SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2004.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-8518
LL&E ROYALTY TRUST
(Exact name of registrant as specified in its charter)
<Table>
TEXAS 76-6007940
(State or other jurisdiction of
incorporation (I.R.S. Employer
or organization) Identification No.)
THE JPMORGAN CHASE BANK, TRUSTEE 78701
INSTITUTIONAL TRUST SERVICES (Zip Code)
700 LAVACA
AUSTIN, TEXAS
(Address of principal executive offices)
</Table>
Registrant's telephone number, including area code: (800)
852-1422/1-512-479-2562
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 X No
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes No X
At August 9, 2004, 18,991,304 Units of Beneficial Interest in the
registrant were outstanding.
TABLE OF CONTENTS
<Table>
<Caption>
PAGE
----
Part I. Financial Information
Item 1. Financial Statements:
Presentation of Financial Information.................. 2
Statements of Cash Earnings and Distributions.......... 3
Statements of Assets, Liabilities and Trust Corpus..... 3
Statements of Changes in Trust Corpus.................. 3
Notes to Financial Statements.......................... 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................... 9
Item 3. Quantitative and Qualitative Disclosures about
Market Risk............................................ 15
Item 4. Controls and Procedures........................... 16
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K.................. 18
Signature................................................... 19
</Table>
-1-
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
LL&E ROYALTY TRUST
PRESENTATION OF FINANCIAL INFORMATION
The accompanying unaudited financial statements of LL&E Royalty Trust
(Trust) have been prepared in accordance with the instructions to Form 10-Q. The
financial statements were prepared on the basis of cash receipts and
disbursements and are not intended to be a presentation in conformity with
accounting principles generally accepted in the United States of America. The
information reflects all adjustments which, in the opinion of the Trustee, are
necessary for a fair presentation of the results for the interim periods
presented. The financial information should be read in conjunction with the
financial statements and notes thereto included in the Trust's Annual Report on
Form 10-K for the year ended December 31, 2003. The cash earnings and
distributions for the six months ended June 30, 2004 are not necessarily
indicative of the results to be expected for the year 2004.
-2-
LL&E ROYALTY TRUST
STATEMENTS OF CASH EARNINGS AND DISTRIBUTIONS
(UNAUDITED)
<Table>
<Caption>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
2004 2003 2004 2003
------------ ------------ ----------- -----------
Royalty revenues......................... $ 3,210,392 $ 1,710,681 $ 6,547,888 $ 3,376,676
Trust administrative expenses............ (207,953) (113,656) (359,118) (315,603)
----------- ----------- ----------- -----------
Cash earnings............................ 3,002,439 1,597,025 6,188,770 3,061,073
Changes in undistributed cash............ (1,141) (82,743) (1,454) (77,729)
----------- ----------- ----------- -----------
Cash distributions....................... $ 3,001,298 $ 1,514,282 $ 6,187,316 $ 2,983,344
=========== =========== =========== ===========
Cash distributions per Unit.............. $ 0.1580 $ 0.0797 $ 0.3258 $ 0.1571
=========== =========== =========== ===========
Units outstanding........................ 18,991,304 18,991,304 18,991,304 18,991,304
=========== =========== =========== ===========
</Table>
STATEMENTS OF ASSETS, LIABILITIES AND TRUST CORPUS
(UNAUDITED)
<Table>
<Caption>
JUNE 30, DECEMBER 31,
2004 2003
------------ ------------
(UNAUDITED)
ASSETS
Cash........................................................ $ 1,706 $ 252
Net overriding royalty interests in productive oil and gas
properties and 3% royalty interests in fee lands (notes 2,
3 and 5).................................................. 76,282,000 76,282,000
Less: accumulated amortization (note 3)..................... (74,445,802) (74,373,000)
------------ ------------
Total assets...................................... $ 1,837,904 $ 1,909,252
============ ============
LIABILITIES AND TRUST CORPUS
Trust Corpus (18,991,304 Units of Beneficial Interest
authorized, issued and outstanding)....................... $ 1,837,904 $ 1,909,252
Contingencies (note 6)
------------ ------------
Total liabilities and trust corpus................ $ 1,837,904 $ 1,909,252
============ ============
</Table>
STATEMENTS OF CHANGES IN TRUST CORPUS
(UNAUDITED)
<Table>
<Caption>
SIX MONTHS ENDED JUNE 30,
-------------------------
2004 2003
----------- -----------
Trust Corpus, beginning of period (note 3).................. $1,909,252 $2,046,528
Cash earnings............................................... 6,188,770 3,061,073
Cash distributions.......................................... (6,187,316) (2,983,344)
Amortization of royalty interest (note 3)................... (72,802) (40,000)
---------- ----------
Trust Corpus, end of period................................. $1,837,904 $2,084,257
========== ==========
</Table>
The accompanying notes are an integral part of these financial statements.
-3-
LL&E ROYALTY TRUST
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2004
(1) FORMATION OF THE TRUST
On June 28, 1983, The Louisiana Land and Exploration Company (herein
Working Interest Owner or Company) created the LL&E Royalty Trust (the "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.
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, Texas and in federal waters offshore Louisiana (Productive
Properties) and (b) 3% royalty interests (Fee Lands Royalties) in certain of the
Company's 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% and 1%
interests, respectively.
The Trust is passive, with The JPMorgan Chase Bank (the "Trustee")
successor by merger to the Chase Bank of Texas, National Association as Trustee,
having only such powers as are necessary for the collection and distribution of
revenues resulting from the Royalties, the payment of Trust liabilities and the
conservation and protection of the Trust estate. The Units are listed on the New
York Stock Exchange (NYSE Symbol: LRT).
If the Trust's net revenues for two successive years fall below $5,000,000
(calculated in accordance with the provisions of the Trust Agreement), the
Trustee will be required to sell the assets of the Trust for cash unless a
majority of the Unit holders approve a sale for specified non-cash consideration
consisting of personal property, in which case the Trustee may, but will not be
required to, attempt to consummate any such transaction approved by a majority
of the Unit holders. In any case, any sale will be on terms that the Trustee, in
its sole discretion, determines to be in the best interests of Unit holders.
Upon any sale, the Trustee will distribute the proceeds to the Unit holders as
promptly as practicable after paying all then existing liabilities of the Trust,
including fees of the Trustee, and, if necessary, setting up reserves in amounts
the Trustee deems appropriate to provide for payment of contingent liabilities.
If any asset required to be sold has not been sold within three years after
the termination of the Trust, the Trustee will cause the asset to be sold at
public auction to the highest cash bidder. Except in connection with any
proposed non-cash sale as described above, no approval of the Unit holders will
be required or solicited in connection with the sale of the Trust's assets after
termination of the Trust.
-4-
LL&E ROYALTY TRUST
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(2) NET OVERRIDING ROYALTY INTERESTS AND FEE LANDS ROYALTIES
The instruments conveying the Overriding Royalties generally provide that
the Working Interest Owner or any successor working interest owner will
calculate and pay to the Trust each month an amount equal to various percentages
of the Net Proceeds (as defined in the Conveyance 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 Owner 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 Owner 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 4 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.
Consequently, at June 30, 2004, the Fee Lands consisted of approximately 22,600
gross acres.
(3) BASIS OF PRESENTATION
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 Trust's interest.
(b) Trust expenses, which include accounting, engineering, legal and
other professional fees, Trustee's fees and out-of-pocket expenses, are
recorded on a cash basis.
(c) Amortization of the net overriding royalty interests in productive
oil and gas properties and the 3% royalty interest in Fee Lands, which is
calculated on a unit-of-production basis, is charged directly to the Trust
Corpus since the amount does not affect cash earnings.
(d) The initial carrying value of the Trust's royalty interests in oil
and gas properties represents the Company's cost on a successful efforts
basis (net of accumulated depreciation, depletion and amortization) at June
28, 1983 applicable to the interest in the properties transferred to the
Trust. Information
-5-
LL&E ROYALTY TRUST
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
regarding the calculation of the amount of such cost was supplied by the
Company to the Trustee. The unamortized balance at June 30, 2004 is not
necessarily indicative of the fair market value of the interests held by
the Trust.
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.
While these statements differ from financial statements prepared in
accordance with accounting principles generally accepted in the United States of
America, the cash basis of reporting revenues and expenses is considered to be
the most meaningful because monthly distributions to the Unit holders are based
on net cash receipts. The financial information furnished herein should be read
in conjunction with the financial statements and notes thereto included in the
Trust's Annual Report on Form 10-K for the year ended December 31, 2003.
(4) 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 will 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 will be classified as a partnership
and not as an association taxable as a corporation, (d) the Company will 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 will 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 will 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.
-6-
LL&E ROYALTY TRUST
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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 Company's 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.
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.
(5) DISMANTLEMENT COSTS
The Working Interest Owner, under the terms of the Trust Conveyances is
permitted to escrow funds from the Productive Properties for estimated future
costs such as dismantlement costs and capital expenditures. According to the
most recent reserve report, included in the Trust's Annual Report and Form 10-K
for the year ended December 31, 2003, the total future dismantlement costs to
the Working Interest Owner are estimated to be $13,300,000 for Jay Field,
$1,900,000 for South Pass 89, and $2,300,000 for the Offshore Louisiana
property. The Trust's 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.
In February 2000, the Working Interest Owner informed the Trustee that it
had elected at that time not to escrow any additional funds from the Productive
Properties to provide for the Trust's portion of estimated dismantlement costs
effective with the April 2000 royalty distribution.
The cumulative escrow balance as of June 30, 2004 was $4,543,402 for the
Jay Field property and $2,600,000 for the South Pass 89 property, 50% of which
would otherwise have been distributable to the Trust. At June 30, 2004, the
cumulative escrow balance for the Offshore Louisiana property was $3,000,000,
90% of which would otherwise have been distributable to the Trust. 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 are no longer exists a need for
escrowing all or any portion of such funds. However, the Working Interest Owner
is not required to do so. The Working Interest Owner has informed the Trustee
that it does not intend to release any of the excess escrowed funds at this
time.
-7-
LL&E ROYALTY TRUST
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Working Interest Owner has advised the Trustee that it intends to
continue monitoring its estimates of relevant factors in order to evaluate the
necessity of escrowing funds on an ongoing basis. The Working Interest Owner is
under no obligation to give any advance notice to the Trustee or the Unit
holders in the event it determines that additional funds should be escrowed. If
the Working Interest Owner begins to escrow additional funds, the Royalties paid
to the Trust would be reduced, and the reductions could be significant.
(6) CONTINGENCY
The Trustee has been informed by the Working Interest Owner 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.
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 Owner to reimbursements for past periods attributable to properties
covered by the Trust's interest, which could decrease future royalty payments to
the Trust. 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 Trust's interest.
-8-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following review of the Trust's financial conditions and results of
operations should be read in conjunction with the financial statements and notes
thereto.
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 "Management's Discussion and Analysis of
Financial Condition and Results of Operations", are forward-looking statements.
Although the Working Interest Owner has advised the Trust that it believes 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 Trust's Form 10-K, 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 Owner.
DURATION AND TERMINATION OF THE TRUST
Unless sooner terminated, the Trust will continue until such time as its
net revenues for each of two successive years are less than $5,000,000 per year.
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 Conveyance (the Trust's
pro rata portion of escrowed amounts relating to the future dismantlement of
platforms are included in the net revenue calculation for this purpose). The
Trust may be terminated at any time by a vote of Unit holders owning a majority
of the Units. Upon the termination of the Trust, the Trustee will sell the
assets of the Trust for cash (unless authorized by the holders of a majority of
the Units to sell such assets for non-cash consideration) upon such terms as the
Trustee, in its sole discretion, deems to be in the best interests of the Unit
holders. After paying or making provision for all liabilities of the Trust, the
Trustee will distribute all cash then held by it in its capacity as Trustee.
After the termination of the Trust, the Trustee will continue to act as Trustee
for purposes of liquidating and winding up the affairs of the Trust.
If the Trust's net revenues for two successive years fall below $5,000,000
(calculated in accordance with the provisions of the Trust Agreement), the
Trustee will be required to sell the assets of the Trust for cash unless a
majority of the Unit holders approve a sale for specified non-cash consideration
consisting of personal
-9-
property, in which case the Trustee may, but will not be required to, attempt to
consummate any such transaction approved by a majority of the Unit holders. In
any case, any sale will be on terms that the Trustee, in its sole discretion,
determines to be in the best interests of Unit holders. Upon any sale, the
Trustee will distribute the proceeds to the Unit holders as promptly as
practicable after paying all then existing liabilities of the Trust, including
fees of the Trustee, and, if necessary, setting up reserves in amounts the
Trustee deems appropriate to provide for payment of contingent liabilities.
If any asset required to be sold has not been sold within three years after
the termination of the Trust, the Trustee will cause the asset to be sold at
public auction to the highest cash bidder. Except in connection with any
proposed non-cash sale as described above, no approval of the Unit holders will
be required or solicited in connection with the sale of the Trust's assets after
termination of the Trust.
LIQUIDITY AND CAPITAL RESOURCES
As stipulated in the Trust Agreement, the Trust is intended to be passive,
and the Trustee's 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.
The Trust has no source of liquidity or capital resources other than the
revenue, if any, attributable to the Royalties.
The Working Interest Owner, under the terms of the Trust Conveyances is
permitted to escrow funds from the Productive Properties for estimated future
costs such as dismantlement costs and capital expenditures. According to the
most recent reserve report, included in the Trust's Annual Report and Form 10-K
for the year ended December 31, 2003, the total future dismantlement costs to
the Working Interest Owner are estimated to be $13,300,000 for Jay Field,
$1,900,000 for South Pass 89, and $2,300,000 for the Offshore Louisiana
property. The Trust's 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.
In February 2000, the Working Interest Owner informed the Trustee that it
had elected at that time not to escrow any additional funds from the Productive
Properties to provide for the Trust's portion of estimated dismantlement costs
effective with the April 2000 royalty distribution.
The cumulative escrow balance as of June 30, 2004 was $4,543,402 for the
Jay Field property and $2,600,000 for the South Pass 89 property, 50% of which
would otherwise have been distributable to the Trust. At June 30, 2004, the
cumulative escrow balance for the Offshore Louisiana property was $3,000,000,
90% of which would otherwise have been distributable to the Trust. 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 are no longer exists a need for
escrowing all or any portion of such funds. However, the Working Interest Owner
is not required to do so. The Working Interest Owner has informed the Trustee
that it does not intend to release any of the excess escrowed funds at this
time.
The Working Interest Owner has advised the Trustee that it intends to
continue monitoring its estimates of relevant factors in order to evaluate the
necessity of escrowing funds on an ongoing basis. The Working
-10-
Interest Owner is under no obligation to give any advance notice to the Trustee
or the Unit holders in the event it determines that additional funds should be
escrowed. If the Working Interest Owner begins to escrow additional funds, the
Royalties paid to the Trust would be reduced, and the reductions could be
significant.
RESULTS OF OPERATIONS
<Table>
<Caption>
SECOND QUARTER FIRST HALF
----------------------- -----------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
Royalty revenues............................. $3,210,392 $1,710,681 $6,547,888 $3,376,676
Trust administrative expenses................ (207,953) (113,656) (359,118) (315,603)
---------- ---------- ---------- ----------
Cash earnings................................ $3,002,439 $1,597,025 $6,188,770 $3,061,073
Change in undistributed cash................. (1,141) (82,743) (1,454) (77,729)
---------- ---------- ---------- ----------
Cash distributions........................... $3,001,298 $1,514,282 $6,187,316 $2,983,344
Cash distributions per unit.................. 0.1580 0.0797 0.3258 0.1571
========== ========== ========== ==========
Units of beneficial interest................. 18,991,304 18,991,304 18,991,304 18,991,304
========== ========== ========== ==========
</Table>
Revenues are generally received in the third month following the month of
production of oil and gas attributable to the Trust's interest. Both revenues
and Trust expenses are recorded on a cash basis. Accordingly, distributions to
Unit holders for the three-month and six-month periods ended June 30, 2004 and
2003 (the 2004 and 2003 "Second Quarters" and "First Half", respectively) are
attributable to the Working Interest Owner's operations during the periods
January through March (the "Three-Month Operating Periods") of 2004 and 2003,
respectively, and the periods October 2003 through March 2004 and October 2002
through March 2003 (the 2004 and 2003 "Six-Month Operating Periods",
respectively).
Distributions to Unit holders for the 2004 and 2003 Second Quarters totaled
$3,001,298 ($0.1580 per Unit) and $1,514,282 ($0.0797 per Unit), respectively.
During these periods, the Trust received cash of $3,210,392 and $1,710,681,
respectively, from the Working Interest Owner with respect to the Royalties from
the Properties.
The monthly per Unit distributions during the 2004 and 2003 Second Quarters
were as follow:
<Table>
<Caption>
2004 2003
------- -------
April..................................................... $0.0792 $0.0266
May....................................................... 0.0351 0.0169
June...................................................... 0.0437 0.0362
------- -------
$0.1580 $0.0797
======= =======
</Table>
Distributions to Unit holders for the First Half of 2004 and 2003 amounted
to $6,187,316 ($0.3258 per Unit) and $2,983,344 ($0.1571 per Unit),
respectively. During these periods, the Trust received cash of $6,547,888 and
$3,376,676, respectively, from the Working Interest Owner with respect to the
Royalties from the Properties.
-11-
The following unaudited schedules provide summaries of the Working Interest
Owner's calculation of the Net Proceeds from the Properties and the Royalties
paid to the Trust for the Second Quarter and First Half of 2004:
SECOND QUARTER 2004
<Table>
<Caption>
SOUTH OFFSHORE
JAY FIELD PASS 89 LOUISIANA TOTAL
----------- --------- ---------- -----------
Revenues:
Liquids.................................. $ 5,277,017 $ 296,616 $ 384,800 $ 5,958,433
Natural gas.............................. 27,165 838 2,464,881 2,492,884
----------- --------- ---------- -----------
5,304,182 297,454 2,849,681 8,451,317
Production costs and expenses(1)........... (3,562,741) 90,847 (247,359) (3,719,253)
Capital expenditures....................... (1,587,374) (6,685) (49,869) (1,643,928)
----------- --------- ---------- -----------
Net Proceeds............................... $ 154,067 $ 381,616 $2,552,453 $ 3,088,136
=========== ========= ========== ===========
Overriding Royalties paid to the
Trust(2)................................. $ 238,088 $ 190,807 $2,297,208 $ 2,726,103
=========== ========= ==========
Fee Lands Royalties.............................................................. 484,289
-----------
Royalties paid to the Trust...................................................... $ 3,210,392
===========
</Table>
FIRST HALF 2004
<Table>
<Caption>
SOUTH OFFSHORE
JAY FIELD PASS 89 LOUISIANA TOTAL
----------- ---------- ---------- -----------
Revenues:
Liquids.................................. $10,712,328 $ 606,623 $ 763,587 $12,082,538
Natural gas.............................. 153,067 12,630 4,623,571 4,789,268
----------- ---------- ---------- -----------
10,865,395 619,253 5,387,158 16,871,806
Production costs and expenses(1)........... (6,404,764) 71,382 (329,391) (6,662,773)
Capital expenditures....................... (2,495,314) (6,685) (28,839) (2,530,838)
----------- ---------- ---------- -----------
Net Proceeds............................... $ 1,965,317 $ 683,950 $5,028,928 $ 7,678,195
=========== ========== ========== ===========
Overriding Royalties paid to the
Trust(2)................................. $ 1,143,713 $ 329,897 $4,526,035 $ 5,999,645
=========== ========== ==========
Fee Lands Royalties............................................................... 548,243
-----------
Royalties paid to the Trust....................................................... $ 6,547,888
===========
</Table>
- ---------------
(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 2004 Second Quarter and 2004 First Half was $81,127 and
$162,254, 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.
-12-
(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 Trust's royalty
interest in the Net Proceeds. As of June 30, 2004, excess production costs
to be recovered from future revenues totaled $322,108 for the Jay Field
property.
The following unaudited schedules provide summaries of the Working Interest
Owner's calculation of the Net Proceeds from the Properties and the Royalties
paid to the Trust for the Second Quarter and First Half of 2003:
SECOND QUARTER 2003
<Table>
<Caption>
SOUTH OFFSHORE
JAY FIELD PASS 89 LOUISIANA TOTAL
----------- --------- ---------- -----------
Revenues:
Liquids.................................. $ 5,428,097 $ 268,542 $ 318,894 $ 6,015,533
Natural gas.............................. 128,212 17,713 2,635,609 2,781,534
----------- --------- ---------- -----------
5,556,309 286,255 2,954,503 8,797,067
Production costs and expenses(1)........... (2,451,740) (111,498) (330,089) (2,893,327)
Capital expenditures....................... (689,682) (71,957) (804,416) (1,566,055)
----------- --------- ---------- -----------
Net Proceeds............................... $ 2,414,887 $ 102,800 $1,819,998 $ 4,337,685
=========== ========= ========== ===========
Overriding Royalties paid to the
Trust(2)................................. $ -- $ 49,079 $1,637,998 $ 1,687,077
=========== ========= ==========
Fee Lands Royalties.............................................................. 23,604
-----------
Royalties paid to the Trust...................................................... $ 1,710,681
===========
</Table>
FIRST HALF 2003
<Table>
<Caption>
SOUTH OFFSHORE
JAY FIELD PASS 89 LOUISIANA TOTAL
----------- ---------- ---------- -----------
Revenues:
Liquids.................................. $10,127,073 $ 502,560 $ 457,880 $11,087,513
Natural gas.............................. 278,352 527,278 4,146,903 4,952,533
----------- ---------- ---------- -----------
10,405,425 1,029,838 4,604,783 16,040,046
Production costs and expenses(1)........... (4,875,940) (232,820) (493,583) (5,602,343)
Capital expenditures....................... (2,268,935) (71,957) (804,416) (3,145,308)
----------- ---------- ---------- -----------
Net Proceeds............................... $ 3,260,550 $ 725,061 $3,306,784 $ 7,292,395
=========== ========== ========== ===========
Overriding Royalties paid to the
Trust(2)................................. $ -- $ 361,650 $2,976,106 $ 3,337,756
=========== ========== ==========
Fee Lands Royalties............................................................... 38,920
-----------
Royalties paid to the Trust....................................................... $ 3,376,676
===========
</Table>
- ---------------
(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 2003 Second Quarter and 2003 First Half was $86,239 and
$174,162, respectively. Pursuant to the terms of the Trust Conveyances,
interest earned on
-13-
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.
(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 Trust's royalty
interest in the Net Proceeds. As of June 30, 2003, excess production costs
to be recovered from future revenues totaled $196,713 for the Jay Field
property and $8,533 for the South Pass 89 property.
The following unaudited schedule provides a summary of the Working Interest
Owner's calculation of the Net Proceeds from the Properties and the Royalties
paid to the Trust for the Second Quarter and First Half of 2004 and 2003:
<Table>
<Caption>
SECOND QUARTER FIRST HALF
------------------------- -------------------------
2004 2003 2004 2003
----------- ----------- ----------- -----------
Net Proceeds:
Revenues....................... $ 8,451,317 $ 8,797,067 $16,871,806 $16,040,046
Production costs and
expenses.................... (3,719,253) (2,893,327) (6,662,773) (5,602,343)
Capital expenditures........... (1,643,928) (1,566,055) (2,530,838) (3,145,308)
----------- ----------- ----------- -----------
Net Proceeds................... $ 3,088,136 $ 4,337,685 $ 7,678,195 $ 7,292,395
=========== =========== =========== ===========
Royalties paid to the Trust:
Overriding Royalties........... $ 2,726,103 $ 1,687,077 $ 5,999,645 $ 3,337,756
Fee Lands Royalties............ 484,289 23,604 548,243 38,920
----------- ----------- ----------- -----------
Royalties paid to the Trust.... $ 3,210,392 $ 1,710,681 $ 6,547,888 $ 3,376,676
=========== =========== =========== ===========
</Table>
Revenues of the Working Interest Owner with respect to the Productive
Properties decreased approximately 4% in the 2004 Three-Month Operating Period
and increased approximately 5% in the 2004 Six-Month Operating Period versus the
comparable periods in 2003. The decrease in Revenues is primarily a result of
decreased crude oil and natural gas production and lower in natural gas prices
at the Jay Field, which were partially offset by higher crude oil prices. The
increase in Revenues in the 2004 Six-Month Operating Period is primarily a
result of increased natural gas and crude oil production at Offshore Louisiana
and higher crude oil prices as compared to the 2003 Six-Month Operating Period.
Average crude oil, natural gas liquids and natural gas prices received by
the Working Interest Owner in the 2004 Three-Month Operating Period attributable
to the Productive Properties were $34.47 per barrel, $27.83 per barrel and $5.77
per thousand cubic feet ("mcf"), respectively. In the comparable 2003 period,
average crude oil, natural gas liquids and natural gas prices were $33.25 per
barrel, $26.41 per barrel and $6.90 per mcf, respectively. In the 2004 Six-Month
Operating Period, average crude oil, natural gas liquids and natural gas prices
were $32.09 per barrel, $26.14 per barrel and $5.40 per mcf, respectively. In
the comparable 2003 Six-Month Operating Period, average crude oil, natural gas
liquids and natural gas prices were $30.02 per barrel, $23.98 per barrel and
$5.50 per mcf, respectively.
-14-
Production costs and expenses incurred by the Working Interest Owner on the
Productive Properties increased approximately 29% and 19% in the 2004
Three-Month Operating Period and the 2004 Six-Month Operating Period,
respectively, versus the comparable periods in 2003. The increase in production
costs and expenses for the three and six-month periods is primarily due to an
increase in expense workovers at Jay Field as part of a comprehensive workover
program by the operator to comply with the state of Florida's regulatory
requirements.
Capital expenditures increased 5% in the 2004 Three-Month Operating Period
and decreased 20% for the 2004 Six-Month Operating Period, respectively, versus
the comparable periods in 2003. The increase in capital expenditures for the
2004 Three-Month Operating Period as compared to the same period in 2003 was
primarily due to an increase in capital workovers at the Jay Field as part of
the operator's program to comply with the state of Florida's regulatory
requirements, which was partially offset by a decrease in development drilling
and capital workovers at Offshore Louisiana. The decrease in the 2004 Six-Month
Operating Period as compared to the same period in 2003 was primarily due to a
decrease in development drilling and capital workovers at Offshore Louisiana.
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. Imputed liquids production was 22,271
barrels for the 2004 Three-Month Operating Period and 7,287 barrels for the 2003
Three-Month Operating Period. Imputed natural gas production was 344,902 mcf and
215,065 mcf for the respective periods.
At June 30, 2004, the Fee Lands consisted of approximately 22,600 gross
acres in south Louisiana, approximately 4,500 of which were under lease.
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 Trust's monthly
distributions are highly dependent upon the prices realized from the sale of
natural gas. Natural gas prices can fluctuate widely on a month-to-month basis
in response to a variety of factors that are beyond the control of the Trust and
the working interest owner. Factors that contribute to price fluctuation
include, among others:
- political conditions worldwide, in particular political disruption, war
or other armed conflict in or affecting oil producing regions;
- worldwide economic conditions;
- weather conditions;
- the supply and price of foreign natural gas;
- the level of consumer demand;
- the price and availability of alternative fuels;
-15-
- 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
a) 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 SEC's rules and regulations. Disclosure controls and
procedures include controls and procedures designed to ensure that information
required to be disclosed by the Trust is accumulated and communicated by the
Working Interest Owner to the Trustee and its employees who participate in the
preparation of the Trust's 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 effectiveness of the design and operation of the Trust's
disclosure controls and procedures pursuant to Exchange Act Rules 13a-14 and
15d-4. Based upon that evaluation, Mike Ulrich, as Trust Officer of the Trustee,
concluded that the disclosure controls and procedures maintained in effect by
the Trustee are effective to ensure timely disclosure and reporting of all
material information required to be disclosed in the reports that the Trust
files or submits under the Exchange Act while noting certain potential
limitations on the effectiveness of the disclosure controls and procedures
relating to the Trust as described herein. The Trustee also believes that the
controls and procedures maintained in effect by Burlington Resources Inc., as
Working Interest Owner and as the Managing General Partner of the Partnership
which holds title to the Royalties, are effective to ensure timely disclosure
and reporting of all material information required to be disclosed, although the
Trustee does not have any way to verify that the controls and procedures
maintained in effect by the Managing General Partner and Working Interest Owner
are adequate for the Trust's purposes. The Managing General Partner and Working
Interest Owner has assured the Trustee that the information it has provided to
the Trustee is accurate in all material respects.
Due to the nature of the Trust and the Partnership which holds title to the
Royalties, as well as the nature of the underlying Royalties, there may be
inherent weaknesses in the controls and procedures at various levels which may
adversely affect the Trust's ability to identify and disclose and report all
information required to be disclosed and reported. These inherent weaknesses in
disclosure controls and procedures are described below:
The Working Interest Owner is the Managing General Partner of the
Partnership, which holds title to the Royalties in which the Trust has an
interest. The Managing General Partner is responsible under the terms of
the Partnership Agreement for keeping the books and records of the
Partnership, and for providing to the Trustee sufficient information
concerning the Royalties to permit the Trustee to comply with the reporting
obligations of the Trust under the Exchange Act, and with the requirements
of the New York Stock Exchange or any other exchange on which the Trust
Units may be listed. The Partnership Agreement requires the Managing
General Partner to provide specified information to the
-16-
Trustee by specified dates, and provides that the Managing General Partner
will indemnify the Trustee, as Trustee of the Trust, against any loss,
liability, damage or expense incurred by the Trustee or arising out of any
of the information provided by the Managing General Partner being untimely
or incorrect or untrue in any material respect. Under the terms of the
Partnership Agreement the Trustee has no obligation to verify the accuracy
or completeness of the information provided to the Trustee by the Managing
General Partner. The information furnished to the Trustee includes most of
the information relevant to the Trust, 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
liabilities, the effects of regulatory changes, the number of producing
wells and acreage, and plans for future operating and capital expenditures.
The Working Interest Owner is not the operator of the Productive
Properties; accordingly, it obtains the information that it furnishes to
the Trustee from the operators of the Productive Properties, each of which
is a third party over which neither the Working Interest Owner nor the
Trustee has control. Consequently, both the Trust and the Working Interest
Owner are dependent upon third parties for information that could be
material to the Trust or that could be required to be disclosed in the
Trust's periodic or other filings under the Exchange Act. Under the terms
of the Trust Agreement, the Trustee is entitled to and does rely upon
certain experts in good faith, including the independent petroleum reserve
engineers who prepare the annual imputed reserve report included in the
Trust's Annual Report on Form 10-K (which reserve report includes projected
production, operating expenses and capital expenditures). The Trustee
reviews the information furnished to the Trustee by the Managing General
Partner and Working Interest Owner, but makes no independent or direct
verification of the reserve data, the operating data, the financial
information or other information furnished. Although the Trustee has no
reason to believe that its reliance upon experts and upon the Managing
General Partner is unreasonable, this reliance may be viewed as a weakness.
The Trustee does not intend to expand its responsibilities beyond
those permitted or required by the Trust Agreement and those required by
applicable law.
(b) Changes in Controls and Procedures. To the knowledge of the Trustee,
there have been no significant changes in the Trust's internal controls that
could significantly affect the Trust's internal controls and procedures
subsequent to the date the Trustee completed its evaluation.
-17-
PART II
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
<Table>
<Caption>
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.
28.2* -- Form of Conveyance of Overriding Royalty Interests for Fort
Worth Basin Property.
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
</Table>
- ---------------
* Incorporated by reference to Exhibits of like designation to Registrant's
Annual Report on Form 10-K for the period ended December 31, 1983 (Commission
File No. 1-8518).
(b) Reports on Form 8-K
Current reports on Form 8-K were filed with the Securities and Exchange
Commission on April 23, 2004, May 28, 2004 and June 25, 2004.
-18-
SIGNATURE
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE
REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
LL&E ROYALTY TRUST
(Registrant)
By: JPMORGAN CHASE BANK
Trustee
By: /s/ MIKE ULRICH
----------------------------------
Mike Ulrich
Vice President and Trust Officer
Date: August 9, 2004
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.
-19-
INDEX TO EXHIBITS
<Table>
<Caption>
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.
28.2* -- Form of Conveyance of Overriding Royalty Interests for Fort
Worth Basin Property.
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
</Table>
- ---------------
* Incorporated by reference to Exhibits of like designation to Registrant's
Annual Report on Form 10-K for the period ended December 31, 1983 (Commission
File No. 1-8518).