NOTES TO FINANCIAL STATEMENTS
(unaudited)
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1.
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TRUST ORGANIZATION AND PROVISIONS
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Permianville Royalty Trust
(the “Trust”), previously known as Enduro Royalty Trust, is a Delaware statutory trust formed in May 2011 pursuant to
a trust agreement (the “Trust Agreement”) among Enduro Resource Partners LLC (“Enduro”), as trustor, The Bank
of New York Mellon Trust Company, N.A. (the “Trustee”), as trustee, and Wilmington Trust Company (the “Delaware Trustee”),
as Delaware Trustee.
The Trust was created to
acquire and hold for the benefit of the Trust unitholders a net profits interest representing the right to receive 80% of the net profits
from the sale of oil and natural gas production from certain properties in the states of Texas, Louisiana and New Mexico held by Enduro
as of the date of the conveyance of the net profits interest to the Trust (the “Net Profits Interest”). The properties in
which the Trust holds the Net Profits Interest are referred to as the “Underlying Properties.”
In connection with the closing
of the initial public offering in November 2011, Enduro contributed the Net Profits Interest to the Trust in exchange for 33,000,000
units of beneficial interest in the Trust (the “Trust Units”). On August 31, 2018, COERT Holdings 1 LLC (“COERT”
or the “Sponsor”) acquired from Enduro the Underlying Properties and all of the outstanding Trust Units owned by Enduro (the
“Sale Transaction”). In connection with the Sale Transaction, COERT assumed all of Enduro’s obligations under the Trust
Agreement and other instruments to which Enduro and the Trustee were parties. As of March 31, 2021, the Sponsor owned 8,600,000 Trust
Units, or 26% of the issued and outstanding Trust Units.
The Net Profits Interest
is passive in nature and neither the Trust nor the Trustee has any management control over or responsibility for costs relating to the
operation of the Underlying Properties. The Amended and Restated Trust Agreement provides, among other provisions, that:
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the Trust’s business activities are limited to owning the Net Profits Interest and any activity reasonably related to such ownership, including activities required or permitted by the terms of the Conveyance of Net Profits Interest, dated effective as of July 1, 2011 (as supplemented and amended to date, the “Conveyance”). As a result, the Trust is not permitted to acquire other oil and natural gas properties or net profits interests or otherwise to engage in activities beyond those necessary for the conservation and protection of the Net Profits Interest;
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the Trust may dispose of all or any material part of the assets of the Trust (including the sale of the Net Profits Interest) if approved by at least 75% of the outstanding Trust Units;
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the Sponsor may sell a divided or undivided portion of its interests in the Underlying Properties, free from and unburdened by the Net Profits Interest, if approved by at least 50% of the outstanding Trust Units at a meeting of Trust unitholders;
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the Trustee will make monthly cash distributions to unitholders (Note 5);
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the Trustee may create a cash reserve to pay for future liabilities of the Trust;
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the Trustee may authorize the Trust to borrow money to pay administrative or incidental expenses of the Trust that exceed its cash on hand and available reserves. No further distributions will be made to Trust unitholders until such amounts borrowed are repaid; and
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the Trust is not subject to any pre-set termination provisions based on a maximum volume of oil or natural gas to be produced or the passage of time. The Trust will dissolve upon the earliest to occur of the following:
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the Trust, upon approval of the holders of at least 75% of the outstanding Trust Units, sells the Net Profits Interest;
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the annual cash proceeds received by the Trust attributable to the Net Profits Interest are less than $2 million for each of any two consecutive years;
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the holders of at least 75% of the outstanding Trust Units vote in favor of dissolution; or
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the Trust is judicially dissolved.
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PERMIANVILLE ROYALTY TRUST
NOTES TO FINANCIAL STATEMENTS - Continued
(unaudited)
The Statement of Assets,
Liabilities and Trust Corpus as of December 31, 2020, which has been derived from audited financial statements, and the unaudited
interim financial statements as of March 31, 2021 and for the three months ended March 31, 2021 and 2020 have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, certain information
and disclosures normally included in annual financial statements have been condensed or omitted pursuant to those rules and regulations.
Therefore, these financial statements should be read in conjunction with the financial statements and notes thereto included in the Trust’s
Annual Report on Form 10-K for the fiscal year ended December 31, 2020 (the “2020 Annual Report on Form 10-K”).
In the opinion of the Trustee,
the accompanying unaudited financial statements reflect all adjustments, consisting only of normal, recurring accrual adjustments, that
are necessary for a fair presentation of the interim periods presented and include all the disclosures necessary to make the information
presented not misleading. These interim results are not necessarily indicative of results for a full year.
The preparation of financial
statements requires the Trustee to make estimates and assumptions that affect reported amounts of assets and liabilities and the reported
amounts of revenues and expenses during the reporting period. Although the Trustee believes that these estimates are reasonable, actual
results could differ from those estimates.
The Trust uses the modified
cash basis of accounting to report Trust receipts of income from the Net Profits Interest and payments of expenses incurred. The Net Profits
Interest represents the right to receive revenues (oil and natural gas sales), less direct operating expenses (lease operating expenses
and production and property taxes) and development expenses of the Underlying Properties, multiplied by 80%. Cash distributions of the
Trust are made based on the amount of cash received by the Trust pursuant to terms of the Conveyance creating the Net Profits Interest.
Under the terms of the Conveyance,
the monthly Net Profits Interest calculation includes oil and natural gas revenues received during the relevant month. Monthly operating
expenses and capital expenditures represent estimated incurred expenses and, as a result, represent accrued expenses as well as expenses
paid during the period.
The financial statements
of the Trust are prepared on the following basis:
(a) Income from Net
Profits Interest is recorded when distributions are received by the Trust;
(b) Distributions to
Trust unitholders are recorded when paid by the Trust;
(c) Trust general and
administrative expenses (which includes the Trustee’s fees as well as accounting, engineering, legal, and other professional fees)
are recorded when paid;
(d) Cash reserves for
Trust expenses may be established by the Trustee for certain future expenditures that would not be recorded as contingent liabilities
under accounting principles generally accepted in the United States of America (“GAAP”);
(e) Amortization
of the Net Profits Interest in oil and natural gas properties is calculated on a unit-of-production basis based on the Underlying
Properties' production and reserves and is charged directly to the Trust corpus; and
(f) The Net Profits
Interest in oil and natural gas properties is periodically assessed whenever events or circumstances indicate that the aggregate value
may have been impaired below its total capitalized cost based on the Underlying Properties. If an impairment loss is indicated by the
carrying amount of the assets exceeding the sum of the undiscounted expected future net cash flows of the Net Profits Interest, then an
impairment loss is recognized for the amount by which the carrying amount of the asset exceeds its estimated fair value determined using
discounted cash flows.
The
financial statements of the Trust differ from financial statements prepared in accordance with GAAP because revenues are not accrued;
certain cash reserves may be established for contingencies which would not be accrued in financial statements prepared in accordance with
GAAP; general and administrative expenses are recorded when paid instead of when incurred; and amortization of the net profits interest
calculated on a unit-of-production basis is charged directly to trust corpus instead of as an expense. While these statements differ from
financial statements prepared in accordance with GAAP, the modified cash basis of reporting is considered to be the most meaningful because
monthly distributions to the Trust unitholders are based on net cash receipts.
This comprehensive basis
of accounting other than GAAP corresponds to the accounting permitted for royalty trusts by the SEC as specified by Staff Accounting Bulletin
Topic 12:E, Financial Statements of Royalty Trusts.
PERMIANVILLE ROYALTY TRUST
NOTES TO FINANCIAL STATEMENTS - Continued
(unaudited)
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3.
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NET PROFITS INTEREST IN OIL AND NATURAL GAS PROPERTIES
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The Net Profits Interest in
oil and natural gas properties was recorded at its fair value on the date of conveyance. Amortization of the Net Profits Interest in oil
and natural gas properties is calculated on a unit-of-production basis based on the Underlying Properties’ production and reserves.
The reserves upon which the amortization rate is based are quantity estimates that are subject to numerous uncertainties inherent in the
estimation of proved reserves. The volumes considered to be commercially recoverable fluctuate with changes in commodity prices and operating
costs. These estimates are expected to change as additional information becomes available in the future. Downward revisions in proved
reserves may result in an increased rate of amortization. Amortization is charged directly to the Trust corpus balance and does not affect
the distributable income of the Trust. Accumulated amortization as of March 31, 2021 and December 31, 2020 was $287,384,924
and $285,826,125, respectively.
The Net Profits Interest is
periodically assessed for impairment whenever events or circumstances indicate that the current fair value based on expected future cash
flows of the Underlying Properties may be less than the carrying value of the Net Profits Interest. While the Trust did not record an
impairment during the three months ended March 31, 2021 or 2020, future downward revisions in actual production volumes relative
to current forecasts, higher than expected operating costs, or lower than anticipated commodity prices could result in recognition of
impairment in future periods.
Federal Income Taxes
For federal income tax purposes,
the Trust is a grantor trust and therefore is not subject to tax at the trust level. Trust unitholders are treated as owning a direct
interest in the assets of the Trust, and each Trust unitholder is taxed directly on his or her pro rata share of the income and gain attributable
to the assets of the Trust and entitled to claim his or her pro rata share of the deductions and expenses attributable to the assets of
the Trust. The income of the Trust is deemed to have been received or accrued by each unitholder at the time such income is received or
accrued by the Trust rather than when distributed by the Trust.
The deductions of the Trust
consist of severance taxes and administrative expenses. In addition, each unitholder is entitled to depletion deductions because the Net
Profits Interest constitutes “economic interests” in oil and natural gas properties for federal income tax purposes. Each
unitholder is entitled to amortize the cost of the Trust Units through cost depletion over the life of the Net Profits Interest or, if
greater, through percentage depletion. Unlike cost depletion, percentage depletion is not limited to a unitholder’s depletable tax
basis in the Trust Units. Rather, a unitholder could be entitled to percentage depletion as long as the applicable Underlying Properties
generate gross income.
Some Trust Units are held
by a middleman, as such term is broadly defined in U.S. Treasury Regulations (and includes custodians, nominees, certain joint owners,
and brokers holding an interest for a custodian in street name). Therefore, the Trustee considers the Trust to be a non-mortgage widely
held fixed investment trust (“WHFIT”) for U.S. federal income tax purposes. The Bank of New York Mellon Trust Company, N.A.,
601 Travis, 16th Floor, Houston, Texas 77002, telephone number (512) 236-6545, is the representative of the Trust that will
provide tax information in accordance with applicable U.S. Treasury Regulations governing the information reporting requirements of the
Trust as a WHFIT. Tax information is also posted by the Trustee at www.permianvilleroyaltytrust.com. Notwithstanding the foregoing,
the middlemen holding units on behalf of unitholders, and not the Trustee of the Trust, are solely responsible for complying with the
information reporting requirements under the U.S. Treasury Regulations with respect to such units, including the issuance of IRS Forms
1099 and certain written tax statements. Unitholders whose units are held by middlemen should consult with such middlemen regarding the
information that will be reported to them by the middlemen with respect to the Trust Units.
The tax consequences to a
unitholder of ownership of Trust Units will depend in part on the unitholder’s tax circumstances. Unitholders should consult their
tax advisors about the federal tax consequences relating to owning the Trust Units.
State Taxes
The Trust’s revenues
are from sources in the states of Louisiana, New Mexico and Texas. Because it distributes all of its net income to unitholders, the Trust
is not taxed at the trust level in Louisiana or New Mexico. Although the Trust does not owe tax, the Trustee is required to file
a return with Louisiana reflecting the income and deductions of the Trust attributable to properties located in that state. Presently,
Louisiana and New Mexico tax nonresident income from real property located within that state. Louisiana and New Mexico impose a corporate
income tax which may apply to unitholders organized as corporations.
Texas does not impose a state
income tax, so the Trust’s income is not subject to income tax at the trust level in Texas. Texas imposes a franchise tax at a rate
of 0.75% on gross revenues less certain deductions for returns originally due on or after January 1, 2016, as specifically set forth
in the Texas franchise tax statutes. Entities subject to tax generally include trusts unless otherwise exempt. Trusts that receive at
least 90% of their federal gross income from designated passive sources, including royalties from mineral properties and other income
from other non-operating mineral interests, and do not receive more than 10% of their income from operating an active trade or business,
generally are exempt from the Texas franchise tax as “passive entities.” Although the Trust is intended to be exempt from
Texas franchise tax at the trust level as a passive entity, each unitholder that is considered a taxable entity under the Texas franchise
tax would generally be required to include its portion of Trust net income in its own Texas franchise tax computation.
Each unitholder should consult
his or her own tax advisor regarding state tax requirements, if any, applicable to such person’s ownership of Trust Units.
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5.
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DISTRIBUTIONS TO UNITHOLDERS
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Each
month, the Trustee determines the amount of funds available for distribution to the Trust unitholders. Available funds are the excess
cash, if any, received by the Trust from the Net Profits Interest and other sources (such as interest earned on any amounts reserved by
the Trustee) that month, over the Trust’s liabilities for that month, subject to adjustments for changes made by the Trustee during
the month in any cash reserves established for future liabilities of the Trust. No distributions will be made to Trust unitholders
until the indebtedness created by such amounts drawn or borrowed as advances to the Trust have been repaid in full. Distributions are
made to the holders of Trust Units as of the applicable record date (generally the last business day of each calendar month) and are payable
on or before the 10th business day after the record date.
The following table provides
information regarding the Trust’s distributions per unit paid during the periods indicated:
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Distribution
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Declaration Date
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Record Date
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Payment Date
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per Unit
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Three Months Ended March 31, 2021:
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Year to Date – 2021
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$
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0.000000
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Three Months Ended March 31, 2020:
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December 16, 2019
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December 31, 2019
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January 15, 2020
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$
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0.018000
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January 17, 2020
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January 31, 2020
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February 14, 2020
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$
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0.020630
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February 18, 2020
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February 28, 2020
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March 13, 2020
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$
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0.024500
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Year to Date - 2020
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$
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0.063130
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For
the three months ended March 31, 2021, the Net Profits Interest generated positive income for each month in the period, and
reduced the cumulative shortfall of $1.7 million as of December 31, 2020. As a result, there were no net profits reported or distributed
in the first three months of 2021. The aggregate Net Profits Interest shortfall, which was approximately $1.3 million as of March 31,
2021, will be carried forward to be deducted from future net profits generated by the Underlying Properties.
From time to time, if the
Trust’s cash on hand (including available cash reserves, if any) is not sufficient to pay the Trust’s ordinary course administrative
expenses that are due prior to the monthly payment to the Trust of proceeds from the Net Profits Interest, COERT may advance funds to
the Trust to pay such expenses. Such advances are recorded as a liability on the Statements of Assets, Liabilities and Trust Corpus until
repaid. As of March 31, 2021 and December 31, 2020, advances to the Trust were $612,744 and $348,821, respectively.
Under the terms of the Trust
Agreement, the Trust pays an administrative fee of $200,000 per year to the Trustee and an annual fee of $2,000 to the Delaware Trustee.
During each of the three-month periods ended March 31, 2021 and 2020, the Trust paid $50,000 to the Trustee pursuant to the terms
of the Trust Agreement. During each of the three-month periods ended March 31, 2021 and 2020 the Trust paid $2,000 to the Delaware
Trustee.