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EX-32 - EX-32 - LL&E ROYALTY TRUST | h85167exv32.htm |
EX-31 - EX-31 - LL&E ROYALTY TRUST | h85167exv31.htm |
Table of Contents
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ü] | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE |
SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30,
2011
OR
[ ] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE |
SECURITIES
EXCHANGE ACT OF 1934
Commission file number 1-8518
LL&E
ROYALTY TRUST
(Exact name of registrant as
specified in its charter)
Texas
|
76-6007940 | |
(State or other jurisdiction of Incorporation or organization) |
(I.R.S. Employer Identification No.) |
|
The Bank of New
York Mellon Trust Company, N.A., Trustee Global Corporate Trust 919 Congress Avenue Austin, Texas (Address of principal executive offices) |
78701 (Zip Code) |
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 No ü
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
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.
Large Accelerated Filer | Accelerated Filer | Non-Accelerated Filer | Smaller reporting company ü |
(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 No ü
At October 20, 2011, 18,991,304 Units of Beneficial
Interest in the registrant were outstanding.
Table of Contents
Special
Note
LL&E Royalty Trust (the Trust) filed its 2009
and 2010 quarterly and annual reports on August 19, 2011.
The Trust is now concurrently filing its quarterly reports on
Form 10-Q
for the first and second quarters of 2011. The Trust was unable
to prepare its financial statements for these filings until it
completed the 2009 and 2010 filings. Please see the Trusts
annual report on
Form 10-K
for the year ended December 31, 2010 for additional
information.
-2-
Table of Contents
Item 1. | Financial Statements. |
LL&E
ROYALTY TRUST
The accompanying unaudited financial statements of LL&E
Royalty Trust (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, 2010. The cash earnings and
distributions for the three months ended June 30, 2011 are
not necessarily indicative of the results to be expected for the
year ending December 31, 2011.
-3-
Table of Contents
LL&E
ROYALTY TRUST
(Unaudited)
Three Months Ended |
Six Months Ended |
|||||||||||||||
June 30, | June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Royalty revenues
|
$ | | $ | 224,725 | $ | | $ | 233,924 | ||||||||
Trust administrative expenses
|
(1,060,881 | ) | (25,313 | ) | (1,068,051 | ) | (439,216 | ) | ||||||||
Cash earnings (losses)
|
(1,060,881 | ) | 199,412 | (1,068,051 | ) | (205,292 | ) | |||||||||
Changes in undistributed cash
|
1,060,881 | (199,412 | ) | 1,068,051 | 205,292 | |||||||||||
Cash distributions
|
$ | | $ | | $ | | $ | | ||||||||
Cash distributions per Unit
|
$ | | $ | | $ | | $ | | ||||||||
Units outstanding
|
18,991,304 | 18,991,304 | 18,991,304 | 18,991,304 | ||||||||||||
Statements
of Assets, Liabilities and Trust Corpus
June 30, |
December 31, |
|||||||
2011 | 2010 | |||||||
ASSETS
|
||||||||
Cash
|
$ | 3,077 | $ | 564,477 | ||||
Net overriding royalty interests in productive oil and gas
properties
|
76,282,000 | 76,282,000 | ||||||
Less: accumulated amortization (note 2)
|
(76,282,000 | ) | (76,282,000 | ) | ||||
Total assets
|
$ | 3,077 | $ | 564,477 | ||||
LIABILITIES AND TRUST CORPUS | ||||||||
Advances payable
|
$ | 1,650,961 | $ | 1,144,310 | ||||
Trust Corpus (18,991,304 Units of Beneficial Interest
authorized, issued and outstanding)
|
(1,647,884 | ) | (579,833 | ) | ||||
Contingencies (note 7)
|
||||||||
Total liabilities and trust corpus
|
$ | 3,077 | $ | 564,477 | ||||
Statements
of Changes in Trust Corpus
(Unaudited)
(Unaudited)
Six Months Ended |
||||||||
June 30, | ||||||||
2011 | 2010 | |||||||
Trust Corpus, beginning of period (note 4)
|
$ | (579,833 | ) | $ | 3,741 | |||
Cash losses
|
(1,068,051 | ) | (205,292 | ) | ||||
Cash distributions
|
| | ||||||
Amortization of royalty interest (note 4)
|
| | ||||||
Trust Corpus, end of period
|
$ | (1,647,884 | ) | $ | (201,551 | ) | ||
The accompanying notes are an integral part of these financial
statements.
-4-
Table of Contents
LL&E
ROYALTY TRUST
June 30, 2011
(1) | Formation of the Trust |
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 are traded over the counter under the symbol LRTR.
The accompanying financial statements should be read in
conjunction with the Trusts Annual Report on
Form 10-K
for the year ended December 31, 2010.
Termination
of the Trust and Recent Developments
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
-5-
Table of Contents
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 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 the Beckett lawsuit, certain of the bidders who
had submitted preliminary indications of interest in purchasing
the Trusts remaining assets 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 in the Trusts public
filings, the Trustee suspended the sale process pending a
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 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.
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 held a meeting of the Unitholders for the
purpose of appointing Premier Bank & Trust, National
Association, as successor trustee, provided that notice of the
Meeting was mailed by August 1, 2011 and the Meeting
occurred by September 1, 2011. The notice of the meeting
-6-
Table of Contents
LL&E
ROYALTY TRUST
NOTES TO
FINANCIAL STATEMENTS (Continued)
to appoint Premier was mailed by August 1, 2011 and the
meeting to appoint Premier occurred by September 1, 2011.
However, Premier refused to accept its appointment, and
Mr. Beckett has asserted that the settlement agreement did
not require him to dismiss his lawsuit.
Although the Trustee believes that the settlement agreement
clearly required the dismissal of the Beckett lawsuit, the
Trustee has called a second meeting of the Unitholders for the
purpose of voting on a proposal by Mr. Beckett to appoint
James E. Barlett as successor trustee. In connection with the
calling of the second meeting, Mr. Beckett dismissed his
lawsuit with prejudice.
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 otherwise
prevented from doing so, the Trustee intends to auction the
remaining Trust assets in accordance with the
Trust Agreement. The Trustee will mail notice of any public
auction to all Unit holders at least 30 days prior to any
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.
As of June 30, 2011, the Trust had $3,077 in cash (all of
which had been advanced to the Trust by BNY Mellon, as described
below) and was holding unpaid invoices for administrative
services totaling approximately $857,068. In addition, BNY
Mellon, an affiliate of the Trustee, has made interest-free
advances to enable the Trust to pay administrative expenses. As
of June 30, 2011, the total amount advanced to the Trust
(the Bank Advance) by BNY Mellon was $1,650,961
Based on current general and administrative expenditures, in the
absence of Royalty Revenues the Trustee expects that the Trust
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 Trust 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 Trust. The Trust Agreement prohibits the Trust
from making any distributions to unitholders until all loans are
repaid in full.
As of October 20, 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 October 20, 2011, the
total amount advanced to the Trust (the Bank
Advance) by the Bank was $2,379,347, of which $9,968
remained available to pay expenses at October 20, 2011.
However, at October 20, 2011, in addition to the amount
owed to the Bank, the Trust was also holding unpaid invoices for
administrative services totaling $509,362. 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 distribution can be made to Unit holders.
For the first six months of 2011, the Trust did not receive any
royalty revenue. Excess production costs must be recovered by
the Working Interest Owners before any distribution of royalty
revenues will be made to the Trust. During the first six months
of 2010, the Trust did not receive any royalty revenue except
for $9,199 of royalty revenue from the Fee Lands property.
-7-
Table of Contents
LL&E
ROYALTY TRUST
NOTES TO
FINANCIAL STATEMENTS (Continued)
(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, 2011 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.
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 year ended December 31, 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.
(3) | Going Concern |
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
-8-
Table of Contents
LL&E
ROYALTY TRUST
NOTES TO
FINANCIAL STATEMENTS (Continued)
effective December 31, 2007. Accordingly, there exists
substantial doubt about the Trusts ability to continue as
a going concern. The accompanying financial statements do not
include any adjustments as a result of the termination of the
Trust.
As of June 30, 2011, the Trust had $3,077 in cash (all of
which had been advanced to the Trust by BNY Mellon, as described
below) and was holding unpaid invoices for administrative
services totaling approximately $857,068. In addition, BNY
Mellon, an affiliate of the Trustee, has made interest-free
advances to enable the Trust to pay administrative expenses. As
of June 30, 2011, the total amount advanced to the Trust
(the Bank Advance) by BNY Mellon was $1,650,961.
Based on current general and administrative expenditures, in the
absence of Royalty Revenues the Trustee expects that the Trust
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 Trust 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 Trust. The Trust Agreement prohibits the Trust
from making any distributions to unitholders until all loans are
repaid in full.
(4) | Net Overriding Royalty Interests |
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
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.
(5) | Income Tax Matters |
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
-9-
Table of Contents
LL&E
ROYALTY TRUST
NOTES TO
FINANCIAL STATEMENTS (Continued)
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 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.
The 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.
-10-
Table of Contents
LL&E
ROYALTY TRUST
NOTES TO
FINANCIAL STATEMENTS (Continued)
(6) | Dismantlement Costs |
According to the reserve report as of September 30, 2010,
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. However,
according to the most recent estimates provided to the Trust by
the Jay Field Working Interest Owner, the estimated
dismantlement costs at Jay Field have increased to $20,367,781.
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 or otherwise
deduct 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 Katrina and Rita. During the first
six months of 2011, the Working Interest Owner withheld
$4,390,863, $1,260,880 and $1,340,368 in escrow from the Jay
Field, Offshore Louisiana and South Pass 89 Properties,
respectively. The Working Interest Owner expended $3,053,973 and
$16,770 from the escrow funds for dismantlement costs incurred
during the first six months of 2011 for the Offshore Louisiana
and South Pass 89 properties, respectively.
The cumulative escrow balance as of June 30, 2011 was
$8,934,267 for the Jay Field property and $10,914,873 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, 2011 for the
Offshore Louisiana property was $8,970,616, 90 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 conveyance. 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.
-11-
Table of Contents
LL&E
ROYALTY TRUST
NOTES TO
FINANCIAL STATEMENTS (Continued)
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.
(7) | Contingencies |
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.
(8) | Subsequent Events |
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 held a meeting of the Unitholders for the
purpose of appointing Premier Bank & Trust, National
Association, as successor trustee, provided that notice of the
Meeting was mailed by August 1, 2011 and the Meeting
occurred by September 1, 2011. The notice of the meeting
-12-
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LL&E
ROYALTY TRUST
NOTES TO
FINANCIAL STATEMENTS (Continued)
to appoint Premier was mailed by August 1, 2011 and the
meeting to appoint Premier occurred by September 1, 2011.
However, Premier refused to accept its appointment, and
Mr. Beckett has asserted that the settlement agreement did
not require him to dismiss his lawsuit.
Although the Trustee believes that the settlement agreement
clearly required the dismissal of the Beckett lawsuit, the
Trustee has called a second meeting of the Unitholders for the
purpose of voting on a proposal by Mr. Beckett to appoint
James E. Barlett as successor trustee. In connection with the
calling of the second meeting, Mr. Beckett dismissed his
lawsuit with prejudice.
-13-
Table of Contents
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, 2011.
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 Report on
Form 10-K
for the year ended December 31, 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.
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, 2011 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.
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.
-14-
Table of Contents
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.
As a result of the Beckett lawsuit, certain of the bidders who
had submitted preliminary indications of interest in purchasing
the Trusts remaining assets 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 in the Trusts public
filings, the Trustee suspended the sale process pending a
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 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.
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 held a meeting of the Unitholders for the
purpose of appointing Premier Bank & Trust, National
Association, as successor trustee, provided that notice of the
Meeting was mailed by August 1, 2011 and the Meeting
occurred by September 1, 2011. The notice of the meeting
-15-
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to appoint Premier was mailed by August 1, 2011 and the
meeting to appoint Premier occurred by September 1, 2011.
However, Premier refused to accept its appointment, and
Mr. Beckett has asserted that the settlement agreement did
not require him to dismiss his lawsuit.
Although the Trustee believes that the settlement agreement
clearly required the dismissal of the Beckett lawsuit, the
Trustee has called a second meeting of the Unitholders for the
purpose of voting on a proposal by Mr. Beckett to appoint
Mr. Barlett as successor trustee. In connection with the
calling of the second meeting, Mr. Beckett dismissed his
lawsuit with prejudice
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 otherwise
prevented from doing so, the Trustee intends to auction the
remaining Trust assets in accordance with the
Trust Agreement. The Trustee will mail notice of any public
auction to all Unit holders at least 30 days prior to any
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.
As of June 30, 2011, the Trust had $3,077 in cash, unpaid
invoices for administrative services totaling approximately
$857,000, and owed $1,650,961 to BNY Mellon for the Bank Advance.
As of October 20, 2011, the Trust had no cash except for
the cash advanced to the Trust by BNY Mellon, an affiliate of
the Trustee, as an interest-free advance to enable the Trust to
pay administrative expenses. As of October 20, 2011, the
total amount advanced to the Trust (the Bank
Advance) by the Bank was $2,379,347, of which $9,968
remained available to pay expenses at October 20, 2011.
However, at October 20, 2011, in addition to the amount
owed to the Bank, the Trust was also holding unpaid invoices for
administrative services totaling $509,362.
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 $10,064 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 the first six months of 2011, the Trust received no
royalty income. The Jay Field, South Pass 89 and Offshore
Louisiana properties excess production costs as of June 30,
2011 were approximately $13,790,000, $1,408,000 and $2,849,000,
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.
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
-16-
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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.
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. There has been
no material change in the status of the information provided to
the Trustee by the Working Interest owners and set forth in the
Trusts Annual Report on
Form 10-K
for the year ended December 31, 2010 regarding the
hurricane damages.
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 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.
The cumulative Offshore Louisiana escrow balance (which is held
by the Working Interest Owner and is not segregated) as of
June 30, 2011 was $8,970,616. 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.
-17-
Table of Contents
The cumulative escrow balance (which is held by the Working
Interest Owner and is not segregated) as of June 30, 2011
was $8,934,268 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, 2011
was $10,914,870 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 89
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 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 neither
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 June 2011 and Trust accounting month September
2011 indicates that 125% of Quantums current estimate of
these costs is approximately $25,500,000 and that the amount
withheld in escrow is approximately $12,400,000.
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.
-18-
Table of Contents
Results
of Operations
Second Quarter | First Half | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Royalty revenues
|
$ | | $ | 224,725 | $ | | $ | 233,924 | ||||||||
Trust administrative expenses
|
(1,060,881 | ) | (25,313 | ) | (1,068,051 | ) | (439,216 | ) | ||||||||
Cash earnings
|
$ | (1,060,881 | ) | $ | 199,412 | $ | (1,068,051 | ) | $ | (205,292 | ) | |||||
Change in undistributed cash
|
1,060,881 | (199,412 | ) | 1,068,051 | 205,292 | |||||||||||
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, 2011 and 2010 (the 2011 and 2010 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 2011 and 2010, respectively, and the
periods October 2010 through March 2011 and October 2009 through
March 2010 (the 2011 and 2010
Six-Month
Operating Periods, respectively).
There were no distributions made to the Unit holders for the
2011 Second Quarter or the 2010 Second Quarter. For the second
quarter of 2011, the Trust had $1,060,881 in G&A expenses,
primarily related to cash payments made for legal and accounting
services. G&A expenses are paid based on the trustees
discretion or the available cash amounts. As of June 30,
2011, the Trust had only $3,077 in cash, and had substantial
unpaid administrative expenses.. During the Second Quarter 2011
and 2010, the Trust received cash of $0 and $224,725,
respectively, from the Working Interest Owner with respect to
the Royalties from the Properties.
There were no Distributions to the Unit holders for the First
Half of 2011 or the First Half of 2010. During the First Half of
2011 and 2010, the Trust received cash of $0 and $233,924,
respectively, from the Working Interest Owner with respect to
the Royalties from the Properties.
-19-
Table of Contents
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 2011:
Second
Quarter 2011
South |
Offshore |
|||||||||||||||
Jay Field | Pass 89 | Louisiana | Total | |||||||||||||
Revenues:
|
||||||||||||||||
Liquids
|
$ | 7,835,883 | $ | 728,747 | $ | 605,768 | $ | 9,170,398 | ||||||||
Sulfur
|
161,308 | | | 161,308 | ||||||||||||
Natural gas
|
| | 76,352 | 76,352 | ||||||||||||
7,997,191 | 728,747 | 682,120 | 9,408,058 | |||||||||||||
Amounts withheld in escrow(3)
|
(2,902,589 | ) | (728,747 | ) | (682,120 | ) | (4,313,456 | ) | ||||||||
Production costs and expenses(1)
|
(3,950,747 | ) | (278,634 | ) | (308,303 | ) | (4,537,684 | ) | ||||||||
Capital expenditures
|
(1,141,060 | ) | | | (1,141,060 | ) | ||||||||||
Net Proceeds
|
$ | 2,795 | $ | (278,634 | ) | $ | (308,303 | ) | $ | (584,142 | ) | |||||
Overriding Royalties paid to the Trust(2)
|
$ | | $ | | $ | | $ | | ||||||||
Other Proceeds Paid to the Trust
|
| |||||||||||||||
Fee Lands Royalties
|
| |||||||||||||||
Royalties paid to the Trust
|
$ | | ||||||||||||||
-20-
Table of Contents
First
Half 2011
South |
Offshore |
|||||||||||||||
Jay Field | Pass 89 | Louisiana | Total | |||||||||||||
Revenues:
|
||||||||||||||||
Liquids
|
$ | 14,423,892 | $ | 1,340,368 | $ | 1,127,652 | $ | 16,891,912 | ||||||||
Sulfur
|
282,990 | | | 282,990 | ||||||||||||
Natural gas
|
| | 133,228 | 133,228 | ||||||||||||
14,706,882 | 1,340,368 | 1,260,880 | 17,308,130 | |||||||||||||
Amounts withheld in escrow
|
(4,390,864 | ) | (1,340,368 | ) | (1,260,880 | ) | (6,992,112 | ) | ||||||||
Production costs and expenses(1)
|
(7,207,495 | ) | (539,804 | ) | (677,366 | ) | (8,424,665 | ) | ||||||||
Capital expenditures
|
(3,276,065 | ) | | | (3,276,065 | ) | ||||||||||
Net Proceeds
|
$ | (167,542 | ) | $ | (539,804 | ) | $ | (677,366 | ) | $ | (1,384,712 | ) | ||||
Overriding Royalties paid to the Trust(2)
|
$ | | $ | | $ | | $ | | ||||||||
Other Proceeds Paid to the Trust(3)
|
| |||||||||||||||
Fee Lands Royalties
|
| |||||||||||||||
Royalties paid to the Trust
|
$ | | ||||||||||||||
(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 2011 Second Quarter and 2011 First Half was $166,894 and $316,826, 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 2011 Second Quarter production costs and expenses include processing fee income of $112,122 For the 2011 First Half, South Pass 89 processing fees earned were $270,224. | ||
(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. |
-21-
Table of Contents
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
|
$ | 3,872,280 | $ | 562,036 | $ | 574,196 | $ | 5,008,512 | ||||||||
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 | ||||||||||||||
-22-
Table of Contents
First
Half 2010
South |
Offshore |
|||||||||||||||
Jay Field | Pass 89 | Louisiana | Total | |||||||||||||
Revenues:
|
||||||||||||||||
Liquids
|
$ | 4,187,697 | $ | 1,326,500 | $ | 1,195,594 | $ | 6,709,791 | ||||||||
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. |
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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 2011 and 2010:
Second Quarter | First Half | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Net Proceeds:
|
||||||||||||||||
Revenues
|
$ | 9,408,058 | $ | 5,307,508 | $ | 17,308,130 | $ | 7,707,638 | ||||||||
Amounts withheld in escrow
|
(4,313,456 | ) | (1,370,084 | ) | (6,992,112 | ) | (3,455,992 | ) | ||||||||
Production costs and expenses
|
(4,537,684 | ) | (1,920,030 | ) | (8,424,665 | ) | (3,676,179 | ) | ||||||||
Capital expenditures
|
(1,141,060 | ) | (353,769 | ) | (3,276,065 | ) | (1,102,727 | ) | ||||||||
Net Proceeds
|
$ | (584,142 | ) | $ | 1,663,625 | $ | (1,384,712 | ) | $ | (527,260 | ) | |||||
Royalties paid to the Trust:
|
||||||||||||||||
Other proceeds paid to the Trust
|
$ | | $ | 223,910 | $ | | $ | 223,910 | ||||||||
Overriding Royalties
|
| | | | ||||||||||||
Fee Lands Royalties
|
| 815 | | 10,014 | ||||||||||||
Royalties paid to the Trust
|
$ | | $ | 224,725 | $ | | $ | 233,924 | ||||||||
With respect to the Productive Properties in the current
operating period, revenues of the Working Interest Owner
increased 77% in the 2011 Three-Month Operating Period versus
the comparable period in 2010 primarily due to a large increase
in sales price, as well as the re-starting production at Jay
Field property effective March 2010. In the 2011 Three-month
Operating Period, average crude oil, natural gas liquids,
natural gas, and sulfur prices were $95.63 per barrel, $73.52
per barrel $4.47 per Mcf and $171.86 per long ton, respectively.
In the comparable 2010 Three-Month Operating Period, average
crude oil, natural gas liquids, natural gas, and sulfur prices
were $75.46 per barrel, $66.33 per barrel, $8.92 per Mcf and
$102.20 per long ton, respectively. The revenues paid to the
Trust decreased to zero in the 2011 Six-Month Operating Period
versus the comparable period in 2010 since no proceeds left net
of special cost escrow and excess production costs. The revenues
of Working Interest Owner increased greater than 100% in the
2011 Six-Month Operating Period versus the comparable period in
2010 primarily due to a large increase in sales price, as well
as re-starting production at Jay Field property effective March
2010. In the 2011 Six-Month Operating Period, average crude oil,
natural gas liquids, natural gas and sulfur prices were $89.08
per barrel, $54.02 per barrel, $4.32 per Mcf and $154.35 per
long ton, respectively. In the comparable 2010 Six-Month
Operating Period, average crude oil, natural gas liquids,
natural gas, and sulfur prices were $75.04 per barrel, $43.74
per barrel, $6.11 per Mcf and $100.54 per long ton, 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 2011 and 2010 Six-Month Operating Period.
There was no imputed natural gas production for the 2011 and
2010 Six-Month Operating Period.
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In the first six months of 2011 and 2010, the Working Interest
Owners reserved $6,992,112 and $3,455,992, 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 increased greater than 100%
in the 2011 Three-Month and 2011 Six-Month Operating Period
versus the comparable periods in 2010. The increase in the
Three-Month and Six-Month Operating Period is primarily due to
the fact that 2011 contained a full period of operations while
2010 contained limited activity as production was temporarily
suspended through February 2010. Limited production was
restarted in March 2010 for the remainder of the six month
period through June 2010 at the Jay Field property.
Capital expenditures increased greater than 100% in the 2011
Three-Month Operating Period and increased greater than 100% as
well for the 2011 Six-Month Operating Period versus the
comparable periods in 2010. The increase in the Three Month and
Six Month Operating Period in capital expenditures is primarily
due to the design and installation of a new system at the Jay
Field property in preparation to restart the NGL production the
coming quarter that was previously suspended.
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 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.
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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 information regarding the
assets of the Trust:
ASSETS
|
||||
Cash at June 30, 2011
|
$ | 3,077 | ||
Net Revenues Discounted at 10% per year per reserve report as of
September 30, 2010
|
4,848,000 |
Estimates of the proved oil and gas reserves and estimates of
the future net revenues from the proved oil and gas reserves
attributable to the Properties as of September 30, 2010
have been made by Miller and Lents, Ltd. (Miller and
Lents). Based on such estimates, Miller and Lents has also
calculated the present value of the estimated future net
revenues to the Trust and the imputed reserves attributable to
the Trust as of September 30, 2010. A copy of the Miller
and Lents letter, dated June 8, 2011, setting forth such
estimates, is filed as exhibit 99.2 to the Trusts
Form 10-K
for the year end December 31, 2010.
Management is unable to estimate the fair value of the
properties at this time due to the uncertain nature of the
industry and the complex nature of the calculation. In lieu of
such calculation, the Net Revenues as estimated in the reserve
report have been used to estimate the assets of the Trust. In
addition, 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 Trust has
substantial unpaid expenses and liabilities. The Trustee will
use any future revenues to pay Trust expenses. Any funds
remaining after all expenses have been paid will be distributed
to the Unit holders.
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 report as of September 30, 2010 filed as an exhibit
to the Trusts Annual Report on
Form 10-K.
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.
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Table of Contents
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 Owners. 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
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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, 2011 that has materially
affected, or is reasonably likely to materially affect, the
Trustees internal control over financial reporting.
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Table of Contents
PART II
OTHER INFORMATION
Item 1A. | Risk Factors |
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, 2010.
Item 6. | Exhibits |
(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 |
* | 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). |
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Table of Contents
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
By: |
/s/ MIKE
ULRICH
|
Mike Ulrich
Vice President and Trust Officer
Date: October 20, 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. |
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Table of Contents
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 |
* | 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). |
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