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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 March 31, 2006.
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.)
JPMORGAN CHASE BANK, N.A., 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
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 a large accelerated filer,
an accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer" and "large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large Accelerated Filer __ Accelerated Filer X Non-Accelerated
Filer __
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes __ . No X .
At May 10, 2006, 18,991,304 Units of Beneficial Interest in the registrant
were outstanding.
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TABLE OF CONTENTS
<Table>
<Caption>
PAGE
----
Part I. Financial Information............................... 2
Item 1. Financial Statements:............................. 2
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.................... 12
Item 3. Quantitative and Qualitative Disclosures about
Market Risk............................................ 20
Item 4. Controls and Procedures........................... 20
Part II. Other Information.................................. 22
Item 1A. Risk Factors..................................... 22
Item 6. Exhibits.......................................... 22
Signature................................................... 23
</Table>
-1-
PART I
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 as of and for the three years ended December 31, 2005, as amended. The
cash earnings and distributions for the three months ended March 31, 2006 are
not necessarily indicative of the results to be expected for the year 2006.
-2-
LL&E ROYALTY TRUST
STATEMENTS OF CASH EARNINGS AND DISTRIBUTIONS
(UNAUDITED)
<Table>
<Caption>
THREE MONTHS ENDED
MARCH 31,
-------------------------
2006 2005
----------- -----------
Royalty revenues............................................ $ 432,197 $ 1,710,710
Trust administrative expenses............................... (277,715) (212,154)
----------- -----------
Cash earnings............................................... 154,482 1,498,556
Changes in undistributed cash............................... (154,482) (569)
----------- -----------
Cash distributions.......................................... $ -- $ 1,497,987
=========== ===========
Cash distributions per Unit................................. $ 0.0000 $ 0.0789
=========== ===========
Units outstanding........................................... 18,991,304 18,991,304
=========== ===========
</Table>
STATEMENTS OF ASSETS, LIABILITIES AND TRUST CORPUS
(UNAUDITED)
<Table>
<Caption>
MARCH 31, DECEMBER 31,
2006 2005
------------ ------------
ASSETS
Cash........................................................ $ 739,422 $ 584,940
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)...................... (74,473,900) (74,473,600)
------------ ------------
Total assets...................................... $ 2,547,522 $ 2,393,340
============ ============
LIABILITIES AND TRUST CORPUS
Trust Corpus (18,991,304 Units of Beneficial Interest
authorized, issued and outstanding)....................... $ 2,547,522 $ 2,393,340
Contingencies (note 6)...................................... -- --
------------ ------------
Total liabilities and Trust Corpus................ $ 2,547,522 $ 2,393,340
============ ============
</Table>
STATEMENTS OF CHANGES IN TRUST CORPUS
(UNAUDITED)
<Table>
<Caption>
THREE MONTHS ENDED
MARCH 31,
------------------------
2006 2005
---------- -----------
Trust Corpus, beginning of period (note 3).................. $2,393,340 $ 1,827,273
Cash earnings............................................... 154,482 1,498,556
Cash distributions.......................................... -- (1,497,987)
Amortization of royalty interest (note 3)................... (300) (4,000)
---------- -----------
Trust Corpus, end of period................................. $2,547,522 $ 1,823,842
========== ===========
</Table>
The accompanying notes are an integral part of these financial statements.
-3-
LL&E ROYALTY TRUST
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2006
(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. On March 31, 2006, ConocoPhillips acquired BR via
merger into Cello Acquisition Corp., a wholly owned subsidiary of
ConocoPhillips. The surviving entity of the merger was Cello Acquisition Corp.,
which changed its name to Burlington Resources Inc. "New BR". Consequently, "New
BR" and the Company are wholly owned subsidiaries of ConocoPhillips. 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 JPMorgan Chase Bank, N.A., (the Trustee)
formerly known as The Chase Manhattan Bank successor by merger to 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).
On April 8, 2006, JP Morgan Chase Bank, N.A. and Bank of New York announced
an agreement pursuant to which Bank of New York would acquire JPMorgan Chase's
corporate trust business. The transaction has been approved by both companies'
boards of directors. Subject to regulatory approvals, the transaction is
expected to close in the late third quarter or fourth quarter of 2006. The
transaction is not expected to have any material effect on the Trust.
STATUS OF THE TRUST
The Trust Agreement provides that the Trust will terminate in the event
that the net revenues fall below $5 million for two successive years ("the
Termination Threshold"). Net revenues are calculated as royalty
-4-
LL&E ROYALTY TRUST
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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 most recent Trust model prepared
by Miller and Lents, Ltd., which is based on natural gas and oil prices current
as of September 22, 2005 and September 30, 2005, respectively, does not project
that net revenues to the Trust will be less than $5 million per year for two
successive years within the next ten years. However, the damage to the
facilities described below, changes in prices and other factors could have a
material effect on the timing of termination of the Trust. It is therefore
possible (depending on the timing of repairs, future production and drilling
activities, market conditions, recoupment of unrecovered capital costs and other
matters) that in 2006, year one of the Termination Threshold may be triggered.
As of March 31, 2005, the Trust had excess production costs of approximately
$2.6 million and $0.1 million at Jay Field and South Pass 89, respectively, that
will be deducted from Jay Field's and South Pass 89's future gross proceeds
before any distributions will be made, thereby reducing future net revenues. Net
revenues through March 31, 2006 were $0.2 million. Through May 2006, the Trust
has calculated net revenues of approximately $0.9 million. Whether the Trust's
2006 net revenues are above the Termination Threshold will depend on the timing
of repairs to damaged properties in which the Trust has an interest, oil and
natural gas prices for 2006, timing and level of hydrocarbon production, the
level of capital expenditures, and other operational matters as well as
administrative expenses of the Trust. Therefore, there can be no assurance that
the net revenues of the Trust in 2006 will be above the Termination Threshold.
During 2005, Hurricanes Katrina and Rita affected the operational status of
properties included in the Offshore Louisiana and South Pass 89 groups of
properties, and Hurricane Dennis and Tropical Storm Cindy affected the
operational status of the gas plant at Jay Field. The gas plant at Jay Field
returned to full operating status on April 13, 2006. However future
distributions to the Trust will be reduced significantly for a period of time as
a result of other damage from these storms to production facilities for
properties in which the Trust has an interest. As a result of the uncertainty of
future proceeds from these properties the Trustee as of March 31, 2006 has
reserved approximately $0.7 million that otherwise would have been distributed
to the unitholders for the payment of the Trust's likely expenses in the
foreseeable future. The Trustee intends to hold these funds for use in the
payment of future Trust expenses until it becomes reasonably clear that they are
no longer necessary.
Following is a description of the damage caused by Hurricanes Katrina, Rita
and Dennis as well as Tropical Storm Cindy, to production facilities for
properties in which the Trust has an interest. This information is based on
preliminary assessments of damage the Working Interest Owner has received
regarding damage from Hurricanes Katrina and Rita to the Offshore Louisiana and
South Pass 89 properties. All of the information in this Report on Form 10-Q
relating to the operational status of the properties in which the Trust has an
interest was provided to the Working Interest Owner by the various operators of
the
-5-
LL&E ROYALTY TRUST
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
properties in which the Trust has an interest, and was then provided to the
Trust by the Working Interest Owner. The Working Interest Owner is not the
operator of any of these properties, and relies on the various operators for
information regarding the operational status of the various properties.
OFFSHORE LOUISIANA
The platform for East Cameron 195, which is included in the Offshore
Louisiana property, was heavily damaged during Hurricane Rita. East Cameron 195
was not a significant producer, and had been shut in by the operator, Maritech,
and had been approved for abandonment prior to Hurricane Rita. However, the
damage resulting from Hurricane Rita is likely to result in an increase in the
abandonment costs. The operator estimates the East Cameron 195 abandonment costs
at $27,323,000 (resulting in estimated costs attributable to the Trust's
interest of $9,108,000); however, the Working Interest Owner has cautioned the
Trust that this estimate is for diving costs and the costs to plug and abandon
the ten wells, and does not include platform abandonment costs. Consequently,
the total abandonment costs for East Cameron 195 may exceed these estimated
costs. These costs are expected to have a material adverse effect on
distributions from the Offshore Louisiana properties to the Trust, and from the
Trust to unitholders, for an extended period of time. As previously disclosed,
the Working Interest Owner has begun escrowing all funds otherwise distributable
to the Trust from the Offshore Louisiana property, beginning with the April 2006
monthly distribution.
The platform for Vermillion 331, which is included in the Offshore
Louisiana property and is operated by Energy Resource Technology, was damaged by
Hurricane Rita and is shut in. The operator estimates the repair costs at $1.2
million (resulting in estimated costs attributable to the Trust's interest of
$150,000). The Working Interest Owner has informed the Trust that the operator
currently expects to have the Vermillion 331 property back online during the
second half of 2006.
Eugene Island 261, which is included in the Offshore Louisiana property and
which is operated by Houston Exploration, was also damaged by Hurricane Rita.
The operator estimates the repair costs at $220,000 (resulting in estimated
costs attributable to the Trust's interest of $44,000). The Eugene Island 261
property returned to full production during November 2005.
The platform for South Marsh Island 76, which is included in the Offshore
Louisiana property, was heavily damaged during Hurricane Rita. The operator,
Mariner, has not yet provided complete repair costs or time estimates to the
Working Interest Owner, other than an estimate of costs related to inspections,
diving and removal of the deck from the sea floor attributable to the Trust's
interest of $900,820. The Working Interest Owner has cautioned the Trust that it
is possible that the operator may determine to plug and abandon the property
rather than repair the platform and facilities. The Working Interest Owner has
not yet received any information about the estimated costs of either repairs or
abandonment of the facilities at South Marsh Island 76.
-6-
LL&E ROYALTY TRUST
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The abandonment and repair costs estimated as described above are expected
to have a material adverse effect on royalties payable to the Trust from the
Offshore Louisiana properties, and could eliminate royalties from the Offshore
Louisiana properties to the Trust for an extended period of time. As discussed
below, the Working Interest Owner began escrowing all funds otherwise
distributable to the Trust from the Offshore Louisiana property, beginning with
the April 2006 monthly distribution. Consequently, distributions from the Trust
to Unitholders relating to Offshore Louisiana are expected to be eliminated
completely for an extended period of time.
SOUTH PASS 89
Both the B platform and the C platform at South Pass 89, which is operated
by Marathon Oil Corporation, were damaged by Hurricane Katrina. The operator's
updated estimates the repair costs are $6.5 million with respect to the B
platform (resulting in estimated costs attributable to the Trust's interest of
$1.6 million with respect to the B platform) and $5.8 million with respect to
the C platform (resulting in estimated costs attributable to the Trust's
interest of $640,000 with respect to the C platform). The Working Interest Owner
has informed the Trust that the operator currently expects to have the South
Pass 89 property back online during the second quarter of 2006. As previously
disclosed, the Working Interest Owner has begun escrowing all funds otherwise
distributable to the Trust from the South Pass 89 property, beginning with the
April 2006 monthly distribution. Consequently, distributions from the Trust to
Unitholders from South Pass 89 are expected to be eliminated completely for an
extended period of time.
JAY FIELD
The Jay Field gas plant was damaged by Hurricane Dennis and Tropical Storm
Cindy. The damage was repaired by the first week of October 2005. The operator,
ExxonMobil, has informed the working interest owner that in addition, the
previously disclosed non-storm problem affecting a trunk line and approximately
25% of production from Jay Field was repaired April 13, 2006.
In addition to the Trust terminating as a result of net revenues to the
Trust of less than $5 million for two successive years, the Trust may also be
terminated at any time by a vote of Unitholders owning a majority of the Units,
or the Trust may also be terminated at the expiration of twenty-one years after
the death of the last to die of all of the descendants living at the date of
execution of this Trust Agreement of John D. Rockefeller, Jr., late father of
the late former Vice President of the United States, Nelson A. Rockefeller.
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
interest of the Unit holders. After paying or making provisions 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
-7-
LL&E ROYALTY TRUST
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
and, if necessary, will set up reserves in the 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.
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 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 March 31, 2006, the Fee Lands consisted of approximately 22,357
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.
-8-
LL&E ROYALTY TRUST
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(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 regarding the calculation of the amount of such cost was
supplied by the Company to the Trustee. The unamortized balance at March
31, 2006, 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 as of and for the three-years ended December
31, 2005. The information furnished reflects all adjustments which are, in the
opinion of the Trustee, necessary for a fair presentation of the results for the
interim periods presented.
(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
-9-
LL&E ROYALTY TRUST
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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 on Form 10-K
for the year ended December 31, 2005, as amended, the total future dismantlement
costs to the Working Interest Owner are estimated to be $15,100,000 for the Jay
Field property, $2,000,000 for the South Pass 89 property, and $3,100,000 for
the Offshore Louisiana property. In January 2006, the Working Interest Owner
notified the Trustee that they have received preliminary estimates for damages
caused by hurricanes from the various operators of properties in which the Trust
has an interest. These current estimates for Special Costs for South Pass 89 and
Offshore Louisiana are significantly higher than those estimated at September
30, 2005. 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.
-10-
LL&E ROYALTY TRUST
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Beginning with the April 2006 distribution, the Working Interest Owner has
elected to escrow funds from the South Pass 89 and Offshore properties due to
significant increases in estimated dismantlement costs for the Offshore
Louisiana property and capital expenditures for the South Pass 89 properties due
to damage caused by Hurricanes Katrina and Rita.
The cumulative escrow balance as of March 31, 2006 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 March 31, 2006, 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 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 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) CONTINGENCIES
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.
-11-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following review of the Trust's financial condition 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.
STATUS OF THE TRUST
The Trust Agreement provides that the Trust will terminate in the event
that the net revenues fall below $5 million for two successive years. 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 Owner or the Partnership under escrow
arrangements or to make refund payments pursuant to the Conveyances (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
most recent Trust model prepared by Miller and Lents, Ltd., which is based on
natural gas and oil prices current as of September 22, 2005 and September 30,
2005, respectively, does not project that net revenues to the Trust will be less
than $5 million per year for two successive years within the next ten years.
However, the damage to the facilities described below, changes in prices and
other factors could have a material effect on the timing of termination of the
Trust. It is therefore possible (depending on the timing of repairs, future
production and drilling activities, market conditions, recoupment of unrecovered
capital costs and other matters) that in 2006, year one of the Termination
Threshold may be triggered. As of March 31, 2005, the Trust had excess
production costs of approximately $2.6 million and $0.1 million at Jay Field and
South Pass 89, respectively, that will be deducted from Jay Field's and South
Pass 89's future gross proceeds before any distributions will be made, thereby
reducing future net revenues. Net revenues through March 31, 2006 were $0.2
million. Through May 2006, the Trust has calculated net revenues of
approximately $0.9 million. Whether the Trust's 2006 net revenues are
-12-
above the Termination Threshold will depend on the timing of repairs to damaged
properties in which the Trust has an interest, oil and natural gas prices for
2006, timing and level of hydrocarbon production, the level of capital
expenditures, and other operational matters as well as administrative expenses
of the Trust. Therefore, there can be no assurance that the net revenues of the
Trust in 2006 will be above the Termination Threshold.
During 2005, Hurricanes Katrina and Rita affected the operational status of
properties included in the Offshore Louisiana and South Pass 89 groups of
properties, and Hurricane Dennis and Tropical Storm Cindy affected the
operational status of the gas plant at Jay Field. The gas plant at Jay Field
returned to full operating status on April 13, 2006. However, future
distributions to the Trust will be reduced significantly for a period of time as
a result of other damage from these storms to production facilities for
properties in which the Trust has an interest. As a result of the uncertainty of
future proceeds from these properties the Trustee as of March 31, 2006 has
reserved approximately $0.7 million that otherwise would have been distributed
to the unitholders for the payment of the Trust's likely expenses in the
foreseeable future. The Trustee intends to hold these funds for use in the
payment of Trust expenses until it becomes reasonably clear that they are no
longer necessary.
Following is a description of the damage caused by Hurricanes Katrina, Rita
and Dennis as well as Tropical Storm Cindy, to production facilities for
properties in which the Trust has an interest. This information is based on
preliminary assessments of damage the Working Interest Owner has received
regarding damage from Hurricanes Katrina and Rita to the Offshore Louisiana and
South Pass 89 properties. All of the information in this Report on Form 10-Q
relating to the operational status of the properties in which the Trust has an
interest was provided to the Working Interest Owner by the various operators of
the properties in which the Trust has an interest, and was then provided to the
Trust by the Working Interest Owner. The Working Interest Owner is not the
operator of any of these properties, and relies on the various operators for
information regarding the operational status of the various properties.
OFFSHORE LOUISIANA
The platform for East Cameron 195, which is included in the Offshore
Louisiana property, was heavily damaged during Hurricane Rita. East Cameron 195
was not a significant producer, and had been shut in by the operator, Maritech,
and had been approved for abandonment prior to Hurricane Rita. However, the
damage resulting from Hurricane Rita is likely to result in an increase in the
abandonment costs. The operator estimates the East Cameron 195 abandonment costs
at $27,323,000 (resulting in estimated costs attributable to the Trust's
interest of $9,108,000); however, the Working Interest Owner has cautioned the
Trust that this estimate is for diving costs and the costs to plug and abandon
the ten wells, and does not include platform abandonment costs. Consequently,
the total abandonment costs for East Cameron 195 may exceed these estimated
costs. These costs are expected to have a material adverse effect on
distributions from the Offshore Louisiana properties to the Trust, and from the
Trust to unitholders, for an extended period of time. As previously disclosed,
the Working Interest Owner has begun escrowing all funds otherwise distributable
to the Trust from the Offshore Louisiana property, beginning with the April 2006
monthly distribution.
The platform for Vermillion 331, which is included in the Offshore
Louisiana property and is operated by Energy Resource Technology, was damaged by
Hurricane Rita and is shut in. The operator estimates the
-13-
repair costs at $1.2 million (resulting in estimated costs attributable to the
Trust's interest of $150,000). The Working Interest Owner has informed the Trust
that the operator currently expects to have the Vermillion 331 property back
online during the second half of 2006.
Eugene Island 261, which is included in the Offshore Louisiana property and
which is operated by Houston Exploration, was also damaged by Hurricane Rita.
The operator estimates the repair costs at $220,000 (resulting in estimated
costs attributable to the Trust's interest of $44,000). The Eugene Island 261
property returned to full production during November 2005.
The platform for South Marsh Island 76, which is included in the Offshore
Louisiana property, was heavily damaged during Hurricane Rita. The operator,
Mariner, has not yet provided complete repair costs or time estimates to the
Working Interest Owner, other than an estimate of costs related to inspections,
diving and removal of the deck from the sea floor attributable to the Trust's
interest of $900,820. The Working Interest Owner has cautioned the Trust that it
is possible that the operator may determine to plug and abandon the property
rather than repair the platform and facilities. The Working Interest Owner has
not yet received any information about the estimated costs of either repairs or
abandonment of the facilities at South Marsh Island 76.
The abandonment and repair costs estimated as described above are expected
to have a material adverse effect on royalties payable to the Trust from the
Offshore Louisiana properties, and could eliminate royalties from the Offshore
Louisiana properties to the Trust for an extended period of time. As discussed
below, the Working Interest Owner began escrowing all funds otherwise
distributable to the Trust from the Offshore Louisiana property, beginning with
the April, 2006 monthly distribution. Consequently, distributions from the Trust
to Unitholders relating to offshore Louisiana are expected to be eliminated
completely for an extended period of time.
SOUTH PASS 89
Both the B platform and the C platform at South Pass 89, which is operated
by Marathon Oil Corporation, were damaged by Hurricane Katrina. The operator's
updated estimates the repair costs at $6.5 million with respect to the B
platform (resulting in estimated costs attributable to the Trust's interest of
$1.6 million with respect to the B platform) and $5.8 million with respect to
the C platform (resulting in estimated costs attributable to the Trust's
interest of $640,000 with respect to the C platform). The Working Interest Owner
has informed the Trust that the operator currently expects to have the South
Pass 89 property back online during the second quarter of 2006. As previously
disclosed, the Working Interest Owner has begun escrowing all funds otherwise
distributable to the Trust from the South Pass 89 property, beginning with the
April 2006 monthly distribution. Consequently, distributions from the Trust to
Unitholders from South Pass 89 are expected to be eliminated completely for an
extended period of time.
JAY FIELD
The Jay Field gas plant was damaged by Hurricane Dennis and Tropical Storm
Cindy. The damage was repaired by the first week of October 2005. The operator,
ExxonMobil, has informed the working interest
-14-
owner that in addition, the previously disclosed non-storm problem affecting a
trunk line and approximately 25% of production from Jay Field was repaired April
13, 2006.
The Trustee has participated in discussions with the Working Interest Owner
regarding the insurance policies carried by the Working Interest Owner in effect
at the dates of the various storms affecting the properties in which the Trust
has an interest. The Working Interest Owner and its outside insurance counsel
have advised the Trustee that they are in the process of analyzing the scope and
applicability of the policies carried by the Working Interest Owner to the
various types of damages that resulted from the storms, and are in the process
of discussing these matters with the carriers. The Trustee has requested
additional information about the policies, potential coverage to damages
affecting the Trust, the likely timing of the resolution of issues relating to
the possible insurance coverage and the various types of damages caused by the
storms, and other information regarding the possibility of recovery under any
insurance policy that, directly or indirectly, may be for the benefit of the
Trust. The Working Interest Owner has undertaken to provide all such information
as it becomes available, but has advised the Trustee that it remains in
discussions with its insurance carriers, and does not yet have reliable
information about the scope and applicability of the policies to the properties
in which the Trust has an interest or the effects, if any, on the Trust.
In addition to the Trust terminating as a result of net revenues to the
Trust of less than $5 million for two successive years, the Trust may also be
terminated at any time by a vote of Unit holders owning a majority of the Units,
or the Trust may also be terminated at the expiration of twenty-one years after
the death of the last to die of all of the descendants living at the date of
execution of this Trust Agreement of John D. Rockefeller, Jr., late father of
the late former Vice President of the United States, Nelson A. Rockefeller.
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
interest of the Unit holders. After paying or making provisions 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 an, if necessary, will set up reserves in the 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.
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.
-15-
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 on Form 10-K
as of and for the three years ended December 31, 2005, as amended, the total
future dismantlement costs to the Working Interest Owner are estimated to be
$15,100,000 for the Jay Field property, $2,000,000 for the South Pass 89
property, and $3,100,000 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.
The cumulative escrow balance as of March 31, 2006 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 March 31, 2006, 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 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 escrowed amounts for the South Pass 89 and
Offshore Louisiana properties are expected to decrease in the future as funds
are released to cover substantial increases in estimated capital expenditures
and dismantlement costs, respectively, for those properties due to damage caused
by Hurricanes Katrina and Rita.
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.
RESULTS OF OPERATIONS
<Table>
<Caption>
THREE MONTHS ENDED MARCH 31,
-----------------------------
2006 2005
------------- -------------
Royalty revenues......................................... $ 432,197 $ 1,710,710
Trust administrative expenses............................ (277,715) (212,154)
----------- -----------
Cash earnings............................................ $ 154,482 $ 1,498,556
Changes in undistributed cash............................ (154,482) (569)
----------- -----------
Cash distributions....................................... $ -- $ 1,497,987
=========== ===========
Cash distributions per unit.............................. $ 0.0000 $ 0.0789
=========== ===========
Units outstanding........................................ 18,991,304 18,991,304
=========== ===========
</Table>
-16-
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 periods ended March 31, 2006 and 2005 (the 2006
and 2005 "First Quarters", respectively) are attributable to the Working
Interest Owner's operations during the periods October through December of 2005
(the "Current Operating Period") and October through December of 2004 (the
"Prior Year's Operating Period"), respectively. Revenues for November 2005 were
not submitted to the Trust until April 2006. As Royalties are recorded on a cash
basis, November Royalty revenues of $152,103 are not included in the Current
Operating Period.
There was no distribution to the Unit holders for the three months ended
March 31, 2006 as compared to $1,497,987 ($0.0789 per Unit) for the three months
ended March 31, 2005. As a result of the uncertainty of future proceeds from
properties in which the Trust has an interest, the Trustee has reserved $0.7
million in proceeds that otherwise would have been distributed to the Unit
holders for the payment of the Trust's likely expenses in the foreseeable
future. The Trustee intends to hold these funds for use in the payment of future
Trust expenses until it becomes reasonably clear that they are no longer
necessary. During the three months ended March 31, 2006 and 2005, the Trust
received cash of $432,197 and $1,710,710, respectively, from the Working
Interest Owner with respect to the Royalties from the Properties.
The monthly per Unit distributions during the 2006 and 2005 First Quarters
were as follows:
<Table>
<Caption>
2006 2005
------- -------
January..................................................... $0.0000 $0.0322
February.................................................... 0.0000 0.0187
March....................................................... 0.0000 0.0280
------- -------
$0.0000 $0.0789
======= =======
</Table>
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 First Quarters of 2006 and 2005:
FIRST QUARTER 2006
<Table>
<Caption>
SOUTH OFFSHORE
JAY FIELD PASS 89 LOUISIANA TOTAL
---------- -------- --------- ----------
Revenues:
Liquids....................................... $4,635,890 $ -- $ 68,679 $4,704,569
Natural gas................................... (43,852) -- 440,964 397,112
---------- -------- -------- ----------
$4,592,038 -- $509,643 $5,101,681
Production costs and expenses(1)................ 1,990,161 (28,805) 62,216 2,023,572
Capital expenditures............................ 2,144,965 -- 5,065 2,150,030
---------- -------- -------- ----------
Net Proceeds.................................... $ 456,912 $ 28,805 $442,362 $ 928,079
========== ======== ========
Overriding Royalties paid to the Trust(2)....... $ -- $ -- $398,128 $ 398,128
========== ======== ========
Fee Lands Royalties................................................................ 34,069
----------
Royalties paid to the Trust........................................................ $ 432,197
==========
</Table>
-17-
- ---------------
(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 2006 First Quarter was $98,046. Pursuant to the terms of the
Trust Conveyances, interest earned on the escrowed funds for any month will
be calculated at an interest rate equal to 80% of the median between the
Prime Rate at the end of such month and the Prime Rate at the end of the
preceding month. Processing fees earned are also shown as a reduction of
production costs and expenses. For the three months ended March 31, 2006,
South Pass 89 property processing fees totaled $51,040 and interest earned
on funds escrowed totaled $25,182, while actual production costs totaled
$47,367, netting proceeds of $28,805.
(2) As a result of excess production costs being incurred in one monthly
operating period and then being 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. The March 31, 2006 royalty
income for the Jay Field and the South Pass 89 properties have been reduced
by $2,121,713 and $32,905, respectively, of excess production costs arising
in 2005. The Jay Field and South Pass 89 properties had excess production
costs of $1,664,798 and $4,099, respectively as of March 31, 2006. In
addition, March 31, 2006 royalty income does not include $152,103 of
proceeds from November 2005 that were reported in February 2006. Revenues
for November 2005 were not submitted to the Trust until April 2006. As
Royalties are recorded on a cash basis, November Royalty revenues are not
included in the Current Operating Period.
FIRST QUARTER 2005
<Table>
<Caption>
SOUTH OFFSHORE
JAY FIELD PASS 89 LOUISIANA TOTAL
----------- -------- ---------- -----------
Revenues:
Liquids................................... $ 6,703,239 $359,072 $ 364,456 $ 7,426,767
Natural gas............................... 511,808 1,399 1,844,737 2,357,944
----------- -------- ---------- -----------
$ 7,215,047 $360,471 $2,209,193 $ 9,784,711
Production costs and expenses(1)............ (3,515,277) 45,332 (612,828) (4,082,773)
Capital expenditures........................ (1,251,352) 5,573 (11,324) (1,257,103)
----------- -------- ---------- -----------
Net Proceeds................................ $ 2,448,418 $411,376 $1,585,041 $ 4,444,835
=========== ======== ========== ===========
Overriding Royalties paid to the Trust(2)... $ 200,618 $ -- $1,426,537 $ 1,627,155
=========== ======== ==========
Fee Lands Royalties.............................................................. 83,555
-----------
Royalties paid to the Trust...................................................... $ 1,710,710
===========
</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 2005 First Quarter was $102,307. Pursuant to the terms of the
Trust Conveyances, interest earned on the escrowed funds for any month will
be calculated at an interest rate equal to 80% of the median between the
Prime Rate at the end of such month and the Prime Rate at the end of the
preceding month. Processing fees earned are also shown as a reduction of
production costs and expenses. For the three months ended March 31, 2005,
South Pass 89 property
-18-
processing fees totaled $164,996 and interest on escrow totaled $26,224, while
the production costs totaled $145,888, netting additional proceeds of $45,332.
(2) As a result of excess production costs being incurred in one monthly
operating period and then being 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. The March 31, 2005 royalty
income for the Jay Field and the South Pass 89 properties have been reduced
by $2,047,183 and $438,790, respectively, of excess production costs arising
in 2004. The South Pass 89 property had excess production costs of $27,414
as of March 31, 2005.
The following unaudited schedule summarizes the Working Interest Owner's
calculation of the Net Proceeds from the Properties and the Royalties paid to
the Trust for the First Quarters of 2006 and 2005:
<Table>
<Caption>
FIRST QUARTER
-------------------------
2006 2005
----------- -----------
Net Proceeds:
Revenues................................................. $ 5,101,681 $ 9,784,711
Production costs and expenses............................ (2,023,572) (4,082,773)
Capital expenditures..................................... (2,150,030) (1,257,103)
----------- -----------
Net Proceeds............................................. $ 928,079 $ 4,444,835
=========== ===========
Royalties paid to the Trust:
Overriding Royalties..................................... $ 398,128 $ 1,627,155
Fee Lands Royalties...................................... 34,069 83,555
----------- -----------
Royalties paid to the Trust.............................. $ 432,197 $ 1,710,710
=========== ===========
</Table>
Revenues of the Working Interest Owner with respect to the Productive
Properties in the Current Operating Period decreased 48% from the Prior Year's
Operating Period primarily as a result of decreased volumes as impacted by
Hurricanes Katrina and Rita. As noted above, the current operating period does
not include November 2005 revenues of $2.3 million. Additionally, volumes were
impacted at Jay Field primarily due to a down trunkline that was repaired in
April 2006. Average crude oil, natural gas liquids and natural gas prices
received by the Working Interest Owner in the Current Operating Period
attributable to the Productive Properties were $60.04 per barrel, $49.13 per
barrel and $12.61 per thousand cubic feet ("mcf"), respectively. In the
comparable 2005 period, average crude oil, natural gas liquids and natural gas
prices were $46.64 per barrel, $36.33 per barrel and $6.78 per mcf,
respectively. Imputed production attributable to the Trust is calculated by
multiplying the gross production volumes attributable to the Productive
Properties by the ratio of the net overriding royalties paid to the Trust to the
gross revenues attributable to the Productive Properties. Imputed liquids
production was 945 barrels for the Current Operating Period and 10,021 barrels
for the Prior Year's Operating Period. Imputed natural gas production was 26,043
thousand cubic feet and 182,455 thousand cubic feet for the respective periods.
Production costs and expenses incurred by the Working Interest Owner on the
Productive Properties in the Current Operating Period decreased 50% primarily
due to lower workover and production tax expenses at Jay Field and lower
workover and lease operating expenses at Offshore Louisiana.
-19-
Capital and abandonment expenditures increased 71% in the Current Operating
Period compared to the same period in 2005 primarily due to an increase in
developmental drilling and nitrogen purchases at Jay Field.
At March 31, 2006, the Fee Lands consisted of approximately 22,357 gross
acres in South Louisiana, approximately 1,015 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 oil producing regions;
- worldwide economic conditions;
- weather conditions;
- the supply and price of foreign natural gas;
- the level of consumer demand;
- the price and availability of alternative fuels;
- the proximity to, and capacity of, transportation facilities; and
- the effect of worldwide energy conservation measures.
Moreover, government regulations, such as regulation of natural gas
transportation and price controls, can affect product prices in the long term.
ITEM 4. CONTROLS AND PROCEDURES
The Trust maintains disclosure controls and procedures designed to ensure
that information required to be disclosed by the Trust in reports that it files
or submits under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), is recorded, processed, summarized and reported within the time periods
specified in the 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.
-20-
As of the end of the period covered by this report, the Trustee carried out
an evaluation of the Trustee's disclosure controls and procedures. Mike Ulrich,
as Trust Officer of the Trustee, has concluded that these controls and
procedures are effective.
Due to the contractual arrangements pursuant to which the Trust was created
and the terms of the related Conveyances regarding information furnished by the
Working Interest Owner, the Trustee relies on (i) information provided by the
Working Interest Owner, including all information relating to the productive
properties burdened by the Royalties, such as operating data, data regarding
operating and capital expenditures, geological data relating to reserves,
information regarding environmental and other conditions relating to the
productive properties, liabilities and potential liabilities potentially
affecting the revenues to the Trust's interest, the effects of regulatory
changes and of the compliance of the operators of the productive properties with
applicable laws, rules and regulations, the number of producing wells and
acreage, and plans for future operating and capital expenditures, and (ii)
conclusions of independent reserve engineers regarding reserves. The conclusions
of the independent reserve engineers are based on information received from the
Working Interest Owner.
Changes in Control Over Financial Reporting. There has been no change in
the Trustee's internal control over financial reporting during the three months
ended March 31, 2006 that has materially affected, or is reasonably likely to
materially affect, the Trustee's internal control over financial reporting.
-21-
PART II
OTHER INFORMATION
ITEM 1A. RISK FACTORS.
There have been no material changes in the risk factors disclosed under
Part I, Item 1A of the Trust's Annual Report on Form 10-K for the year ended
December 31, 2005.
ITEM 6. EXHIBITS.
<Table>
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. 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).
-22-
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, N.A.
Trustee
By: /s/ MIKE ULRICH
----------------------------------
Mike Ulrich
Vice President and Trust Officer
Date: May 10, 2006
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.
-23-
INDEX TO EXHIBITS
<Table>
<Caption>
EXHIBIT
NUMBER
-------
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. 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).