STATEMENTS OF ASSETS, LIABILITIES AND TRUST CORPUS
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March 31,
2017
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December 31,
2016
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(Unaudited)
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ASSETS
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Cash and short-term investments
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$
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1,871,646
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$
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1,604,112
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Net overriding royalty interest in oil and gas properties
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42,498,034
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42,498,034
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Accumulated amortization
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(40,203,893
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(40,058,695
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Total assets
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$
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4,165,787
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$
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4,043,451
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LIABILITIES AND TRUST CORPUS
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Distributions payable
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$
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789,402
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$
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604,112
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Trust corpus (1,863,590 units of beneficial interest authorized, issued and outstanding)
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3,376,385
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3,439,339
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Total liabilities and trust corpus
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$
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4,165,787
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$
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4,043,451
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(The accompanying notes are an integral part of these financial statements.)
2
MESA ROYALTY TRUST
STATEMENTS OF CHANGES IN TRUST CORPUS
(Unaudited)
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Three Months Ended
March 31,
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2017
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2016
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Trust corpus, beginning of period
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$
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3,439,339
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$
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3,727,980
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Distributable income
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871,646
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156,222
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Distributions to unitholders
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(789,402
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(149,484
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Amortization of net overriding royalty interest
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(145,198
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(41,077
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Trust corpus, end of period
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$
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3,376,385
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$
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3,693,641
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(The accompanying notes are an integral part of these financial statements.)
3
MESA ROYALTY TRUST
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
Note 1Trust Organization and Provisions
The Mesa Royalty Trust (the "Trust") was created on November 1, 1979. On that date, Mesa Petroleum Co., predecessor to Mesa Limited Partnership ("MLP"), which was the
predecessor to MESA Inc., conveyed to the Trust an overriding royalty interest (the "Royalty") equal to 90% of the Net Proceeds (as defined in the Conveyance and described below) attributable
to the specified interests in properties conveyed by the assignor on that date (the "Subject Interests"). The Subject Interests consisted of interests in certain producing oil and gas properties
located in the Hugoton field of Kansas, the San Juan Basin field of New Mexico and Colorado and the Yellow Creek field of Wyoming (the "Royalty Properties"). The Royalty is evidenced by counterparts
of an Overriding Royalty Conveyance dated as of November 1, 1979 (the "Conveyance"). On April 30, 1991, MLP sold its interests in the Royalty Properties located in the San Juan Basin
field to ConocoPhillips. ConocoPhillips sold the portion of its interests in the San Juan Basin Royalty Properties located in Colorado to MarkWest Energy Partners, Ltd. (effective
January 1, 1993) and Red Willow Production Company (effective April 1, 1992). On October 26, 1994, MarkWest Energy Partners, Ltd. sold substantially all of its interest in
the Colorado San Juan Basin Royalty Properties to BP Amoco Company ("BP"), a subsidiary of BP p.l.c. Until August 7, 1997, MESA Inc. operated the Hugoton Royalty Properties through Mesa
Operating Co., a wholly owned subsidiary of MESA Inc. On August 7, 1997, MESA Inc. merged with and into Pioneer Natural Resources Company ("Pioneer"), formerly a wholly
owned subsidiary of MESA Inc., and Parker & Parsley Petroleum Company merged with and into Pioneer Natural Resources USA, Inc. (successor to Mesa Operating Co.), a wholly
owned subsidiary of Pioneer ("PNR") (collectively, the mergers are referred to herein as the "Merger"). Subsequent to the Merger, the Hugoton Royalty Properties were operated by PNR until
December 31, 2014., at which point Linn Energy Holdings, LLC ("Linn") took over as operator. Substantially all of the San Juan Basin Royalty Properties located in New Mexico are operated
by ConocoPhillips. Effective January 1, 2005, ConocoPhillips assigned its interest in an immaterial number of San Juan Basin Royalty Properties located in New Mexico to XTO Energy Inc.
The San Juan Basin Royalty Properties located in Colorado are operated by BP. As used in this report, Linn refers to the current operator of the Hugoton Royalty Properties, ConocoPhillips refers to
the operator of the San Juan Basin Royalty
Properties, other than the portion of such properties located in Colorado, and BP refers to the operator of the Colorado San Juan Basin Royalty Properties unless otherwise indicated.
Effective
October 2, 2006, The Bank of New York Mellon Trust Company, N.A. (the "Trustee") succeeded JP Morgan Chase Bank, N.A. as Trustee of the Trust. JPMorgan Chase Bank, N.A.
is the successor by mergers to the original name of the Trustee, Texas Commerce Bank National Association. The terms of the Mesa Royalty Trust Indenture (as amended, the "Trust Indenture") provide,
among other things, that:
(a) the
Trust cannot engage in any business or investment activity or purchase any assets;
(b) the
Royalty can be sold in part or in total for cash upon approval by the unitholders;
4
MESA ROYALTY TRUST
NOTES TO FINANCIAL STATEMENTS (Continued)
(Unaudited)
Note 1Trust Organization and Provisions (Continued)
(c) the
Trustee can establish cash reserves and borrow funds to pay liabilities of the Trust and can pledge assets of the Trust to secure payment of the borrowings;
(d) the
Trustee will make cash distributions to the unitholders in January, April, July and October each year as discussed more fully in Note 2;
(e) the
Trust will terminate upon the first to occur of the following events: (i) at such time as the Trust's royalty income for two successive years is less than
$250,000 per year or (ii) a vote by the unitholders in favor of termination. Upon termination of the Trust, the Trustee will sell for cash all the assets held in the Trust estate and make a
final distribution to unitholders of any funds remaining after all Trust liabilities have been satisfied; and
(f) Linn,
ConocoPhillips and BP (collectively the "Working Interest Owners") will reimburse the Trust for 59.34%, 27.45% and 1.77%, respectively, for general and
administrative expenses of the Trust.
As
of March 31, 2017, there were $0 of unreimbursed expenses. During 2011, the Trustee withheld $1.0 million for future unknown contingent liabilities and expenses in
accordance with the Trust Indenture. At any given time, the amount currently reserved for such future unknown contingent liabilities and expenses is included in cash and short-term investments. For
the three months ended March 31, 2017, the Trustee increased the reserve for future unknown contingent liabilities and expenses by $82,244 of royalty income received from BP in March 2017 after
the distribution to unitholders had been announced for the month of March 2017. Such royalty income was included in the April 2017 distribution to unitholders. As of March 31, 2017, the reserve
for unknown contingent liabilities and expenses was $1,082,244 and is included in cash and short term investments. The Trustee reserves the right to determine whether or not to release cash reserves
in future periods with respect to any unreimbursed expenses.
The
Trustee was due $118,750 for its services for the quarter ended March 31, 2017. The Trust paid $108,288 of this amount to the Trustee, and $10,462 was allocated to offset
against interest due to the Trust under the Trust Indenture. The Trust Indenture requires that cash being held by the Trustee earn interest at 1.5% below the prime rate, which would have yielded the
Trust a 2.25% return from January 1, 2017 through March 15, 2017 and a 2.50% return from March 16, 2017 through March 31, 2017. However, due to the current interest rate
environment, the Trustee was unable to obtain an account in which such an interest rate was available. In the event such an interest rate is unavailable in the future, the Trustee intends to allocate
certain of its fees due to the Trust to meet the minimum interest rate payable under the Trust Indenture. The Trustee will continue to allocate a portion of the fees earned for its services to the
Trust until the remaining $26,204 of interest due to the Trust is fully offset, and it may do so in future periods in which unpaid interest is due to the Trust. The working interest owners partially
reimburse the Trust each quarter for amounts paid in connection with the Trustee's services. For the quarter ended March 31, 2017, such reimbursements totaled $95,900. For the
5
MESA ROYALTY TRUST
NOTES TO FINANCIAL STATEMENTS (Continued)
(Unaudited)
Note 1Trust Organization and Provisions (Continued)
quarter
ended March 31, 2016, trustee fees were $108,288. Reimbursements received for the quarter ended March 31, 2016 were $95,900.
On
May 11, 2016, Linn Energy, LLC ("Old Linn"), LinnCo, LLC ("LinnCo"), an affiliate of Old Linn, and certain of Old Linn's direct and indirect subsidiaries
(collectively with Old Linn and LinnCo, the "Debtors"), filed voluntary petitions for reorganization under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court
for the Southern District of Texas (the "Court"). The Debtors' Chapter 11 cases were administered jointly under the caption
In re Linn Energy, LLC, et
al.
, Case No. 16-60040.
On
January 27, 2017, the Court entered the
Order Confirming (I) Amended Joint Chapter 11 Plan of Reorganization of Linn Energy, LLC
and its Debtor Affiliates Other Than Linn Acquisition Company, LLC and Berry Petroleum Company, LLC and (II) Amended Joint Chapter 11 Plan of Reorganization of Linn
Acquisition Company, LLC and Berry Petroleum Company, LLC
, which approved and confirmed the Amended Joint Chapter 11 Plan of Reorganization of Linn
Energy, LLC and Its Debtor Affiliates Other Than Linn Acquisition Company, LLC and Berry Petroleum Company, LLC (the "Plan"). The Plan became effective on February 28, 2017
(the "Effective Date").
Pursuant
to the Plan, on the Effective Date, all assets of Old Linn (other than equity interests in Linn Acquisition Company, LLC and Berry Petroleum Company, LLC) were
conveyed to Linn Energy, Inc. (or a subsidiary thereof), and LinnCo, LLC and Linn Energy, LLC were wound down and liquidated. Subsequent to the effectiveness of the Plan, Linn
Energy, Inc. is now the reorganized successor to Old Linn. Under the Plan Supplement, as amended, filed with the Court, the Debtors assumed all executory contracts and unexpired leases with the
Trust and Mesa Operating Limited Partnership as the counterparty. Furthermore, pursuant to the Plan, the royalty interests in the Hugoton Royalty Properties owned by the Trust shall be preserved and
remain in full force and effect in accordance with the terms of the granting instruments or other governing documents.
Note 2Basis of Presentation
The accompanying unaudited financial information has been prepared by the Trustee in accordance with the instructions to Form 10-Q. The preparation of the financial statements
requires estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts
of income and expenses during the reporting period. Actual results could differ from those estimates. The Trustee believes such information includes all the disclosures necessary to make the
information presented not misleading. The information furnished reflects all adjustments which are, in the opinion of the Trustee, necessary
for a fair presentation of the results for the interim periods presented. The financial information 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 year ended December 31, 2016. The Trust considers all highly liquid
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MESA ROYALTY TRUST
NOTES TO FINANCIAL STATEMENTS (Continued)
(Unaudited)
Note 2Basis of Presentation (Continued)
investments
with a maturity of three months or less to be cash equivalents. Subsequent events were evaluated through the issuance date of the financial statements.
In
accordance with the Conveyance, the Working Interest Owners are obligated to calculate and pay the Trust each month an amount equal to 90% of the Net Proceeds (as defined in the
Conveyance) attributable to the month. In 1985, the Trust Indenture was amended and the Trust conveyed to an affiliate of Mesa Petroleum Co. 88.5571% of the original Royalty (such transfer, the
"1985 Assignment"). The effect of the 1985 Assignment was an overall reduction of approximately 88.56% in the size of the Trust. As a result, the Trust is now entitled to receive 11.44% of 90% of the
Net Proceeds attributable to each month.
The
financial statements of the Trust are prepared on the following basis:
(a) Royalty
income recorded for a month is the amount computed and paid by the Working Interest Owners to the Trustee for such month rather than either the value of a
portion of the oil and gas produced by the Working Interest Owners for such month or the amount subsequently determined to be the Trust's proportionate share of the net proceeds for such month;
(b) Interest
income, interest receivable and distributions payable to unitholders include interest to be earned on short-term investments from the financial statement date
through the next date of distribution;
(c) Trust
general and administrative expenses, net of reimbursements, are recorded in the month they are included in the calculation of the monthly distribution amount;
(d) Amortization
of the Royalty is computed on a unit-of-production basis and is charged directly to trust corpus because such amount does not affect distributable income;
and
(e) Distributions
payable are determined on a monthly basis and are payable to unitholders of record as of the last business day of each month or such later date as the
Trustee determines is required to comply with applicable law or stock exchange requirements. However, cash distributions are made quarterly in January, April, July and October, and include interest
earned from the monthly record dates to the date of distribution.
This
basis for reporting distributable income is considered to be the most meaningful because distributions to the unitholders for a month are based on net cash receipts for such month.
However, these statements differ from financial statements prepared in accordance with accounting principles generally accepted in the United States of America because, under such principles, royalty
income for a month would be based on net proceeds from production for such month without regard to when calculated or received, general and administrative expenses would be recorded in the month they
accrue, and interest income for a month would be calculated only through the end of such month.
7
MESA ROYALTY TRUST
NOTES TO FINANCIAL STATEMENTS (Continued)
(Unaudited)
Note 3Legal Proceedings
There are no pending legal proceedings to which the Trust is a named party. The Trustee has been advised by Linn, ConocoPhillips and BP that it is subject to litigation in the ordinary
course of business for certain matters that include the Royalty Properties. While each of the working interest owners has advised the Trustee that it does not currently believe any of the pending
litigation will have a material adverse effect net to the Trust, in the event such matters were adjudicated or settled in a material amount and charges were made against Royalty income, such charges
could have a material impact on future Royalty income.
Note 4Income Tax Matters
In a technical advice memorandum dated February 26, 1982, the IRS advised the Dallas District
Director that the Trust is classifiable as a grantor trust and not as an association taxable as a corporation. As a grantor trust, the Trust incurs no federal income tax liability and each unitholder
is subject to tax on the unitholder's pro rata share of the income and expense of the Trust as if the unitholder were the direct owner of a pro rata share of the Trust's assets. In addition, there is
no state tax liability for the period.
For
taxable years beginning after December 31, 2012, individuals, estates, and trusts with income above certain thresholds are subject under Section 1411 of the Internal
Revenue Code to an additional 3.8% taxalso known as the "Medicare contribution tax"on their net investment income. Grantor trusts such as Mesa Royalty Trust are not subject
to the 3.8% tax; however, the unitholders may be subject to the tax. For these purposes, investment income would generally include certain income derived from investments, such as the royalty income
derived from the units and gain realized by a unitholder from a sale of units.
The
Trustee assumes that 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 Street, Floor 16, Houston, Texas 77002, telephone number 713-483-6020, 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.
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 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 units.
8
MESA ROYALTY TRUST
NOTES TO FINANCIAL STATEMENTS (Continued)
(Unaudited)
Note 5Excess Production Costs
Excess production costs result when costs, charges, and expenses attributable to a Working Interest Property exceed the revenue received from the sale of oil, gas, and other hydrocarbons
produced from such property. The excess production costs must be recovered by the working interest owners before any distribution of Royalty income from the properties will be made to the Trust. As of
March 31, 2017 and December 31, 2016, there were $17,567 and $19,983, respectively, of excess production costs. Excess production costs in the amount of $3,735 and $3,591 as of
March 31, 2017 and December 31, 2016, respectively, related to the San Juan BasinNew Mexico properties operated by XTO Energy Inc. The remainder of the excess
production costs in the amount of $13,832 as of March 31, 2017 and $16,392 as of December 31, 2016, related to the San Juan BasinColorado properties operated by BP and Red
Willow. Excess production costs related to the San Juan BasinColorado properties operated by BP were approximately $0 and $3,860 as of March 31, 2017 and December 31, 2016,
respectively. Excess production costs related to the San Juan BasinColorado properties operated by Red Willow were approximately $13,832 and $12,532 as of March 31, 2017 and
December 31, 2016, respectively. Red Willow made a $147 distribution to the Trust in error during the first quarter of 2017 without recovering the $3,735 excess production costs.
Note 6Distributable Income Per Unit
During 2011, the Trustee withheld $1.0 million for future unknown contingent liabilities and expenses in accordance with the Trust Indenture. As of March 31, 2017, the
Trustee increased the reserve for future unknown contingent liabilities and expenses by $82,244 of royalty income received from BP in March 2017 after the distribution to unitholders had been
announced for the month of March 2017. Such royalty income was included in the April 2017 distribution to unitholders. The effect on distributable income per unit is as follows:
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Three Months Ended
March 31,
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2017
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2016
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Distributable Income Before Reserve for Contingent Liabilities and Expenses
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$
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871,646
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$
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156,222
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Increase in Reserve for Contingent Liabilities and Expenses (See Note 1)
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(82,244
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(6,738
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Withdrawal from (Increase to) Reserve for Contingent Liabilities and Expenses (See Note 1)
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Distributable income Available for Distribution
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$
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789,402
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$
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149,484
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Distributable income Available for Distribution per unit
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$
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0.4236
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$
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0.0802
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Units outstanding
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1,863,590
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1,863,590
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9