10-Q/A 1 h90387e10-qa.txt FREEPORT-MCMORAN OIL & GAS ROYALTY TRUST 1 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2001. OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from .............. to ............... Commission file number 1-8581 FREEPORT-MCMORAN OIL AND GAS ROYALTY TRUST (Exact name of registrant as specified in its charter) TEXAS 72-6108468 (State or other jurisdiction of incorporation (I.R.S. Employer or organization) Identification No.) THE CHASE MANHATTAN BANK, TRUSTEE 78701 700 LAVACA (Zip Code) AUSTIN, TEXAS (Address of principal executive offices)

Registrant's telephone number, including area code: (512) 479-2562 .................................... (Former name, former address and former fiscal year, if changed since last report) 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 ______ -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- 2 FREEPORT-MCMORAN OIL AND GAS ROYALTY TRUST TABLE OF CONTENTS

--2-- 3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. FREEPORT-MCMORAN OIL AND GAS ROYALTY TRUST STATEMENTS OF ROYALTY PROCEEDS AND DISTRIBUTABLE CASH (UNAUDITED)

STATEMENTS OF ASSETS, LIABILITIES AND TRUST CORPUS

--3-- 4 FREEPORT-MCMORAN OIL AND GAS ROYALTY TRUST NOTES TO FINANCIAL STATEMENTS (UNAUDITED) 1. BACKGROUND AND STATUS Freeport-McMoRan Oil and Gas Royalty Trust (the Trust) was created effective September 30, 1983. On that date, Freeport-McMoRan Inc. (FTX) transferred to a Partnership (the Partnership) a net overriding royalty interest in certain offshore oil and gas properties equal to 90 percent of the Net Proceeds (as defined in the Conveyance referred to below) from FTX's working interests in such properties and conveyed a 99.9 percent general partnership interest in the Partnership to the Trust. Such net overriding royalty interest is referred to herein as the "Royalty." The Overriding Royalty Conveyance which created the Royalty is referred to herein as the "Conveyance." IMC Global Inc. ("IMC") succeeded to FTX effective December 22, 1997, following the merger of FTX into IMC. Accordingly, IMC is now the Working Interest Owner and owns the oil and gas interests burdened by the Royalty. The Conveyance provides that the owner of the interests burdened by the Royalty will calculate and pay monthly to the Partnership an amount equal to 90 percent of the net proceeds for the preceding month. Net proceeds generally consist of the excess of gross revenues received from the Royalty Properties (Gross Proceeds), on a cash basis, over operating costs, capital expenditures and other charges, on an accrual basis (Net Proceeds). The Trust is passive, with Chase Manhattan Bank as Trustee. The Trustee has only such powers as are necessary for the collection and distribution of revenues attributable to the Royalty, the payment of Trust liabilities and the protection of Trust assets. The Trust Indenture provides generally that the Trust shall terminate upon the first to occur of: (i) the sale of all the Trust's interest in the Partnership, or the sale by the Partnership of all the assets of the Partnership including the Royalty, or (ii) a decision to terminate the Trust by the affirmative vote of Unitholders representing a majority of the Units. The Trust Indenture originally stated that the Trust must also terminate if the amount of cash per year received by the Trust for each of three successive years commencing after December 26, 1990 is less than $3 million. The Trust's cash receipts were less than $3 million in 1996, 1997 and 1998. However, at a special meeting of the Unitholders held on March 12, 1999, the Unitholders approved a shareholder proposal to amend the Trust Indenture to extend the life of the Trust for at least two years. This extension expired on December 31, 2000, as there were no payments in respect of the Royalty during 1999 and 2000. Therefore, the Trust Indenture provides the Trustee must sell the Trust's interest in the Partnership or cause the Partnership to sell the Royalty. Pursuant to a shareholder proposal, the trustee is working on proxy materials and anticipates filing definitive proxy materials with a plan for distribution of the Trust's assets. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The Trust's financial statements, which reflect the Trust's 99.9 percent interest in the Partnership are prepared on the cash basis of accounting for reporting revenues and expenses. Therefore, revenues and expenses are recognized only as cash is received or paid and the associated receivables, payables and accrued expenses are not reflected in the accompanying financial statements. Under accounting principles generally accepted in the United States, revenues and expenses would be recognized on an accrual basis. --4-- 5 NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) The initial carrying amount of the Royalty represented the Working Interest Owner's net book value applicable to the interest in the properties conveyed to the Trust on the date of creation of the Trust. Amortization of the Royalty has been charged directly against trust corpus using the future net revenue method. This method provides for calculating amortization by dividing the unamortized portion of the Royalty by estimated future net revenues from proved reserves and applying the resulting rate to the Trust's share of royalty proceeds. The Trust considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents. The Trust's expense reserve is invested in certificates of deposit which mature every thirty days. The carrying value of the Royalty is limited to the discounted present value (at 10 percent) of estimated future net cash flows. Any excess carrying value is reduced and the adjustment is charged directly against trust corpus. The carrying value of the Royalty is $0 at June 30, 2001 and 2000. The carrying value is not necessarily indicative of the fair market value of the Royalty held by the Trust. 3. COST CARRYFORWARD As a result of the capital costs incurred in recent years, a cumulative excess Class A cost carryforward of $15,094,877 existed as of June 30, 2001. The cost carryforward is subject to and includes an interest amount at the prime rate, which totaled $731,562 net to the Trust during the six month period ended June 30, 2001. This excess Class A cost carryforward, including the interest factor, must be recouped by the Working Interest Owner out of future Gross Proceeds before distributions to the Unitholders can be resumed. 4. GAS BALANCING ARRANGEMENTS As a result of past curtailments in gas takes by the principal purchaser of production from the Royalty Properties, certain quantities of gas have been sold by other parties with interests in the Royalty Properties pursuant to gas balancing arrangements. Proceeds from gas produced from the Royalty Properties but sold by other parties pursuant to such balancing arrangements (underproduction) are not included in Gross Proceeds for purposes of calculating the Royalty. In the future, the Working Interest Owner will be entitled to sell volumes equal to such underproduction or receive cash settlements. On certain of the Royalty Properties, a cash settlement may be required, depending on future results, due to the lack of sufficient remaining reserves from which to makeup any underproduction. As of June 30, 2001, the unrecovered quantity of gas sold by third parties pursuant to such gas balancing arrangements since inception of the Trust was approximately 0.2 billion cubic feet (bcf), net to the Trust. Gross Proceeds will be increased in future periods when the Working Interest Owner is compensated either through the sale of gas or through cash settlements, the amount and timing of which are uncertain. In addition, other factors including the creditworthiness of the counter parties should be considered in determining the probability and the amount of the future proceeds. --5-- 6 NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 5. GAS CONTRACT SETTLEMENT The Working Interest Owner has brought suit against a prior gas purchaser seeking reimbursement as excess royalty of a portion of amounts paid to the Minerals Management Service (MMS). This is a result of the Working Interest Owner's settlement of claims made by the MMS for additional royalty arising from the Working Interest Owner's compromise of claims against the gas purchaser. The Trust's interest in the proceeds of the gas contract settlement were included in the Trust's Gross Proceeds and the funds paid to the MMS reduced the Trust's Gross Proceeds. Discovery in this suit is proceeding and a trial date has been set for August 28, 2001. The amount of any recovery with respect to this claim is presently indeterminable. However, if the Working Interest Owner receives any amount pursuant to this litigation, a portion of it will be treated as Gross Proceeds. 6. ESTABLISHMENT OF AN EXPENSE RESERVE Because of the decline in royalty income, at certain times since late 1993 the Trust was unable to pay its ongoing administrative expenses. To permit the Trust to pay its routine administrative expenses, the Trustee, in accordance with the Trust Indenture, established an expense reserve of $2.4 million of which approximately $.4 million remained as of June 30, 2001. During the first six months of 2001, $.2 million was withdrawn from the expense reserve to pay Trust administrative expenses. The funding for this reserve is deposited with Chase Manhattan Bank and invested in Chase Manhattan Bank collateralized certificates of deposit. The average interest rate earned on these funds for the second quarter of 2001 and 2000 was 3.72 percent and 5.5 percent, respectively. The expense reserve is established at the Trust level and is unrelated to the items, including the cost carryforward, that are taken into account by the Working Interest Owner in determining whether amounts are payable pursuant to the Royalty. 7. FEDERAL INCOME TAX MATTERS The Trustee reports on the basis that the Trust is a grantor trust. As a grantor trust, the Trust will incur no federal income tax liability. In addition, it will incur little or no federal income tax liability if it is held to be a non-grantor trust. If the Trust was held to be taxable as a corporation, it would have to pay tax on its net taxable income at the corporate rate. 8. RESERVE FOR FUTURE ESTIMATED ABANDONMENT COSTS Estimated future abandonment costs are accrued over the life of the Trust's properties based on current laws and regulations. Such costs are by their nature imprecise and can be expected to be revised over time because of changes in general and specific cost levels, government regulations, operation or technology. As of June 30, 2001, the estimated remaining aggregate abandonment costs to be incurred for all of the Trust's properties totaled $4.2 million net to the Trust, all of which has been taken into account in computing the cost carryforward. --6-- 7 NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 9. TRANSPORTATION AGREEMENT In December 1997, the Working Interest Owner entered into a crude oil agreement with an oil pipeline company to deliver on a daily basis specified quantities of crude oil from West Cameron 498. Under the terms of the agreement, the Working Interest Owner agreed to pay a transportation fee calculated at a sliding monthly rate based upon the total average daily volumes delivered from West Cameron 498 during the month. Should the annual minimum delivery volume not be met, a deficiency payment is assessed by the pipeline. During 2000 the Working Interest Owner did not deliver the minimum volume under the agreement. Therefore, in 2001 the pipeline company billed the Working Interest Owner approximately $0.5 million for the 2000 deficiency. This amount was taken into account in computing the Class A cost carryforward of $15.0 million at June 30, 2001. Based on 2001 projected production the minimum delivery volumes will not be met in 2001 and the Working Interest Owner expects a deficiency assessment of approximately $.2 million in 2001. However should production exceed the 2001 minimum, the Working Interest Owner is entitled to receive transportation without pay up to the cumulative prior undelivered volumes of 1.1 million barrels. THE INFORMATION HEREIN SHOULD BE READ IN CONJUNCTION WITH THE FREEPORT-MCMORAN OIL AND GAS ROYALTY TRUST FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2000, WHICH ARE CONTAINED IN ITS ANNUAL REPORT ON FORM 10-K FOR 2000. --7-- 8 FREEPORT-MCMORAN OIL AND GAS ROYALTY TRUST REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Chase Manhattan Bank (Trustee) and the Unit Holders of Freeport-McMoRan Oil and Gas Royalty Trust: We have reviewed the accompanying statement of assets, liabilities and trust corpus of Freeport-McMoRan Oil and Gas Royalty Trust as of June 30, 2001, and the related statements of royalty proceeds and distributable cash for the three-month and six-month periods ended June 30, 2001 and 2000. These financial statements are the responsibility of the Trustee. We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical review procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit in accordance with auditing standards generally accepted in the United States, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. As discussed in Note 2, these financial statements were prepared on the cash basis of accounting, which is a comprehensive basis of accounting other than accounting principles generally accepted in the United States. Based on our reviews, we are not aware of any material modifications that should be made to the financial statements referred to above for them to be in conformity with the cash basis of accounting. ARTHUR ANDERSEN LLP Houston, Texas August 6, 2001 --8-- 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION The information contained herein regarding operations and exploration and development activities on the properties burdened by the Royalty has been furnished by the Working Interest Owner who obtained this information from the relevant operators. For convenience, references are made to the Notes to Financial Statements. The following discussion includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Although it is believed that these forward-looking statements are based on reasonable assumptions, important factors could cause actual results to differ materially from those in the forward-looking statements herein, including the timing and extent of changes in commodity prices for oil and gas, environmental risks, drilling and operating risks, risks related to exploration and development, uncertainties about oil and gas reserves, governmental regulations and other matters beyond the control of the Trustee and the Working Interest Owner. Early in December 2000, the Trustee was approached by representatives of Roberson Oil Company and IMC Global, Inc. (IMC), the Working Interest Owner, proposing a transaction whereby a to-be-formed corporation (NewCo) would purchase the Trust assets and the working interest from IMC. Thereafter, NewCo would conduct an exchange offer whereby Unitholders would be offered the opportunity to exchange, based on terms and conditions established by NewCo, their Units in the Trust for shares in NewCo. The Trustee has received a Unitholder proposal that would amend the Trust Indenture to allow the transaction to proceed if the proposal receives the requisite vote of the Unitholders. The Trustee prepared proxy materials for a special meeting of the Unitholders at which time the Unitholders will vote on a proposal to authorize the Trustee to conduct a sale of the Trust's Royalty for nominal consideration in accordance with the plan described above. The preliminary proxy materials were filed with the Securities and Exchange Commission (SEC) on April 4, 2001. The Trustee is currently waiting on comments from the SEC staff. Once the definitive proxy materials are filed and a Unitholders meeting is set, if a majority of the Unitholders entitled to vote at the meeting, in which a quorum is present, vote to authorize the Trustee to sell the Trust's assets to NewCo, the Trustee will do so. If the sale to NewCo is not approved, the Trustee will proceed to conduct an auction of the Trust properties in accordance with the existing terms of the Trust Indenture. Complete information concerning the vote will be provided to the Unitholders in the forthcoming proxy materials. During the second quarter of 2001, the Class A cost carryforward decreased by $2.3 million, from $17.3 million at March 31, 2001, to $15.0 million at June 30, 2001. There were no proved reserve quantities and related discounted cash flows attributable to the Trust as of December 31, 2000. Such proved reserve estimates are based on various assumptions, many of which are subject to uncertainties, as more fully discussed in the Trust's Annual Report on Form 10-K. These estimates do not consider changes in prices and costs subsequent to December 31, 2000, or the possibility of additional potentially recoverable reserves not currently classified as proved, and therefore should not be considered to be a prediction of actual amounts to be paid to the Trustee or an estimate of fair market value. The Working Interest Owner has advised the --9-- 10 Trustee that, based on an independent review of the oil and gas interests burdened by the Royalty, the net present value of the reserves contained therein is less than the cumulative excess Class A cost carryforward. The information from the Working Interest Owner indicates that the Royalty may have little or no value, based on the net present value of reserves determined as a result of the independent review. As noted, there has been a reduction in the cost carryforward during 2001. The Trustee cannot predict whether the oil and gas properties will produce sufficient quantities of oil and gas in the future to eliminate the cost carryforward altogether (in which case Royalties would again be payable). The Ryder Scott report prepared at year-end 2000 indicated that the production from proved reserves would decline over time and that a substantial percentage of the remaining production from proved reserves on the oil and gas properties burdened by the Royalty would be attributable to production during 2001. Changes in hydrocarbon prices subsequent to December 31, 2000 were not taken into account in the Ryder Scott report. It is possible (if not likely) that, as production from the Working Interests declines, the rate at which the cost carryforward is reduced will decline, and it is possible (if not likely) that the cost carryforward will never be eliminated, in which case there would never be payments in respect of the Royalty. Although no interim report has been prepared, the proved reserves have been depleted by production from the Working Interests that has generated $8.57 million in total revenue to the Royalty in 2001 through June. Therefore, although the Trustee cannot quantify any reduction in the revenues at this time, it is very likely that the amount of future net revenue of the Royalty has declined since the time of the Ryder Scott report on December 31, 2000. In any event, the Trustee believes that, based on the information in the Ryder Scott report, the appraisal prepared early last year by Albrecht & Associates and the terms of the proposed transaction between the Working Interest Owner and TXS, it is not unreasonable to conclude that there is little or no chance that additional payments will ever be made with respect to the Royalty. Nevertheless, an auction of the Royalty would likely produce the best evidence of the Royalty's value or lack thereof, and if the Shareholder Proposal is approved, no such auction will take place. RESULTS OF OPERATIONS There were no cash distributions to Unitholders during the first six months of 2001 or 2000. No cash distributions have been made since 1995. During the second quarter of 2001, Gross Proceeds exceeded total costs by approximately $2.5 million, primarily because of higher oil and gas prices received. As a result, the Class A cost carryforward decreased to $15.0 million net to the Trust as of June 30, 2001. Since mid-1995, the --10-- 11 trust administrative expenses have been paid from the expense reserve. The calculation of distributable cash for each year follows:

--------------- (1) Represents amounts received by the Working Interest Owner during the three and six month periods ended in May of such year. (2) Represents amounts accrued by the Working Interest Owner during the three and six month periods ended in May of such year. Includes accrued interest of $340,108 and $813,661 for the three and six months during 2001 and $512,449 and $1,031,370 for the three and six months during 2000. (3) Represents Class A costs in excess of Gross Proceeds (Gross Proceeds in excess of Class A costs) in the applicable periods. (4) Represents withdrawals from the Trust administrative expense reserve during the respective periods. --11-- 12 Gross Proceeds, which include gas and oil revenues, are calculated based on amounts received by the Working Interest Owner. Operating information follows:

Gas revenue increased significantly for the second quarter and first half of 2001 due to a sharp increase in gas prices. Volume increases achieved in the first quarter of 2001 due to previous well workovers have leveled out and are falling due to normal reserve decline. Oil revenues held fairly constant both in price and volume. Costs consist of the following (in millions):

Costs for the second quarter were down for 2001. Total costs for the first six months were constant compared to the same time last year. Capital expenditures fell due to fewer workover operations while lease operating expenses for the first half 2001 increased due to maintenance needs. In December 1997, the Working Interest Owner entered into a crude oil agreement with an oil pipeline company to deliver on a daily basis specified quantities of crude oil from West Cameron 498. Under the terms of the agreement, the Working Interest Owner agreed to pay a transportation fee calculated at a sliding monthly rate based upon the total average daily volumes delivered from West Cameron 498 during the month. Should the annual minimum delivery volume not be met a deficiency payment is assessed by the pipeline. During 2000 the Working Interest Owner did not deliver the minimum volume under the agreement. Therefore, in February 2001, the pipeline company billed the Working Interest Owner approximately $0.5 million for the 2000 deficiency. This amount was paid and taken into account in computing the Class A cost carryforward in the second quarter of 2001. Based on current production projected the minimum delivery --12-- 13 volumes will not be met in 2001. However, should production exceed the 2001 minimum the Working Interest Owner is entitled to receive transportation without pay up to the cumulative prior undelivered volumes. CAPITAL RESOURCES AND LIQUIDITY All revenues received by the Trust, net of Trust administrative expenses and liabilities, are distributed to the Unitholders in accordance with provisions of the Trust Indenture. The Class A cost carryforward, with interest at the prime rate, must be recouped from future Gross Proceeds before any distribution may be made to Unitholders. Additional exploration may be proposed by the operators of certain other Royalty Properties. After analyzing each proposal, the Working Interest Owner will determine whether or not to participate in additional exploratory operations. There are no exploration and development costs formally budgeted for 2001. However, in the first quarter of 2001 the Operator of the West Cameron Block 498 installed additional water handling and compression equipment resulting in the working interest owner incurring $0.9 million in development cost for the year. The Working Interest Owner is reviewing all options relating to its ownership interest in the remaining properties, including discussions with several unitholders. As of June 30, the estimated remaining aggregate abandonment costs to be incurred for all of the Trust's properties totaled $4.2 million net to the Trust, all of which has been taken into account in computing the cost carryforward. Such costs are by their nature imprecise and can be expected to be revised over time because of changes in general and specific cost levels, governmental regulations, operations or technology. Any further adjustments to estimated abandonment costs or variances to actual cost will reduce or increase future distributable cash accordingly. At certain times since late 1993, the Trust has been unable to pay its ongoing administrative expenses. To permit the Trust to pay its administrative expenses during the time the Trust incurs a Class A cost deficit, the Trustee, in accordance with the Trust Indenture, established a $2.4 million Trust administrative expense reserve to pay such expenses (see Note 6 -- Establishment of an Expense Reserve), of which $0.4 million remained at June 30, 2001. The Trustee may sell or dispose of its interest in the Partnership, or permit the Partnership to sell or dispose of all or any part of the Royalty, only as authorized by a vote of Unitholders, upon termination of the Trust and in certain other limited circumstances. However, the Trust Indenture also stated that if the amount of cash per year received by the Trust for each of three successive years, commencing after December 31, 1990, is less than $3 million, the Trustee will sell (without any such vote) the Trust's interest in the Partnership or cause the Partnership to sell the Royalty. The Trust's cash receipts were less than $3 million in 1996, 1997 and 1998. However, at a special meeting of the Unitholders held on March 12, 1999, the Unitholders approved a shareholder proposal to amend the Trust Indenture to extend the life of the Trust for at least two years. This extension expired on December 31, 2000. Therefore, the Trust Indenture provides the Trustee must sell the Trust's interest in the Partnership or --13-- 14 cause the Partnership to sell the Royalty. The Trustee is currently investigating alternatives to fulfill its responsibilities in that regard. --14-- 15 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 of the undersigned, thereunto duly authorized. FREEPORT-McMoRan OIL AND GAS ROYALTY TRUST By: The Chase Manhattan Bank, Trustee By: /s/ MIKE ULRICH ------------------------------ --15--

FREEPORT MCMORAN OIL & GAS ROYALTY TRUST 10-Q/A