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Item 1. Financial Statements

2023-08-11 compared with 2023-05-09 · 74 added, 54 removed, 192 unchanged (40% of the section changed)

2 unchanged sentences

STATEMENTS OF ASSETS, LIABILITIES AND TRUST CORPUS

March 31, December 31,

June 30, December 31,

ASSETS (unaudited) (audited)

6 unchanged sentences

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

outstanding as of March 31, 2023 and December 31, 2022) 499,830 1,245,494

outstanding as of June 30, 2023 and December 31, 2022) 149,830 1,245,494

Total liabilities and trust corpus $ 1,237,958 $ 2,310,845

2 unchanged sentences

STATEMENTS OF DISTRIBUTABLE INCOME (Unaudited)

Three Months Ended

Three Months Ended Six Months Ended

June 30, June 30,

2023 2022 2023 2022

Royalty income $ 14,331 $ 525,689 $ 401,278 $ 976,719

1 unchanged sentence

Administrative expenses (171,714) (211,923) (361,390) (396,090)

Income in excess of administrative expenses (Note 4) $ 206,081 $ 266,880

Income in excess of administrative expenses (administrative expenses in excess of income) (Note 4) $ (152,669) $ 314,132 $ 53,412 $ 581,012

Distributable income (Note 4) $ — $ 305,382 $ 197,331 $ 563,512

4 unchanged sentences

STATEMENTS OF CHANGES IN TRUST CORPUS (Unaudited)

Three Months Ended

Three Months Ended Six Months Ended

June 30, June 30,

2023 2022 2023 2022

Trust corpus, beginning of period $ 499,830 $ 950,816 $ 1,245,494 $ 1,219,756

1 unchanged sentence

Impairment of subject interests — — (308,071) —

Income in excess of administrative expenses 206,081 266,880

Income in excess of administrative expenses (administrative expenses in excess of income) (152,669) 314,132 53,412 581,012

Distributions paid (197,331) (258,130) (819,225) (755,829)

12 unchanged sentences

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

Operating results for the three-month period ended March 31, 2023, are not necessarily indicative of the results that may be expected for the year ending December 31, 2023.

Operating results for the three- and six-month periods ended June 30, 2023, are not necessarily indicative of the results that may be expected for the year ending December 31, 2023.

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).

11 unchanged sentences

The onshore Highlander subject interest is the only producing subject interest in which the Royalty Trust holds an overriding royalty interest.

Amortization charges related to production volumes associated with the onshore Highlander subject interest reduced the carrying value of the overriding royalty interests by $21,780 and $38,121 during the three-month periods ended March 31, 2023 and 2022, respectively.

Amortization charges related to production volumes associated with the onshore Highlander subject interest reduced the carrying value of the overriding royalty interests by $0 and $21,780 during the three- and six-month periods ended June 30, 2023, respectively, and $35,346 and $73,467 during the three- and six-month periods ended June 30, 2022, 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.

3 unchanged sentences

Following an evaluation by HOGA’s field operations team, HOGA determined that it would be necessary to commence operations to control the water production, in expectation of eventually initiating “kill” operations on the well.

HOGA recently has informed the Trustee that the well was shut in effective March 31, 2023 and production from the well has ceased.

HOGA has informed the Trustee that the well was shut in effective March 31, 2023 and production from the well has ceased.

Since that time the well has flowed intermittently but not on a continuous basis.

HOGA currently is evaluating its options with respect to the well.

Unless the operational issues with the well can be rectified, the well is redrilled or another well is drilled on the onshore Highlander subject interest, the Royalty Trust does not expect to receive any income attributable to its overriding royalty interests and accordingly, does not expect to have any cash available to distribute to Royalty Trust unitholders in future periods.

The Trust fully impaired the carrying value of the onshore Highlander subject interest by $308,071 during the three-month period ended March 31, 2023.

Accumulated amortization was $6,756,701 and $6,426,850 at March 31, 2023 and December 31, 2022, respectively.

The Trust determined the fair value of the onshore Highlander subject interest to be zero using Level 3 measurements under the fair value hierarchy of ASC 820 Fair Value Measurement .

Therefore, the Trust recognized the remaining carrying value of the onshore Highlander subject interest as of March 31, 2023 as an impairment loss.

Shutting in the well for an extended period of time will eliminate any production from the onshore Highlander subject interest during such period, which will also eliminate any proceeds to which the Royalty Trust would be entitled pursuant to its overriding royalty interest during the same period.

Therefore, while the well remains shut in, the Royalty Trust will not receive significant income attributable to its overriding royalty interest.

Unless the operational issues with the well can be rectified, the well is redrilled or another well is drilled on the onshore Highlander subject interest, the Royalty Trust does not expect to receive any significant income attributable to its overriding royalty interests and accordingly, does not expect to have any cash available to distribute to Royalty Trust unitholders in future periods.

The Royalty Trust fully impaired the carrying value of the onshore Highlander subject interest by $308,071 on March 31, 2023.

The Royalty Trust determined the fair value of the onshore Highlander subject interest to be zero using Level 3 measurements under the fair value hierarchy of ASC 820 Fair Value Measurement .

Therefore, the Royalty Trust recognized the remaining carrying value of the onshore Highlander subject interest as of March 31, 2023 as an impairment loss.

Accumulated amortization was $6,756,701 and $6,426,850 at June 30, 2023 and December 31, 2022, respectively.

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.

The Royalty Trust received royalties of $386,947 and $451,030 during the three-month periods ended March 31, 2023 and 2022, respectively.

The Royalty Trust received royalties of $14,331 and $401,278 during the three- and six-month periods ended June 30, 2023, respectively, and $525,689 and $976,719 during the three- and six-month periods ended June 30, 2022, respectively.

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, 2023 and December 31, 2022.

The Royalty Trust had no indebtedness outstanding as of June 30, 2023 and December 31, 2022.

Each quarter, the trustee will determine the amount of funds available for distribution to the Royalty Trust unitholders.

1 unchanged sentence

Available funds will be reduced by any cash the trustee reserves against future liabilities.

As of March 31, 2023, the Trustee has established a minimum cash reserve of $302,500.

Commencing with the distribution to unitholders in the first quarter of 2022, the Trust has been withholding, and in the future intends to withhold, $8,750 from the funds otherwise available for distribution each quarter to gradually build a cash reserve of approximately $350,000.

This cash is reserved for the payment of future known, anticipated or contingent expenses or liabilities of the Trust.

As of June 30, 2023, the Trustee has established a minimum cash reserve of $302,500.

Commencing with the distribution to unitholders in the first quarter of 2022, the Royalty Trust has been withholding, and in the future intends to withhold, $8,750 from the funds otherwise available for distribution each quarter to gradually build a cash reserve of approximately $350,000.

As no proceeds were available for distribution, the Royalty Trust did not withhold any funds for the cash reserve in the second quarter of 2023.

This cash is reserved for the payment of future known, anticipated or contingent expenses or liabilities of the Royalty Trust.

The Trustee may increase or decrease the targeted cash reserve 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.

5 unchanged sentences

(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-month periods ended March 31, 2023 or 2022.

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 March 31, 2023 or December 31, 2022.

No such contributions were made during the three-month periods ended June 30, 2023 or 2022.

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 June 30, 2023 or December 31, 2022.

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.

Currently, with the consent of the Trustee, FCX may reduce the reserve account or

substitute a letter of credit with a different face amount for the original letter of credit or any substitute letter of credit.

Currently, with the consent of the Trustee, FCX may reduce the reserve account or substitute a letter of credit with a different face amount for the original letter of credit or any substitute letter of credit.

In connection with this arrangement, FCX provided $1.0 million to the Royalty Trust.

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 March 31, 2023, 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 June 30, 2023, the Royalty Trust had not drawn any funds from the reserve account, and FCX had not requested a reduction of such reserve account.

Administration.

6 unchanged sentences

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-month periods ended March 31, 2023 and 2022, are set forth in the table below.

Three Months Ended

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 six-month periods ended June 30, 2023 and 2022, are set forth in the table below.

Three Months Ended Six Months Ended

June 30, June 30,

2023 2022 2023 2022

Natural gas sales volumes (Mcf) 14,231 107,110 101,352 222,627

5 unchanged sentences

Administrative expenses (171,714) (211,923) (361,390) (396,090)

Income in excess of administrative expenses 206,081 266,880

Income in excess of administrative expenses (administrative expenses in excess of income) (152,669) 314,132 53,412 581,012

Income available for distribution — 314,132 206,081 581,012

Adjustment to minimum cash reserve — (8,750) (8,750) (17,500)

Net cash proceeds available for distribution $ — $ 305,382 $ 197,331 $ 563,512

A summary of quarterly per unit distributions for the three-month periods ended March 31, 2023 and 2022, is set forth in the table below.

A summary of quarterly per unit distributions for the three- and six-month periods ended June 30, 2023 and 2022, is set forth in the table below.

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

$ 197,331 $ 0.000857 4/28/2023 5/12/2023 $ 258,130 $ 0.001121 4/29/2022 5/13/2022

$ — $ — — — $ 305,382 $ 0.001327 7/29/2022 8/12/2022

These distributions are not necessarily indicative of future distributions.

2 unchanged sentences

SUBSEQUENT EVENTS

On April 14, 2023, the Royalty Trust declared a cash distribution of $0.000857 per unit payable on May 12, 2023, to Royalty Trust unitholders of record on April 28, 2023.

For additional information, see Note 4.

As discussed in Note 3 above, 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.

In July 2023, the Trustee requested FCX to contribute $350,000 to the Royalty Trust pursuant to this arrangement, in light of the shut-in of the sole well on the Highlander subject interest, and the cessation of production from the well, as described in Note 2 above.

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

27 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 March 31, 2023, only the onshore Highlander subject interest had established commercial production.

As of June 30, 2023, 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

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, 2023, 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.

At June 30, 2023, 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.

Whether or not HOGA maintains the acreage associated with the onshore Highlander subject interest is determined by HOGA's current and future plans, over which the Royalty Trust has no control.

2 unchanged sentences

HOGA recently has informed the Trustee that the well was shut in effective March 31, 2023 and production from the well has ceased.

HOGA has informed the Trustee that the well was shut in effective March 31, 2023 and production from the well has ceased.

Since that time the well has flowed intermittently but not on a continuous basis.

Therefore, while the well remains shut in, the Royalty Trust will not receive significant income attributable to its overriding royalty interest.

Unless the operational issues with the well can be rectified, the well is redrilled or another well is drilled on the onshore Highlander subject interest, the Royalty Trust does not expect to receive any significant income attributable to its overriding royalty interests and accordingly, does not expect to have any cash available to distribute to Royalty Trust unitholders in future periods.

LIQUIDITY AND CAPITAL RESOURCES

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-month periods ended March 31, 2023 or 2022.

No such contributions by FCX were made during the six-month periods ended June 30, 2023 or 2022.

No loans were outstanding as of March 31, 2023, or December 31, 2022.

No loans were outstanding as of June 30, 2023, or December 31, 2022.

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.

2 unchanged sentences

In connection with this arrangement, FCX provided $1.0 million to the Royalty Trust.

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

As of March 31, 2023, the Royalty Trust had not drawn any funds from the reserve account, and FCX had not requested a reduction of such reserve account.

The $1.0 million, plus interest

collected thereon, is held in reserve fund cash.

As of June 30, 2023, the Royalty Trust had not drawn any funds from the reserve account, and FCX had not requested a reduction of such reserve account.

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.

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.

The Royalty Trust received royalties of $386,947 and $451,030 during the three-month periods ended March 31, 2023 and 2022, respectively.

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, 2023 and December 31, 2022.

The Royalty Trust had no indebtedness outstanding as of June 30, 2023 and December 31, 2022.

Each quarter, the Trustee will determine the amount of funds available for distribution to the Royalty Trust unitholders.

1 unchanged sentence

Available funds will be reduced by any cash the Trustee decides to hold as a reserve against future liabilities.

As of March 31, 2023, the Trustee has established a minimum cash reserve of $302,500.

This cash is reserved for the payment of future known, anticipated or contingent expenses or liabilities of the Trust.

As of June 30, 2023, the Trustee has established a minimum cash reserve of $302,500.

As no proceeds were available for distribution, the Royalty Trust did not withhold any funds for the cash reserve in the second quarter of 2023.

This cash is reserved for the payment of future known, anticipated or contingent expenses or liabilities of the Royalty Trust.

1 unchanged sentence

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.

Distributable income totaled $197,331 and $258,130 during the three-month periods ended March 31, 2023 and 2022, respectively.

On April 14, 2023, the Royalty Trust declared a cash distribution of $0.000857 per unit payable on May 12, 2023, to Royalty Trust unitholders of record on April 28, 2023.

Distributable income totaled $0 and $197,331 during the three- and six-month periods ended June 30, 2023, respectively, and $305,382 and $563,512 during the three- and six-month periods ended June 30, 2022, respectively.

These distributions are not necessarily indicative of future distributions, particularly in light of the shutting in of the sole well producing from the Highlander subject interest, as discussed above, and the cessation of production from the well, effective March 31, 2023.

HOGA currently is evaluating its options with respect to the well.

Unless the operational issues with the well can be rectified, the well is redrilled or another well is drilled on the onshore Highlander subject interest, the Royalty Trust does not expect to receive any significant income attributable to its overriding royalty interests and accordingly, does not expect to have any cash available to distribute to Royalty Trust unitholders in future periods.

The Royalty Trust's only other sources of liquidity are mandatory annual contributions, any loans and the required standby reserve account or letter of credit from FCX.

5 unchanged sentences

Royalty Income.

In accordance with the terms of the master conveyance, during the three-month period ended March 31, 2023, the Royalty Trust received royalties of $386,947 related to 87,121 thousand cubic feet (Mcf) of natural gas production with average post-production costs of $0.54 per Mcf and an average sales price of $4.98 per Mcf.

During the three-month period ended March 31, 2022, the Royalty Trust received royalties of $451,030 related to 115,517 Mcf of natural gas production attributable to the onshore Highlander subject interest with average post-production costs of $0.40 per Mcf and an average sales price of $4.30 per Mcf.

Royalty income was lower during the three-month period ended March 31, 2023, as compared to the corresponding 2022 period, primarily due to lower production, partially offset by higher natural gas prices.

In accordance with the terms of the master conveyance, during the three-month period ended June 30, 2023, the Royalty Trust received royalties of $14,331 related to 14,231 thousand cubic feet (Mcf) of natural gas production with average post-production costs of $1.43 per Mcf and an average sales price of $2.43 per Mcf.

During the three-month period ended June 30, 2022, the Royalty Trust received royalties of $525,689 related to

107,110 Mcf of natural gas production attributable to the onshore Highlander subject interest with average post-production costs of $0.40 per Mcf and an average sales price of $5.30 per Mcf.

During the six-month period ended June 30, 2023, the Royalty Trust received royalties of $401,278 related to 101,352 Mcf of natural gas production attributable to the onshore Highlander subject interest with average post-production costs of $0.67 per Mcf and an average sales price of $4.63 per Mcf.

During the six-month period ended June 30, 2022, the Royalty Trust received royalties of $976,719 related to 222,627 Mcf of natural gas production attributable to the onshore Highlander subject interest with average post-production costs of $0.40 per Mcf and an average sales price of $4.78 per Mcf.

Royalty income was lower during the three- and six-month periods ended June 30, 2023, as compared to the corresponding 2022 periods, primarily due to lower production resulting from the operational issues relating to the sole well producing from the Highlander subject interest and ultimately the shutting in of the well.

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 March 31, 2023 and

2022, the Royalty Trust paid administrative expenses of $189,676 and $184,167, respectively.

Administrative expenses were higher for the three-month period ended March 31, 2023, as compared to the corresponding 2022 period, primarily due to the timing of payments for professional services.

During the three-month periods ended June 30, 2023 and 2022, the Royalty Trust paid administrative expenses of $171,714 and $211,923, respectively.

During the six-month periods ended June 30, 2023 and 2022, the Royalty Trust paid administrative expenses of $361,390 and $396,090, respectively.

Administrative expenses were lower for the three- and six-month periods ended June 30, 2023, as compared to the corresponding 2022 periods, primarily due to the timing of payments for professional services.

NEW ACCOUNTING STANDARDS

1 unchanged sentence

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 (the Exchange Act).

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, expectations regarding the repair or redrill of the well on the Highlander subject interest, the drilling of another well on the Highlander subject interest, and statements regarding the Trust’s future income from the overriding royalty interests and future distributions to 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, expectations regarding the repair or redrill of the well on the Highlander subject interest, the drilling of another well on the Highlander subject interest, and statements regarding the Royalty Trust’s future income from the overriding royalty interests and future distributions to Royalty Trust unitholders 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.

21 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