The condensed financial statements included herein have been prepared by Simmons
Bank as Trustee for the Permian Basin Royalty Trust (the Trust), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Effective February 20, 2018, Simmons Bank (the Trustee)
became the new trustee for the Trust. Certain information and footnote disclosures normally included in annual financial statements have been condensed or omitted pursuant to such rules and regulations, although the Trustee believes that the
disclosures are adequate to make the information presented not misleading. It is suggested that these condensed interim financial statements and notes thereto be read in conjunction with the financial statements and the notes thereto included in the
Trusts latest annual report on Form
10-K.
In the opinion of the Trustee, all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the assets, liabilities and trust
corpus of the Permian Basin Royalty Trust at March 31, 2018, the distributable income for the three-month periods ended March 31, 2018 and 2017 and the changes in trust corpus for the three-month periods ended March 31, 2018 and 2017,
have been included. The distributable income for such interim periods is not necessarily indicative of the distributable income for the full year.
The
condensed interim financial statements as of March 31, 2018 and for the three-month periods ended March 31, 2018 and 2017, included herein, have been reviewed by Weaver and Tidwell, L.L.P., an independent registered public accounting firm,
as stated in their report appearing herein.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Unit Holders of Permian Basin Royalty Trust and
Simmons
Bank, Trustee
Dallas, Texas
Results of Review of
Interim Financial Statements
We have reviewed the accompanying condensed statements of assets, liabilities and trust corpus of Permian Basin Royalty
Trust (the Trust) as of March 31, 2018, and the related condensed statements of distributable income and changes in trust corpus for the three-month periods ended March 31, 2018 and 2017, and the related notes (collective
referred to as the condensed interim financial statements or interim financial information). Based on our review, we are not aware of any material modifications that should be made to the accompanying condensed interim financial
statements for them to be in conformity with the modified cash basis of accounting, which is a comprehensive basis of accounting other than accounting principles generally accepted in the United States of America.
As described in Note 2 to the condensed interim financial statements, these condensed interim financial statements were prepared on a modified cash basis of
accounting, which is a comprehensive basis of accounting other than accounting principles generally accepted in the United States of America.
Basis
for Review Results
These condensed interim financial statements are the responsibility of the Trustee. We conducted our review in accordance with the
standards of the Public Company Accounting Oversight Board (United States) (PCAOB). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for
financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the PCAOB, 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.
/s/ WEAVER AND TIDWELL, L.L.P.
We have served as the Trusts auditor since 2016.
Dallas,
TX
May 10, 2018
3
PERMIAN BASIN ROYALTY TRUST
CONDENSED STATEMENTS OF ASSETS, LIABILITIES AND TRUST CORPUS
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March 31,
2018
(Unaudited)
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December 31,
2017
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ASSETS
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Cash and short-term investments
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$
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4,523,106
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$
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3,421,419
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Net overriding royalty interests in producing oil and gas properties (net of accumulated
amortization of $10,465,495
and $10,446,173 at March 31, 2018 and December 31, 2017, respectively)
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509,721
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529,043
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TOTAL ASSETS
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$
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5,032,827
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$
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3,950,462
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LIABILITIES AND TRUST CORPUS
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Distribution payable to Unit holders
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$
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3,473,106
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$
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2,371,419
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Commitments and reserves for contingencies (Note 6)
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1,050,000
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1,050,000
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Trust corpus 46,608,796 Units of beneficial interest authorized and outstanding
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509,721
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529,043
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TOTAL LIABILITIES AND TRUST CORPUS
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$
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5,032,827
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$
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3,950,462
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The accompanying notes are an integral part of these condensed financial statements.
4
PERMIAN BASIN ROYALTY TRUST
CONDENSED STATEMENTS OF DISTRIBUTABLE INCOME (UNAUDITED)
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THREE MONTHS ENDED
March 31, 2018
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THREE MONTHS ENDED
March 31, 2017
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Royalty income
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$
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9,719,305
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$
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9,552,223
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Interest income
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5,476
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2,282
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9,724,781
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9,554,505
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General and administrative expenditures
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(413,850
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)
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(365,457
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Distributable income
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$
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9,310,931
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$
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9,189,048
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Distributable income per Unit (46,608,796 Units)
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$
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.20
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$
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.20
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The accompanying notes are an integral part of these condensed financial statements.
5
PERMIAN BASIN ROYALTY TRUST
CONDENSED STATEMENTS OF CHANGES IN TRUST CORPUS (UNAUDITED)
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THREE MONTHS ENDED
March 31, 2018
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Three MONTHS ENDED
March 31, 2017
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Trust corpus, beginning of period
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$
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529,043
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$
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603,119
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Amortization of net overriding royalty interests
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(19,322
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)
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(19,453
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)
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Distributable income
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9,310,931
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9,189,048
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Distributions declared
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(9,310,931
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)
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(9,189,048
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)
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Total Trust Corpus, end of period
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$
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509,721
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$
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583,666
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Distributions per Unit
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$
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.20
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$
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.20
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The accompanying notes are an integral part of these condensed financial statements.
6
PERMIAN BASIN ROYALTY TRUST
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
1.
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TRUST ORGANIZATION AND PROVISIONS
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The Permian Basin Royalty Trust (Trust)
was established as of November 1, 1980. Simmons Bank (Trustee) is Trustee for the Trust. The net overriding royalties conveyed to the Trust include (1) a 75% net overriding royalty in Southland Royalty Companys fee
mineral interest in the Waddell Ranch in Crane County, Texas (the Waddell Ranch properties) and (2) a 95% net overriding royalty carved out of Southland Royalty Companys major producing royalty properties in Texas (the
Texas Royalty properties). The net overriding royalty for the Texas Royalty properties is subject to the provisions of the lease agreements under which such royalties were created. The net overriding royalties above are collectively
referred to as the Royalties.
On November 3, 1980, Units of Beneficial Interest (Units) in the Trust were
distributed to the Trustee for the benefit of Southland Royalty Companys shareholders of record as of November 3, 1980, who received one Unit in the Trust for each share of Southland Royalty Company common stock held. The Units are traded
on the New York Stock Exchange.
Burlington Resources Oil & Gas Company LP (BROG), a subsidiary of ConocoPhillips, is
the interest owner for the Waddell Ranch properties and Riverhill Energy Corporation (Riverhill Energy), formerly a wholly owned subsidiary of Riverhill Capital Corporation (Riverhill Capital) and formerly an affiliate of
Coastal Management Corporation (CMC), is the interest owner for the Texas Royalty properties. BROG currently conducts all field, technical and accounting operations on behalf of BROG with regard to the Waddell Ranch properties. Riverhill
Energy currently conducts the accounting operations for the Texas Royalty properties.
In February 1997, BROG sold its interest in the
Texas Royalty properties to Riverhill Energy.
The Trustee was advised that in the first quarter of 1998, Schlumberger Technology
Corporation (STC) acquired all of the shares of stock of Riverhill Capital. Prior to such acquisition by STC, CMC and Riverhill Energy were wholly owned subsidiaries of Riverhill Capital. The Trustee was further advised that in
connection with STCs acquisition of Riverhill Capital, the shareholders of Riverhill Capital acquired ownership of all of the shares of stock of Riverhill Energy. Thus, the ownership in the Texas Royalty properties referenced above remained in
Riverhill Energy, the stock ownership of which was acquired by the former shareholders of Riverhill Capital.
7
On January 9, 2014, Bank of America N.A. (as successor to The First National Bank of Fort
Worth) gave notice to Unit holders that it would be resigning as trustee of the Trust subject to certain conditions that included the appointment of Southwest Bank as successor trustee. At a Special Meeting of Trust Unit holders, the Unit holders
approved the appointment of Southwest Bank as successor trustee of the Trust once the resignation of Bank of America N.A. took effect and also approved certain amendments to the Trust Indenture. The effective date of Bank of America N.A.s
resignation and the effective date of Southwest Banks appointment as successor trustee was August 29, 2014. Effective October 19, 2017, Simmons First National Corporation (SFNC) completed its acquisition of First Texas
BHC, Inc., the parent company of Southwest Bank. SFNC is the parent company of Simmons Bank. SFNC merged Southwest Bank with Simmons Bank effective February 20, 2018. The defined term Trustee as used herein shall refer to Bank of
America N.A. for periods prior to August 29, 2014, and shall refer to Southwest Bank for periods from August 29, 2014 through February 19, 2018 and shall refer to Simmons Bank for periods on and after February 20, 2018.
The terms of the Trust Indenture provide, among other things, that:
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the Trust shall not engage in any business or commercial activity of any kind or acquire any assets other than those initially conveyed to the Trust;
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the Trustee may not sell all or any part of the Royalties unless approved by holders of 75% of all Units outstanding in which case the sale must be for cash and the proceeds promptly distributed;
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the Trustee may establish a cash reserve for the payment of any liability which is contingent or uncertain in amount;
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the Trustee is authorized to borrow funds to pay liabilities of the Trust; and
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the Trustee will make monthly cash distributions to Unit holders (see Note 3).
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8
Basis of Accounting
The financial statements of the Trust are prepared on the following basis:
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Royalty income recorded for a month is the amount computed and paid to the Trustee on behalf of the Trust by the interest owners. Royalty income consists of the amounts received by the owners of the interest burdened by
the Royalties from the sale of production less accrued production costs, development and drilling costs, applicable taxes, operating charges and other costs and deductions multiplied by 75% in the case of the Waddell Ranch properties and 95% in the
case of the Texas Royalty properties.
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Trust expenses, consisting principally of routine general and administrative costs, recorded are based on liabilities paid and cash reserves established out of cash received or borrowed funds for liabilities and
contingencies.
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Distributions to Unit holders are recorded when declared by the Trustee.
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Royalty income is computed separately for each of the conveyances under which the Royalties were conveyed to the Trust. If monthly costs exceed revenues for any conveyance (excess costs), such excess costs
cannot reduce royalty income from other conveyances, but is carried forward with accrued interest to be recovered from future net proceeds of that conveyance.
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The financial statements of the Trust differ from financial statements prepared in accordance with accounting principles generally accepted in
the United States of America (GAAP) because revenues are not accrued in the month of production expenses are recorded when paid and certain cash reserves may be established for contingencies which would not be accrued in financial
statements prepared in accordance with GAAP. Amortization of the Royalties calculated on a
unit-of-production
basis is charged directly to trust corpus. This
comprehensive basis of accounting other than GAAP corresponds to the accounting permitted for royalty trusts by the U.S. Securities and Exchange Commission as specified by Staff Accounting Bulletin Topic 12:E, Financial Statements of Royalty Trusts.
Use of Estimates
The
preparation of financial statements in conformity with the basis of accounting described above requires management to make estimates and assumptions that affect reported amounts of certain assets, liabilities, revenues and expenses as of and for the
reporting periods. Actual results may differ from such estimates.
9
Impairment
The Trustee routinely reviews its royalty interests in oil and gas properties for impairment whenever events or circumstances indicate that the
carrying amount of an asset may not be recoverable. If an impairment event occurs and it is determined that the carrying value of the Trusts royalty interests may not be recoverable, an impairment will be recognized as measured by the amount
by which the carrying amount of the royalty interests exceeds the fair value of these assets, which would likely be measured by discounting projected cash flows. There was no impairment of the assets as of March 31, 2018.
Contingencies
Contingencies related to the underlying properties that are unfavorably resolved would generally be reflected by the Trust as reductions to
future royalty income payments to the Trust with corresponding reductions to cash distributions to Unit holders.
Distributable Income
Per Unit
Basic distributable income per Unit is computed by dividing distributable income by the weighted average of Units
outstanding. Distributable income per Unit assuming dilution is computed by dividing distributable income by the weighted average number of Units and equivalent Units outstanding. The Trust had no equivalent Units outstanding for any period
presented. Therefore, basic distributable income per Unit and distributable income per Unit assuming dilution are the same.
New
Accounting Pronouncements
In May 2014, the FASB issued updated guidance for recognizing revenue from contracts with customers. This
update amends the existing accounting standards for revenue recognition and is based on the principle that revenue should be recognized to depict the transfer of goods and services to a customer at an amount that reflects the consideration a company
expects to receive in exchange for those goods or services. The Trust adopted this standards update, as required, in the first quarter of 2018, but the adoption of this standard did not have a significant impact on its financial statements due to
the modified cash basis of reporting used by the Trust.
3.
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NET OVERRIDING ROYALTY INTERESTS AND DISTRIBUTION TO UNIT HOLDERS
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The amounts to be
distributed to Unit holders (Monthly Distribution Amounts) are determined on a monthly basis. The Monthly Distribution Amount is an amount equal to the sum of cash received by the Trustee during a calendar month attributable to the
Royalties, any reduction in cash reserves and any other cash receipts of the Trust, including interest, reduced by the sum of
10
liabilities paid and any increase in cash reserves. If the Monthly Distribution Amount for any monthly period is a negative number, then the distribution will be zero for such month. To the
extent the distribution amount is a negative number, that amount will be carried forward and deducted from future monthly distributions until the cumulative distribution calculation becomes a positive number, at which time a distribution will be
made. Unit holders of record will be entitled to receive the calculated Monthly Distribution Amount for each month on or before 10 business days after the monthly record date, which is generally the last business day of each calendar month.
The cash received by the Trustee consists of the amounts received by owners of the interest burdened by the Royalties from the sale of
production less the sum of applicable taxes, accrued production costs, development and drilling costs, operating charges and other costs and deductions, multiplied by 75% in the case of the Waddell Ranch properties and 95% in the case of the Texas
Royalty properties.
For federal income tax purposes, the Trust constitutes a fixed
investment trust that is taxed as a grantor trust. A grantor trust is not subject to federal income tax at the trust level. The Unit holders are considered for federal tax purposes to own the Trusts income and principal as though no trust were
in existence. The income of the Trust is deemed to have been received or accrued by each Unit holder at the time such income is received or accrued by the Trust and not when distributed by the Trust. If the Trust borrows funds to pay liabilities of
the Trust, as contemplated in the Trust Indenture,
tax-exempt
Unit holders could be required to recognize unrelated business taxable income.
5.
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STATE TAX CONSIDERATIONS
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All revenues from the Trust are from sources within Texas,
which does not impose an individual income tax. Texas imposes a franchise tax at a rate of 0.75% on gross revenues less certain deductions, as specifically set forth in the Texas franchise tax statutes. Entities subject to the Texas franchise tax
generally include trusts and most other types of entities that provide limited liability protection, unless otherwise exempt. Trusts that receive at least 90% of their federal gross income from certain passive sources, including royalties from
mineral properties and other
non-operated
mineral interest income, 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. The Trust has been and expects to continue to be exempt from Texas franchise
11
tax as a passive entity. Because the Trust should be exempt from Texas franchise tax at the Trust level as a passive entity, each Unit holder that is a taxable entity under the Texas franchise
tax generally will be required to include its portion of Trust revenues in its own Texas franchise tax computation. This revenue is sourced to Texas under provisions of the Texas Administrative Code providing that such income is sourced according to
the principal place of business of the Trust, which is Texas.
Unit holders should consult their tax advisors regarding state tax
requirements, if any, applicable to such Unit holders ownership of Trust units.
6.
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COMMITMENTS AND CONTINGENCIES
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Contingencies related to the Underlying Properties that
are unfavorably resolved would generally be reflected by the Trust as reductions to future royalty income payments to the Trust with corresponding reductions to cash distributions to Unit holders.
Subsequent to March 31, 2018, the Trust declared a distribution
on April 20, 2018 of $0.052172 per Unit payable on May 14, 2018 to Unit holders of record on April 30, 2018.
* * * * *
12