Quantum to the Trust for
production month April 2011 and Trust accounting month July 2011
indicates that 125% of Quantums current estimate of these
costs is approximately $26,500,000 and that the amount withheld
in escrow is $8,900,000.
The Working Interest Owners have advised the Trustee that they
intend to escrow any amounts otherwise distributable to the
Trust to the extent permitted to do so by the conveyances.
Results
of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Quarter
|
|
|
First Half
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
Royalty revenues
|
|
$
|
224,725
|
|
|
$
|
46,585
|
|
|
$
|
233,924
|
|
|
$
|
569,483
|
|
Trust administrative expenses
|
|
|
(25,313
|
)
|
|
|
(160,102
|
)
|
|
|
(439,216
|
)
|
|
|
(567,442
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash earnings
|
|
$
|
199,412
|
|
|
$
|
(113,517
|
)
|
|
$
|
(205,292
|
)
|
|
$
|
2,041
|
|
Change in undistributed cash
|
|
|
(199,412
|
)
|
|
|
113,517
|
|
|
|
205,292
|
|
|
|
(2,041
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash distributions
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash distributions per unit
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Units of beneficial interest
|
|
|
18,991,304
|
|
|
|
18,991,304
|
|
|
|
18,991,304
|
|
|
|
18,991,304
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues are generally received in the third month following the
month of production of oil and gas attributable to the
Trusts interest. Both revenues and Trust expenses are
recorded on a cash basis. Accordingly, distributions to Unit
holders for the three-month and six-month periods ended
June 30, 2010 and 2009 (the 2010 and 2009 Second
Quarters and First Half, respectively) are
attributable to the Working Interest Owners operations
during the periods January through March (the Three-Month
Operating Periods) of 2010 and 2009, respectively, and the
periods October 2009 through March 2010 and October 2008 through
March 2009 (the 2010 and 2009 Six-Month Operating
Periods, respectively).
There were no distributions made to the Unit holders for the
2010 Second Quarter or the 2009 Second Quarter. As a result of
the uncertainty of future proceeds from properties in which the
Trust has an interest as of June 30, 2010, the Trustee had
reserved $239,449 in proceeds that otherwise would have been
distributed to the Unit holders for the payment of the
Trusts likely expenses in the foreseeable future. The
Trustee intends to hold these funds for use in the payment of
future Trust expenses until it becomes reasonably clear that
they are no longer necessary.
-31-
During the Second Quarter 2010 and 2009, the Trust received cash
of $224,725 and $46,585, respectively, from the Working Interest
Owner with respect to the Royalties from the Properties.
The monthly per Unit distributions during the 2010 and 2009
Second Quarters were as follow:
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
April
|
|
$
|
0.0000
|
|
|
$
|
0.0000
|
|
May
|
|
|
0.0000
|
|
|
|
0.0000
|
|
June
|
|
|
0.0000
|
|
|
|
0.0000
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.0000
|
|
|
$
|
0.0000
|
|
|
|
|
|
|
|
|
|
|
There were no Distributions to the Unit holders for the First
Half of 2010 or the First Half of 2009. During the First Half of
2010 and 2009, the Trust received cash of $233,924 and $569,483,
respectively, from the Working Interest Owner with respect to
the Royalties from the Properties.
The following unaudited schedules provide summaries of the
Working Interest Owners calculation of the Net Proceeds
from the Properties and the Royalties paid to the Trust for the
Second Quarter and First Half of 2010:
Second
Quarter 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
South
|
|
|
Offshore
|
|
|
|
|
|
|
Jay Field
|
|
|
Pass 89
|
|
|
Louisiana
|
|
|
Total
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liquids
|
|
$
|
|
|
|
$
|
562,036
|
|
|
$
|
574,196
|
|
|
$
|
1,136,232
|
|
Oil
|
|
|
3,872,280
|
|
|
|
|
|
|
|
|
|
|
|
3,872,280
|
|
Sulfur
|
|
|
65,144
|
|
|
|
|
|
|
|
|
|
|
|
65,144
|
|
Natural gas
|
|
|
|
|
|
|
(10,016
|
)
|
|
|
243,868
|
|
|
|
233,852
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,937,424
|
|
|
|
552,020
|
|
|
|
818,064
|
|
|
|
5,307,508
|
|
Amounts withheld in escrow(3)
|
|
|
|
|
|
|
(552,020
|
)
|
|
|
(818,064
|
)
|
|
|
(1,370,084
|
)
|
Production costs and expenses(1)
|
|
|
(2,772,783
|
)
|
|
|
260,856
|
|
|
|
591,897
|
|
|
|
(1,920,030
|
)
|
Capital expenditures
|
|
|
(353,769
|
)
|
|
|
|
|
|
|
|
|
|
|
(353,769
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Proceeds
|
|
$
|
810,872
|
|
|
$
|
260,856
|
|
|
$
|
591,897
|
|
|
$
|
1,663,625
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Overriding Royalties paid to the Trust(2)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Proceeds Paid to the Trust
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
223,910
|
|
Fee Lands Royalties
|
|
|
815
|
|
|
|
|
|
|
Royalties paid to the Trust
|
|
$
|
224,725
|
|
|
|
|
|
|
-32-
First
Half 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
South
|
|
|
Offshore
|
|
|
|
|
|
|
Jay Field
|
|
|
Pass 89
|
|
|
Louisiana
|
|
|
Total
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liquids
|
|
$
|
|
|
|
$
|
1,326,500
|
|
|
$
|
1,195,594
|
|
|
$
|
2,522,094
|
|
Oil
|
|
|
4,187,697
|
|
|
|
|
|
|
|
|
|
|
|
4,187,697
|
|
Sulfur
|
|
|
63,949
|
|
|
|
|
|
|
|
|
|
|
|
63,949
|
|
Natural gas
|
|
|
|
|
|
|
(10,016
|
)
|
|
|
943,914
|
|
|
|
933,898
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,251,646
|
|
|
|
1,316,484
|
|
|
|
2,139,508
|
|
|
|
7,707,638
|
|
Amounts withheld in escrow
|
|
|
|
|
|
|
(1,316,484
|
)
|
|
|
(2,139,508
|
)
|
|
|
(3,455,992
|
)
|
Production costs and expenses(1)
|
|
|
(4,402,439
|
)
|
|
|
(27,525
|
)
|
|
|
753,785
|
|
|
|
(3,676,179
|
)
|
Capital expenditures
|
|
|
(1,086,547
|
)
|
|
|
(16,180
|
)
|
|
|
|
|
|
|
(1,102,727
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Proceeds
|
|
$
|
(1,237,340
|
)
|
|
$
|
(43,705
|
)
|
|
$
|
753,785
|
|
|
$
|
(527,260
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Overriding Royalties paid to the Trust(2)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Proceeds Paid to the Trust(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
223,910
|
|
Fee Lands Royalties
|
|
|
10,014
|
|
|
|
|
|
|
Royalties paid to the Trust
|
|
$
|
233,924
|
|
|
|
|
|
|
|
|
|
(1) |
|
Interest earned on funds escrowed for estimated future
dismantlement costs are reported as a reduction of production
costs and expenses. Interest earned for the 2010 Second Quarter
and 2010 First Half was $264,101 and $395,859, respectively.
Pursuant to the terms of the Trust Conveyances, interest
earned on the escrowed funds for any month will be calculated at
an interest rate equal to 80% of the median between the Prime
Rate at the end of such month and the Prime Rate at the end of
the preceding month. |
|
|
|
Processing fees earned on the South Pass 89 properties are shown
as a reduction of production costs and expenses. For the 2010
Second Quarter production costs and expenses include processing
fee income of $23,006. For the 2010 First Half, South Pass 89
processing fees earned were $184,599. |
|
(2) |
|
As a result of excess production costs incurred in one monthly
operating period and then recovered in subsequent monthly
operating periods, the Overriding Royalties paid to the Trust
may not agree to the Trusts royalty interest in the Net
Proceeds. |
|
(3) |
|
The working interest owner is routinely subject to joint
interest audits of the royalty interest computations. Given
such, the referenced amounts withheld in escrow are for royalty
computation purposes and do not reflect subsequent audit
adjustments to escrow balances; subsequent escrow audit
adjustments have no effect on royalty payments already made. |
-33-
The following unaudited schedules provide summaries of the
Working Interest Owners calculation of the Net Proceeds
from the Properties and the Royalties paid to the Trust for the
Second Quarter and First Half of 2009:
Second
Quarter 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
South
|
|
|
Offshore
|
|
|
|
|
|
|
Jay Field
|
|
|
Pass 89
|
|
|
Louisiana
|
|
|
Total
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liquids
|
|
$
|
|
|
|
$
|
357,107
|
|
|
$
|
295,487
|
|
|
$
|
652,594
|
|
Natural gas
|
|
|
|
|
|
|
584
|
|
|
|
222,559
|
|
|
|
223,143
|
|
Oil
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
357,691
|
|
|
|
518,046
|
|
|
|
875,737
|
|
Amounts withheld in escrow
|
|
|
|
|
|
|
|
|
|
|
(518,046
|
)
|
|
|
(518,046
|
)
|
Production costs and expenses(1)
|
|
|
(2,623,125
|
)
|
|
|
(323,982
|
)
|
|
|
8,759
|
|
|
|
(2,938,348
|
)
|
Capital expenditures
|
|
|
(1,206,991
|
)
|
|
|
(5,417
|
)
|
|
|
397,216
|
|
|
|
(815,192
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Proceeds
|
|
$
|
(3,830,116
|
)
|
|
$
|
28,292
|
|
|
$
|
405,975
|
|
|
$
|
(3,395,849
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Overriding Royalties paid to the Trust(2)
|
|
$
|
|
|
|
$
|
30,659
|
|
|
$
|
|
|
|
$
|
30,659
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Proceeds Paid to the Trust
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fee Lands Royalties
|
|
|
15,926
|
|
|
|
|
|
|
Royalties paid to the Trust
|
|
$
|
46,585
|
|
|
|
|
|
|
-34-
First
Half 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
South
|
|
|
Offshore
|
|
|
|
|
|
|
Jay Field
|
|
|
Pass 89
|
|
|
Louisiana
|
|
|
Total
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liquids
|
|
$
|
|
|
|
$
|
682,956
|
|
|
$
|
524,892
|
|
|
$
|
1,207,848
|
|
Natural gas
|
|
|
|
|
|
|
(16,575
|
)
|
|
|
424,900
|
|
|
|
408,325
|
|
Oil
|
|
|
5,200,147
|
|
|
|
|
|
|
|
|
|
|
|
5,200,147
|
|
Other(3)
|
|
|
|
|
|
|
|
|
|
|
1,275,000
|
|
|
|
1,275,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,200,147
|
|
|
|
666,381
|
|
|
|
2,224,792
|
|
|
|
8,091,320
|
|
Amounts withheld in escrow(5)
|
|
|
|
|
|
|
|
|
|
|
(2,224,792
|
)
|
|
|
(2,224,792
|
)
|
Production costs and expenses(1)
|
|
|
(7,298,590
|
)
|
|
|
(511,906
|
)
|
|
|
(342,502
|
)
|
|
|
(8,152,998
|
)
|
Insurance recovery proceeds(4)
|
|
|
|
|
|
|
927,814
|
|
|
|
9,113,272
|
|
|
|
10,041,086
|
|
Capital expenditures
|
|
|
(4,462,167
|
)
|
|
|
(5,920
|
)
|
|
|
(246,840
|
)
|
|
|
(4,714,927
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Proceeds
|
|
$
|
(6,560,610
|
)
|
|
$
|
1,076,369
|
|
|
$
|
8,523,930
|
|
|
$
|
3,039,689
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Overriding Royalties paid to the Trust(2)
|
|
$
|
|
|
|
$
|
526,448
|
|
|
$
|
|
|
|
$
|
526,448
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Proceeds Paid to the Trust
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fee Lands Royalties
|
|
|
43,035
|
|
|
|
|
|
|
Royalties paid to the Trust
|
|
$
|
569,483
|
|
|
|
|
|
|
|
|
|
(1) |
|
Interest earned on funds escrowed for estimated future
dismantlement costs are reported as a reduction of production
costs and expenses. Interest earned for the 2009 Second Quarter
and 2009 First Half was $134,911 and $292,706, respectively.
Pursuant to the terms of the Trust Conveyances, interest
earned on the escrowed funds for any month will be calculated at
an interest rate equal to 80% of the median between the Prime
Rate at the end of such month and the Prime Rate at the end of
the preceding month. |
|
|
|
Processing fees earned as also shown as a reduction of
production costs and expenses. For the three months ended and
six months ended June 30, 2009, South Pass 89 processing
fees totaled $0 and $42,802, respectively. |
|
(2) |
|
As a result of excess production costs incurred in one monthly
operating period and then recovered in subsequent monthly
operating periods, the Overriding Royalties paid to the Trust
may not agree to the Trusts royalty interest in the Net
Proceeds. |
|
(3) |
|
During January of 2009, the Working Interest Owner received
$1,275,000 of insurance proceeds related to lost production due
to Hurricane Rita. |
|
(4) |
|
During January of 2009, the Working Interest Owner received
$10,041,086 of insurance proceeds related to operating costs
incurred due to Hurricane Katrina and Hurricane Rita. |
|
(5) |
|
The working interest owner is routinely subject to joint
interest audits of the royalty interest computations. Given
such, the referenced amounts withheld in escrow are for royalty
computation purposes and do not reflect |
-35-
|
|
|
|
|
subsequent audit adjustments to escrow balances; subsequent
escrow audit adjustments have no effect on royalty payments
already made. |
The following unaudited schedule provides a summary of the
Working Interest Owners calculation of the Net Proceeds
from the Properties and the Royalties paid to the Trust for the
Second Quarter and First Half of 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Quarter
|
|
|
First Half
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
Net Proceeds:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
5,307,509
|
|
|
$
|
875,737
|
|
|
$
|
7,643,690
|
|
|
$
|
8,091,320
|
|
Amounts withheld in escrow
|
|
|
(1,370,084
|
)
|
|
|
(518,046
|
)
|
|
|
(3,455,992
|
)
|
|
|
(2,224,792
|
)
|
Production costs and expenses
|
|
|
(1,920,030
|
)
|
|
|
(2,938,348
|
)
|
|
|
(3,676,179
|
)
|
|
|
(8,152,998
|
)
|
Insurance recovery proceeds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,041,086
|
|
Capital expenditures
|
|
|
(353,769
|
)
|
|
|
(815,192
|
)
|
|
|
(1,102,727
|
)
|
|
|
(4,714,927
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Proceeds
|
|
$
|
1,663,625
|
|
|
$
|
(3,395,849
|
)
|
|
$
|
(527,260
|
)
|
|
$
|
3,039,689
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Royalties paid to the Trust:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other proceeds paid to the Trust
|
|
$
|
223,910
|
|
|
$
|
|
|
|
$
|
223,910
|
|
|
$
|
|
|
Overriding Royalties
|
|
|
|
|
|
|
30,659
|
|
|
|
|
|
|
|
526,448
|
|
Fee Lands Royalties
|
|
|
815
|
|
|
|
15,926
|
|
|
|
10,014
|
|
|
|
43,035
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Royalties paid to the Trust
|
|
$
|
224,725
|
|
|
$
|
46,585
|
|
|
$
|
233,924
|
|
|
$
|
569,483
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With respect to the Productive Properties in the current
operating period, revenues of the Working Interest Owner
increased greater than 100% in the 2010 Three-Month Operating
Period versus the comparable period in 2009 primarily due to
proceeds received by the Trustee from Jay Filed property as a
result of a review conducted by an independent oil and gas
accounting firm retained by the Trustee to review the Working
Interest Owners calculation of amounts relevant to the
determination of the net proceeds properly payable to the Trust
under the Conveyances. The revenues paid to the Trust decreased
approximately 59% in the 2010 Six-Month Operating Period versus
the comparable period in 2009 primarily due to the temporary
production shut down at the Jay Field property during the first
half of 2009. However, during for South Pass 89 and Offshore
Louisiana resulted saw increased commodity prices and increased
production. In the 2010 Six-Month Operating Period, average
crude oil, natural gas liquids and natural gas prices were
$75.04 per barrel, $43.74 per barrel and $6.11 per Mcf,
respectively. In the comparable 2009 Six-Month Operating Period,
average crude oil, natural gas liquids and natural gas prices
were $54.58 per barrel, $6.19 per barrel and $3.96 per Mcf,
respectively.
Imputed production attributable to the Trust is calculated by
multiplying the gross production volumes attributable to the
Productive Properties by the ratio of the net overriding
royalties paid to the Trust to the gross revenues attributable
to the Productive Properties. There was no imputed liquids
production for the 2010 Six-Month Operating Period. There were
11,880 barrels of imputed liquids production for the 2009
Six-Month Operating Period. There was no imputed natural gas
production for the 2010 Six-Month Operating Period. There were 3
mcf of imputed natural gas production for the 2009 Six-Month
Operating Period.
-36-
In the first six months of 2010 and 2009, the Working Interest
Owners reserved $3,455,992 and $2,224,792, respectively, in
escrow as a result of uncertainties related to oil and gas
properties.
Production costs and expenses incurred by the Working Interest
Owner on the Productive Properties decreased approximately 35%
in the 2010 Three-Month Operating Period and decreased 55% in
the 2010 Six-Month Operating Period versus the comparable
periods in 2009. The decrease in the Three-Month and Six-Month
Operating Period is primarily due to re-starting production at
Jay Field property effective March 2010. Starting April 2009 to
February 2010, the working interest owner had temporarily
suspended production at the Jay Field property.
Insurance recovery proceeds decreased 100% due to the receipt of
$927,814 and $9,113,272 for South Pass 89 and Offshore
Louisiana, respectively, during the six months ended
June 30, 2009. The South Pass 89 and Offshore Louisiana
properties received zero insurance recovery proceeds during the
first six months of 2010.
Capital expenditures decreased 57% in the 2010 Three-Month
Operating Period and decreased 77% for the 2010 Six-Month
Operating Period versus the comparable periods in 2009. The
decrease in the Three-Month and Six-Month Operating Period is
primarily due to the temporary shutdown of production in the Jay
Field property during 2009. The capital expenditures incurred
during 2010 by Jay Field property was for capital work including
replacement, repair, facility upgrades, and capital well work
associated with regulatory non-certified wells.
As noted previously, on November 11, 2009, the Trust sold
its interest in the south Louisiana acreage described in the
Trusts public filings as the Fee Lands. The
sale resulted in cash proceeds to the Trust, net of fees of
$24,828 paid to the auction company that conducted the sale, of
approximately $500,000.
The Trustee has been informed that The Louisiana Land and
Exploration Company or a subsidiary has been named as one of
many defendants in certain lawsuits alleging the underpayment of
royalties on the production of natural gas and natural gas
liquids through the use of below-market prices, improper
deductions, improper measurement techniques and transactions
with affiliated companies. Plaintiffs in some of the lawsuits
allege that the underpayment of royalties, among other things,
resulted in false forms being filed by the Working Interest
Owners with the Minerals Management Service, thereby violating
the civil False Claims Act.
If the plaintiffs are successful in the matters described above,
revenues to the Trust could decrease. A judgment or settlement
could entitle the Working Interest Owners to reimbursements for
past periods attributable to properties covered by the
Trusts interest. ConocoPhillips has informed the Trustee
that, at this time, it is not able to reasonably estimate the
amount of any potential loss or settlement allocable to the
Trusts interest.
The Trust is now required by the terms of the
Trust Agreement to sell its assets and to liquidate. As
previously disclosed, the Trustee engaged the Financial Advisor
to market the Trusts assets in anticipation of a sale in
accordance with the terms of the Trust Agreement. The
Financial Advisor marketed the Trusts assets and had
received preliminary indications of interest in late 2010, and
the Trustee intended to sell the assets in accordance with the
terms of the Trust Agreement. However, as previously
announced, in November 2010 the Trust and Trustee were named as
defendants in a Complaint for Legal and Equitable Relief (the
Complaint) filed by Jeff Beckett in the United
States District Court for the Eastern District of Michigan.
Mr. Becketts Complaint sought a judicial modification
of the terms of the Trust Agreement governing the Trust, a
judgment declaring that the termination
-37-
provisions of the Trust Agreement do not apply and an order
preventing the sale of the Trusts assets. The Complaint
also made a number of other allegations and sought removal of
the Trustee and other relief.
As a result of Mr. Becketts lawsuit, the bidders who
had submitted preliminary indications of interest to the
Financial Advisor indicated that they were unwilling to proceed
with the purchase of the Jay Field interest from the Trust until
the Beckett lawsuit was resolved. Consequently, as previously
disclosed, the Trustee suspended the sale process pending
resolution of the lawsuit. Additional information regarding the
status of the Beckett lawsuit and the status of the sale of the
Trusts assets is included in this report.
For more recent information regarding all these matters, please
see the Trusts Annual Report on
Form 10-K
for the years ended December 31, 2009 and 2010.
Assets
and Liabilities in the Process of Liquidation
As a result of the contractual termination of the Trust
effective December 31, 2007, the Trust is in the process of
liquidation. The table below presents the assets of the Trust at
their estimated fair value, based solely on the assessment
described below:
|
|
|
|
|
|
|
June 30,
|
|
|
|
2010
|
|
|
ASSETS
|
Cash as of June 30, 2010
|
|
$
|
239,449
|
|
Net overriding royalty interests in oil and gas properties
|
|
|
0
|
|
|
|
|
|
|
Net assets in process of liquidation
|
|
$
|
239,449
|
|
|
|
|
|
|
The net overriding royalty interest in oil and gas properties at
June 30, 2010 reflect the Trustees estimate of value
(in the absence of third-party appraisals or evaluations), based
on the Trusts share of future net revenues from the net
overriding royalty interest in the properties as of
June 20, 2010.
As noted previously, on November 11, 2009, the Trust sold
its interest in the south Louisiana acreage described in the
Trusts public filings as the Fee Lands. The
sale resulted in cash proceeds to the Trust, net of fees of
$24,828 paid to the auction company that conducted the sale, of
approximately $500,000. Additionally, the estimated fair value
does not include any amounts related to the Jay Field, South
Pass 89, or Offshore Louisiana properties. The estimated share
for these properties is not economical per the oil and gas
reserve report as of September 30, 2009, dated May 24,
2011.
The actual net proceeds from the sales of oil and gas properties
may vary substantially from these estimates in value due to
changes in current and estimated future oil and gas prices,
subsequent production, estimates of actual abandonment costs and
other factors.
For all other assets presented in the above table, the Trustee
believes that historical cost approximates fair market value due
to the short-term nature of such assets. The Trustee will add
any future distributions to previously established reserves to
pay Trust expenses, which will primarily consist of expenses
incurred by the Trustee to liquidate the Trusts assets.
Any funds remaining after all expenses have been paid will be
distributed to the Unit holders.
-38-
For more information regarding the estimated remaining life of
each of the Royalty Properties and the estimated future net
revenues of the Royalty Properties based on information provided
by the Working Interest Owners to Miller and Lents, see the
reserve reports as of September 30, 2009, dated
May 24, 2011 and September 30, 2010 dated June 8,
2011, filed as exhibits to this
Form 10-Q.
Nothing herein should be interpreted as an assurance of the
values of the assets held by the Trust. The actual value, if
any, of such assets will be determined solely by the amount a
buyer is willing to pay for the assets.
-39-
|
|
Item 3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
The Trust does not engage in any operations and does not utilize
market risk sensitive instruments, either for trading purposes
or for other than trading purposes. As described in detail
elsewhere herein, the Trusts monthly distributions are
highly dependent upon the prices realized from the sale of
natural gas. Natural gas prices can fluctuate widely on a
month-to-month
basis in response to a variety of factors that are beyond the
control of the Trust and the Working Interest Owner. Factors
that contribute to price fluctuation include, among others:
|
|
|
|
|
political conditions worldwide, (in particular, political
disruption, war or other armed conflict in or affecting oil
producing regions);
|
|
|
|
worldwide economic conditions;
|
|
|
|
weather conditions;
|
|
|
|
the supply and price of foreign natural gas;
|
|
|
|
the level of consumer demand;
|
|
|
|
the price and availability of alternative fuels;
|
|
|
|
the proximity to, and capacity of, transportation
facilities; and
|
|
|
|
the effect of worldwide energy conservation measures.
|
Moreover, government regulations, such as regulation of natural
gas transportation and price controls, can affect product prices
in the long term.
|
|
Item 4.
|
Controls
and Procedures
|
The Trust maintains disclosure controls and procedures designed
to ensure that information required to be disclosed by the Trust
in reports that it files or submits under the Securities
Exchange Act of 1934, as amended (the Exchange Act),
is recorded, processed, summarized and reported within the time
periods specified in the SECs rules and forms. Disclosure
controls and procedures include controls and procedures designed
to ensure that information required to be disclosed by the Trust
in the reports that it files or submits under the Exchange Act
is accumulated and communicated by the Working Interest Owners
to the Trustee and its employees who participate in the
preparation of the Trusts periodic reports as appropriate
to allow timely decisions regarding required disclosure.
As of the end of the period covered by this report, the Trustee
carried out an evaluation of the Trusts disclosure
controls and procedures. Mike Ulrich, as Trust Officer of
the Trustee, has concluded that these controls and procedures
were not effective to allow timely decisions regarding required
disclosure. Because the Trust has terminated in accordance with
the terms of the Trust Agreement and is required by the
Trust Agreement to auction its assets, pay its expenses and
distribute any remaining funds to Unit holders, the Trustee will
not attempt to implement additional controls and procedures
designed to ensure that information required to be disclosed by
the Trust is accumulated and communicated to the Trustee on a
timely basis.
Due to the contractual arrangements pursuant to which the Trust
was created and the terms of the related Conveyances regarding
information furnished by the Working Interest Owners, the
Trustee relies on (i) information
-40-
provided by the Working Interest Owners, including all
information relating to the productive properties burdened by
the Royalties, such as operating data, data regarding operating
and capital expenditures, geological data relating to reserves,
information regarding environmental and other conditions
relating to the productive properties, liabilities and potential
liabilities potentially affecting the revenues to the
Trusts interest, the effects of regulatory changes and of
the compliance of the operators of the productive properties
with applicable laws, rules and regulations, the number of
producing wells and acreage, and plans for future operating and
capital expenditures, and (ii) conclusions of independent
reserve engineers regarding reserves. The conclusions of the
independent reserve engineers are based on information received
from the Working Interest Owners.
Changes in Control Over Financial
Reporting. There has been no change in the
Trustees internal control over financial reporting during
the three months ended June 30, 2010 that has materially
affected, or is reasonably likely to materially affect, the
Trustees internal control over financial reporting.
-41-
PART II
OTHER INFORMATION
Except as set forth in the Trusts Annual Report on
Form 10-K
for the year ended December 31, 2010, there have been no
material changes in the risk factors disclosed under
Part I, Item 1A of the Trusts Annual Report on
Form 10-K
for the year ended December 31, 2009.
(a) Exhibits
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
Number
|
|
|
|
Description
|
|
|
4*
|
|
|
|
|
Trust Agreement for LL&E Royalty Trust, dated as of
June 1, 1983, between the Company and First City National
Bank of Houston, as Trustee.
|
|
28
|
.1*
|
|
|
|
Agreement of General Partnership of LL&E Royalty
Partnership.
|
|
28
|
.3*
|
|
|
|
Form of Conveyance of Overriding Royalty Interests for Jay Field
(Alabama) Property.
|
|
28
|
.4*
|
|
|
|
Form of Conveyance of Overriding Royalty Interests for Jay Field
(Florida) Property.
|
|
28
|
.5*
|
|
|
|
Form of Conveyance of Overriding Royalty Interests for Offshore
Louisiana Property.
|
|
28
|
.6*
|
|
|
|
Form of Conveyance of Overriding Royalty Interests for South
Pass 89 Property.
|
|
28
|
.7*
|
|
|
|
Form of Royalty Deed.
|
|
31
|
|
|
|
|
Certification pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
|
|
32
|
|
|
|
|
Certification pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
|
|
99
|
.1
|
|
|
|
Reserve Report as of September 30, 2009 dated May 24,
2011 prepared by Miller and Lents, Ltd. (incorporated by
reference to exhibit 99.1 to the Trusts Annual Report
on
Form 10-K
for the year ended December 31, 2009 (Commission File
No. 1-8518).
|
|
99
|
.2
|
|
|
|
Reserve report as of September 30, 2010 dated
March 28, 2011 prepared by Miller and Lents, Ltd.
(incorporated by reference to exhibit 99.1 to the
Trusts Annual Report on
Form 10-K
for the year ended December 31, 2010 (Commission File
No. 1-8518).
|
|
|
|
* |
|
Incorporated by reference to Exhibits of like designation to
Registrants Annual Report on
Form 10-K
for the period ended December 31, 1983 (Commission File
No. 1-8518). |
-42-
SIGNATURE
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.
LL&E ROYALTY TRUST
(Registrant)
|
|
|
|
By:
|
THE BANK OF NEW YORK MELLON TRUST COMPANY, N.A.
|
Trustee
Mike Ulrich
Vice President and Trust Officer
Date: August 19, 2011
|
|
NOTE: |
Because the Registrant is a trust without officers or employees,
only the signature of an officer of the Trustee is available and
has been provided.
|
-43-
INDEX TO
EXHIBITS
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
Number
|
|
|
|
Description
|
|
|
4*
|
|
|
|
|
Trust Agreement for LL&E Royalty Trust, dated as of
June 1, 1983, between the Company and First City National
Bank of Houston, as Trustee.
|
|
28
|
.1*
|
|
|
|
Agreement of General Partnership of LL&E Royalty
Partnership.
|
|
28
|
.3*
|
|
|
|
Form of Conveyance of Overriding Royalty Interests for Jay Field
(Alabama) Property.
|
|
28
|
.4*
|
|
|
|
Form of Conveyance of Overriding Royalty Interests for Jay Field
(Florida) Property.
|
|
28
|
.5*
|
|
|
|
Form of Conveyance of Overriding Royalty Interests for Offshore
Louisiana Property.
|
|
28
|
.6*
|
|
|
|
Form of Conveyance of Overriding Royalty Interests for South
Pass 89 Property.
|
|
28
|
.7*
|
|
|
|
Form of Royalty Deed.
|
|
31
|
|
|
|
|
Certification pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
|
|
32
|
|
|
|
|
Certification pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
|
|
99
|
.1
|
|
|
|
Reserve Report as of September 30, 2009 dated May 24,
2011 prepared by Miller and Lents, Ltd. (incorporated by
reference to exhibit 99.1 to the Trusts Annual Report
on
Form 10-K
for the year ended December 31, 2009 (Commission File
No. 1-8518).
|
|
99
|
.2
|
|
|
|
Reserve report as of September 30, 2010 dated
March 28, 2011 prepared by Miller and Lents, Ltd.
(incorporated by reference to exhibit 99.1 to the
Trusts Annual Report on
Form 10-K
for the year ended December 31, 2010 (Commission File
No. 1-8518).
|
|
|
|
* |
|
Incorporated by reference to Exhibits of like designation to
Registrants Annual Report on
Form 10-K
for the period ended December 31, 1983 (Commission File
No. 1-8518). |
-44-