- ------------------------------------------------------------------------------
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, 1998
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITION EXCHANGE ACT OR 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 MONTREAL TRUST COMPANY
C/O HARRIS TRUST AND SAVINGS BANK
311 W. MONROE STREET, 12TH FLOOR
CHICAGO, ILLINOIS 60606
(Address of principal executive offices)
(Zip Code)
(312) 461-4662
(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 |_|
<PAGE>
================================================================================
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
EASTERN AMERICAN NATURAL GAS TRUST
STATEMENTS OF DISTRIBUTABLE INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Nine months ended Three months ended
September 30 September 30
1998 1997 1998 1997
========================================================
<S> <C> <C> <C> <C>
Royalty Income .............................. $ 7,742,352 $ 8,817,202 $ 2,524,530 $ 2,761,041
Operating Expenses:
Taxes on production and property ............ 531,814 600,752 172,346 186,603
Operating cost charges ...................... 355,884 340,987 118,254 112,167
----------- ----------- ----------- -----------
Total Operating Expense .................. 887,698 941,739 290,600 298,770
Net Proceeds to the Trust ................... 6,854,654 7,875,463 2,233,830 2,462,271
General and Administrative Expense .......... (349,007) (357,175) (93,385) (84,998)
Interest Income ............................. 5,513 6,365 1,858 1,983
Cash proceeds on Sale of Net Profits Interest 838,474 177,843 0 177,843
----------- ----------- ----------- -----------
Distributable Income .................. $ 7,349,634 $ 7,702,496 $ 2,142,303 $ 2,557,099
----------- ----------- ----------- -----------
Distributable Income Per Unit (5,900,00
units authorized and outstanding): .... $1,2457 $ 1.3055 $ 0.3631 $ 0.4334
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE>
EASTERN AMERICAN NATURAL GAS TRUST
STATEMENTS OF ASSETS, LIABILITIES AND TRUST CORPUS
As of As of
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------ ------------
(Unaudited)
Assets:
Cash ......................................... $ 1,858 $ 1,905
Net Proceeds Receivable ...................... 2,233,830 2,218,406
Net Profits Interests in Gas Properties ...... 93,162,180 93,162,180
Accumulated Amortization ..................... (32,989,193) (28,846,663)
------------ ------------
Total Assets .............................. $ 62,408,674 $ 66,535,828
============ ============
Liabilities and Trust Corpus:
Trust General and Administrative
Expenses Payable .......................... $ 93,385 $ 118,944
Distributions Payable ........................ 2,142,303 2,101,367
Trust Corpus (5,900,000 Trust Units authorized
and outstanding) .......................... 60,172,987 64,315,517
------------ ------------
Total Liabilities and Trust Corpus ........ $ 62,408,674 $ 66,535,828
============ ============
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
EASTERN AMERICAN NATURAL GAS TRUST
STATEMENTS OF CHANGES IN TRUST CORPUS
(UNAUDITED)
Nine Months Nine Months
Ended Ended
SEPTEMBER 30, 1998 SEPTEMBER 30, 1997
------------------ ------------------
Trust Corpus, Beginning of Period ....... $ 64,315,517 $ 70,016,943
Distributable Income .................... 7,349,634 7,702,496
Distributions Declared to Unitholders ... (7,349,634) (7,702,496)
Amortization of Net Profits Interests
in Gas Properties .................... (4,142,530) (4,499,742)
------------ ------------
Trust Corpus, End of Period ............ $ 60,172,987 $ 65,517,201
============ ============
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
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 consist 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.
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 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, 1997.
5
<PAGE>
EASTERN AMERICAN NATURAL GAS TRUST
NOTES TO UNAUDITED FINANCIAL STATEMENTS - (CONTINUED)
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, depletion, interest income and expense, and income taxes. The Trust uses
the accrual basis to recognize revenue, with Royalty Income recorded as income
as reserves are extracted from properties and sold. Expenses are also presented
on an accrual basis. Actual cash receipts and payments will vary from the
accrual of revenues and expenses 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 has been impaired. The Trust will
provide a write-down to its investment in the Net Profits Interests in Gas
Properties when the total capitalized costs, less accumulated amortization,
exceed undiscounted future net revenues attributable to proved gas reserves of
the Underlying Properties. Any such write-down would not reduce Distributable
Income, but 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 reserves to derive an amortization rate per reserve unit.
Such amortization does not reduce distributable income, but does reduce 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
<PAGE>
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
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 to Unitholders
cash 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 1997 was based on an annual rate of $454,860 and
for 1998 the annual rate is $476,764. 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 (published by the United States
Department of Labor, Bureau of Labor Statistics), but not more than 5% per year.
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" 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 Corporation will be
obligated to purchase such gas production, on a quarterly basis, at a purchase
price per Mcf, subject to certain adjustments, equal to the greater of the Index
Price and the Floor Price for gas produced during the seven-year period ending
December 31, 1999 (the "Primary Term") and at a purchase price per Mcf equal to
the Index Price thereafter. The Floor Price was $2.57 per Mcf for 1997 and shall
be $2.84 per Mcf for 1998 and $3.09 per Mcf for 1999, in each case subject to
adjustment under certain circumstances. The Index Price for any quarter during
the Primary Term will be a weighted average
7
<PAGE>
price determined by reference to the fixed price ("Fixed Price") component,
which will be given a 66 2/3% weight, and a variable price ("Variable Price")
component, which will be given a 33 1/3% weight. Following the Primary Term, the
Index Price will be determined solely by reference to the Variable Price. The
Fixed Price was equal to $3.23 per Mcf for the 1997 calendar year, and escalates
at 5% for each year thereafter during the primary term. The fixed price for the
1998 calendar year is $3.39 per Mcf. The Variable Price is equal to the Henry
Hub Average Spot Price (as defined) plus $.30 per MMBtu, multiplied by 110% to
effect a fixed adjustment for Btu content. The Henry Hub Average Spot Price for
any quarter is a price per MMBtu based on a 12-month average settlement price of
the gas futures contracts for gas delivered to the Henry Hub (Henry, Louisiana).
Pursuant to the Conveyances Eastern American was obligated to drill the 65
Development Wells As of December 31, 1997, Eastern American had fulfilled its
obligation with respect to the drilling
of the Development Wells. (See the Trust's Form 10-K for the fiscal year ended
December 31, 1997 for a more complete description of the Development Wells.)
Year 2000 Compliance. Eastern American Energy Corporation has substantially
completed its assessment of its business information systems to determine what
issues, if any, exist regarding these systems' compliance with Year 2000 issues
and is taking the necessary steps to ensure its systems will be compliant by the
year 2000.
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, 1998, an
additional volume of 9,935 Mcf was delivered to the Trust to fulfill Eastern
American's obligation to provide volumes for Development Wells that had been
closely offset by third parties.
Three wells in which the Trust owns a Net Profits Interest may be required to
be plugged and abandoned in the near future by the coal lessee of the property
upon which wells were drilled since the wells interfere with proposed mining
operations. The coal lessee could cause these wells to be plugged and abandoned
pursuant to an agreement entered into prior to the formation of the Trust. This
prior agreement is a Permitted Encumbrance under the Conveyances and the Trust
accepted its Net Profits Interest subject to this prior agreement. Pursuant to
this prior agreement the coal lessee is required to pay for the wells it causes
to be plugged and abandoned. Eastern American is negotiating with the coal
lessee regarding the value of these three wells, which had revenues of $86,160
for the nine months ended September 30, 1998.
8
<PAGE>
COMPARISON OF RESULTS OF OPERATIONS FOR THREE MONTHS ENDED SEPTEMBER 30, 1998
AND THREE MONTHS ENDED SEPTEMBER 30, 1997
The Trust's distributable income was $2,142,303 for the three months ended
September 30, 1998 as compared to $2,557,099 for the three months ended
September 30, 1997. This decrease was due, in part, to a decrease in production
of gas attributable to the Net Profits Interests for the three months ended
September 30, 1998 (790 MMcf) as compared to the three months ended September
30, 1997 (895 MMcf). This decline is partially attributable to the natural
declines in production and the required plugging and abandonment of certain
wells in previous periods. This decrease was partially offset by an increase in
the price payable to the Trust under the Gas Purchase Contract ($3.197 per Mcf
for the three months ended September 30, 1998; $3.093 per Mcf for the three
months ended September 30, 1997). The distributable income included no Cash
Proceeds on Sale of Net Profits Interest for the quarter ended September 30,
1998, as compared to $177,843 of Cash Proceeds on Sale of Net Profits Interest
included in the quarter ended September 30, 1997.
The price payable to the Trust for gas production attributable to the Net
Profits Interests was $3.197 per Mcf for the three months ended September 30,
1998 and $3.093 per Mcf for the three months ended September 30, 1997. The price
per Mcf was higher for the three months ended September 30, 1998 than for the
corresponding three month period ending September 30, 1997 due to a higher Fixed
Price component ($3.39 per MCF for the three months ended September 30, 1998;
$3.23 per MCF for the three months ended September 30, 1997). The Variable Price
component of the Index Price under the Gas Purchase Contract remained relatively
unchanged due to comparable average futures spot market prices for gas delivered
at the Henry Hub near Henry, Louisiana ($2.255 per Dth for the three months
ended September 30, 1998; $2.257 per Dth for the three months ended September
30, 1997).
COMPARISON OF RESULTS OF OPERATIONS FOR NINE MONTHS ENDED SEPTEMBER 30, 1998 AND
NINE MONTHS ENDED SEPTEMBER 30, 1997
The Trust's distributable income was $7,349,634 for the nine months ended
September 30, 1998 as compared to $7,702,496 for the nine months ended September
30, 1997. This decrease was due to a decrease in production of gas attributable
to the Net Profits Interests for the nine months ended September 30, 1998 (2,398
MMcf) as compared to the nine months ended September 30, 1997 (2,798 MMcf). The
production decreases were attributable to normal production declines associated
with the Underlying Properties and the required plugging and abandonment of
certain wells in previous periods. This decrease was partially offset by an
increase in the average price payable to the Trust under the Gas Purchase
Contract ($3.228 per Mcf for the nine months ended September 30, 1998; $3.151
per Mcf for the nine months ended September 30, 1997).
9
<PAGE>
The average price payable to the Trust for gas production attributable to
the Net Profits Interests was $3.228 per Mcf for the nine months ended September
30, 1998 and $3.151 per Mcf for the nine months ended September 30, 1997. The
price per Mcf was higher for the nine months ended September 30, 1998 than for
the corresponding nine month period ending September 30, 1997 due to a higher
Fixed Price component ($3.39 per MCF for the nine months ended September 30,
1998; $3.23 per MCF for the nine months ended September 30, 1997) which was
partially offset by a lower Variable Price component of the Index Price under
the Gas Purchase Contract ($2.905 per Mcf for the nine months ended September
30, 1998; $2.989 per Mcf for the nine months ended September 30, 1997). Such
lower Variable Price is directly attributable to a decrease in the average
futures spot market prices for gas delivered at the Henry Hub near Henry,
Louisiana for the nine months ended September 30, 1998 ($2.340 per Dth) as
compared to the prior period ($2.417 per Dth).
10
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings.
EASTERN AMERICAN HAS PREVIOUSLY ADVISED THE TRUST THAT IT HAD BEEN
SERVED WITH A COMPLAINT FROM COLUMBIA GAS TRANSMISSION CORPORATION
("COLUMBIA") THAT ALLEGES THAT SOME OF EASTERN AMERICAN'S WELLS
INCLUDED WITH IN THE COMPLAINT ARE PRODUCING STORAGE GAS FROM A
COLUMBIA STORAGE FIELD IN WEST VIRGINIA. A PORTION OF THE WELLS ARE
ONES IN WHICH THE TRUST OWNS A NET PROFIT INTEREST. THE TRUST WAS
NOT NAMED AS A PARTY TO THIS ACTION. EASTERN AMERICAN AND COLUMBIA
ENTERED INTO A SETTLEMENT AGREEMENT AND MUTUAL RELEASE OF ALL CLAIMS
DATED AS OF JULY 16, 1997. THIS AGREEMENT SETTLES ALL MATTERS IN
CONTROVERSY BETWEEN THE PARTIES AND REQUIRES THE SUIT TO BE
DISMISSED WITH PREJUDICE. EASTERN AMERICAN AND THE TRUST ARE
EVALUATING HOW, IF ANY WAY, THE SETTLEMENT MAY AFFECT THE TRUST.
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, 1998, 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 $477.93 AND $422.89 RESPECTIVELY. ON SEPTEMBER 30, 1998 THE
CLOSING PRICE OF THE TREASURY OBLIGATIONS, AS QUOTED ON SUCH MARKET, WAS
$477.93.
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
NONE
(b) Reports on Form 8-K
NONE
11
<PAGE>
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 Montreal Trust Company, Trustee
/s/ E. KAY LIEDERMAN
Name: E. Kay Liederman
Title: Vice President
Date: November 12, 1998
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
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE UNAUDITED SEPTEMBER 30, 1998 FINANCIAL STATEMENTS OF EASTERN AMERICAN
NATURAL GAS TRUST AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 1,858
<SECURITIES> 0
<RECEIVABLES> 2,233,830
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,235,688
<PP&E> 93,162,180
<DEPRECIATION> 32,989,193
<TOTAL-ASSETS> 62,408,674
<CURRENT-LIABILITIES> 2,235,688
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 60,172,987
<TOTAL-LIABILITY-AND-EQUITY> 62,408,674
<SALES> 7,742,352
<TOTAL-REVENUES> 7,742,352
<CGS> 0
<TOTAL-COSTS> 887,698
<OTHER-EXPENSES> 349,007
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (5,513)
<INCOME-PRETAX> 7,349,634
<INCOME-TAX> 0
<INCOME-CONTINUING> 6,511,160
<DISCONTINUED> 0
<EXTRAORDINARY> 838,474
<CHANGES> 0
<NET-INCOME> 7,349,634
<EPS-PRIMARY> 1.24
<EPS-DILUTED> 1.24
</TABLE>
