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Item 1. Financial Statements

2021-05-13 compared with 2020-11-12 · 53 added, 72 removed, 172 unchanged (42% of the section changed)

2 unchanged sentences

STATEMENTS OF ASSETS, LIABILITIES AND TRUST CORPUS

September 30, December 31,

March 31, December 31,

ASSETS (unaudited) (audited)

Operating cash $ 282,589 $ 321,252

Reserve fund cash 1,054,248 1,047,541

Reserve fund cash and short-term investments 1,054,467 1,054,444

Overriding royalty interests in subject interests, net 565,242 609,806

3 unchanged sentences

Trust corpus (230,172,696 royalty trust units authorized, issued and

outstanding as of September 30, 2020 and December 31, 2019) 931,123 1,236,176

outstanding as of March 31, 2021 and December 31, 2020) 847,831 931,058

Total liabilities and trust corpus $ 1,902,298 $ 1,985,502

2 unchanged sentences

STATEMENTS OF DISTRIBUTABLE INCOME (Unaudited)

Three Months Ended Nine Months Ended,

September 30, September 30,

2020 2019 2020 2019

Three Months Ended

Royalty income $ 238,183 $ 256,417

8 unchanged sentences

STATEMENTS OF CHANGES IN TRUST CORPUS (Unaudited)

Three Months Ended Nine Months Ended,

September 30, September 30,

2020 2019 2020 2019

Three Months Ended

Trust corpus, beginning of period $ 931,058 $ 1,236,176

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All such adjustments are, in the opinion of the Trustee, of a normal recurring nature.

Operating results for the three- and nine-month periods ended September 30, 2020, are not necessarily indicative of the results that may be expected for the year ending December 31, 2020.

Operating results for the three-month period ended March 31, 2021, are not necessarily indicative of the results that may be expected for the year ending December 31, 2021.

The Royalty Trust was created to hold a 5% gross overriding royalty interest (collectively, the overriding royalty interests) in future production from specified Inboard Lower Tertiary/Cretaceous exploration prospects, located in the shallow waters of the Gulf of Mexico and onshore in South Louisiana that existed as of December 5, 2012 (collectively, the subject interests).

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OVERRIDING ROYALTY INTERESTS

No impairment charges were recorded during the three- or nine-month periods ended September 30, 2020 or 2019.

No impairment charges were recorded during the three-month periods ended March 31, 2021 or 2020.

The onshore Highlander subject interest is the only producing subject interest in which the Royalty Trust holds an overriding royalty interest, and began commercial production on February 25, 2015.

Prior to this date there had been no commercial production of hydrocarbons from any of the subject interests.

Amortization charges related to production volumes associated with the onshore Highlander subject interest reduced the carrying value of the overriding royalty interests by $54,854 and $168,195 during the three- and nine-month periods ended September 30, 2020, respectively, and by $131,637 and $407,707 during the three- and nine-month periods ended September 30, 2019, respectively.

Accumulated amortization was $6,100,968 and $5,932,773 at September 30, 2020, and December 31, 2019, respectively.

On February 5, 2019, McMoRan Oil & Gas LLC (McMoRan) completed the sale of all of its rights, title and interest in and to the onshore Highlander subject interest (the Highlander Sale) pursuant to a purchase and sale agreement with Highlander Oil & Gas Assets LLC (HOGA).

The onshore Highlander subject interest was sold subject to the overriding royalty interest in future production held by the Royalty Trust.

As a result of the Highlander Sale, HOGA has a 72 percent working interest and an approximate 48 percent net revenue interest in the onshore Highlander subject interest.

The Royalty Trust continues to hold a 3.6 percent overriding royalty interest in the onshore Highlander subject interest.

McMoRan was the operator of the onshore Highlander subject interest through May 31, 2019.

HOGA qualified and was designated as the operator on June 1, 2019.

McMoRan has informed the Trustee that it has no plans to pursue, has relinquished, has allowed to expire or has sold all of its subject interests.

Accumulated amortization was $6,191,458 and $6,146,894 at March 31, 2021, and December 31, 2020, respectively.

Highlander Oil & Gas Assets LLC (HOGA) has a 72 percent working interest and an approximate 48 percent net revenue interest in the onshore Highlander subject interest.

The Royalty Trust holds a 3.6 percent overriding royalty interest in the onshore Highlander subject interest.

McMoRan Oil & Gas LLC (McMoRan) was the operator of the onshore Highlander subject interest through May 31, 2019.

HOGA is the operator of the onshore Highlander subject interest.

RELATED PARTY TRANSACTIONS

1 unchanged sentence

In accordance with the terms of the master conveyance, royalties are paid to the Royalty Trust on the last day of the month following the month in which production payments are received by HOGA.

As of September 30, 2020, only the onshore Highlander subject interest had established commercial production.

The Royalty Trust received royalties of $163,604 and $597,667 during the three- and nine-month periods ended September 30, 2020, respectively, and of $277,768 and $1,106,048 during the three- and nine-month periods ended September 30, 2019, respectively, relating to production from the onshore Highlander subject interest.

Royalties received by the Royalty Trust must first be used to (i) satisfy Royalty Trust administrative expenses and (ii) reduce

Royalty Trust indebtedness.

The Royalty Trust had no indebtedness outstanding as of September 30, 2020.

As of March 31, 2021, only the onshore Highlander subject interest had established commercial production.

The Royalty Trust received royalties of $238,183 and $256,417 during the three-month periods ended March 31, 2021 and 2020, respectively, relating to production from the onshore Highlander subject interest.

Royalties received by the Royalty Trust must first be used to (i) satisfy Royalty Trust administrative expenses and (ii) reduce Royalty Trust indebtedness.

The Royalty Trust had no indebtedness outstanding as of March 31, 2021.

Additionally, the Trustee has established a minimum cash reserve of $250,000.

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(FCX) has agreed to pay annual trust expenses up to a maximum amount of $350,000, with no right of repayment or interest due, to the extent the Royalty Trust lacks sufficient funds to pay administrative expenses.

No such contributions were made during the three- and nine-month periods ended September 30, 2020 or 2019.

No such contributions were made during the three-month periods ended March 31, 2021 or 2020.

In addition to such annual contributions, FCX has agreed to lend money, on an unsecured, interest-free basis, to the Royalty Trust to fund the Royalty Trust's ordinary administrative expenses as set forth in the royalty trust agreement.

No loans were outstanding at September 30, 2020 or December 31, 2019.

No loans were outstanding at March 31, 2021 or December 31, 2020.

Pursuant to the royalty trust agreement, FCX agreed to provide and maintain a $1.0 million stand-by reserve account or an equivalent letter of credit for the benefit of the Royalty Trust to enable the Trustee to draw on such reserve account or letter of credit to pay obligations of the Royalty Trust if its funds are inadequate to pay its obligations at any time.

2 unchanged sentences

The $1.0 million, plus interest collected thereon, is reflected as reserve fund cash, with a corresponding reserve fund liability in the accompanying Statements of Assets, Liabilities and Trust Corpus.

As of September 30, 2020, the Royalty Trust had not drawn any funds from the reserve account, and FCX had not requested a reduction of such reserve account.

As of March 31, 2021, the Royalty Trust had not drawn any funds from the reserve account, and FCX had not requested a reduction of such reserve account.

Administration.

In connection with the completion of the Highlander Sale, HOGA assumed all administrative and reporting responsibilities with respect to the Royalty Trust, including those described in Article III of the royalty trust agreement.

HOGA performs all administrative and reporting responsibilities with respect to the Royalty Trust, including those described in Article III of the royalty trust agreement.

Compensation of the Trustee.

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Royalty Trust Units Held by FCX and HOGA.

At September 30, 2020, the Royalty Trust had 230,172,696 royalty trust units outstanding.

In connection with the Highlander Sale on February 5, 2019, FCX, through its indirect wholly owned subsidiary McMoRan, assigned 31,143,150 of its royalty trust units to HOGA and retained 31,143,149 royalty trust units.

At March 31, 2021, the Royalty Trust had 230,172,696 royalty trust units outstanding, HOGA held 31,143,150 royalty trust units, and FCX, through its indirect wholly owned subsidiary McMoRan, held 31,143,149 royalty trust units.

FCX and HOGA each hold 13.5% of the outstanding royalty trust units.

DISTRIBUTIONS

Natural gas sales volumes (measured in thousands of cubic feet, or "Mcf"), average sales price and net cash proceeds available for distribution for the three- and nine-month periods ended September 30, 2020 and 2019, are set forth in the table below.

Three Months Ended Nine Months Ended,

September 30, September 30,

2020 2019 2020 2019

Natural gas sales volumes (measured in thousands of cubic feet, or “Mcf”), average sales price and net cash proceeds available for distribution for the three-month periods ended March 31, 2021 and 2020, are set forth in the table below.

Three Months Ended

Natural gas sales volumes (Mcf) (a) 111,410 138,347

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(a) Attributable to the onshore Highlander subject interest, which is the only subject interest with commercial production.

A summary of quarterly per unit distributions for the three-month periods ended March 31, 2020 and 2019, June 30, 2020 and 2019, and September 30, 2020 and 2019, is set forth in the table below.

A summary of quarterly per unit distributions for the three-month periods ended March 31, 2021 and 2020, is set forth in the table below.

Amount Per Unit Amount Record Date Payment Date Amount Per Unit Amount Record Date Payment Date

$ 32,589 $0.000142 4/30/2021 5/14/2021 $ 76,819 $0.000334 4/30/2020 5/14/2020

$ 1,702 $0.000007 7/30/2020 8/13/2020 $ 243,530 $0.001058 7/30/2019 8/13/2019

$ 25,391 $0.000110 10/30/2020 11/13/2020 $ 138,062 $0.000600 10/30/2019 11/13/2019

These distributions are not necessarily indicative of future distributions.

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SUBSEQUENT EVENTS

On October 16, 2020, the Royalty Trust declared a cash distribution of $0.000110 per unit payable on November 13, 2020, to Royalty Trust unitholders of record on October 30, 2020.

On April 16, 2021, the Royalty Trust declared a cash distribution of $0.000142 per unit payable on May 14, 2021, to Royalty Trust unitholders of record on April 30, 2021.

For additional information, see Note 4.

The Royalty Trust evaluated all other events subsequent to September 30, 2020, and through the date the Royalty Trust ’ s financial statements were issued, and determined that all events or transactions occurring during this period requiring recognition or disclosure were appropriately addressed in these financial statements.

The Royalty Trust evaluated all other events subsequent to March 31, 2021, and through the date the Royalty Trust ’ s financial statements were issued, and determined that all events or transactions occurring during this period requiring recognition or disclosure were appropriately addressed in these financial statements.

Trustee's Discussion and Analysis of Financial Condition and Results of Operations .

9 unchanged sentences

The COVID-19 pandemic and related economic repercussions have created significant volatility, uncertainty, and turmoil in the oil and natural gas industry.

Governments have tried to slow the spread of the virus by imposing social distancing guidelines, travel restrictions, and stay-at-home orders, which have caused a significant decrease in activity in the global economy and the demand for oil and natural gas.

Demand and pricing may continue to decline if there is a resurgence of the virus across the U.S.

and other locations around the world.

The extent of the additional impacts on the oil and natural gas industry and further effects on the Royalty Trust cannot be reasonably predicted at this time.

If there is a resurgence of the virus across the U.S.

and other locations around the world, the extent of these impacts on the oil and natural gas industry and further effects on the Royalty Trust cannot be reasonably predicted at this time.

Business Overview

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In connection with the merger, on June 3, 2013, (1) FCX, as depositor, McMoRan, as grantor, the Trustee and the Delaware Trustee entered into the amended and restated royalty trust agreement to govern the Royalty Trust and the respective rights and obligations of FCX, the Trustee, the Delaware Trustee, and the Royalty Trust unitholders with respect to the Royalty Trust (the royalty trust agreement);

and (2) McMoRan, as grantor, and the Royalty Trust,

as grantee, entered into the master conveyance of overriding royalty interests (the master conveyance) pursuant to which McMoRan conveyed to the Royalty Trust the overriding royalty interests in future production from the subject interests.

Other than (a) its formation, (b) its receipt of contributions and loans from FCX for administrative and other expenses as provided for in the royalty trust agreement, (c) its payment of such administrative and other expenses, (d) its repayment of loans from FCX, (e) its receipt of the conveyance of the overriding royalty interests from McMoRan pursuant to the master conveyance, (f) its receipt of royalties from McMoRan and HOGA, and (g) its cash distributions to Royalty Trust unitholders, the Royalty Trust has not conducted any activities.

and (2) McMoRan, as grantor, and the Royalty Trust, as grantee, entered into the master conveyance of overriding royalty interests (the master conveyance) pursuant to which McMoRan conveyed to the Royalty Trust the overriding royalty interests in future production from the subject interests.

Other than (a) its formation, (b) its receipt of contributions and loans from FCX for administrative and other

expenses as provided for in the royalty trust agreement, (c) its payment of such administrative and other expenses, (d) its repayment of loans from FCX, (e) its receipt of the conveyance of the overriding royalty interests from McMoRan pursuant to the master conveyance, (f) its receipt of royalties from McMoRan and HOGA, and (g) its cash distributions to Royalty Trust unitholders, the Royalty Trust has not conducted any activities.

The Trustee has no involvement with, control over, or responsibility for, any aspect of any operations on or relating to the subject interests.

3 unchanged sentences

The Trustee has a lien on the Royalty Trust’s assets to secure payment of its compensation and any indemnification expenses and other amounts to which it is entitled under the royalty trust agreement.

As of September 30, 2020, only the onshore Highlander subject interest had established commercial production.

As of March 31, 2021, only the onshore Highlander subject interest had established commercial production.

On February 5, 2019, McMoRan completed the sale of all of its rights, title and interest in and to the onshore Highlander subject interest pursuant to a purchase and sale agreement with HOGA (the Highlander Sale).

5 unchanged sentences

McMoRan has informed the Trustee that it has no plans to pursue, has relinquished, has allowed to expire or has sold all of its subject interests.

In connection with the Highlander Sale, McMoRan sold its interests in substantially all of its oil and gas leases associated with the subject interests to HOGA.

At September 30, 2020, HOGA owned interests in approximately 131 gas leases onshore in South Louisiana, covering approximately 9,000 gross acres (6,476 acres net to HOGA's interest) associated with the onshore Highlander subject interest.

In connection with the Highlander Sale, McMoRan sold its interests in substantially all of its oil and gas leases associated with the Highlander subject interest to HOGA.

At March 31, 2021, HOGA owned interests in approximately 131 gas leases onshore in South Louisiana, covering approximately 9,000 gross acres (6,476 acres net to HOGA's interest) associated with the onshore Highlander subject interest.

McMoRan has informed the Trustee that it has no plans to pursue, has relinquished, has allowed to expire or has sold all of its subject interests.

2 unchanged sentences

Pursuant to the royalty trust agreement, FCX has agreed to pay annual trust expenses up to a maximum amount of $350,000, with no right of repayment or interest due, to the extent the Royalty Trust lacks sufficient funds to pay administrative expenses.

No such contributions by FCX were made during the three- and nine-month periods ended September 30, 2020 or 2019.

No such contributions by FCX were made during the three-month periods ended March 31, 2021 or 2020.

No loans were outstanding as of September 30, 2020, or December 31, 2019.

No loans were outstanding as of March 31, 2021, or December 31, 2020.

All funds the Trustee borrows to cover expenses or liabilities, whether from FCX or from any other source, must be repaid before the Royalty Trust unitholders receive any distributions.

3 unchanged sentences

The $1.0 million, plus interest collected thereon, is held in reserve fund cash.

As of September 30, 2020, the Royalty Trust had not drawn any funds from the reserve account, and FCX had not requested a reduction of such reserve account.

As of March 31, 2021, the Royalty Trust had not drawn any funds from the reserve account, and FCX had not requested a reduction of such reserve account.

In accordance with the terms of the master conveyance, royalties are paid to the Royalty Trust on the last day of the month following the month in which production payments are received by HOGA.

As of September 30, 2020, only the onshore Highlander subject interest had established commercial production.

The Royalty Trust received royalties of $163,604 and $597,667 during the three- and nine-month periods ended September 30, 2020, respectively, and $277,768 and $1,106,048 during the three- and nine-month periods ended September 30, 2019, respectively, relating to production from the onshore Highlander subject interest.

As of March 31, 2021, only the onshore Highlander subject interest had established commercial production.

The Royalty Trust received royalties of

$238,183 and $256,417 during the three-month periods ended March 31, 2021 and 2020, relating to production from the onshore Highlander subject interest.

Royalties received by the Royalty Trust must first be used to (i) satisfy Royalty Trust administrative expenses and (ii) reduce Royalty Trust indebtedness.

The Royalty Trust had no indebtedness outstanding as of September 30, 2020.

The Royalty Trust had no indebtedness outstanding as of March 31, 2021.

Additionally, the Trustee has established a minimum cash reserve of $250,000.

As a result, distributions will be made to Royalty Trust unitholders only when royalties received less administrative expenses incurred and repayment of any indebtedness exceeds the $250,000 minimum cash reserve.

Distributable income totaled $25,391 and $103,912 during the three- and nine-month periods ended September 30, 2020, respectively.

Distributable income totaled $138,062 and $643,779 during the three- and nine-month periods ended September 30, 2019, respectively.

O n October 16, 2020 , th e Royalty Trust declared a cash distribution of $0.000110 per unit payable on November 13, 2020, to Royalty Trust unitholders of record on October 30, 2020.

Distributable income totaled $32,589 and $76,819 during the three-month periods ended March 31, 2021 and 2020, respectively.

O n April 16, 2021 , th e Royalty Trust declared a cash distribution of $0.000142 per unit payable on May 14, 2021, to Royalty Trust unitholders of record on April 30, 2021.

These distributions are not necessarily indicative of future distributions.

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Royalty Income.

As of September 30, 2020, only the onshore Highlander subject interest had established commercial production.

In accordance with the terms of the master conveyance, during the three-month period ended September 30, 2020, the Royalty Trust received royalties of $163,604 related to 130,604 thousand cubic feet ("Mcf") of natural gas production attributable to the onshore Highlander subject interest with average post-production costs of $0.34 per Mcf and an average sales price of $1.59 per Mcf.

During the three-month period ended September 30, 2019, the Royalty Trust received royalties of $277,768 related to 140,039 Mcf of natural gas production attributable to the onshore Highlander subject interest with average post-production costs of $0.34 per Mcf and an average sales price of $2.32 per Mcf.

During the nine-month period ended September 30, 2020, the Royalty Trust received royalties of $597,667 related to 400,463 Mcf of natural gas production attributable to the onshore Highlander subject interest with average post-production costs of $0.34 per Mcf and an average sales price of $1.83 per Mcf.

During the nine-month period ended September 30, 2019, the Royalty Trust received royalties of $1,106,048 related to 433,731 Mcf of natural gas production attributable to the onshore Highlander subject interest with average post-production costs of $0.33 per Mcf and an average sales price of $2.88 per Mcf.

Royalty income was lower during the three- and nine-month periods ended September 30, 2020, as compared to the corresponding 2019 periods, due to lower average sales prices and lower production compared to the three- and nine-month 2019 periods.

As of March 31, 2021, only the onshore Highlander subject interest had established commercial production.

In accordance with the terms of the master conveyance, during the three-month period ended March 31, 2021, the Royalty Trust received royalties of $238,183 related to 111,410 thousand cubic feet (“Mcf”) of natural gas production attributable to the onshore Highlander subject interest with average post-production costs of $0.38 per Mcf and an average sales price of $2.51 per Mcf.

During the three-month period ended March 31, 2020, the Royalty Trust received royalties of $256,417 related to 138,347 Mcf of natural gas production attributable to the onshore Highlander subject interest with average post-production costs of $0.34 per Mcf and an average sales price of $2.19 per Mcf.

Royalty income was lower during the three-month period ended March 31, 2021, as compared to the corresponding 2020 period, due to lower production compared to the three-month 2020 period.

Administrative Expenses.

Administrative expenses consist primarily of audit, legal and trustee expenses incurred in connection with the administration of the Royalty Trust.

During the three-month periods ended September 30, 2020 and 2019, the Royalty Trust paid administrative expenses of $138,236 and $141,959, respectively.

During the nine-month periods ended September 30, 2020 and 2019, the Royalty Trust paid administrative expenses of $495,600 and $469,570, respectively.

Administrative expenses were lower for the three-month period ended September 30, 2020 and higher for the nine-month period ended September 30, 2020 as compared to the corresponding 2019 periods, primarily because of the timing of payments for professional fees.

During the three-month periods ended March 31, 2021 and 2020, the Royalty Trust paid administrative expenses of $205,602 and $181,091, respectively.

Administrative expenses were higher for the three-month period ended March 31, 2021 as compared to the corresponding 2020 period, primarily because of the timing of payments for professional fees.

NEW ACCOUNTING STANDARDS

CAUTIONARY STATEMENT

This Quarterly Report on Form 10-Q contains 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.

Forward-looking statements are all statements other than statements of historical facts, such as any statements regarding the future financial condition of the Royalty Trust or the trading market for the royalty trust units, all statements regarding the respective plans of McMoRan or HOGA for the subject interests, the potential results of any drilling on the subject interests by the applicable operator, anticipated interests of McMoRan or HOGA and the Royalty Trust in any of the subject interests, HOGA's geologic models and the nature of the geologic trend onshore in South Louisiana discussed in this Form 10-Q, the amount and date of quarterly distributions to Royalty Trust unitholders, and all statements regarding any belief or understanding of the nature or potential of the subject interests.

Forward-looking statements are all statements other than statements of historical facts, such as any statements regarding the future financial condition of the Royalty Trust or the trading market for the royalty trust units, all statements regarding the respective plans of McMoRan or HOGA for the subject interests, the potential results of any drilling on the subject interests by the applicable operator, anticipated interests of McMoRan or HOGA and the Royalty Trust in any of the subject interests, HOGA's geologic models and the nature of the geologic trend onshore in South Louisiana discussed in this Form 10-Q, the amount and date of quarterly distributions to Royalty Trust unitholders, the potential impact of a resurgence of COVID-19 on the oil and gas industry and on the Royalty Trust, and all statements regarding any belief or understanding of the nature or potential of the subject interests.

The words “anticipates,” “may,” “can,” “plans,” “believes,” “estimates,” “expects,” “projects,” “intends,” “likely,” “will,” “should,” “to be,” “potential,” and any similar expressions and/or statements that are not historical facts are intended to identify those assertions as forward-looking statements.

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and other factors described in Part I, Item 1A.

"Risk Factors" in the 2019 Form 10-K and in Part II, Item 1A.

"Risk Factors" in this Form 10-Q, as updated by the Royalty Trust's subsequent filings with the SEC.

“Risk Factors” in the 2020 Form 10-K, as updated by the Royalty Trust’s subsequent filings with the SEC.

Any differences in actual cash receipts by the Royalty Trust could affect the amount of quarterly cash distributions.

4 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-Q

Item 1. Financial Statements