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
September 30, 2009
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 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 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. (Check one):
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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 August 1, 2011, 18,991,304 Units of Beneficial Interest
in the registrant were outstanding.
TABLE OF
CONTENTS
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Page
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4
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4
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4
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5
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5
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5
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6
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39
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42
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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.
-2-
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, 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 Reports on
Form 10-K
for the years ended December 31, 2009 and 2010.
-3-
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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, 2008 as well as the
Trusts Annual Reports on
Form 10-K
for the years ended December 31, 2009 and 2010. The cash
earnings and distributions for the three and nine months ended
September 30, 2009 are not necessarily indicative of the
results to be expected for the year ending December 31,
2009. Please see the Annual Report on
Form 10-K
for the year ended December 31, 2009.
-4-
LL&E
ROYALTY TRUST
Statements
of Cash Earnings and Distributions
(Unaudited)
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Three Months Ended
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September 30,
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Nine Months Ended September 30,
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2009
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2008
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2009
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2008
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Royalty revenues
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$
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225,534
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$
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82,854
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$
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795,017
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$
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632,268
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Trust administrative expenses
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(226,573
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(298,209
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(794,015
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(904,678
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Cash earnings (deficit)
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(1,039
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(215,355
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1,002
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(272,410
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Changes in undistributed cash
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1,039
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215,355
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(1,002
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272,410
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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
(Unaudited)
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September 30,
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December 31,
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2009
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2008
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ASSETS
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Cash
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$
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1,064
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$
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62
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Net overriding royalty interests in productive oil and gas
properties and 3% royalty interests in fee lands (notes 2,
5 and 6)
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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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1,064
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$
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62
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LIABILITIES AND TRUST CORPUS
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Trust Corpus (18,991,304 Units of Beneficial Interest
authorized, issued and outstanding)
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$
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1,064
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$
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62
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Contingencies (note 7)
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Total liabilities and trust corpus
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$
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1,064
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$
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62
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Statements
of Changes in Trust Corpus
(Unaudited)
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Nine Months Ended
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September 30,
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2009
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2008
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Trust Corpus, beginning of period (note 2)
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$
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62
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$
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2,037,083
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Cash earnings (deficit)
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1,002
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(272,410
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Cash distributions
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Amortization of royalty interest (note 2)
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Trust Corpus, end of period
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$
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1,064
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$
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1,764,673
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The accompanying notes are an integral part of these financial
statements.
-5-
LL&E
ROYALTY TRUST
September 30, 2009
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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 (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, 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 September 30, 2009, the Trust had $1,064 in cash
reserved for Trust expenses and unpaid invoices of approximately
$416,322. 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 nine months of 2009, the Trust did not receive any
royalty revenue associated with the Jay Field or Offshore
Louisiana properties. The Trust received $737,199 of royalty
revenue from the South Pass 89 property in the first nine months
of 2009. Excess production costs must be recovered by the
Working Interest Owners before any distribution of royalty
revenues will be made to the Trust from the respective
properties.
During the first nine 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 period production costs. The
remaining insurance proceeds combined with royalty revenues
resulted in net royalty income of $737,199 to the Trust for
South Pass 89 during the first nine months of 2009. In addition,
the Working Interest Owner received insurance recovery 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.
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 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.
-8-
LL&E
ROYALTY TRUST
NOTES TO
FINANCIAL STATEMENTS (Continued)
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, 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. 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 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.
-9-
LL&E
ROYALTY TRUST
NOTES TO
FINANCIAL STATEMENTS (Continued)
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 September 30, 2009, the Trust had $1,064 in cash and
was holding unpaid invoices for administrative services totaling
approximately $416,322. 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.
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 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
-10-
LL&E
ROYALTY TRUST
NOTES TO
FINANCIAL STATEMENTS (Continued)
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 have done so.
Unit holders should review the reserve report as of
September 30, 2008 included with the Trusts Annual
Report on
Form 10-K
for the year ended December 31, 2008, as well as 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 a reserve report is 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.
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
-11-
LL&E
ROYALTY TRUST
NOTES TO
FINANCIAL STATEMENTS (Continued)
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 December 31, 2010 of
Quantums estimate of the abandonment and related costs it
expects to incur in connection with the Jay Field working
interest was approximately $16.1 million, of which
approximately $4.5 million had been withheld by the working
interest owner (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
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,
-12-
LL&E
ROYALTY TRUST
NOTES TO
FINANCIAL STATEMENTS (Continued)
2006. However, distributions to the Trust have been and will be
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
September 30, 2009 has reserved $1,064 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 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 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
has not been abandoned yet due to a
3rd party
production pipeline located on the platform that requires
abandonment prior to removal. It is estimated the platform
removal and abandonment will cost an additional $4,000,000
($800,000 net to the trust).
-13-
LL&E
ROYALTY TRUST
NOTES TO
FINANCIAL STATEMENTS (Continued)
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 and platform
abandonment. Well abandonment work began in February 2006 and
was substantially finished in December 2006 (7 wells were
plugged and abandoned and 3 wells had remaining plugging
work that was to 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).
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.
-14-
LL&E
ROYALTY TRUST
NOTES TO
FINANCIAL STATEMENTS (Continued)
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.
For the first nine 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 $737,199 to the Trust for South Pass 89
for the first nine 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 nine months of 2009.
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 and in prior
filings by the Trust, 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.
-15-
LL&E
ROYALTY TRUST
NOTES TO
FINANCIAL STATEMENTS (Continued)
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 September 30, 2009, 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 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 Reports on
Form 10-K
for the years ended December 31, 2008, 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.
The Trust had $1,064 in cash reserved for Trust expenses as of
September 30, 2009 and had unpaid invoices of approximately
$416,322. 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
-16-
LL&E
ROYALTY TRUST
NOTES TO
FINANCIAL STATEMENTS (Continued)
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 Reports on
Form 10-K
for the years ended December 31, 2009 and 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 in the Conveyances of Overriding Royalty Interests)
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 owner from the
sale of oil, gas and other hydrocarbons 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.
The Fee Lands Royalties consist of royalty interests equal to a
3% interest in the future gross oil, gas, and other hydrocarbon
production, if any, from each of the Fee Lands, unburdened by
the expense of drilling, completion, development, operating and
other costs incident to production. In June 1993, pursuant to
applicable law, the Fee Lands Royalties terminated as to all
tracts not then held by production or maintained by production
from other tracts. Additional tracts subsequently expired and at
September 30, 2009, the Fee Lands consisted of
approximately 22,282 gross acres in South Louisiana
approximately 1,062 of which were under lease. All of the
remaining Fee Lands Royalties were sold in 2009. See Note
(8) Subsequent Events.
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.
|
|
(5)
|
Federal
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
-17-
LL&E
ROYALTY TRUST
NOTES TO
FINANCIAL STATEMENTS (Continued)
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 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.
-18-
LL&E
ROYALTY TRUST
NOTES TO
FINANCIAL STATEMENTS (Continued)
According to the September 30, 2008 reserve report dated
July 31, 2009, included in the Trusts Annual Report
on
Form 10-K
for the year ended December 31, 2008, the total future
dismantlement costs to the Working Interest Owner are estimated
to be $14,200,000 for the Jay Field property, $7,500,000 for the
South Pass 89 property, and $25,500,000 million for the
Offshore Louisiana property.
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.
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 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
nine months of 2009, the Working Interest Owner withheld
$2,686,781 in escrow from the Offshore Louisiana Properties
respectively. The Working Interest Owner expended $1,141,560
from the escrow funds for dismantlement costs incurred during
the first nine months of 2009 for the Offshore Louisiana
property. The working interest owner is routinely subject to
joint interest audits of the royalty interest computations.
Given such, the aforementioned amounts withheld in escrow are
for royalty computation purposes and would not reflect
subsequent audit adjustments to escrow balances; subsequent
escrow audit adjustments have no effect on royalty payments
already made.
The cumulative escrow balance as of September 30, 2009
including applicable escrow adjustments for the period was
$4,543,402 for the Jay Field property and $8,131,240 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 September 30, 2009
including applicable escrow adjustments for the period for the
Offshore Louisiana property was $10,577,552, 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 conveyances. 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
-19-
LL&E
ROYALTY TRUST
NOTES TO
FINANCIAL STATEMENTS (Continued)
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.
On November 11, 2009, the Trust sold a portion of its
assets consisting of 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 to the auction company conducting the sale, of
$500,172. Fees payable to the auction company that conducted the
sale totaled $24,828. The proceeds were used to reduce the
Trusts accounts payable.
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
-20-
LL&E
ROYALTY TRUST
NOTES TO
FINANCIAL STATEMENTS (Continued)
Eastern District of Michigan (the Court).
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, 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)
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Recently
Issued Pronouncements
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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:
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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;
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disclosure of unproved reserves probable and
possible reserves may be disclosed separately on a voluntary
basis;
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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;
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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
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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.
-21-
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Item 2.
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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 September 30, 2009.
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, 2008, 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 September 30, 2009 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.
-22-
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 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 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 (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
-23-
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.
As of September 30, 2009, the Trust had $1,064 in cash
reserved for Trust expenses and unpaid invoices of approximately
$416,322. 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 nine months of 2009, the Trust did not receive any
royalty revenue associated with the Jay Field or Offshore
Louisiana properties. The Trust received $737,199 of royalty
revenue from the South Pass 89 property in the first nine months
of 2009. The Jay Field and Offshore Louisiana properties excess
production costs as of September 30, 2009 were
approximately $11,926,189 and $2,733,000, respectively. There
were no excess production costs related to South Pass 89 as of
September 30, 2009. The excess production costs must be
recovered by the Working Interest Owners before any distribution
of royalty revenues will be made to the Trust from the
respective properties.
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.
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 noted that as operator of the Jay Field,
Quantum was facing three major issues: declining production,
increased costs, and significantly lower oil prices. The letter
also stated that Quantums long term goal for the Jay Field
was to economically produce the maximum amount of reserves, and
noted that when Quantum temporarily suspended production, it
maintained the capability to reestablish production at a future
date. As previously announced, production at Jay Field resumed
in December 2009.
-24-
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 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 and will be
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
September 30, 2009 has reserved $1,064 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 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 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.
-25-
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
has not been abandoned yet due to a
3rd party
production pipeline located on the platform that requires
abandonment prior to removal. It is estimated 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 and platform
abandonment. Well abandonment work began in February 2006 and
was substantially finished in December 2006 (7 wells were
plugged and abandoned and 3 wells had remaining plugging
work that was to 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).
-26-
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.
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 is
ongoing. 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 (or calculating the royalties as though it
had done so) otherwise distributable to the Trust from the South
Pass 89 property and Offshore Louisiana properties, beginning
with the April 2006 monthly distribution. In addition, the
Jay Field Working Interest Owner has begun or intends to begin
escrowing funds, if any, not utilized to pay Excess Production
Costs. 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. As described herein and in prior reports
filed by the Trust, the Working Interest Owners are not required
to fund actual escrow accounts, and neither has done so.
-27-
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
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
September 30, 2009 was $10,577,552. 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 September 30,
2009 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.
-28-
The cumulative escrow balance (which is held by the Working
Interest Owner and is not segregated) as of September 30,
2009 was $8,131,240 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 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter
|
|
|
First Nine Months
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
Royalty revenues
|
|
$
|
225,534
|
|
|
$
|
82,854
|
|
|
$
|
795,017
|
|
|
$
|
632,268
|
|
Trust administrative expenses
|
|
|
(226,573
|
)
|
|
|
(298,209
|
)
|
|
|
(794,015
|
)
|
|
|
(904,678
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash earnings (deficit)
|
|
|
(1,039
|
)
|
|
|
(215,355
|
)
|
|
|
1,002
|
|
|
|
(272,410
|
)
|
Change in undistributed cash
|
|
|
1,039
|
|
|
|
215,355
|
|
|
|
(1,002
|
)
|
|
|
272,410
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash distributions
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash distributions per unit
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Units of beneficial interest
|
|
|
18,991,304
|
|
|
|
18,991,304
|
|
|
|
18,991,304
|
|
|
|
18,991,304
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-29-
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 nine-month periods ended
September 30, 2009 and 2008 (the 2009 and 2008 Third
Quarters and First Nine Months, respectively)
are attributable to the Working Interest Owners operations
during the periods April through June (the Three-Month
Operating Periods) of 2009 and 2008, respectively, and the
periods October 2008 through June 2009 and October 2007 through
June 2008 (the 2009 and 2008 Nine-Month Operating
Periods, respectively).
There were no distributions made to the Unit holders for the
2009 and 2008 Third Quarter. As a result of the uncertainty of
future proceeds from properties in which the Trust has an
interest, the Trustee has reserved $1,064 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. During the
Third Quarter 2009 and 2008, the Trust received cash of $225,534
and $82,854, respectively, from the Working Interest Owners with
respect to the Royalties from the Properties.
The monthly per Unit distributions during the 2009 and 2008
Third Quarters were as follow:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
July
|
|
$
|
.0000
|
|
|
$
|
.0000
|
|
August
|
|
|
.0000
|
|
|
|
.0000
|
|
September
|
|
|
.0000
|
|
|
|
.0000
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
.0000
|
|
|
$
|
.0000
|
|
|
|
|
|
|
|
|
|
|
There were no Distributions to the Unit holders for the First
Nine Months of 2009 and 2008. During these periods, the Trust
received cash of $795,017 and $632,268, respectively, from the
Working Interest Owners with respect to the Royalties from the
Properties.
-30-
The following unaudited schedules provide summaries of the
Working Interest Owners calculations of the Net Proceeds
from the Properties and the Royalties paid to the Trust for the
Third Quarter and First Nine Months of 2009:
Third
Quarter 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
South
|
|
|
Offshore
|
|
|
|
|
|
|
Jay Field
|
|
|
Pass 89
|
|
|
Louisiana
|
|
|
Total
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liquids
|
|
$
|
989,720
|
|
|
$
|
646,480
|
|
|
$
|
419,377
|
|
|
$
|
2,055,576
|
|
Natural gas
|
|
|
|
|
|
|
|
|
|
|
42,612
|
|
|
|
42,612
|
|
Other(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
989,720
|
|
|
|
646,680
|
|
|
|
461,989
|
|
|
|
2,098,188
|
|
Amounts withheld in escrow(3)
|
|
|
|
|
|
|
|
|
|
|
(461,989
|
)
|
|
|
(461,989
|
)
|
Production costs and expenses(1)
|
|
|
(1,007,770
|
)
|
|
|
(189,932
|
)
|
|
|
(64,320
|
)
|
|
|
(1,262,022
|
)
|
Insurance recovery proceeds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(12,619
|
)
|
|
|
(2,021
|
)
|
|
|
|
|
|
|
(14,681
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Proceeds
|
|
$
|
30,710
|
|
|
$
|
454,527
|
|
|
$
|
(64,320
|
)
|
|
$
|
359497
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Overriding Royalties paid to the Trust(2)
|
|
$
|
|
|
|
$
|
210,751
|
|
|
$
|
|
|
|
$
|
210,751
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fee Land Royalties
|
|
|
14,783
|
|
|
|
|
|
|
Royalties paid to the Trust
|
|
$
|
225,534
|
|
|
|
|
|
|
-31-
First
Nine Months 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
South
|
|
|
Offshore
|
|
|
|
|
|
|
Jay Field
|
|
|
Pass 89
|
|
|
Louisiana
|
|
|
Total
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liquids
|
|
$
|
6,189,867
|
|
|
$
|
1,329,436
|
|
|
$
|
944,269
|
|
|
$
|
8,463,571
|
|
Natural Gas
|
|
|
|
|
|
|
(16,575
|
)
|
|
|
467,512
|
|
|
|
450,937
|
|
Other(3)
|
|
|
|
|
|
|
|
|
|
|
1,275,000
|
|
|
|
1,275,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,189,867
|
|
|
|
1,312,861
|
|
|
|
2,686,781
|
|
|
|
10,189,509
|
|
Amounts withheld in escrow(3)
|
|
|
|
|
|
|
|
|
|
|
(2,686,781
|
)
|
|
|
(2,686,781
|
)
|
Production costs and expenses(1)
|
|
|
(8,306,360
|
)
|
|
|
(701,838
|
)
|
|
|
(406,822
|
)
|
|
|
(9,415,020
|
)
|
6,926,748 Insurance recovery proceeds
|
|
|
|
|
|
|
927,814
|
|
|
|
9,113,272
|
|
|
|
10,041,086
|
|
Capital expenditures
|
|
|
(4,474,828
|
)
|
|
|
(7,941
|
)
|
|
|
(246,840
|
)
|
|
|
(4,729,609
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Proceeds
|
|
$
|
(6,591,321
|
)
|
|
$
|
1,530,896
|
|
|
$
|
8,459,610
|
|
|
$
|
3,399,185
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Overriding Royalties paid to the Trust(2)
|
|
$
|
|
|
|
$
|
737,199
|
|
|
$
|
|
|
|
$
|
737,199
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fee Land Royalties
|
|
|
57,818
|
|
|
|
|
|
|
Royalties Paid to the Trust
|
|
$
|
795,017
|
|
|
|
|
|
|
|
|
|
(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 Third Quarter
and 2009 First Nine Months was $136,787 and $429,493,
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 2009
Third Quarter, production costs and expenses include no
processing fee income. For the First Nine Months of 2009, South
Pass 89 processing fees earned were $42,802. |
|
(2) |
|
As a result of excess production costs incurred in one monthly
operating period and then recovered in a subsequent monthly
operating period(s), 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. |
-32-
The following unaudited schedules provide summaries of the
Working Interest Owners calculations of the Net Proceeds
from the Properties and the Royalties paid to the Trust for the
Third Quarter and First Nine Months of 2008:
Third
Quarter 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
South
|
|
|
Offshore
|
|
|
|
|
|
|
Jay Field
|
|
|
Pass 89
|
|
|
Louisiana
|
|
|
Total
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liquids
|
|
$
|
7,654,690
|
|
|
$
|
1,703,651
|
|
|
$
|
1,328,174
|
|
|
$
|
10,686,515
|
|
Natural gas
|
|
|
678,263
|
|
|
|
82,761
|
|
|
|
1,418,120
|
|
|
|
2,179,144
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,332,953
|
|
|
|
1,786,412
|
|
|
|
2,746,294
|
|
|
|
12,865,659
|
|
Amounts withheld in escrow
|
|
|
|
|
|
|
|
|
|
|
(2,746,294
|
)
|
|
|
(2,746,294
|
)
|
Production costs and expenses(1)
|
|
|
(9,382,774
|
)
|
|
|
(150,198
|
)
|
|
|
(521,424
|
)
|
|
|
(10,054,396
|
)
|
Capital expenditures
|
|
|
(5,523,871
|
)
|
|
|
(36,304
|
)
|
|
|
(269,145
|
)
|
|
|
(5,829,320
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Proceeds
|
|
$
|
(6,573,692
|
)
|
|
$
|
1,599,910
|
|
|
$
|
(790,569
|
)
|
|
$
|
(5,764,351
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Overriding Royalties paid to the Trust(2)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fee Lands Royalties
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
57,689
|
|
Fee Land overpayments (to be offset against future royalty
payments)(4)
|
|
|
25,165
|
|
|
|
|
|
|
Other Proceeds Paid to the Trust
|
|
|
|
|
|
|
|
|
|
Royalties paid to the Trust
|
|
$
|
82,854
|
|
|
|
|
|
|
-33-
First
Nine Months 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
South
|
|
|
Offshore
|
|
|
|
|
|
|
Jay Field
|
|
|
Pass 89
|
|
|
Louisiana
|
|
|
Total
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liquids
|
|
$
|
25,551,979
|
|
|
$
|
3,920,139
|
|
|
$
|
3,521,208
|
|
|
$
|
32,993,326
|
|
Natural gas
|
|
|
1,718,095
|
|
|
|
382,115
|
|
|
|
3,678,650
|
|
|
|
5,778,860
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,270,074
|
|
|
|
4,302,254
|
|
|
|
7,199,858
|
|
|
|
38,772,186
|
|
Amounts withheld in escrow
|
|
|
|
|
|
|
(2,409,707
|
)
|
|
|
(7,199,858
|
)
|
|
|
(9,609,565
|
)
|
Production costs and expenses(1)
|
|
|
(25,883,775
|
)
|
|
|
(359,705
|
)
|
|
|
(1,134,251
|
)
|
|
|
(27,377,731
|
)
|
Capital expenditures
|
|
|
(10,623,720
|
)
|
|
|
(60,620
|
)
|
|
|
(1,655,302
|
)
|
|
|
(12,339,642
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Proceeds
|
|
$
|
(9,237,421
|
)
|
|
$
|
1,472,222
|
|
|
$
|
(2,789,553
|
)
|
|
$
|
(10,554,752
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Overriding Royalties paid to the Trust(2)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fee Lands Royalties
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
170,555
|
|
Fee Land overpayments (to be offset against future royalty
payments)(4)
|
|
|
25,165
|
|
|
|
|
|
|
Other Proceeds Paid to the Trust(3)
|
|
|
436,548
|
|
|
|
|
|
|
Royalties paid to the Trust
|
|
$
|
632,268
|
|
|
|
|
|
|
|
|
|
(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 2008 Third Quarter
and 2008 First Nine Months was $186,930 and $572,704,
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 2008
Third Quarter, production costs and expenses include processing
fee income of $210,632. For the First Nine Months of 2008, South
Pass 89 processing fees earned were $640,238. |
|
(2) |
|
As a result of excess production costs incurred in one monthly
operating period and then recovered in a subsequent monthly
operating period(s), the Overriding Royalties paid to the Trust
may not agree to the Trusts royalty interest in the Net
Proceeds. |
|
(3) |
|
In the first quarter 2008, the Trust received a single payment
of $436,548 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. |
|
(4) |
|
As a result of inquiries by the Trustee, the working interest
owner recalculated its computation of the Fee Lands royalties
and determined that the Trust was overpaid $25,165 during the
third quarter 2008. The overpayment will offset future Fee Lands
royalties received by the Trust. In October and November 2008,
royalty income was reduced by $16,925 and $8,240, respectively,
to adjust for this overpayment. |
-34-
The following unaudited schedule provides a summary of the
Working Interest Owners calculations of the Net Proceeds
from the Properties and the Royalties paid to the Trust for the
Third Quarter and First Nine Months of 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter
|
|
|
First Nine Months
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
Net Proceeds:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
2,098,189
|
|
|
$
|
12,865,659
|
|
|
$
|
10,189,508
|
|
|
$
|
38,772,186
|
|
Amounts withheld in escrow
|
|
|
(461,989
|
)
|
|
|
(2,746,294
|
)
|
|
|
(2,686,781
|
)
|
|
|
(9,609,565
|
)
|
Production costs and expenses
|
|
|
(1,262,021
|
)
|
|
|
(10,054,396
|
)
|
|
|
(9,415,019
|
)
|
|
|
(27,377,731
|
)
|
Insurance recovery proceeds
|
|
|
|
|
|
|
|
|
|
|
10,041,086
|
|
|
|
|
|
Capital expenditures
|
|
|
(14,682
|
)
|
|
|
(5,829,320
|
)
|
|
|
(4,729,609
|
)
|
|
|
(12,339,642
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Proceeds
|
|
$
|
(359,497
|
)
|
|
$
|
(5,764,351
|
)
|
|
$
|
3,399,185
|
|
|
$
|
(10,554,752
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Royalties paid to the Trust:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Overriding Royalties
|
|
$
|
210,751
|
|
|
|
|
|
|
$
|
737,199
|
|
|
$
|
|
|
Other proceeds paid to the Trust
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
436,548
|
|
Fee Lands Royalties
|
|
|
14,783
|
|
|
|
82,854
|
|
|
|
57,818
|
|
|
|
195,720
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Royalties paid to the Trust
|
|
$
|
225,534
|
|
|
$
|
82,854
|
|
|
$
|
795,017
|
|
|
$
|
632,268
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With respect to the Productive Properties in the Current
Operating Period, revenues of the Working Interest Owners
decreased approximately 84% in the 2009 Three-Month Operating
Period and decreased approximately 74% in the 2009 Nine-Month
Operating Period versus the comparable periods in 2008. Average
crude oil, natural gas liquids and natural gas prices received
by the Working Interest Owners in the 2009 Three-Month Operating
Period attributable to the Productive Properties were $110.75
per barrel, $57.86 per barrel and $2.83 per thousand cubic feet
(mcf), respectively. In the comparable 2008 period,
average crude oil, natural gas liquids and natural gas prices
were $124.09 per barrel, $61.13 per barrel and $10.00 per mcf,
respectively. In the 2009 Nine-Month Operating Period, average
crude oil, natural gas liquids and natural gas prices were
$62.10 per barrel, $12.80 per barrel and $3.82 per mcf,
respectively. In the comparable 2008 Nine-Month Operating
Period, average crude oil, natural gas liquids and natural gas
prices were $102.47 per barrel, $59.93 per barrel and $7.82 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 3,772 barrels of
imputed liquids production for the 2009 Three-Month Operating
Period and no imputed liquids production for the 2008
Three-Month Operating Period. There were 15,653 barrels of
imputed liquids production for the 2009 nine-month operating
period and no imputed liquids production for the 2008 nine-month
operating period.
Production costs and expenses incurred by the Working Interest
Owners on the Productive Properties decreased approximately 87%
and 66% in the 2009 Three-Month Operating Period and in the 2009
Nine-Month Operating Period, respectively, versus the comparable
periods in 2008. The decrease in the Three-Month and
-35-
decrease in the Nine-Month Operating Period is primarily due to
temporarily shut-down of production for Jay Field property in
2009 and lower volumes of production on South Pass 89 and
Offshore Louisiana properties.
Capital expenditures and abandonment decreased 100% and 62% in
the 2009 Three-Month Operating Period and 2009 Nine-Month
Operating Period, respectively, versus the comparable periods in
2008. The decrease in the Three-Month and Nine-Month Operating
Period is primarily due to less capital activities due to the
two hurricanes during 2008 in the Jay Field property.
Insurance recovery proceeds increased 100% due to the receipt of
$927,814 and $9,113,272 for South Pass 89 and Offshore
Louisiana, respectively, during the nine months ended
September 30, 2009.
At September 30, 2009, the Fee Lands consisted of
approximately 22,282 gross acres in south Louisiana,
approximately 1,062 of which were under lease. All of the
remaining Fee Lands Royalties were sold during 2009.
The Trustee has been informed by the Company that it 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. The Company 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 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. 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 of these matters,
please see the Trusts Annual Reports on
Form 10-K
for the years ended December 31, 2009 and 2010.
-36-
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
and their estimated fair value at September 30, 2009, based
solely on the assessment described below:
|
|
|
|
|
|
|
September 30,
|
|
|
|
2009
|
|
|
ASSETS
|
Cash
|
|
$
|
1,064
|
|
Net overriding royalty interests in oil and gas properties and
3% royalty interests in fee lands
|
|
|
1,060,801
|
|
|
|
|
|
|
Net assets in process of liquidation
|
|
$
|
1,061,865
|
|
|
|
|
|
|
The net overriding royalty interest in oil and gas properties at
September 30, 2009 reflect the Trustees estimate of
value (in the absence of third-party appraisals or evaluations),
based on the Trusts share of estimated future net revenues
from the net overriding royalty interest in the properties as of
September 30, 2009. This estimate is based on the
Trustees assessment of the impact of selling existing
assets based on market conditions at September 30, 2009,
and includes the following assumptions:
|
|
|
|
|
The Trusts estimated share of proved oil and gas reserve
volumes at September 30, 2009, which were derived from the
December 31, 2008 reserve report prepared by Miller and
Lents and updated for first nine months of 2009 production. The
Working Interest Owners did not prepare a reserve report as of
September 30, 2009, and therefore any possible revisions in
oil and gas reserves during the first nine months of 2009 were
not considered in the estimate of fair value of the net
overriding royalty interest in oil and gas properties. The
estimated fair value also does not include any value for
probable or possible oil and gas reserves.
|
|
|
|
|
|
The estimated fair value does not include any amounts related to
Jay Field and Offshore Louisiana properties. The estimated share
for these properties is not economical per the oil and gas
reserve report.
|
|
|
|
Forward strip commodity prices on September 30, 2009.
|
|
|
|
Includes approximately $500,000 of future abandonment costs and
$33,000 of excess production costs to be recouped by the Working
Interest Owners, for South Pass 89 property.
|
|
|
|
Discount rate of 10%.
|
|
|
|
Future income taxes were not taken into account.
|
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
-37-
liquidate the Trusts assets. 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, 2008, dated
July 31, 2009, included in the Trusts Annual Report
on
Form 10-K
for the year ended December 31, 2008 and 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.
-38-
|
|
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, including hurricanes and tropical storms in
the Gulf of Mexico;
|
|
|
|
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 design and operation of the
Trustees disclosure controls and procedures. Mike Ulrich,
as Vice President 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 unitholders, 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
-39-
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 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 September 30, 2009 that has
materially affected, or is reasonably likely to materially
affect, the Trustees internal control over financial
reporting.
-40-
PART II
OTHER INFORMATION
Except as set forth in the Trusts Annual Reports on
Form 10-K
for the years ended December 31, 2009 and 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, 2008.
|
|
|
|
|
|
|
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). |
-41-
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.
|
-42-
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). |
-43-