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 September 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 (I.R.S. Employer
incorporation 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 November 14, 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.......................................... 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 nine months ended September 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------
2004 2003 2004 2003
----------- ---------- ----------- ----------
Royalty revenues........................... $ 2,359,118 $2,210,771 $ 8,907,006 $5,587,447
Trust administrative expenses.............. (166,469) (179,881) (525,587) (495,484)
----------- ---------- ----------- ----------
Cash earnings.............................. 2,192,649 2,030,890 8,381,419 5,091,963
Changes in undistributed cash.............. 725 88,882 (729) 11,153
----------- ---------- ----------- ----------
Cash distributions......................... $ 2,193,374 $2,119,772 $ 8,380,690 $5,103,116
=========== ========== =========== ==========
Cash distributions per Unit................ $ .1154 $ .1116 $ .4412 $ .2687
=========== ========== =========== ==========
Units outstanding.......................... 18,991,304 18,991,304 18,991,304 18,991,304
=========== ========== =========== ==========
</Table>
STATEMENTS OF ASSETS, LIABILITIES AND TRUST CORPUS
<Table>
<Caption>
SEPTEMBER 30, DECEMBER 31,
2004 2003
------------- ------------
(UNAUDITED)
ASSETS
Cash........................................................ $ 981 $ 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)..................... (74,453,100) (74,373,000)
------------ ------------
Total assets...................................... $ 1,829,881 $ 1,909,252
============ ============
LIABILITIES AND TRUST CORPUS
Trust Corpus (18,991,304 Units of Beneficial Interest
authorized, issued and outstanding)....................... $ 1,829,881 $ 1,909,252
Contingencies (note 6)......................................
------------ ------------
Total liabilities and trust corpus................ $ 1,829,881 $ 1,909,252
============ ============
</Table>
STATEMENTS OF CHANGES IN TRUST CORPUS
(UNAUDITED)
<Table>
<Caption>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------
2004 2003
----------- ----------
Trust Corpus, beginning of period (note 3).................. $ 1,909,252 $2,046,528
Cash earnings............................................... 8,381,419 5,091,963
Cash distributions.......................................... (8,380,690) (5,103,116)
Amortization of royalty interest (note 3)................... (80,100) (66,000)
----------- ----------
Trust Corpus, end of period................................. $ 1,829,881 $1,969,375
=========== ==========
</Table>
The accompanying notes are an integral part of these financial statements.
-3-
LL&E ROYALTY TRUST
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
(1) FORMATION OF THE TRUST
On September 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 September 22, 1983. In 1997 the Company was
acquired by Burlington Resources, Inc. ("BR"), and is now a wholly owned
subsidiary of BR.
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).
Unless sooner terminated, the Trust will continue until such time as its
net revenues (cash earnings) 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 consisting of personal property) 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 then existing liabilities of the Trust,
including fees of the Trustee, the Trustee will distribute all cash then held by
it as promptly as practicable in its capacity as Trustee and, if necessary, will
set up reserves in amounts the Trustee deems appropriate to provide for payment
of contingent liabilities. 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.
-4-
LL&E ROYALTY TRUST
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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.
(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 September
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 September 30, 2004, the Fee Lands consisted of
approximately 22,600 gross acres in south Louisiana, approximately 4,400 of
which were under lease.
-5-
LL&E ROYALTY TRUST
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(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
September 28, 1983 applicable to the interest in the properties transferred
to the Trust. Information regarding the calculation of the amount of such
cost was supplied by the Company to the Trustee. The unamortized balance at
September 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 September 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
-6-
LL&E ROYALTY TRUST
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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.
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.
-7-
LL&E ROYALTY TRUST
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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 September 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 September 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 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 (cash earnings) 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 September 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 September 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>
THIRD QUARTER FIRST NINE MONTHS
------------------------ -------------------------
2004 2003 2004 2003
----------- ---------- ----------- -----------
Royalty revenues.......................... $ 2,359,118 $2,210,771 $ 8,907,006 $ 5,587,447
Trust administrative expenses............. (166,469) (179,881) (525,587) (495,484)
----------- ---------- ----------- -----------
Cash earnings............................. $ 2,192,649 $2,030,890 $ 8,381,419 $ 5,091,963
Change in undistributed cash.............. 725 88,882 (729) 11,153
----------- ---------- ----------- -----------
Cash distributions........................ $ 2,193,374 $2,119,772 $ 8,380,690 $ 5,103,116
Cash distributions per unit............... .1154 .1116 .4412 .2687
=========== ========== =========== ===========
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 nine-month periods ended September 30, 2004
and 2003 (the 2004 and 2003 "Third Quarters" and "First Nine Months",
respectively) are attributable to the Working Interest Owner's operations during
the periods April through June (the "Three-Month Operating Periods") of 2004 and
2003, respectively, and the periods October 2003 through June 2004 and October
2002 through June 2003 (the 2004 and 2003 "Nine-Month Operating Periods",
respectively).
Distributions to Unit holders for the 2004 and 2003 Third Quarters totaled
$2,193,374 ($.1154 per Unit) and $2,119,772 ($.1116 per Unit), respectively.
During these periods, the Trust received cash of $2,359,118 and $2,210,771,
respectively, from the Working Interest Owner with respect to the Royalties from
the Properties.
The monthly per Unit distributions during the 2004 and 2003 Third Quarters
were as follow:
<Table>
<Caption>
2004 2003
------- -------
July...................................................... $ .0357 $ .0184
August.................................................... .0412 .0430
September................................................. .0385 .0502
------- -------
$ .1154 $ .1116
======= =======
</Table>
Distributions to Unit holders for the First Nine Months of 2004 and 2003
amounted to $8,380,690 ($.4412 per Unit) and $5,103,116 ($.2687 per Unit),
respectively. During these periods, the Trust received cash of $8,907,006 and
$5,587,447, 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 Third Quarter and First Nine Months of 2004:
THIRD QUARTER 2004
<Table>
<Caption>
SOUTH OFFSHORE
JAY FIELD PASS 89 LOUISIANA TOTAL
---------- -------- ---------- ----------
Revenues:
Liquids..................................... $5,495,807 $275,737 $ 254,751 $6,026,295
Natural gas................................. 33,020 5,891 2,383,487 2,422,398
---------- -------- ---------- ----------
5,528,827 281,628 2,638,238 8,448,693
Production costs and expenses(1).............. (3,397,508) 94,171 (306,525) (3,609,862)
Capital expenditures.......................... (2,489,151) (6,585) (49,843) (2,545,579)
---------- -------- ---------- ----------
Net Proceeds.................................. $ (357,832) $369,214 $2,281,870 $2,293,252
========== ======== ========== ==========
Overriding Royalties paid to the Trust(2)..... $ -- $184,608 $2,053,683 $2,238,291
========== ======== ==========
Fee Lands Royalties............................................................... 120,827
----------
Royalties paid to the Trust....................................................... $2,359,118
==========
</Table>
FIRST NINE MONTHS 2004
<Table>
<Caption>
SOUTH OFFSHORE
JAY FIELD PASS 89 LOUISIANA TOTAL
----------- ---------- ---------- -----------
Revenues:
Liquids................................... $16,208,135 $ 882,360 $1,018,337 $18,108,832
Natural gas............................... 186,087 18,521 7,007,059 7,211,667
----------- ---------- ---------- -----------
16,394,222 900,881 8,025,396 25,320,499
Production costs and expenses(1)............ (9,802,271) 165,553 (635,916) (10,272,634)
Capital expenditures........................ (4,984,465) (13,270) (78,682) (5,076,417)
----------- ---------- ---------- -----------
Net Proceeds................................ $ 1,607,486 $1,053,164 $7,310,798 $ 9,971,448
=========== ========== ========== ===========
Overriding Royalties paid to the Trust(2)... $ 1,143,713 $ 514,504 $6,579,718 $ 8,237,935
=========== ========== ==========
Fee Lands Royalties................................................................ 669,071
-----------
Royalties paid to the Trust........................................................ $ 8,907,006
===========
</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 Third Quarter and 2004 First Nine Months was $83,723 and
$245,978, 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 September 30, 2004, excess production
costs to be recovered from future revenues totaled $679,940 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 Third Quarter and First Nine Months of 2003:
THIRD QUARTER 2003
<Table>
<Caption>
OFFSHORE
JAY FIELD SOUTH PASS 89 LOUISIANA TOTAL
----------- ------------- ---------- -----------
Revenues:
Liquids................................. $ 4,974,255 $ 126,803 $ 327,769 $ 5,428,827
Natural gas............................. 187,792 9,065 2,646,923 2,843,780
----------- --------- ---------- -----------
5,162,047 135,868 2,974,692 8,272,607
Production costs and expenses(1).......... (2,776,535) (145,261) (407,835) (3,329,631)
Capital expenditures...................... (843,770) (7,404) (883,212) (1,734,386)
----------- --------- ---------- -----------
Net Proceeds.............................. $ 1,541,742 $ (16,797) $1,683,645 $ 3,208,590
=========== ========= ========== ===========
Overriding Royalties paid to the
Trust(2)................................ $ 672,515 $ -- $1,515,281 $ 2,187,796
=========== ========= ==========
Fee Lands Royalties................................................................. 22,975
-----------
Royalties paid to the Trust......................................................... $ 2,210,771
===========
</Table>
FIRST NINE MONTHS 2003
<Table>
<Caption>
OFFSHORE
JAY FIELD SOUTH PASS 89 LOUISIANA TOTAL
----------- ------------- ----------- -----------
Revenues:
Liquids................................ $15,101,328 $ 629,363 $ 785,649 $16,516,340
Natural gas............................ 466,144 536,343 6,793,826 7,796,313
----------- ---------- ----------- -----------
15,567,472 1,165,706 7,579,475 24,312,653
Production costs and expenses(1)......... (7,652,475) (378,081) (901,418) (8,931,974)
Capital expenditures..................... (3,112,705) (79,361) (1,687,628) (4,879,694)
----------- ---------- ----------- -----------
Net Proceeds............................. $ 4,802,292 $ 708,264 $ 4,990,429 $10,500,985
=========== ========== =========== ===========
Overriding Royalties paid to the
Trust(2)............................... $ 672,515 $ 361,650 $ 4,491,387 $ 5,525,552
=========== ========== ===========
Fee Lands Royalties................................................................. 61,895
-----------
Royalties paid to the Trust......................................................... $ 5,587,447
===========
</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 Third Quarter and 2003 First Nine Months was $83,723 and
$257,885, respectively. Pursuant to the terms of the Trust Conveyances,
interest earned
-13-
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.
(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 September 30, 2003, excess production
costs to be recovered from future revenues totaled $25,330 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 Third Quarter and First Nine Months of 2004 and 2003:
<Table>
<Caption>
THIRD QUARTER FIRST NINE MONTHS
------------------------- --------------------------
2004 2003 2004 2003
----------- ----------- ------------ -----------
Net Proceeds:
Revenues.............................. $ 8,448,693 $ 8,272,607 $ 25,320,499 $24,312,653
Production costs and expenses......... (3,609,862) (3,329,631) (10,272,634) (8,931,974)
Capital expenditures.................. (2,545,579) (1,734,386) (5,076,417) (4,879,694)
----------- ----------- ------------ -----------
Net Proceeds.......................... $ 2,293,252 $ 3,208,590 $ 9,971,448 $10,500,985
=========== =========== ============ ===========
Royalties paid to the Trust:
Overriding Royalties.................. $ 2,238,291 $ 2,187,796 $ 8,237,935 $ 5,525,552
Fee Lands Royalties................... 120,827 22,975 669,071 61,895
----------- ----------- ------------ -----------
Royalties paid to the Trust........... $ 2,359,118 $ 2,210,771 $ 8,907,006 $ 5,587,447
=========== =========== ============ ===========
</Table>
Revenues of the Working Interest Owner with respect to the Productive
Properties increased approximately 2% in the 2004 Three-Month Operating Period
and increased approximately 4% in the 2004 Nine-Month Operating Period versus
the comparable periods in 2003. The increase in Revenues for the Three-Month
Operating Period is primarily a result of higher commodity prices partially
offset by lower production at Jay Field and Offshore Louisiana. The increase in
Revenues for the Nine-Month Operating Period is primarily a result of higher
commodity prices partially offset by lower production at Jay Field. Jay Field
production is lower primarily due to the fact that it is a mature, declining
field, and has experienced facility downtime due to operational difficulties
throughout the year.
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 $37.32 per barrel, $28.62 per barrel and $6.16
per thousand cubic feet ("mcf"), respectively. In the comparable 2003 period,
average crude oil, natural gas liquids and natural gas prices were $28.76 per
barrel, $21.84 per barrel and $5.62 per mcf, respectively. In the 2004
Nine-Month Operating Period , average crude oil, natural gas liquids and natural
gas prices were $33.64 per barrel, $26.97 per barrel and $5.63 per mcf,
respectively. In the comparable 2003 Nine-Month Operating Period , average crude
oil, natural gas liquids and natural gas prices were $29.60 per barrel, $23.26
per barrel and $5.54 per mcf, respectively.
-14-
Production costs and expenses incurred by the Working Interest Owner on the
Productive Properties increased approximately 8% and 15% in the 2004 Three-Month
Operating Period and the 2004 Nine-Month Operating Period, respectively, versus
the comparable periods in 2003. The increase in production costs and expenses
for the three and nine-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 partially
offset by higher credits for third party processing at South Pass 89. South Pass
89 production cost is a credit primarily due to credits for processing third
party gas at South Pass 89.
Capital expenditures increased 47% in the 2004 Three-Month Operating Period
and increased 4% for the 2004 Nine-Month Operating Period, respectively, versus
the comparable periods in 2003. The increase in capital expenditures for the
three and nine month periods is primarily due to an increase in capital
workovers and abandonment costs at the Jay Field as part of the operator's
program to comply with the state of Florida's regulatory requirements, offset by
decreases in nitrogen injection costs at Jay Field and 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 10,215
barrels for the 2004 Three-Month Operating Period and 29,866 barrels for the
2003 Three-Month Operating Period. Imputed natural gas production was 301,987
mcf and 241,457 mcf for the respective periods. Imputed liquids production for
the Nine-Month Operating Periods ending September 30, 2004 and 2003 was 78,527
barrels and 43,408 barrels, respectively. Imputed natural gas production was
1,029,438 mcf and 805,435 mcf for the respective Nine-Month periods.
At September 30, 2004, the Fee Lands consisted of approximately 22,600
gross acres in south Louisiana, approximately 4,400 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 Internal Control Over Financial Reporting. There has been
no change in the Trustee's internal control over financial reporting during the
three months ended September 30, 2004 that has materially affected, or is
reasonably likely to materially affect, the Trustee's internal control over
financial reporting. The Trustee notes for purposes of clarification that it has
no authority over, and makes no statement concerning, the internal control over
financial reporting of the working interest owner.
-17-
PART II
OTHER INFORMATION
ITEM 6. EXHIBITS
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
4* -- Trust Agreement for LL&E Royalty Trust, dated as of
September 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).
-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: November 14, 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
September 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).