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| NGT > SEC Filings for NGT > Form 10-Q on 7-Nov-2008 | All Recent SEC Filings |
7-Nov-2008
Quarterly Report
Cautionary Statement
This Form 10-Q includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. All statements other than
statements of historical fact included in this Form 10-Q, including without
limitation the statements under "Management's Discussion and Analysis of
Financial Condition and Results of Operations" are forward-looking statements.
Although Eastern American has advised the Trustee that it believes that the
expectations reflected in the forward-looking statements contained herein are
reasonable, no assurance can be given that such expectations will prove to have
been correct. Important factors that could cause actual results to differ
materially from expectations ("Cautionary Statements") are disclosed in this
Form 10-Q and in the Trust's Annual Report on Form 10-K for the year ended
December 31, 2007 and include the fact that none of the Trust, the Trustee or
Eastern American is able to predict future changes in gas prices, gas production
levels, economic activity, legislation or regulation, or certain changes in
expenses of the Trust. All subsequent written and oral forward-looking
statements attributable to the Trust or persons acting on its behalf are
expressly qualified in their entirety by the Cautionary Statements. The Trust,
the Trustee and Eastern American disclaim any obligation to update any
forward-looking statements.
General
The Trust does not conduct any operations or activities. The Trust's purpose is, in general, to hold the Net Profits Interests, to distribute the cash proceeds to Unitholders which the Trust receives in respect of the Net Profits Interests (net of Trust expenses), and to perform certain administrative functions in respect of the Net Profits Interests and the Depositary Units. Accordingly, the Trust derives substantially all of its income and cash flows from the Net Profits Interests. The Trust has no source of liquidity or capital resources other than the cash flows from the Net Profits Interests.
The Net Profits Interests were created pursuant to conveyances (the "Conveyances") from Eastern American to the Trust. In connection therewith, Eastern American assigned its rights under a gas purchase contract (the "Gas Purchase Contract"), which obligates Eastern Marketing Corporation, a subsidiary of Eastern American, to purchase all of the natural gas produced from the Underlying Properties that is attributable to the Net Profits Interests.
The Conveyances and the Gas Purchase Contract entitle the Trust to receive an amount of cash for each calendar quarter equal to the Net Proceeds for such quarter. "Net Proceeds" for any calendar quarter generally means an amount of cash equal to (a) 90% of a volume of gas equal to (i) the volume of gas produced during such quarter attributable to the Underlying Properties less (ii) a volume of gas equal to "Chargeable Costs" for such quarter, multiplied by (b) the applicable price for such quarter under the Gas Purchase Contract. "Chargeable Costs" is that volume of gas which equates in value, determined by reference to the relevant sales price under the Gas Purchase Contract or the Conveyances, as applicable, to the sum of the "Operating Cost Charge", "Capital Costs" and "Taxes".
The "Operating Cost Charge" for 2008 is based on an annual rate of $617,564, and 2007 was based on an annual rate of $588,160. As provided in the Conveyances, the Operating Cost Charge will fluctuate based on the lesser of (A) five percent (5%) or (B) a percentage, not less than zero percent (0%), equal to the percentage increase, if any, in the average weekly earnings of Crude Petroleum and Gas Production Workers for the last calendar year, as shown by the index of average weekly earnings of Crude Petroleum and Gas Production Workers, as published by the United States Department of Labor, Bureau of Labor Statistics, based on December-to-December comparison.
During 2003, the United States Department of Labor, Bureau of Labor Statistics converted all of its industry-based statistics to a different reporting system that was developed in cooperation with the
United States' North American Free Trade Agreement Partners, Canada and Mexico, in an effort to standardize and modernize reporting codes. As a result of this conversion, the Crude Petroleum and Gas Production Workers index is no longer available for use in the annual calculation of overhead adjustment called for in the various Council of Petroleum Accountants Societies, or COPAS, model forms after March 2003.
Research by COPAS covering a ten year period indicated that by blending the Oil and Gas Extraction Index with the Professional and Technical Services Index, the results approximate the data from the old Crude Petroleum and Natural Gas Workers Index. Accordingly, COPAS has calculated the percentage change in the simple average of the Oil and Extraction Index and the Professional and Technical Services Index, commencing in April 2004. This "Overhead Adjustment Index" has been provided as a guidance to the industry as a replacement index for use in calculating the overhead adjustment. The adjustment for the effective time period is 5.0%. Since the Conveyance Documents do not specifically provide for a replacement index if the Crude Petroleum and Gas Production Workers Index was no longer published, Eastern American believes, and advised the Trustee, that the "Overhead Adjustment Index" as calculated by COPAS is a reasonable index to utilize since the industry is generally adopting the same as a replacement. Eastern American, with the concurrence of the Trustee, will utilize this "Overhead Adjustment Index" to adjust the "Operating Cost Charge" so long as such index is published by COPAS.
The Operating Cost Charge will be reduced for each well that is sold (free of the Net Profits Interests) or plugged and abandoned. Capital Costs are defined as Eastern American's working interest share of capital costs for operations on the Underlying Properties having a useful life of at least three years, and excluding any capital costs incurred in drilling the Development Wells. Taxes refer to ad valorem taxes, production and severance taxes, and other taxes imposed on Eastern American's or the Trust's interests in the Underlying Properties, or production therefrom.
Pursuant to the Gas Purchase Contract, Eastern Marketing is obligated to purchase such gas production at a purchase price per Mcf equal to the Index Price. The Index Price for any quarter is determined solely by reference to the Variable Price component. The Variable Price for any quarter is equal to the Henry Hub Average Spot Price (as defined) per MMBtu plus $0.30 per MMBtu, multiplied by 110% to effect a fixed adjustment for Btu content. The Henry Hub Average Spot Price is defined as the price per MMBtu determined for any calendar quarter equal to the price obtained with respect to each of the three months in such quarter, in the manner specified below, and then taking the average of the prices determined for each of such three months. The price determined for any month of such quarter is equal to the average of (i) the final settlement price per MMBtu for Henry Hub Gas Futures Contracts (as defined), as reported in The Wall Street Journal, for such contracts which expired in each of the five months prior to such month; (ii) the final settlement price per MMBtu for Henry Hub Gas Futures Contracts, as reported in The Wall Street Journal, for such contracts which expire during such month; and (iii) the closing settlement price per MMBtu of Henry Hub Gas Futures Contracts determined as of the contract settlement date for such month, as reported in The Wall Street Journal, for such contracts which expire in each of the six months following such month. A Henry Hub Gas Futures Contract is defined as a gas futures contract for gas to be delivered to the Henry Hub that is traded on the New York Mercantile Exchange.
Accordingly, the Index Price payable to the Trust for production may be higher or lower based on the fluctuations in natural gas futures prices during the relevant calculation period. The price payable to the Trust will have a direct impact, positively or negatively, on the quarterly Distributions Payable by the Trust to its Unitholders.
Eastern American had a disagreement with the Trust over Eastern American's obligation to drill certain Development Wells that were closely offset by third parties. The Trust agreed that in lieu of drilling these closely offset Development Wells, Eastern American could provide the Trust, on an
annual basis commencing on April 1, 1997, and over the remaining life of the Trust, a volume of gas which is equal to the projected volumes of the wells as if they had been drilled. These volumes have been estimated by Ryder Scott Company, independent petroleum engineers. During the quarter ended September 30, 2008, payment for an additional volume of 3,263 Mcf was delivered to the Trust, as compared to a payment for 3,527 Mcf for the quarter ended September 30, 2007. These additional payments fulfill Eastern American's agreement to provide payment for volumes for Development Wells that had been closely offset by third parties.
Eastern American has fulfilled its obligation with respect to the drilling of the Development Wells. Since the inception of the Trust, Eastern has drilled a total of 59 Development Wells, which are online and producing. (See the Trust's Annual Report on Form 10-K for the fiscal year ended December 31, 2007, for a more complete description of the Development Wells.)
Over the remaining life of the Trust, wells may be disposed of from time to time in accordance with the documents governing the Trust.
The administrative costs the Trust incurs in the future will fluctuate depending primarily on the expenses the Trust incurs for professional services, particularly legal, accounting and engineering services.
Critical Accounting Policies
The following is a summary of the critical accounting policies followed by the Trust.
Basis of Accounting:
The financial statements of the Trust differ from financial statements prepared in accordance with accounting principles generally accepted in the United States of America due to the following: (i) certain cash reserves may be established for contingencies which were not accrued in the financial statements; (ii) amortization of the Net Profits Interests in Gas Properties is charged directly to Trust Corpus; and (iii) the sale of the Net Profits Interests is reflected in the Statements of Distributable Income as cash proceeds to the Trust.
Most accounting pronouncements apply to entities whose financial statements are prepared in accordance with accounting principles generally accepted in the United States of America. Because the Trust's financial statements are prepared on a comprehensive basis of accounting other than accounting principles generally accepted in the United States of America, as described above, most accounting pronouncements are not applicable to the Trust's financial statements.
Net Profits Interests in Gas Properties:
The Net Profits Interests in Gas Properties are periodically assessed to determine whether their net capitalized cost is impaired. The Trust will determine if a writedown is necessary to its investment in the Net Profits Interests in Gas Properties to the extent that total capitalized costs, less accumulated amortization, exceed undiscounted future net revenues attributable to proved gas reserves of the Underlying Properties. The Trust will then provide a writedown to the extent that the net capitalized costs exceed the discounted future net revenues attributable to proved gas reserves of the Underlying Properties. Any such writedown would not reduce Distributable Income, although it would reduce Trust Corpus.
Amortization of the Net Profits Interests in Gas Properties is calculated on a units-of-production basis, whereby the Trust's cost basis in the properties is divided by total Trust proved reserves to derive an amortization rate per reserve unit. Such amortization does not reduce Distributable Income, rather it is charged directly to Trust Corpus. Revisions to estimated future units-of-production are treated on a prospective basis beginning on the date significant revisions are known.
Recent Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. This statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. This statement is effective for financial statements issued for fiscal years beginning after November 15, 2007. The adoption of this statement did not have an effect on the Trust's financial statements.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities-Including an amendment of FASB Statement No. 115. This statement permits entities to choose to measure many financial instruments and certain other items at fair value. This statement is effective as of the beginning of an entity's first fiscal year that begins after November 15, 2007. The adoption of this statement did not have an effect on the Trust's financial statements.
Liquidity and Capital Resources
The Trust has no source of liquidity or capital resources other than the distributions received from the Net Profits Interests.
In accordance with the provisions of the Conveyances, generally all revenues received by the Trust, net of Trust administrative and operating expenses and the amount of established reserves, are distributed currently to the Unitholders.
The Trust did not have any contractual obligations as of September 30, 2008. At September 30, 2008, the Trust had Trust General and Administrative Expenses Payable of $126,271and Distributions Payable of $4,301,581.
Comparison of Results of Operations for Three Months Ended September 30, 2008 and Three Months Ended September 30, 2007
The Trust's Distributable Income was $4,301,581 for the three months ended September 30, 2008 as compared to $3,084,226 for the three months ended September 30, 2007. This increase was due to an increase in Royalty Income for the three months ended September 30, 2008 to $4,980,328 as compared to the three months ended September 30, 2007 of $3,694,373. The increase in Royalty Income was related to an increase in the price payable to the Trust under the Gas Purchase Contract as discussed below ($12.111 per Mcf for the three months ended September 30, 2008 as compared to $8.433 per Mcf for the three months ended September 30, 2007). This increase in income was partially offset by a decrease in production of gas attributable to the Net Profits Interests for the three months ended September 30, 2008 (411 MMcf) as compared to the three months ended September 30, 2007 (439 MMcf). The decline in production is primarily attributable to natural production declines. Taxes on Production and Property were $365,031 for the three months ended September 30, 2008 as compared to $278,108 for the three months ended September 30, 2007. The increase in taxes is due directly to the increase in Royalty Income as discussed above. General and Administrative Expenses were $159,325 for the three months ended September 30, 2008 as compared to $184,999 for the three months ended September 30, 2007. The decrease in General and Administrative Expenses was due primarily to a decrease in professional fees.
The price payable to the Trust for gas production attributable to the Net Profits Interests was $12.111 per Mcf for the three months ended September 30, 2008 and $8.433 per Mcf for the three
months ended September 30, 2007. The price per Mcf was higher for the three months ended September 30, 2008 than for the corresponding three month period ended September 30, 2007 due to an increase in the average spot market price for gas delivered at the Henry Hub near Henry, Louisiana ($10.710 per Dth for the three months ended September 30, 2008 as compared to $7.366 per Dth for the three months ended September 30, 2007).
Comparison of Results of Operations for Nine Months Ended September 30, 2008 and Nine Months Ended September 30, 2007
The Trust's Distributable Income was $11,031,251 for the nine months ended September 30, 2008 as compared to $9,059,780 for the nine months ended September 30, 2007. This increase was due to an increase in Royalty Income for the nine months ended September 30, 2008 to $13,207,336 as compared to the nine months ended September 30, 2007 of $11,113,944. The increase in Royalty Income was due to an increase in the price payable to the Trust under the Gas Purchase Contract as discussed below ($10.702 per Mcf for the nine months ended September 30, 2008 as compared to $8.372 per Mcf for the nine months ended September 30, 2007). This increase was offset partially due to a decrease in production of gas attributable to the Net Profits Interests for the nine months ended September 30, 2008 (1,231 MMcf) as compared to the nine months ended September 30, 2007 (1,327 MMcf). The decline in production is primarily attributable to natural production declines. Taxes on Production and Property were $971,482 for the nine months ended September 30, 2008 as compared to $836,635 for the nine months ended September 30, 2007. The increase in taxes is due directly to the increase in Royalty Income as discussed above. General and Administrative Expenses were $741,430 for the nine months ended September 30, 2008 as compared to $776,409 for the nine months ended September 30, 2007. The decrease in General and Administrative Expenses was due primarily to a decrease in professional fees.
The price payable to the Trust for gas production attributable to the Net Profits Interests was $10.702 per Mcf for the nine months ended September 30, 2008 and $8.372 per Mcf for the nine months ended September 30, 2007. The price per Mcf was higher for the nine months ended September 30, 2008 than for the corresponding nine month period ended September 30, 2007 due to an increase in the average spot market price for gas delivered at the Henry Hub near Henry, Louisiana ($9.429 per Dth for the nine months ended September 30, 2008 as compared to $7.311 per Dth for the nine months ended September 30, 2007).
Off-Balance Sheet Arrangements
The Trust does not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on the Trust's financial condition, changes in financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.
Other Information
For the calendar quarter ended September 30, 2008, the high and low closing prices of the Treasury Obligations (which have $1,000 face principal amount), as quoted in the over-the-counter market for United States Treasury obligations were $897.20 and $833.60, respectively. On September 30, 2008, the closing price of the Treasury Obligations, as quoted on such market, was $883.80.
The Trust provides Unitholders with the option to separate the related Treasury Obligation from the Trust Units. Upon exercising this option, the Trustee transfers such Trust Units from the name of the Depositary to the name of the withdrawing Unitholder. As of September 30, 2008, this option was
exercised on 131,600 Trust Units. (See the Trust's Form 10-K for the year ended December 31, 2007 for a more complete description of the Withdrawal of Trust Units and Restriction on Transfer.)
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