UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended July 31, 2010 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 1-8245
NORTH EUROPEAN OIL ROYALTY TRUST
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(Exact name of registrant as specified in its charter)
Delaware 22-2084119
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(State of organization) (I.R.S. Employer I.D. No.)
Suite 19A, 43 West Front Street, Red Bank, New Jersey 07701
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(Address of principal executive offices)
(732) 741-4008
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(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
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-2-
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule
405 of Regulation S-T (Section 232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant was required to
submit and post such files). Yes No
----- -----
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer, or a
smaller reporting company. See the definitions of "large accelerated filer,"
"accelerated filer," and "smaller reporting company" in Rule 12b-2 of the
Exchange Act. (Check one):
Large accelerated filer Accelerated filer X
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Non-accelerated filer Smaller reporting company
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Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act). Yes No X
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Class Outstanding at July 31, 2010
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Units of Beneficial Interest 9,190,590
-3-
PART I -- FINANCIAL INFORMATION
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Item 1. Financial Statements.
--------------------
STATEMENTS OF ASSETS, LIABILITIES AND TRUST CORPUS (NOTE 1)
-----------------------------------------------------------
JULY 31, 2010 AND OCTOBER 31, 2009
------------------------------------
2010 2009
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(Unaudited) (Audited)
Current assets - - Cash and
cash equivalents (Note 1) $4,362,712 $3,586,197
Producing gas and oil royalty rights,
net of amortization (Notes 1 and 2) 1 1
---------- ----------
Total Assets $4,362,713 $3,586,198
========== ==========
Current liabilities - - Distributions
to be paid to unit owners, paid
August 2010 and November 2009 $4,319,577 $3,492,424
Trust corpus (Notes 1 and 2) 1 1
Undistributed earnings 43,135 93,773
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Total Liabilities and Trust Corpus $4,362,713 $3,586,198
========== ==========
The accompanying notes are an integral part
of these financial statements.
-4-
STATEMENTS OF REVENUE COLLECTED AND EXPENSES PAID (NOTE 1)
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FOR THE THREE MONTHS ENDED JULY 31, 2010 AND 2009
--------------------------------------------------
2010 2009
----------- ------------
(Unaudited) (Unaudited)
German gas, sulfur and oil
royalties received $4,482,847 $5,466,337
Interest income 2,824 1,191
Trust expenses (169,228) (223,984)
----------- -----------
Net income $4,316,443 $5,243,544
=========== ===========
Net income per unit $0.47 $0.57
===== =====
Distributions per unit
to be paid to unit owners $0.47 $0.58
===== =====
The accompanying notes are an integral part
of these financial statements.
-5-
STATEMENTS OF REVENUE COLLECTED AND EXPENSES PAID (NOTE 1)
----------------------------------------------------------
FOR THE NINE MONTHS ENDED JULY 31, 2010 AND 2009
------------------------------------------------
2010 2009
------------ ------------
(Unaudited) (Unaudited)
German gas, sulfur and oil
royalties received $14,303,305 $25,072,153
Interest income 5,282 10,839
Trust expenses (757,152) (870,079)
----------- -----------
Net income $13,551,435 $24,212,913
=========== ===========
Net income per unit $1.47 $2.63
===== =====
Distributions per unit
to be paid to unit owners $1.48 $2.63
===== =====
The accompanying notes are an integral part
of these financial statements.
-6-
STATEMENTS OF UNDISTRIBUTED EARNINGS (NOTE 1)
---------------------------------------------
FOR THE NINE MONTHS ENDED JULY 31, 2010 AND 2009
------------------------------------------------
2010 2009
------------- -------------
(Unaudited) (Unaudited)
Balance, beginning of period $ 93,773 $ 58,221
Net income 13,551,435 24,212,913
----------- -----------
13,645,208 24,271,134
Less:
Current year distributions paid
or to be paid to unit owners 13,602,073 24,171,252
----------- -----------
Balance, end of period $ 43,135 $ 99,882
=========== ===========
The accompanying notes are an integral part
of these financial statements.
-7-
STATEMENTS OF CHANGES IN CASH AND CASH EQUIVALENTS (NOTE 1)
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FOR THE NINE MONTHS ENDED JULY 31, 2010 AND 2009
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2010 2009
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(Unaudited) (Unaudited)
Sources of cash and cash equivalents:
------------------------------------
German gas, sulfur and oil royalties $14,303,305 $25,072,153
Interest income 5,282 10,839
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14,308,587 25,082,992
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Uses of cash and cash equivalents:
---------------------------------
Payment of Trust expenses 757,152 870,079
Distributions paid 12,774,920 28,307,017
----------- -----------
13,532,072 29,177,096
----------- -----------
Net increase (decrease) in cash and
cash equivalents during the period 776,515 (4,094,104)
Cash and cash equivalents,
beginning of period 3,586,197 9,524,529
----------- -----------
Cash and cash equivalents,
end of period $ 4,362,712 $ 5,430,425
============ ============
The accompanying notes are an integral part
of these financial statements.
-8-
NORTH EUROPEAN OIL ROYALTY TRUST
--------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
(Unaudited)
-----------
(1) Summary of significant accounting policies:
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Basis of Accounting -
---------------------
The accompanying financial statements of North European Oil Royalty Trust
(the "Trust") present financial statement balances and financial
results on a modified cash basis of accounting, which is a
comprehensive basis of accounting other than accounting principles
generally accepted in the United States ("GAAP basis"). On a modified
cash basis, revenue is earned when cash is received and expenses are
incurred when cash is paid. GAAP basis financial statements disclose
revenue as earned and expenses as incurred, without regard to receipts
or payments. The modified cash basis of accounting is utilized to
permit the accrual for distributions to be paid to unit owners (those
distributions approved by the Trustees for the Trust). The Trust's
distributable income represents royalty income received by the Trust
during the period plus interest income less any expenses incurred by
the Trust, all on a cash basis. In the opinion of the Trustees, the
use of the modified cash basis of accounting provides a more meaningful
presentation to unit owners of the results of operations of the Trust.
These financial statements should be read in conjunction with the
financial statements that were included in the Trust's Annual Report
on Form 10-K for the year ended October 31, 2009. The Statements of
Assets, Liabilities and Trust Corpus included herein contain
information from the Trust's 2009 Form 10-K.
Producing gas and oil royalty rights -
--------------------------------------
The rights to certain gas and oil royalties in Germany were transferred
to the Trust at their net book value by North European Oil Company
(the "Company") (see Note 2). The net book value of the royalty
rights has been reduced to one dollar ($1) in view of the fact that
the remaining net book value of royalty rights is de minimis relative
to annual royalties received and distributed by the Trust and does
not bear any meaningful relationship to the fair value of such rights
or the actual amount of proved producing reserves.
Federal income taxes -
----------------------
The Trust, as a grantor trust, is exempt from federal income taxes
under a private letter ruling issued by the Internal Revenue Service.
-9-
Cash and cash equivalents -
---------------------------
Included in cash and cash equivalents are amounts deposited in bank
accounts and amounts invested in certificates of deposit and U. S.
Treasury bills with original maturities of approximately three months
or less from the date of purchase.
Net income per unit -
---------------------
Net income per unit is based upon the number of units outstanding at
the end of the period. As of both July 31, 2010 and 2009, there
were 9,190,590 units of beneficial interest outstanding.
New accounting pronouncements -
-------------------------------
In February 2010, the Financial Accounting Standards Board ("FASB")
issued an update to authoritative guidance relating to subsequent
events, which was effective upon the issuance of the update. The
Trust adopted this authoritative guidance on February 28, 2010. The
update to the authoritative guidance relating to subsequent events
removes the requirement for Securities and Exchange Commission
filers to disclose the date through which subsequent events have
been evaluated in both issued and revised financial statements. The
adoption of this update to the authoritative guidance relating to
subsequent events did not impact the Trust's financial position or
operating results.
(2) Formation of the Trust:
-----------------------
The Trust was formed on September 10, 1975. As of September 30, 1975,
the Company was liquidated and the remaining assets and liabilities
of the Company, including its royalty rights, were transferred to the
Trust. The Trust, on behalf of the owners of beneficial interest in
the Trust, holds overriding royalty rights covering gas and oil
production in certain concessions or leases in the Federal Republic
of Germany. These rights are held under contracts with local German
exploration and development subsidiaries of Exxon Mobil Corp. and the
Royal Dutch/Shell Group of Companies. Under these contracts, the
Trust receives various percentage royalties on the proceeds of the
sales of certain products from the areas involved. At the present
time, royalties are received for sales of gas well gas, oil well gas,
crude oil, condensate and sulfur.
(3) Related party transactions:
---------------------------
John R. Van Kirk, the Managing Director of the Trust, provides office
space and office services to the Trust at cost. For such office space
and office services, the Trust reimbursed the Managing Director $6,371
and $6,948 in the third quarter of fiscal 2010 and 2009, respectively.
For such office space and office services, the Trust reimbursed the
Managing Director $18,443 and $18,748 in the first nine months of
fiscal 2010 and 2009, respectively.
-10-
Lawrence A. Kobrin, a Trustee of the Trust, is a Senior Counsel at Cahill
Gordon & Reindel LLP, which serves as counsel to the Trust. For the
third quarter of fiscal 2010 and 2009, the Trust paid Cahill Gordon &
Reindel LLP $15,660 and $15,267 for legal services, respectively. For
the first nine months of fiscal 2010 and 2009, the Trust paid Cahill
Gordon & Reindel LLP $81,033 and $82,999 for legal services,
respectively.
As of November 1, 2006, John H. Van Kirk, the former Managing Trustee of
the Trust and the father of John R. Van Kirk, was named to the position
of Founding Trustee Emeritus. For his service in such capacity, he
earned $0 and $0 in the third quarters of fiscal 2010 and 2009 and $0
and $5,000 in the first nine months of fiscal 2010 and 2009,
respectively. John H. Van Kirk, who served as President of North
European Oil Corporation and North European Oil Company from 1954-1975
and as Managing Trustee of the Trust from 1975-2006, passed away on
February 25, 2009.
(4) Employee Benefit Plan:
----------------------
The Trust established a savings incentive match plan for employees
(SIMPLE IRA) that is available to all employees of the Trust,
including the Managing Director. The Trustees have authorized the
Trust to make contributions to the accounts of the employees, on a
matching basis, of up to 3% of cash compensation paid to each
employee effective for the 2010 calendar year.
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Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
-------------------------------------------------
Executive Summary
-----------------
The Trust is a passive fixed investment trust which holds overriding
royalty rights, receives income under those rights from certain operating
companies, pays its expenses and distributes the remaining net funds to its
unit owners. The Trust does not engage in any business or extractive
operations of any kind in the areas over which it holds royalty rights and is
precluded from any such involvement by the Trust Agreement. There are no
requirements, therefore, for capital resources with which to make capital
expenditures or investments in order to continue the receipt of royalty
revenues by the Trust.
The properties of the Trust, which the Trust and Trustees hold
pursuant to the Trust Agreement on behalf of the unit owners, are overriding
royalty rights on sales of gas, sulfur and oil under certain concessions or
leases in the Federal Republic of Germany. The actual leases or concessions
are held either by Mobil Erdgas-Erdol GmbH ("Mobil Erdgas"), a German
operating subsidiary of the Exxon Mobil Corp. ("Exxon Mobil"), or by
Oldenburgische Erdolgesellschaft ("OEG"). In 2002, Mobil Erdgas and BEB
Erdgas und Erdol GmbH ("BEB"), a joint venture of Exxon Mobil and the Royal
Dutch/Shell Group of Companies, formed a company Exxon Mobil Production
Deutschland GmbH ("EMPG") to carry out all exploration, drilling and
production activities. All sales activities are still handled by the
operating companies, either Mobil Erdgas or BEB.
The operating companies pay monthly royalties to the Trust based on
their sales of natural gas, sulfur and oil. Of these three products, natural
gas provides approximately 98% of the total royalties. The amount of
royalties paid to the Trust is based on four primary factors: the amount of
gas sold, the price of that gas, the area from which the gas is sold and the
exchange rate. The Oldenburg concession is the primary area from which the
natural gas, sulfur and oil are extracted and provides nearly 100% of all the
royalties received by the Trust. The Oldenburg concession (1,398,000 acres)
covers virtually the entire former Principality of Oldenburg and is located
in the federal state of Lower Saxony.
At approximately the 25th of the months of January, April, July and
October, the operating companies calculate the amount of gas sold during the
previous calendar quarter and determine the amount of royalties that were
payable to the Trust based on those sales. This amount forms the basis for
royalty payments for the Trust's upcoming fiscal quarter and for any
adjustment for the prior calendar quarter. For example, on
January 25th the operating companies calculate gas sales and attributable
royalties payable for the months of October through December. This amount
is divided into thirds and forms the monthly royalty payments (payable on the
15th of each month) to the Trust for its fiscal quarter running from February
through April. Continuing in this example, at the same time that the
operating companies determine the actual amount of royalties that were
payable for months of October through December, they look at the actual
amount of royalties that were paid to the Trust during that same period and
calculate the difference between what was paid and what was payable.
Additional amounts payable by the operating companies would be paid
immediately in January and any overpayment would be deducted from the
-12-
February payment. The operating companies continue their calculations
through the calendar year. In September of the following year the operating
companies will make the final determination of any necessary royalty
adjustments for that prior calendar year.
There are two types of natural gas found within the Oldenburg
concession, sweet gas and sour gas. Sweet gas has little or no contaminants
and needs no treatment before it can be sold. In recent years sweet gas has
assumed the role of swing producer. During periods of high demand, the
production of sweet gas is increased as necessary. During the summer months
sweet gas production is reduced due to a general decline in demand. On the
other hand, sour gas must be processed at either the Grossenkneten or
Norddeutsche Erdgas-Aufbereitungs GmbH ("NEAG") desulfurization plants before
it can be sold. The desulfurization process removes hydrogen sulfide and
other contaminants. The hydrogen sulfide in gaseous form is converted to
sulfur in a solid form and sold separately. For efficiency purposes, the
desulfurization plants are operated at capacity on a continual basis. Any
excess gas production from the plants is stored in underground storage for
higher demand periods. As needed, the operators conduct maintenance on the
plants, generally during the summer months when demand is lower.
Under one set of rights covering the western part of the Oldenburg
concession (approximately 662,000 acres), the Trust receives a royalty
payment of 4% on gross receipts from sales by Mobil Erdgas of gas well gas,
oil well gas, crude oil and condensate (the "Mobil Agreement"). Under the
Mobil Agreement, there is no deduction of costs prior to the calculation of
royalties from gas well gas and oil well gas, which together account for
approximately 99% of all the royalties under this agreement. Historically,
the Trust has received significantly greater royalty payments under the Mobil
Agreement (as compared to the OEG Agreement described below) due to the
higher royalty rate specified by that agreement.
The Trust is also entitled under the Mobil Agreement to receive a 2%
royalty on gross receipts of sales of sulfur obtained as a by-product of sour
gas produced from the western part of Oldenburg. The payment of the sulfur
royalty is conditioned upon sales of sulfur by Mobil Erdgas at a selling
price above an agreed upon base price. This base price is adjusted annually
by an inflation index. The Trust had received no sulfur royalties under this
agreement for over ten years until the second quarter of fiscal 2008, when
the average selling price exceeded the indexed base price. The Trust
continued to receive sulfur royalties under the Mobil Agreement through the
first quarter of fiscal 2009 during which quarter it received $244,874.
The average selling price for sulfur then once again dropped below the
indexed base price and no royalties based on sulfur sales were received under
the Mobil Agreement in the final three quarters of fiscal 2009 or the first
two quarters of fiscal 2010. In the third quarter of fiscal 2010, sulfur
prices again exceeded the indexed base price and the Trust received $78,870
in sulfur royalties. The Trust will continue to receive sulfur royalties
under the Mobil Agreement only so long as the selling price exceeds the
indexed base price.
Under another set of rights covering the entire Oldenburg
concession and pursuant to the agreement with OEG, the Trust receives
royalties at the rate of 0.6667% on gross receipts from sales by BEB of gas
well gas, oil well gas, crude oil, condensate and sulfur (removed during the
processing of sour gas) less a certain allowed deduction of costs (the "OEG
Agreement"). Under the OEG Agreement, 50% of the field handling, treatment
and transportation costs, as reported for state royalty purposes, are
deducted from the gross sales receipts prior to the calculation of the
-13-
royalty to be paid to the Trust. NV Nederlandse Gasunie (the state owned
Dutch gas distribution company) has completed the purchase of BEB's North
German gas distribution and transmission network. As part of its normal
biennial examination of the operating companies, the Trust's German
accountants completed their examination of the royalty payments for 2007-08.
While the pipeline sale occurred in the latter half of 2008, the accountants
confirmed that transportation costs continued in accordance with the
authorized indexed flat rate throughout this period and that the method of
royalty calculation has not been affected. The Trust will continue to
monitor the situation.
The Trust also receives small amounts of royalties from a private
lease area, Grosses Meer, outside the Oldenburg concession. The German
authorities requested that the operating companies conduct a reservoir
analysis to determine whether the royalties are being properly allocated
based on the locations of the gas reserves. Until this analysis was
completed and a final accounting could be made, the payment of royalties to
the Trust was suspended. The final accounting of royalties was completed in
the third quarter of fiscal 2010. The period of adjustment covered the years
2005 through 2009 and the first quarter of calendar 2010. Royalties payable
to the Trust for this period totaled $61,548. In the third quarter of fiscal
2010, the Trust received $128 in royalties from Grosses Meer for sales during
the second calendar quarter of 2010.
The gas is sold to various distributors under long-term contracts
which delineate, among other provisions, the timing, manner, volume and price
of the gas sold. The pricing mechanisms contained in these contracts include
a delay factor of three to six months and use the price of light heating oil
in Germany as one of the primary pricing components. Since Germany must
import a large percentage of its energy requirements, the U.S. dollar price
of oil on the international market has a significant impact on the price of
light heating oil and a delayed impact on the price of gas. The Trust does
not have access to the specific sales contracts under which gas from the
Oldenburg concession is sold. Working under a confidentiality agreement with
the operating companies, the Trust's German accountant reviews these contracts
periodically on behalf of the Trust to verify the correctness of application
of the Agreement formulas for the computation of royalty payments.
For unit owners, changes in the dollar value of the Euro have both
an immediate and long-term impact. The immediate impact is from the exchange
rate that is applied at the time the royalties, paid to the Trust in Euros,
are converted into U.S. dollars at the time of their transfer from Germany to
the United States. In relation to the dollar, a stronger Euro would yield
more dollars and a weaker Euro less dollars. The long-term impact relates to
the mechanism of gas pricing contained in the gas sales contracts negotiated
by the operating companies. These gas sales contracts often use the price of
German light heating oil as one of the primary pricing factors by which the
price of gas is determined. The price of German light heating oil, which is
a refined product, is largely determined by the price of the imported crude
oil from which it was refined. Oil on the international market is priced in
dollars. However, when oil is imported into Germany it is purchased in
Euros, and at this point the dollar value of the Euro becomes relevant.
A weaker Euro would buy less oil making that oil and the subsequently refined
light heating oil more expensive. A stronger Euro would buy more oil making
that oil and the subsequently refined light heating oil less expensive.
Since changes in the price of German light heating oil are subsequently
reflected in the price of gas through the gas sales contracts, the
dollar/Euro relationship can make the prices of gas higher or lower.
The changes in gas prices that result from changes in the prices of German
-14-
light heating oil are only reflected after a built-in delay of three to six
months as specified in the individual gas sales contracts.
Seasonal demand factors affect the income from royalty rights
insofar as they relate to energy demands and increases or decreases in
prices, but on average they are not material to the regular annual income
received under the royalty rights.
The Trust has no means of ensuring continued income from overriding
royalty rights at their present level or otherwise. The Trust's consultant
in Germany provides general information to the Trust on the German and
European economies and energy markets. This information provides a context
in which to evaluate the actions of the operating companies. In his position
as consultant, he receives reports from the operating companies with respect
to current and planned drilling and exploration efforts. However, the
unified exploration and production venture, EMPG, which provides the reports
to the Trust's consultant, continues to limit the information flow to that
which is required by German law.
The low level of administrative expenses of the Trust limits the
effect of inflation on its financial prospects. Sustained price inflation,
which would be reflected in sales prices, along with sales volumes form the
basis on which the royalties paid to the Trust are computed. The impact of
inflation or deflation on energy prices in Germany is delayed by the use, in
certain long-term gas sales contracts, of a delay factor of three to six
months prior to the application of any changes in light heating oil prices to
gas prices.
As mandated by the Trust Agreement, distributions of income are
made on a quarterly basis. These distributions, as determined by the
Trustees, constitute substantially all the funds on hand after provision is
made for Trust expenses then anticipated.
Results: Third Quarter Fiscal 2010 Versus Third Quarter Fiscal 2009
------------------------------------------------------------
For the third quarter of fiscal 2010, the Trust's net income was
$4,316,443, a decrease of 17.68% from the net income of $5,243,544 for the
third quarter of fiscal 2009. Gross royalties received for the third quarter
of fiscal 2010 were $4,482,847, a decrease of 17.99% as compared to
$5,466,337 for the third quarter of fiscal 2009. These royalties were
derived from sales of gas, sulfur and oil from the Trust's overriding
royalty areas in Germany during the second calendar quarter of 2010.
A distribution of 47 cents per unit was paid on August 25, 2010 to owners
of record as of August 13, 2010.
The amount of royalties paid to the Trust is based on four primary
factors: the amount of gas sold, the price of that gas, the area from which
the gas is sold and the exchange rate. Gas sales are measured in billion
cubic feet ("Bcf"). Gas prices are reported in Euro cents per Kilowatt hour
("Ecents/Kwh") and dollars per thousand cubic feet ("$/Mcf"). The major
reasons for the decline in royalty income under both agreements were declines
in the average Euro/dollar exchange rate and to a lesser extent declines in
gas sales compared to the prior year's equivalent quarter. Gas prices were
mixed.
-15-
-----------------------------------------------------------------------------
3rd Fiscal Qtr. 3rd Fiscal Qtr. Percentage
Mobil Agreement Ended 7/31/2010 Ended 7/31/2009 Change
-----------------------------------------------------------------------------
Gas Sales (Bcf) 11.770 12.290 - 4.23%
Gas Prices (Ecents/Kwh) 1.9666 1.8579 + 5.85%
Gas Prices ($/Mcf) $ 7.08 $ 7.52 - 5.85%
Average Euro Exchange Rate $1.2522 $1.4061 -10.95%
-----------------------------------------------------------------------------
OEG Agreement
-----------------------------------------------------------------------------
Gas Sales (Bcf) 30.131 31.205 - 3.44%
Gas Prices (Ecents/Kwh) 2.1186 2.1681 - 2.28%
Gas Prices ($/Mcf) $ 7.49 $ 8.48 -11.67%
Average Euro Exchange Rate $1.2596 $1.3946 - 9.68%
If we exclude the effects of differences in prices and average
exchange rates, the combination of royalty rates on gas sold from western
Oldenburg results in an effective royalty rate approximately seven times
higher than the royalty rate on gas sold from eastern Oldenburg. This is
of particular significance to the Trust since gas sold from western Oldenburg
provides the bulk of royalties paid to the Trust. For the quarter just
ended, gas sales from western Oldenburg accounted for only 39.06% of all gas
sales. However, royalties on these gas sales provided approximately 87.15% or
$3,681,592 out of a total of $4,224,667 in Oldenburg royalties attributable
to gas.
During fiscal 2010, the operating companies have scheduled eighteen
days in August for maintenance on the Grossenkneten desulfurization plant.
During fiscal 2009, no maintenance was conducted on Grossenkneten. The amount
of sour gas being processed is reduced while maintenance on the Grossenkneten
desulfurization plant is conducted.
Per the terms of the Trust Agreement, funds temporarily held by the
Trust are invested in certificates of deposit or U.S. Treasury Bills. For
the quarter just ended, Trust interest income remained at relatively minimal
amounts due to the low interest rates applicable during the period and the
reduced funds available for investment. Trust expenses for the third quarter
of fiscal 2010 decreased 24.45% or $54,756 to $169,228 in comparison to the
prior year's equivalent period. This decline in expenses is due to reduced
Trustee fees as specified in the Trust Agreement and reduced work on the
legal issues raised as a result of the examination of the German operating
companies' royalty payments.
The current Statement of Assets, Liabilities and Trust Corpus of
the Trust at July 31, 2010, compared to that at fiscal year-end (October 31,
2009), shows an increase in assets due to higher royalty payments received
during the quarter just ended.
-16-
Results: First Nine Months of Fiscal 2010 Versus First Nine Months of
------------------------------------------------------------
Fiscal 2009
-----------
For the nine month period, the Trust's net income was $13,551,435,
a decrease of 44.03% from the net income of $24,212,913 for last year's
equivalent period. Gross royalties received for the first nine months of
fiscal 2010 were $14,303,305, a decrease of 42.95% as compared to $25,072,153
for the first nine months of fiscal 2009. These royalties were primarily
derived from sales of gas, sulfur and oil from the Trust's overriding royalty
areas in Germany during the fourth calendar quarter of 2009 and the first two
calendar quarters of 2010. For the nine month periods ended July 31, 2010
and 2009, total distributions were equal to $1.48 and $2.63 per unit,
respectively. As in prior years, the Trust receives adjustments from the
operating companies based on their final calculations of royalties payable
during the previous calendar year. In accordance with the new royalty
payment schedule for fiscal 2010, the earliest the Trust might receive a
year-end adjustment for calendar 2009 is in September 2010. However, during
the first nine months of fiscal 2009, the Trust received the equivalent of
$0.1090 per unit as a year-end adjustment for calendar 2008. In addition,
based upon errors discovered by the Trust's accountants in Germany during
their examination of the royalty payments during the periods 2005-2006 and
2007-2008, the Trust received adjustments equivalent to $0.0119 per unit and
$0.1013 per unit during the first nine months of fiscal 2010 and 2009,
respectively.
The primary factors affecting royalty revenue for the first nine
months of fiscal 2010 were significant declines in gas prices and moderate
declines in gas sales in comparison to the equivalent period in fiscal 2009.
The average exchange rates under both the Mobil and the OEG Agreements were
virtually unchanged.
-----------------------------------------------------------------------------
Nine Months Nine Months Percentage
Mobil Agreement Ended 7/31/2010 Ended 7/31/2009 Change
-----------------------------------------------------------------------------
Gas Sales (Bcf) 34.963 38.827 - 9.95%
Gas Prices (Ecents/Kwh) 1.8384 2.6086 -29.53%
Gas Prices ($/Mcf) $ 7.13 $10.11 -29.48%
Average Euro Exchange Rate $1.3479 $1.3454 - 0.19%
-----------------------------------------------------------------------------
OEG Agreement
-----------------------------------------------------------------------------
Gas Sales (Bcf) 90.831 97.971 - 7.29%
Gas Prices (Ecents/Kwh) 2.0391 2.9499 -30.88%
Gas Prices ($/Mcf) $ 7.68 $11.07 -30.62%
Average Euro Exchange Rate $1.3439 $1.3368 + 0.53%
For the nine months just ended, gas sales from western Oldenburg
accounted for only 38.49% of all gas sales. However, royalties on these
gas sales provided approximately 83.01% or $11,496,986 out of a total of
$13,850,167 in Oldenburg royalties attributable to gas.
Interest income was lower reflecting the continuing low interest
rates applicable during the period and reduced funds available for
investment. Interest income for the nine month period of fiscal 2010
decreased 51.27% to $5,282 from $10,839 in the first nine months of fiscal
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2009. Trust expenses for nine month period of fiscal 2010 decreased 12.98%
or $112,927 to $757,152 in comparison to $870,079 for the prior fiscal year's
equivalent period. The decrease in expenses resulted primarily from reduced
Trustee fees as specified in the Trust Agreement.
-----------------------------------
This report on Form 10-Q contains forward looking statements
concerning business, financial performance and financial condition of the
Trust. Many of these statements are based on information provided to the
Trust by the operating companies or by consultants using public information
sources. These statements are subject to certain risks and uncertainties
that could cause actual results to differ materially from those anticipated
in any forward looking statements. These include uncertainties concerning
levels of gas production and gas prices, general economic conditions and
currency exchange rates and the risks described in Item 1A, "Risk Factors,"
in the Trust's Annual Report on Form 10-K for the fiscal year ended October
31, 2009. Actual results and events may vary significantly from those
discussed in the forward looking statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
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The Trust does not engage in any trading activities with respect to
possible foreign exchange fluctuations. The Trust does not use any financial
instruments to hedge against possible risks related to foreign exchange
fluctuations. The market risk is negligible because standing instructions at
the Trust's German bank require the bank to process conversions and transfers
of royalty payments as soon as possible following their receipt. The Trust
does not engage in any trading activities with respect to possible commodity
price fluctuations.
Item 4. Controls and Procedures.
-----------------------
The Trust maintains disclosure controls and procedures that are
designed to ensure that information required to be disclosed by the Trust
is recorded, processed, summarized, accumulated and communicated to its
management, which consists of the Managing Director, to allow timely
decisions regarding required disclosure, and reported within the time periods
specified in the Securities and Exchange Commission's rules and forms.
The Managing Director has performed an evaluation of the
effectiveness of the design and operation of the Trust's disclosure controls
and procedures as of July 31, 2010. Based on that evaluation, the
Managing Director concluded that the Trust's disclosure controls and
procedures were effective as of July 31, 2010.
There have been no changes in the Trust's internal control over
financial reporting identified in connection with the evaluation described
above that occurred during the third quarter of fiscal 2010 that have
materially affected or are reasonably likely to materially affect the Trust's
internal control over financial reporting.
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PART II -- OTHER INFORMATION
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Item 6. Exhibits.
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Exhibit 31. Certification of Chief Executive Officer and
Chief Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
Exhibit 32. Certification of Chief Executive Officer and
Chief Financial Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
SIGNATURE
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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 hereunto duly authorized.
NORTH EUROPEAN OIL ROYALTY TRUST
---------------------------------
(Registrant)
/s/ John R. Van Kirk
---------------------------------
John R. Van Kirk
Managing Director
Dated: August 30, 2010