| LL&E ROYALTY TRUST ITEM 1A RISK FACTORS Although risk factors are described elsewhere in this Form 10-K together with specific Cautionary Statements, the following is a summary of the principal risks associated with an investment in units in the Trust |
| NATURAL GAS AND OIL PRICES FLUCTUATE DUE TO A NUMBER OF FACTORS, AND LOWER PRICES WILL REDUCE NET PROCEEDS AVAILABLE TO THE TRUST AND DISTRIBUTIONS TO TRUST UNIT HOLDERS The Trustapstas distributions are highly dependent upon the prices realized from the sale of natural gas and oil |
| Natural gas and oil 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 conflicts in oil producing regions; - worldwide economic conditions; - weather conditions; - the supply and price of foreign natural gas and oil; - 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 |
| Lower natural gas and oil prices may reduce the amount of natural gas and oil that is economic to produce and reduce net profits available to the Trust |
| The volatility of energy prices reduces the predictability of future cash distributions to unitholders |
| Substantially all of the natural gas, oil and natural gas liquids produced from the properties are being sold under short-term or multi-month contracts at market clearing prices or on the spot market |
| DAMAGE FROM HURRICANES KATRINA, RITA AND DENNIS AND TROPICAL STORM CINDY WILL HAVE A MATERIAL ADVERSE EFFECT ON DISTRIBUTIONS FROM THE TRUST FOR THE FORSEEABLE FUTURE 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, is expected to have a material adverse effect on distributions from the Trust for the forseeable future |
| While the information available remains preliminary and subject to change, the damage has interrupted production, damaged production facilities, increased expenses, increased abandonment costs, and resulted in the decision by the Working Interest Owner to begin escrowing all funds otherwise distributable to the Trust from the Offshore Louisiana and South Pass 89 properties, as well as the decision by the Trustee to escrow all of the amounts otherwise distributable to Unitholders in November 2005 and January -- March 2006 |
| Additional information regarding the damage to these properties are included under Managementapstas Discussion and Analysis |
| PENDING LITIGATION AGAINST THE WORKING INTEREST OWNER COULD ADVERSELY IMPACT CASH DISTRIBUTIONS 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 40 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 Trustapstas 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 Trustapstas interest |
| INCREASED PRODUCTION AND DEVELOPMENT COSTS FOR THE OVERRIDING ROYALTIES WILL RESULT IN DECREASED TRUST DISTRIBUTIONS Production and development costs attributable to the Overriding Royalties are deducted in the calculation of the Trustapstas share of net proceeds |
| Accordingly, higher or lower production and development costs, without concurrent increases in revenues, directly decrease or increase the amount received by the Trust for the Overriding Royalties |
| If development and production costs of the Overriding Royalties exceed the proceeds of production from the properties, the Trust will not receive net proceeds for those properties until future proceeds from production exceed the total of the excess costs plus accrued interest during the deficit period |
| Development activities may not generate sufficient additional revenue to repay the costs |
| TRUST RESERVE ESTIMATES DEPEND ON MANY ASSUMPTIONS THAT MAY PROVE TO BE INACCURATE, WHICH COULD CAUSE BOTH ESTIMATED RESERVES AND ESTIMATED FUTURE REVENUES TO BE TOO HIGH The value of the units of beneficial interest of the Trust depends upon, among other things, the amount of reserves attributable to the Overriding Royalties and the estimated future value of the reserves |
| Estimating reserves is inherently uncertain |
| Ultimately, actual production, revenues and expenditures for the underlying properties will vary from estimates and those variations could be material |
| Petroleum engineers consider many factors and make assumptions in estimating reserves |
| Those factors and assumptions include: - historical production from the area compared with production rates from similar producing areas; - the assumed effect of governmental regulation; and - assumptions about future commodity prices, production and development costs, severance and excise taxes, and capital expenditures |
| Changes in these assumptions can materially change reserve estimates |
| The reserve quantities attributable to the Overriding Royalties and revenues are based on estimates of reserves and revenues for the underlying properties |
| The method of allocating a portion of those reserves to the Trust is complicated because the Trust holds an interest in the Overriding Royalties and does not own a specific percentage of the natural gas reserves |
| OPERATING RISKS FOR THE WORKING INTEREST OWNER &apos S INTERESTS IN THE PROPERTIES CAN ADVERSELY AFFECT TRUST DISTRIBUTIONS The occurrence of drilling, production or transportation accidents and other natural disasters at any of the properties will reduce Trust distributions by the amount of uninsured costs |
| These occurrences include blowouts, cratering, explosives and other environmental damage that may result in personal injuries, property damage, damage to productive formations or equipment and environmental damages |
| Any uninsured costs would be deducted as a production cost in calculating net proceeds payable to the Trust |
| 41 THE OPERATORS OF THE PROPERTIES ARE SUBJECT TO EXTENSIVE GOVERNMENTAL REGULATION Oil and gas operations have been, and in the future will be, affected by federal, state and local laws and regulations and other political developments, such as price or gathering rate controls and environmental protection regulations |
| NONE OF THE TRUSTEE, THE TRUST NOR THE UNIT HOLDERS CONTROL THE OPERATION OR DEVELOPMENT OF THE PROPERTIES OR HAVE ANY INFLUENCE OVER OPERATION OR DEVELOPMENT Neither the Trustee nor the Unit holders can influence or control the operation or future development of the underlying properties |
| The properties are operated by independent third parties |
| The Working Interest Owner does not operate any of the properties |
| Neither the Trustee nor the Unit holders have any right to replace an operator |
| The Working Interest Owner handles receipt and payment of funds relating to the Properties and payments to the Trust for the Overriding Royalties |
| THE OWNER OF ANY PROPERTIES MAY ABANDON ANY PROPERTY, TERMINATING THE RELATED OVERRIDING ROYALTIES The operators of the properties may abandon any well or property if they reasonably believes that the well or property can no longer produce in commercially economic quantities |
| This could result in termination of the Overriding Royalties relating to the abandoned well or property |
| THE OVERRIDING ROYALTIES CAN BE SOLD AND THE TRUST CAN BE TERMINATED The Trust Agreement provides that the Trust will terminate in the event that the net revenues fall below dlra5 million for two successive years |
| Unless sooner terminated, the Trust will continue until such time as its net revenues (cash earnings) for each of two successive years are less than dlra5 million per year |
| Net revenues are calculated as royalty revenues after administrative expenses of the Trust and as if the Trust had received its pro rata portion of any amounts being withheld by the Working Interest Owners or the Partnership under escrow arrangements or to make refund payments pursuant to the Conveyance (the Trustapstas pro rata portion of escrowed amounts relating to the future dismantlement of platforms are included in the net revenue calculation for this purpose) |
| The Trust may be terminated at any time by a vote of Unit holders owning a majority of the Units |
| The Trust may also be terminated at the expiration of twenty-one (21) years after the death of the last to die of all of the issue 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 Trustapstas assets after termination of the Trust |
| TRUST ASSETS ARE DEPLETING ASSETS AND, IF THE OPERATORS OF THE PROPERTIES DO NOT PERFORM ADDITIONAL DEVELOPMENT PROJECTS, THE ASSETS MAY DEPLETE FASTER THAN EXPECTED The net proceeds payable to the Trust are derived from the sale of depleting assets |
| Accordingly, the portion of the distributions to Unit holders attributable to depletion may be considered a return of capital |
| The reduction in proved reserve quantities is a common measure of depletion |
| Future maintenance and 42 development projects on the properties will affect the quantity of proved reserves |
| The timing and size of these projects will depend on the market prices of natural gas |
| If operators of the Properties do not implement additional maintenance and development projects, the future rate of production decline of proved reserves may be higher than the rate currently expected by the Trust |
| For federal income tax purposes, depletion is reflected as a deduction, which is dependent upon the purchase price of a unit |
| Please see the section entitled "e -- Tax Considerations to Owners of Units -- Federal Income Tax Considerations "e under Item 1 of this Form 10-K UNIT HOLDERS HAVE LIMITED VOTING RIGHTS Voting rights as a Unit holder are more limited than those of stockholders of most public corporations |
| For example, there is no requirement for annual meetings of Unit holders or for an annual or other periodic re-election of the Trustee |
| Unlike corporations which are generally governed by boards of directors elected by their equity holders, the Trust is administered by a corporate Trustee in accordance with the Trust Agreement and other organizational documents |
| The Trustee has extremely limited discretion in its administration of the Trust |
| UNIT HOLDERS HAVE LIMITED ABILITY TO ENFORCE THE TRUST &apos S RIGHTS AGAINST THE CURRENT OR FUTURE OWNERS OF THE PROPERTIES The Trust Agreement and related trust law permit the Trustee and the Trust to sue the Working Interest Owner to compel it to fulfill the terms of the Conveyances of the Overriding Royalties |
| If the Trustee does not take appropriate action to enforce provisions of the Conveyances, the recourse of a Unit holder would likely be limited to bringing a lawsuit against the Trustee to compel the Trustee to take specified actions |
| Unit holders probably would not be able to sue the Working Interest Owner directly |