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Item 5. Market for Registrant’s Common Equity

2020-03-19 compared with 2019-03-22 · 24 added, 23 removed, 136 unchanged (26% of the section changed)

51 unchanged sentences

During the years ended December 31, 2019 and 2018, the Trust recognized no impairments of the Royalty Interests.

If commodity prices do not improve going forward, the Trust may record an impairment in the future.

See Note 2 to the financial statements contained in Part II, Item 8 of this Annual Report for further discussion of the impairment analysis.

1 unchanged sentence

The Trust's distributable income was $7.6 million for the year ended December 31, 2019 , compared to $11.3 million for the year ended December 31, 2018 .

The $2.0 million decrease from 2017 to 2018 was primarily due to a decrease in production volumes in the production period from September 1, 2017 to August 31, 2018 (the " 2018 production period ") as compared to the production period from September 1, 2016 to August 31, 2017 (the " 2017 production period "), offset by an increase in the average realized prices received from sales of oil, natural gas and NGL.

The $3.7 million decrease from 2018 to 2019 was primarily due to a decrease in production volumes in the production period from September 1, 2018 to August 31, 2019 (the " 2019 production period ") as compared to the production period from September 1, 2017 to August 31, 2018 (the " 2018 production period "), and a decrease in the average realized prices received from sales of oil, natural gas and NGL.

See Royalty Income below for information regarding average prices received and sales volumes.

On a per unit basis, cash distributions during the year ended December 31, 2018 and attributable to the 2018 production period were $0.2416 per common unit as compared to $0.3577 per common unit and no subordinated unit distributions were paid for the year ended December 31, 2017 and attributable to the 2017 production period .

On a per unit basis, cash distributions during the year ended December 31, 2019 and attributable to the 2019 production period were $0.1632 per common unit as compared to $0.2416 per common unit for the year ended December 31, 2018 and attributable to the 2018 production period .

Distributable income for the production periods described above was calculated as follows:

6 unchanged sentences

Total expenses

Cash withheld to increase cash reserves (3)

Distributable income available to unitholders

3 unchanged sentences

Includes cash reserves withheld (used).

For the year ended December 31, 2017, no distribution was paid for the subordinated units during the year.

The distributable income for the production periods from September 1, 2016 to May 31, 2017 was, in each case, below the applicable subordination threshold.

The subordination threshold was not applicable to the distributable income for the production period from June 1, 2017 to August 31, 2017.

The subordination and incentive thresholds terminated on June 30, 2017 and are no longer applicable for any future distribution.

For more information, see Notes 1 and 5 to the financial statements contained in Part II, Item 8 of this Annual Report.

Commencing with the distribution to unitholders payable in the first quarter of 2019, the Trustee began withholding the greater of $70,000 or 3.5% of the funds otherwise available for distribution each quarter to gradually increase existing cash reserves by a total of approximately $850,000.

The Trustee may increase or decrease the targeted amount at any time, and may increase or decrease the rate at which it is withholding funds to build the cash reserve at any time, without advance notice to the unitholders.

Cash held in reserve for a payment of the quarterly cash distribution or sales proceeds amounts or for the payment of any liabilities other than routine administrative costs will be invested as required by the Trust Agreement.

Any cash reserved in excess of the amount necessary to pay or provide for the payment of future known, anticipated or contingent expenses or liabilities eventually will be distributed to unitholders, together with interest earned on the funds.

Royalty Income.

4 unchanged sentences

Total production attributable to the Royalty Interests for the 2018 production period was 777 mboe.

Average prices received for oil, natural gas and NGL production, including the impact of certain post-production expenses and excluding production taxes, during the 2017 production period were $42.74 per bbl of oil, $0.99 per mcf of natural gas and $20.11 per bbl of NGL, respectively.

The increase in the average price received per boe in the 2018 production period compared to the 2017 production period resulted in a $1.5 million increase in royalty income.

Average prices received for oil, natural gas and NGL production, including the

impact of certain post-production expenses and excluding production taxes, during the 2018 production period were $57.95 per bbl of oil, $0.89 per mcf of natural gas and $21.35 per bbl of NGL, respectively.

The decrease in the average price received per boe in the 2019 production period compared to the 2018 production period resulted in a $1.5 million decrease in royalty income.

Decreased sales volumes resulted in a $2.2 million decrease in royalty income, for a net decrease in royalty income of $3.7 million.

1 unchanged sentence

Production taxes are calculated as a percentage of oil, natural gas and NGL revenues, net of any applicable tax credits.

Production taxes for the year ended December 31, 2018 , and attributable to the 2018 production period , totaled $0.9 million , or $1.13 per boe, or approximately 6.5% of royalty income, as compared to production taxes of $0.7 million , or $0.66 per boe, or approximately 4.3% of royalty income for the year ended December 31, 2017 , and attributable to the 2017 production period .The increase in production taxes per boe from 2017 to 2018 was primarily due to an increase in oil and NGL prices.

Production taxes for the year ended December 31, 2019 , and attributable to the 2019 production period , totaled $0.5 million , or $0.81 per boe, or approximately 5.4% of royalty income, as compared to production taxes of $0.9 million , or $1.13 per boe, or approximately 6.5% of royalty income for the year ended December 31, 2018 , and attributable to the 2018 production period .

The decrease in production taxes per boe from 2018 to 2019 was primarily due to prior period tax refunds recorded in 2019.

Trust Administrative Expenses.

Trust administrative expenses, including additional cash reserves, for the years ended December 31, 2018 and 2017 totaled $1.3 million and $1.7 million , respectively.

Trust administrative expenses, including additional cash reserves, for the years ended December 31, 2019 and 2018 totaled $1.3 million .

Trust administrative expenses primarily consist of the administrative fees paid to the Trustees and Chesapeake and costs for accounting and legal services.

Liquidity and Capital Resources

The Trust’s principal sources of liquidity and capital are cash flows generated from the Royalty Interests and the loan commitment as described below.

The Trust’s principal sources of liquidity and capital are cash flows generated from the Royalty Interests.

The Trust’s primary uses of cash are distributions to Trust unitholders, payments of production taxes, payments of Trust administrative expenses, including any reserves established by the Trustee for future liabilities and repayment of loans and payments of expense reimbursements to Chesapeake for out-of-pocket expenses incurred on behalf of the Trust.

8 unchanged sentences

The 2019 fourth quarter distribution of $0.0374 per common unit, consisting of proceeds attributable to production from June 1, 2019 through August 31, 2019, was made on November 29, 2019 to record unitholders as of November 19, 2019.

The following is a summary of distributable income, distributable income per common unit and distributable income per subordinated unit by quarter for the years ended December 31, 2018 and 2017 (in thousands except per unit amounts):

The following is a summary of distributable income and distributable income per common unit by quarter for the years ended December 31, 2019 and 2018 (in thousands except per unit amounts):

Distributable income

2 unchanged sentences

Distributable income per common unit

Distributable income per subordinated unit (1)

On June 30, 2017, the subordinated units automatically converted into common units on a one-for-one basis.

Distributions made on common units no longer have the benefit of the subordination threshold, nor are the common units subject to the incentive threshold, and all Trust unitholders share on a pro rata basis in the Trust's distribution.

On February 4, 2019 , the Trust announced that a cash distribution of $0.0631 per common unit consisting of proceeds attributable to production from September 1, 2018 to November 30, 2018 , to common unitholders of record,

as of February 19, 2019 would be paid on March 1, 2019 .

See Note 6 to the financial statements contained in Part II, Item 8 of this Annual Report for additional information regarding the distribution paid on March 1, 2019 to record unitholders as of February 19, 2019 .

Commencing with the distribution to unitholders payable in the first quarter of 2019, the Trustee intends to begin withholding the greater of $70,000 or 3.5% of the funds otherwise available for distribution each quarter to gradually increase existing cash reserves by a total of approximately $850,000.

On February 5, 2020 , the Trust announced that a cash distribution of $0.0371 per common unit consisting of proceeds attributable to production from September 1, 2019 to November 30, 2019 , to common unitholders of record, as of February 19, 2020 would be paid on March 2, 2020 .

See Note 6 to the financial statements contained in Part II,

Item 8 of this Annual Report for additional information regarding the distribution paid on March 2, 2020 to record unitholders as of February 19, 2020 .

The Trustee may increase or decrease the targeted amount at any time, and may increase or decrease the rate at which it withholds funds to build the cash reserve at any time, without advance notice to the unitholders.

Cash held in reserve will be invested as required by the Trust Agreement.

Cash held in reserve for payment of the quarterly cash distribution or sales proceeds amounts or for the payment of any liabilities other than routine administrative costs will be invested as required by the Trust Agreement.

Any cash reserved in excess of the amount necessary to pay or provide for the payment of future known, anticipated or contingent expenses or liabilities will eventually be distributed to unitholders, together with interest earned on the funds.

As of December 31, 2019, $317,075 has been withheld to increase cash reserves.

The Trustee can authorize the Trust to borrow money to pay Trust expenses that exceed cash held by the Trust.

5 unchanged sentences

If Chesapeake loans funds pursuant to this commitment, unless Chesapeake agrees otherwise, no further distributions will be made to unitholders (except in respect of any previously determined quarterly cash distribution amount) until such loan is repaid.

As of December 31, 2018 and December 31, 2017 , there were no loans outstanding.

In March 2019, the Trust's cash on hand (including cash reserves) was insufficient to pay the Trust's ordinary course expenses as they became due.

Chesapeake loaned $275,000 to the Trust necessary to pay such expenses and agreed to permit the Trust to continue making distributions while the loan was outstanding.

The Trust intends to repay the loan in May 2019.

The Trust repaid the loan in the second quarter of 2019.

As of December 31, 2019 and December 31, 2018 , there were no loans outstanding.

Off-Balance Sheet Arrangements

29 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 5. Market for Registrant’s Common Equity