- ------------------------------------------------------------------------------
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 JUNE 30, 1998
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 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>
SIX MONTHS ENDED THREE MONTHS ENDED
JUNE 30 JUNE 30
-------------------------- -------------------------
1998 1997 1998 1997
----------- ----------- ---------- --------
<S> <C> <C> <C> <C>
Royalty Income .............................. $ 5,217,923 $ 6,056,161 $ 2,471,379 $ 3,122,434
Operating Expenses:
Taxes on production and property ......... 359,468 414,149 170,115 215,519
Operating cost charges ................... 237,630 228,820 118,439 114,410
----------- ----------- ----------- -----------
Total Operating Expenses ................. 597,098 642,969 288,554 329,929
----------- ----------- ----------- -----------
Net Proceeds to the Trust ................... 4,620,824 5,413,192 2,182,826 2,792,505
General and Administrative Expenses ......... (255,622) (272,177) (118,341) (98,779)
Interest Income ............................. 3,655 4,382 2,073 1,835
Cash Proceeds on Sale of Net Profits Interest 838,474 0 396,310 0
Distributable Income ..................... $ 5,207,331 $ 5,145,397 $ 2,462,867 $ 2,695,561
----------- ----------- ----------- -----------
Distributable Income Per Unit(5,900,000)
units authorized and Outstanding): ....... $ 0.8826 $ 0.8721 $ 0.4174 $ 0.4569
=========== =========== =========== ===========
</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
<TABLE>
<CAPTION>
AS OF AS OF
JUNE 30, 1998 DECEMBER 31, 1997
--------------- -------------------
(UNAUDITED)
<S> <C> <C>
Assets:
Cash ...................................... $ 2,073 $ 1,905
Net Proceeds Receivable ................... 2,579,136 2,218,406
Net Profits Interests in Gas Properties ... 93,162,180 93,162,180
Accumulated Amortization .................. (31,624,625) (28,846,663)
------------ ------------
Total Assets ........................... $ 64,118,764 $ 66,535,828
============ ============
Liabilities and Trust Corpus:
Trust General and Administrative
Expenses Payable ....................... $ 118,341 $ 118,944
Distributions Payable ..................... 2,462,867 2,101,367
Trust Corpus (5,900,000 Trust
Units authorized and outstanding) ...... 61,537,555 64,315,517
------------ ------------
Total Liabilities and Trust Corpus ..... $ 64,118,764 $ 66,535,828
============ ============
</TABLE>
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)
SIX MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, 1998 JUNE 30, 1997
-------------- --------------
Trust Corpus, Beginning of Period .......... $ 64,315,517 $ 70,016,943
Distributable Income ....................... 5,207,331 5,145,397
Distributions Declared to Unitholders ...... (5,207,331) (5,145,397)
Amortization of Net Profits Interests
in Gas Properties ....................... (2,777,962) (3,054,525)
------------ ------------
Trust Corpus, End of Period ............... $ 61,537,555 $ 66,962,418
============ ============
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 shows
Distributable Income, defined as Trust income available for distribution to
Unitholders before application of those Unitholders' additional expenses, if
any, for 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 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 to the extent that 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.)
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 this quarter 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.
A total of seven (7) wells in which the Trust owns a Net Profits Interest
have been or will be required to be plugged and abandoned by the coal lessee of
the property upon which the wells were drilled since the wells interfere with
existing and proposed mining operations. The coal lessee has the contractual
authority to 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 recently resolved a dispute with the
coal lessee over the valuation of these wells and the total amount to be
received by Eastern American as consideration for the plugging and abandonment
of these wells is $931,637. Ninety percent (90%) of this amount or $838,474 was
paid to the Trust. The coal lessee paid this consideration in installments, and
a portion of this amount, $442,164 was included in the distributable income for
the quarter ending March 31, 1998. During the quarter ended June 30, 1998,
$396,310 is included on the Statement of Distributable Income under Cash
Proceeds on Sale of Net Profits Interests.
8
<PAGE>
COMPARISON OF RESULTS OF OPERATIONS FOR THREE MONTHS ENDED JUNE 30, 1998 AND
THREE MONTHS ENDED JUNE 30, 1997
The Trust's distributable income was $2,462,867 for the three months ended
June 30, 1998 as compared to $2,695,561 for the three months ended June 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 June 30,
1998 (765 MMcf) as compared to the three months ended June 30, 1997 (989 MMcf).
This decline is partially attributable to the natural declines in production and
the required plugging and abandonment of certain wells as disclosed herein. This
decrease was partially offset by an increase in the price payable to the Trust
under the Gas Purchase Contract ($3.221 per Mcf for the three months ended June
30, 1998, as compared to $3.155 per Mcf for the three months ended June 30,
1997). The distributable income includes Cash Proceeds on Sale of Net Profits
Interest of $396,310 for the quarter ended June 30, 1998, while no such sales
were recognized in the corresponding prior quarter.
The price payable to the Trust for gas production attributable to the Net
Profits Interests was $3.221 per Mcf for the three months ended June 30, 1998
and $3.155 per Mcf for the three months ended June 30, 1997. The price per Mcf
was higher for the three months ended June 30, 1998 than for the corresponding
three month period ending June 30, 1997 due to a higher Fixed Price component
($3.39 per MCF for the three months ended June 30, 1998; $3.23 per MCF for the
three months ended June 30, 1997) and was partially offset by a lower Variable
Price component of the Index Price under the Gas Purchase Contract ($2.882 per
Mcf for the three months ended June 30, 1998; $3.00 per Mcf for the three months
ended June 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 three months ended June 30, 1998 ($2.32
per Dth) as compared to the prior period ($2.427 per Dth).
COMPARISON OF RESULTS OF OPERATIONS FOR SIX MONTHS ENDED JUNE 30, 1998 AND SIX
MONTHS ENDED JUNE 30, 1997
The Trust's distributable income was $5,207,331 for the six months ended
June 30, 1998 as compared to $5,145,397 for the six months ended June 30, 1997.
This increase was due, in part, to an increase in the average price payable to
the Trust under the Gas Purchase Contract ($3.244 per Mcf for the six months
ended June 30, 1998; $3.181 per Mcf for the six months ended June 30, 1997) and
was partially offset by a decrease in production of gas attributable to the Net
Profits Interests for the six months ended June 30, 1998 (1,608 MMcf) as
compared to the six months ended June 30, 1997 (1,903 Mmcf). The production
decreases were attributable to normal production declines associated with the
Underlying Properties and the required plugging and abandonment of certain wells
as disclosed herein. The distributable income includes Cash Proceeds on Sale of
Net Profits Interests of $838,474 for the six months ended June 30, 1998, while
no such sales were recognized for the six months ended June 30, 1997.
The average price payable to the Trust for gas production attributable to
the Net Profits
9
<PAGE>
Interests was $3.244 per Mcf for the six months ended June 30, 1998 and $3.181
per Mcf for the six months ended June 30, 1997. The price per Mcf was higher for
the six months ended June 30, 1998 than for the corresponding six month period
ending June 30, 1997 due to a higher Fixed Price component ($3.39 per MCF for
the six months ended June 30, 1998, as compared to $3.23 per MCF for the six
months ended June 30, 1997) and was partially offset by a lower Variable Price
component of the Index Price under the Gas Purchase Contract ($2.952 per Mcf for
the six months ended June 30, 1998, as compared to $3.077 per Mcf for the six
months ended June 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 six months ended June 30, 1998 ($2.38
per Dth) as compared to the prior period ($2.496 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 JUNE 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 $456.29 AND $425.35 RESPECTIVELY. ON JUNE 30, 1998 THE CLOSING PRICE OF THE
TREASURY OBLIGATIONS, AS QUOTED ON SUCH MARKET, WAS $455.08.
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: August 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 JUNE 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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUL-03-1998
<CASH> 2,073
<SECURITIES> 0
<RECEIVABLES> 2,579,136
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,581,209
<PP&E> 93,162,180
<DEPRECIATION> 31,624,625
<TOTAL-ASSETS> 64,118,764
<CURRENT-LIABILITIES> 2,581,208
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 61,537,555
<TOTAL-LIABILITY-AND-EQUITY> 64,118,764
<SALES> 5,217,923
<TOTAL-REVENUES> 5,217,923
<CGS> 0
<TOTAL-COSTS> 597,098
<OTHER-EXPENSES> 255,622
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 5,207,331
<INCOME-TAX> 0
<INCOME-CONTINUING> 4,368,857
<DISCONTINUED> 0
<EXTRAORDINARY> 838,474
<CHANGES> 0
<NET-INCOME> 5,207,331
<EPS-PRIMARY> 0.88
<EPS-DILUTED> 0.88
</TABLE>
