================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 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 1-11748
EASTERN AMERICAN NATURAL GAS TRUST
(Exact name of registrant as specified in its charter)
Delaware 36-7034603
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
BANK OF NEW YORK
CARE OF BNY MIDWEST TRUST COMPANY
2 NORTH LASALLE STREET
CHICAGO, ILLINOIS 60602
(Address of principal executive offices)
(Zip Code)
(312) 827-8553
(Registrant's telephone number, including area code)
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 [ ]
As of November 9, 2001, 5,900,000 Units of Beneficial Interest in Eastern
American Natural Gas Trust were outstanding.
================================================================================
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EASTERN AMERICAN NATURAL GAS TRUST
STATEMENTS OF DISTRIBUTABLE INCOME
(UNAUDITED)
Nine Months Ended Three Months Ended
September 30 September 30
2001 2000 2001 2000
------------ ------------ ------------ ------------
Royalty Income $ 11,020,013 $ 7,883,492 $ 2,872,137 $ 3,090,129
Operating Expenses:
Taxes on production and property 747,026 534,262 196,533 208,517
Operating cost charges 384,831 366,504 128,277 122,168
------------ ------------ ------------ ------------
Total Operating Expenses 1,131,857 900,766 324,810 330,685
------------ ------------ ------------ ------------
Net Proceeds to the Trust 9,888,156 6,982,726 2,547,327 2,759,444
General and Administrative Expenses (411,156) (398,143) (104,469) (123,267)
Interest Income 4,228 7,318 1,276 2,869
Cash Proceeds on Sale of Net Profits Interests 0 0 0 0
------------ ------------ ------------ ------------
Distributable Income $ 9,481,228 $ 6,591,901 $ 2,444,134 $ 2,639,046
============ ============ ============ ============
Distributable Income Per Unit (5,900,000
units authorized and outstanding) $ 1.6070 $ 1.1173 $ 0.4143 $ 0.4473
------------ ------------ ------------ ------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
2
EASTERN AMERICAN NATURAL GAS TRUST
STATEMENTS OF ASSETS, LIABILITIES AND TRUST CORPUS
SEPTEMBER 30, 2001 DECEMBER 31, 2000
------------------ -----------------
(UNAUDITED)
Assets:
Cash $ 1,276 $ 270
Net Proceeds Receivable 2,547,327 3,313,449
Net Profits Interests in Gas Properties 93,162,180 93,162,180
Accumulated Amortization (48,877,805) (45,511,230)
------------ ------------
Total Assets $ 46,832,978 $ 50,964,669
============ ============
Liabilities and Trust Corpus:
Trust General and Administrative
Expenses Payable $ 104,469 $ 128,885
Distributions Payable 2,444,134 3,184,834
Trust Corpus (5,900,000 Trust Units
authorized and outstanding) 44,284,375 47,650,950
------------ ------------
Total Liabilities and Trust Corpus $ 46,832,978 $ 50,964,669
------------ ------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
3
EASTERN AMERICAN NATURAL GAS TRUST
STATEMENT OF CHANGES IN TRUST CORPUS
(UNAUDITED)
Nine Months Nine Months
Ended Ended
September 30, 2001 September 30, 2000
--------------------- --------------------
Trust Corpus, Beginning of Period $ 47,650,950 $ 53,087,803
Distributable Income 9,481,228 6,591,901
Distributions Payable to Unitholders (9,481,228) (6,591,901)
Amortization of Net Profits Interests in
Gas Properties (3,366,575) (4,108,007)
------------ ------------
Trust Corpus, End of Period $ 44,284,375 $ 48,979,796
------------ ------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
4
EASTERN AMERICAN NATURAL GAS TRUST
NOTES TO UNAUDITED FINANCIAL STATEMENTS
NOTE 1. Organization of the Trust
The Eastern American Natural Gas Trust (the "Trust") was formed under the
Delaware Business Trust Act pursuant to a Trust Agreement (the "Trust
Agreement") among Eastern American Energy Corporation ("Eastern American"), as
grantor, Bank of Montreal Trust Company, as Trustee ("Trustee"), and Wilmington
Trust Company, as Delaware Trustee (the "Delaware Trustee"). The Trust was
formed to acquire and hold net profits interests (the "Net Profits Interests")
created from the working interests owned by Eastern American in 650 producing
gas wells and 65 proved development well locations in West Virginia and
Pennsylvania (the "Underlying Properties"). The Net Profits Interests consisted
of a royalty interest in 322 wells and a term interest in the remaining wells
and locations. Prior to or on May 15, 2013, the Trustee is required to sell the
royalty interests and liquidate the Trust.
On March 15, 1993, 5,900,000 Depositary Units were issued in a public
offering at an initial public offering price of $20.50 per Depositary Unit. Each
Depositary Unit consists of beneficial ownership of one unit of beneficial
interest ("Trust Unit") in the Trust and a $20 face amount beneficial ownership
interest in a $1,000 face amount zero coupon United States Treasury Obligation
("Treasury Obligation") maturing on May 15, 2013.
Effective May 8, 2000, The Bank of New York acquired the corporate trust
business of the Bank of Montreal Trust Company / Harris Trust. Consequently, the
Bank of New York serves as Trustee.
The Net Profits Interests are passive in nature, and neither the Trustee nor
the Delaware Trustee has management control or authority over, nor any
responsibility relating to, the operation of the properties subject to the Net
Profits Interests. The Trust Agreement provides, among other things, that the
Trust shall not engage in any business or commercial activity or acquire any
asset other than the Net Profits Interests initially conveyed to the Trust; the
Trustee may establish a reserve for payment of any liability which is
contingent, uncertain in amount or that is not currently due and payable; the
Trustee is authorized to borrow funds required to pay liabilities of the Trust,
provided that such borrowings are repaid in full prior to further distributions
to Unitholders; and the Trustee will make quarterly cash distributions to
Unitholders from funds of the Trust.
NOTE 2. Basis of Presentation
The information furnished is based upon certain estimates of production for
the periods presented and is therefore subject to adjustment in future periods
to reflect actual production for the periods presented. 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
5
EASTERN AMERICAN NATURAL GAS TRUST
NOTES TO UNAUDITED FINANCIAL STATEMENTS - (CONTINUED)
accompanying financial statements are unaudited interim financial statements,
and should be read in conjunction with the audited financial statements and
notes thereto included in the Trust's Annual Report on Form 10-K for the year
ended December 31, 2000.
NOTE 3. Trust Accounting Policies
The Trust serves as a pass-through entity, with items of depletion, interest
income and expense, and income tax attributes being based upon the status and
elections of Unitholders. Thus, the Statements of Distributable Income show
Distributable Income, defined as Trust income available for distribution to
Unitholders before application of those Unitholders' additional expenses, if
any, for depletion, interest expense, and income taxes. The Trust uses the
accrual basis to recognize revenue, with Royalty Income recognized as reserves
are extracted from properties and sold. Expenses are also presented on an
accrual basis. Actual cash receipts will vary from the accrual of revenues due
to, among other reasons, the payment provisions of the gas purchase contract
between the Trust and Eastern Marketing Corporation (a subsidiary of Eastern
American), which requires payment with respect to gas production for a calendar
quarter to be made to the Trust on or before the tenth day of the third month
following such quarter.
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.
NOTE 4. Income Taxes
The Trust is a grantor trust and is not required to pay federal or state
income taxes. Accordingly, no provision for federal or state income taxes has
been made. All income is taxed to the Unitholders of the Trust.
6
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Cautionary Statement
The Trustee and Eastern American, its officers or its agents on behalf of the
Trust may, from time to time, make forward-looking statements (other than
statements of historical fact). When used herein, the words "anticipates,"
"expects," "believes," "intends" or "projects" and similar expressions are
intended to identify forward-looking statements. To the extent that any
forward-looking statements are made, the Trust is unable to predict future
changes in gas prices, gas production levels, economic activity, legislation and
regulation, and certain changes in expenses of the Trust. In addition, the
Trust's future results of operations and other forward looking statements
contained in this item and elsewhere in this report involve a number of risks
and uncertainties. As a result of variations in such factors, actual results may
differ materially from any forward-looking statements. Some of these factors are
described below. The Trustee and Eastern American, disclaims any obligations to
update forward looking statements and all such forward-looking statements in
this document are expressly qualified in their entirety by the cautionary
statements in this paragraph and by the statements in the Annual Report on Form
10-K.
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 which 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 2001 is based on an annual rate of
$513,106, and for 2000 was an annual rate of $488,672. In subsequent years, the
Operating Cost Charge will escalate, based on increases in the index of average
weekly earnings of Crude Petroleum and Gas Production Workers
7
(published by the United States Department of Labor, Bureau of Labor
Statistics), but not more than 5% per year. The Operating Cost Charge was not
increased as Development Wells were completed but will be reduced for each well
that is sold (free of the Net Profits Interests) or plugged and abandoned.
"Capital Costs" means Eastern American's working interest share of capital costs
for operations on the Underlying Properties, but only for items having a useful
life of at least three years, and not including any capital costs incurred in
drilling the Development Wells. "Taxes" means ad valorem taxes, production and
severance taxes, and other taxes imposed on the Trust's interest 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
Contracts is defined as a gas futures contract for gas to be delivered to the
Henry Hub which 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 unit holders.
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 that 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, 2001, an
additional volume of 5,833 Mcf was delivered to the Trust, as compared to 6,625
Mcf for the quarter ended September 30, 2000. These additional volumes fulfill
Eastern American's obligation to provide 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
8
and producing. (See the Trust's Form 10-K for the fiscal year ended December 31,
2000 for a more complete description of the Development Wells.) COMPARISON OF
RESULTS OF OPERATIONS FOR THREE MONTHS ENDED SEPTEMBER 30, 2001 AND THREE MONTHS
ENDED SEPTEMBER 30, 2000
The Trust's distributable income was $2,444,134 for the three months ended
September 30, 2001 as compared to $2,639,046 for the three months ended
September 30, 2000. This decrease was due to a decrease in the price payable to
the Trust under the Gas Purchase Contract as discussed below ($4.514 per Mcf for
the three months ended September 30, 2001; $4.668 per Mcf for the three months
ended September 30, 2000). This decrease was also due to a decrease in
production of gas attributable to the Net Profits Interests for the three months
ended September 30, 2001 (636 Mmcf) as compared to the three months ended
September 30, 2000 (659 Mmcf). The decline in production is primarily
attributable to natural production declines together with the effects of
Dominion Transmission, Inc (DTI) revised gas gathering and processing rates as
filed with and approved by the Federal Energy Regulatory Commission (FERC Docket
No. RP 97-406) effective January 1, 2001. The new rates provide for a percentage
of gas to be retained by DTI as shrink for gas moving through their gathering
system(s) and for extraction of liquids on gas production required to be
processed in order to meet the gas quality requirements of the pipeline
transmission companies to which the gas is delivered.
The price payable to the Trust for gas production attributable to the Net
Profits Interests was $4.514 per Mcf for the three months ended September 30,
2001 and $4.668 per Mcf for the three months ended September 30, 2000. The price
per Mcf was lower for the three months ended September 30, 2001 than for the
corresponding three month period ended September 30, 2000 due to a decrease in
the average spot market price for gas delivered at the Henry Hub near Henry,
Louisiana ($3.804 per Dth for the three months ended September 30, 2001; $3.944
per Dth for the three months ended September 30, 2000).
COMPARISON OF RESULTS OF OPERATIONS FOR NINE MONTHS ENDED SEPTEMBER 30, 2001 AND
NINE MONTHS ENDED SEPTEMBER 30, 2000
The Trust's distributable income was $9,481,228 for the nine months ended
September 30, 2001 as compared to $6,591,901 for the nine months ended September
30, 2000. This increase was due to an increase in the average price payable to
the Trust under the Gas Purchase Contract as discussed below ($5.901 per Mcf for
the nine months ended September 30, 2001; $3.847 per Mcf for the nine months
ended September 30, 2000). This increase was partially offset by a decrease in
production of gas attributable to the Net Profits Interests for the nine months
ended September 30, 2001 (1,870 Mmcf) as compared to the nine months ended
September 30, 2000 (2,053 Mmcf). The decline in production is primarily
attributable to natural production declines together with the effects of
Dominion Transmission, Inc (DTI) revised gas gathering and processing rates as
filed with and approved by the Federal Energy Regulatory Commission (FERC Docket
No. RP 97-406) effective January 1, 2001. The new rates provide for a percentage
of gas to be retained by DTI as shrink for gas moving through their gathering
system(s) and for extraction of liquids on gas production required to be
processed in order to meet the gas quality requirements of the pipeline
transmission companies to
9
which the gas is delivered. Taxes on production and property were $747,026 for
the nine months ended September 30, 2001 as compared to $534,262 for the nine
months ended September 30, 2000.
The increase in taxes was due to an increase in Royalty Income for the nine
months ended September 30, 2001 ($11,020,013) as compared to the nine months
ended September 30, 2000 ($7,883,492).
The average price payable to the Trust for gas production attributable to
the Net Profits Interests was $5.901 per Mcf for the nine months ended September
30, 2001 and $3.847 per Mcf for the nine months ended September 30, 2000. The
average price per Mcf was higher for the nine months ended September 30, 2001
than for the corresponding nine month period ended September 30, 2000 due to an
increase in the average spot market price for gas delivered at the Henry Hub
near Henry, Louisiana ($5.064 per Dth for the nine months ended September 30,
2001; $3.198 per Dth for the nine months ended September 30, 2000).
10
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings.
None.
ITEM 2. Changes in Securities.
None.
ITEM 3. Defaults Upon Senior Securities.
None.
ITEM 4. Submission of Matters to a Vote of Security Holders.
None.
ITEM 5. Other Information.
For the calendar quarter ended September 30, 2001, 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 $549.30 and $503.70 respectively. On September 30, 2001 the
closing price of the Treasury Obligations, as quoted on such market, was
$545.80.
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, 2001, this option was
exercised on 7,900 Trust Units. (See the Trust's 10-K for the fiscal year ended
December 31, 2000 for a more complete description of the Withdrawal of Trust
Units and Restriction on Transfer.)
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
None
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fiscal
quarter ended September 30, 2001.
11
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
EASTERN AMERICAN NATURAL GAS TRUST
By: Bank of New York, Trustee
/s/ ROBERT FOLTZ
----------------------------------
Name: Robert Foltz
Title: Agent
Date: November 13, 2001
The Registrant, Eastern American Natural Gas Trust, has no principal
executive officer, principal financial officer, board of directors or persons
performing similar functions. Accordingly no additional signatures are available
and none have been provided.
12