References to the "Trust" in this document refer to ECA Marcellus Trust I. As
discussed in "Overview" below, Greylock Energy acquired substantially all of the
assets of Energy Corporation of America in November 2017. References to "Legacy
ECA" in this document refer to Energy Corporation of America and its
wholly-owned subsidiaries and, when discussing the conveyance documents, the
Private Investors, as such entities existed prior to the asset acquisition by
Greylock Energy. The following review of the Trust's financial condition and
results of operations should be read in conjunction with the financial
statements and notes thereto and the audited financial statements and notes
thereto included in the Trust's Annual Report on Form 10-K for the year ended
December 31, 2020 (the "2020 Form 10-K"). The Trust's annual reports on
Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all
amendments to those reports are available on the SEC's website at www.sec.gov
and at http://ect.q4web.com/home/default.aspx. Certain terms used herein are
defined in Appendix A. All information regarding operations has been provided to
the Trustee by Greylock Energy.
Note Regarding Forward-Looking Statements
This report contains "forward-looking statements" about Greylock Energy and the
Trust and other matters discussed herein that are subject to risks and
uncertainties. All statements other than statements of historical fact included
in this document, including, without limitation, statements under "Trustee's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Risk Factors" regarding the financial position, business strategy, production
and reserve growth, development activities and costs and other plans and
objectives for the future operations of Greylock Energy and all matters relating
to the Trust are forward-looking statements. Actual outcomes and results may
differ materially from those projected.
When used in this document, the words "believes," "expects," "anticipates,"
"intends" or similar expressions, are intended to identify such forward-looking
statements. Further, all statements regarding future circumstances or events are
forward-looking statements. The following important factors, in addition to
those discussed elsewhere in this document, could affect the future results of
the energy industry in general, and Greylock Energy and the Trust in particular,
and could cause those results to differ materially from those expressed in such
forward-looking statements:
• risks incident to the operation of natural gas wells;
• future production costs;
• the effects of existing and future laws and regulatory actions;
• the effects of changes in commodity prices;
• conditions in the capital markets;
• the effect, impact, potential duration, or other implications of the
Coronavirus Disease 2019 ("COVID-19") pandemic;
• competition in the energy industry;
• the uncertainty of estimates of natural gas reserves and production; and
• other risks described under the caption "Risk Factors" in Part I, Item 1A of
the 2020 Form 10-K
This report describes other important factors that could cause actual results to
differ materially from expectations of Greylock Energy and the Trust. All
subsequent written and oral forward-looking statements attributable to Greylock
Energy or the Trust or persons acting on behalf of Greylock Energy or the Trust
are expressly qualified in their entirety by such factors. The Trust assumes no
obligation, and disclaims any duty, to update these forward-looking statements.
10
Overview
The Trust is a statutory trust created under the Delaware Statutory Trust Act.
The Bank of New York Mellon Trust Company, N.A. serves as Trustee. The Trust
does not conduct any operations or activities. The Trust's purpose is, in
general, to hold the Royalty Interests (described below), to distribute to the
Trust unitholders cash that the Trust receives in respect of the Royalty
Interests after payment of Trust expenses and to perform certain administrative
functions in respect of the Royalty Interests and the Trust units. The Trustee
has no authority or responsibility for, and no involvement with, any aspect of
the oil and gas operations on the properties to which the Royalty Interests
relate. The Trust derives all or substantially all of its income and cash flows
from the Royalty Interests. The Trust is treated as a partnership for federal
and state income tax purposes.
In November 2017, Greylock Energy and certain of its wholly owned subsidiaries,
including Greylock Production, LLC, which serves as operator of the subject
wells, and Greylock Midstream, LLC, whose subsidiaries market and gather certain
of the gas, acquired substantially all of the gas production and midstream
assets of Legacy ECA, including all of Legacy ECA's interests in certain natural
gas properties that are subject to royalty interests held by the Trust.
In connection with the transaction, Greylock Production assumed all of Legacy
ECA's obligations under the Trust Agreement and other instruments to which
Legacy ECA and the Trustee were parties, including (1) the Administrative
Services Agreement by and among Legacy ECA, the Trust and the Trustee dated
July 7, 2010, and (2) a letter agreement between Legacy ECA and the Trustee
regarding certain loans to be made by Legacy ECA to the Trust as necessary to
enable the Trust to pay its liabilities as they become due (the "Letter
Agreement"). In addition, Legacy ECA, Greylock Production, and the Trustee
entered into a Reaffirmation and Amendment of Mortgage, Assignment of Leases,
Security Agreement, Fixture Filing and Financing Statement (the "Reaffirmation
Agreement"), pursuant to which, among other things, Greylock Production
(1) reaffirmed the liens and the security interest granted pursuant to the
existing mortgage securing the interests in the subject properties, as well as
the mortgage and the obligations of Legacy ECA under the mortgage, and
(2) assumed the obligations of Legacy ECA under the Letter Agreement.
As part of the initial acquisition of substantially all of Legacy ECA's assets,
neither Greylock Energy nor Greylock Production acquired title ownership of
Legacy ECA's working interest in two wells in which the Trust also has an
interest, the Penneco Morrow #1MH and Penneco Morrow #2MH wells. In March 2019
Legacy ECA sold the title ownership and working interest in these two wells to
Greylock Production.
The Royalty Interests were conveyed to the Trust from the working interest now
held by Greylock Production in the Producing Wells and the PUD Wells limited to
the Underlying Properties. The PDP Royalty Interest entitles the Trust to
receive 90% of the proceeds (exclusive of any production or development costs
but after deducting post-production costs and any applicable taxes) from the
sale of production of natural gas attributable to the Sponsor's initial interest
in the Producing Wells for a period of 20 years commencing on April 1, 2010 and
45% thereafter. The PUD Royalty Interest entitles the Trust to receive 50% of
the proceeds (exclusive of any production or development costs but after
deducting post-production costs and any applicable taxes) from the sale of
production of natural gas attributable to the Sponsor's initial interest in the
PUD Wells for a period of 20 years commencing on April 1, 2010 and 25%
thereafter.
Legacy ECA was obligated to drill all of the PUD Wells by March 31, 2014. As of
November 30, 2011, Legacy ECA had fulfilled its drilling obligation to the Trust
by drilling 40 PUD Wells (52.06 Equivalent PUD Wells), calculated as provided in
the Development Agreement. Consequently, no additional wells will be drilled for
the Trust. The Trust was not responsible for any costs related to the drilling
of development wells or any other development or operating costs. As of
September 30, 2020, the Trust owns royalty interests in 14 Producing Wells and
the 40 development wells (52.06 Equivalent PUD Wells) that are now completed and
in production.
The Trust's cash receipts in respect of the Royalty Interests are determined
after deducting post-production costs and any applicable taxes associated with
the Royalty Interests, and the Trust's cash available for distribution is
reduced by Trust administrative expenses and any amounts reserved for
administrative expenses. Post-production costs generally consist of costs
incurred to gather, compress, transport, process, treat, dehydrate and market
the natural gas produced. Charges (the "Post-Production Services Fee") payable
to Legacy ECA for such post-production costs on the related GCGS were limited to
$0.52 per MMBtu gathered until Legacy ECA fulfilled its drilling obligation in
2011; since then the Sponsor has been permitted to increase the Post-Production
Services Fee to the extent necessary to recover certain capital expenditures in
the GCGS.
11
Greylock Production has an agreement with Columbia Gas Transmission, LLC
("Columbia") to provide firm transportation downstream of the GCGS for 50,000
MMBtu per day (the "Transportation Agreement"). The Transportation Agreement has
been in effect since August 1, 2011 and provides for firm transportation at
Columbia's filed tariff rate, which is currently $0.2508 per MMBtu at one
hundred percent load factor. As amended by Greylock Production and Columbia in
September 2020, the Transportation Agreement will terminate on December 31, 2024
with respect to 45,000 MMBtu per day, and July 31, 2022 with respect to the
remaining 5,000 MMBtu per day, unless Greylock Production exercises its right of
first refusal to extend the term.
Greylock Production and Columbia have entered into an additional agreement, as
amended in September 2020, to provide firm transportation downstream of the GCGS
for 52,550 MMBtu per day that will utilize Columbia's Mountaineer XPress Project
(the "MXP Agreement"). This firm transportation arrangement went into effect on
January 18, 2019, and is at a fixed demand rate of $0.50 per MMBtu at one
hundred percent load factor plus applicable Columbia tariff surcharges. Unless
otherwise modified or altered, the MXP Agreement, as amended, will terminate in
on December 31, 2022. The previously existing negotiated reservation rate will
remain in place for all months other than September 2020 and December 2021. Firm
transportation utilized as to the Trust's interests is a chargeable
post-production cost, and the Trust bears its proportionate share of such costs;
however, the Trust will not be charged for the costs associated with modifying
the firm transportation agreements with TCO, including the difference between
the base negotiated rate and the increased negotiated rate in September 2020 and
December 2021 under the MXP Agreement.
On July 31, 2020 Columbia submitted an application to the Federal Energy
Regulatory Commission ("FERC") to increase certain tariff rates effective
February 1, 2021. FERC issued an Order Accepting and Suspending Filing, Subject
to Refund on August 31, 2020. As proposed, this tariff filing would increase the
tariff rate from $0.23/MMbtu to $0.41/MMbtu on the applicable contracts. and the
tariff filing is currently being protested at FERC. Once the rate case is
settled, TCO would be required to issue a refund on any difference between the
$0.41/MMbtu currently being applied and the final tariff rate.
Generally, the percentage of production proceeds to be received by the Trust
with respect to a well equals the product of (i) the percentage of proceeds to
which the Trust is entitled under the terms of the conveyances (90% for the
Producing Wells and 50% for the PUD Wells) multiplied by (ii) Greylock
Production's net revenue interest in the well. Greylock Production on average
owns an 81.53% net revenue interest in the Producing Wells. Therefore, the Trust
is entitled to receive on average 73.37% of the proceeds of production from the
Producing Wells. With respect to the PUD Wells, the conveyance related to the
PUD Royalty Interest provides that the proceeds from the PUD Wells will be
calculated on the basis that the underlying PUD Wells are burdened only by
interests that in total would not exceed 12.5% of the revenues from such
properties, regardless of whether the royalty interest owners are actually
entitled to a greater percentage of revenues from such properties. As an
example, assuming Greylock Production owns a 100% working interest in a PUD
Well, the applicable net revenue interest is calculated by multiplying Greylock
Production's percentage working interest in the 100% working interest well by
the unburdened interest percentage (87.5%), and such well would have a minimum
87.5% net revenue interest. Accordingly, the Trust is entitled to a minimum of
43.75% of the production proceeds from the well provided in this example. To the
extent Greylock Production's working interest in a PUD Well is less than 100%,
the Trust's share of proceeds would be proportionately reduced.
The Trust makes quarterly cash distributions of substantially all of its cash
receipts, after deducting Trust administrative expenses and costs and reserves
therefor, on or about the 60th day following the completion of each quarter.
Unless sooner terminated, the Trust will begin to liquidate in March 2030 and
will soon thereafter wind up its affairs and terminate.
12
The amount of Trust revenues and cash distributions to Trust unitholders depends
on, among other things:
• natural gas prices received;
• the volume and Btu rating of natural gas produced and sold;
• post-production costs and any applicable taxes; and
• administrative expenses of the Trust including expenses incurred as a result of
being a publicly traded entity and any changes in amounts reserved for such
expenses.
The global spread of COVID-19 created significant volatility, uncertainty, and
economic disruption during 2020 and continuing through the beginning of 2021.
The ongoing COVID-19 pandemic has reached more than 200 countries and has
continued to be a rapidly evolving economic and public health situation. The
pandemic has resulted in widespread adverse impacts on the global economy, and
there is considerable uncertainty regarding the extent to which COVID-19 will
continue to spread and the extent and duration of governmental and other
measures implemented to try to slow the spread of the virus, such as
quarantines, shelter-in-place orders and business and government shutdowns.
State and local authorities have also implemented multi-step policies with the
goal of re-opening. However, certain jurisdictions began re-opening only to
return to restrictions in the face of increases in new COVID-19 cases.
Natural gas prices are expected to continue to be volatile as a result of the
ongoing COVID-19 pandemic and as changes in natural gas inventories, industry
demand and national and economic performance are reported, and the Trust cannot
predict when prices will improve and stabilize. The Trust cannot predict the
full impact that COVID-19 or the significant disruption and volatility currently
being experienced in the oil and natural gas markets will have on Greylock
Energy's business, financial condition and results of operations or on proceeds
to the Trust and the Trust's reserves and quarterly cash distributions to
unitholders due to numerous uncertainties.
The extent to which the COVID-19 pandemic negatively impacts Greylock Energy's
business will depend on the severity, location and duration of the effects and
spread of COVID-19, the actions undertaken by federal, state and local
governments and health officials to contain the virus or treat its effects, and
how quickly and to what extent economic conditions improve and normal business
and operating conditions resume. A prolonged period of low natural gas prices
will adversely affect Greylock Energy. If commodity prices for natural gas
remain at reduced levels, cash distributions to unitholders will be
substantially lower than historical distributions, and in certain periods in
which cash proceeds to the Trust are insufficient to cover Trust expenses, there
may be no distribution to unitholders. For example, there were no distributions
to unitholders for the quarters ended March 31, 2020, June 30, 2020 or
September 30, 2020, as Trust expenses exceeded net revenues to the Trust.
Moreover, continued low natural gas prices may ultimately reduce the amount of
natural gas that is economic to produce from the Underlying Properties. As a
result, the operator of any of the Underlying Properties could determine during
periods of low natural gas prices to shut in or curtail production from wells on
the Underlying Properties. In addition, the operator of the Underlying
Properties could determine during periods of low natural gas prices to plug and
abandon marginal wells that otherwise may have been allowed to continue to
produce for a longer period under conditions of higher prices. Specifically,
Greylock Production may abandon any well or property if it reasonably believes
that the well or property can no longer produce natural gas in commercially
economic quantities. This could result in termination of the portion of the
royalty interest relating to the abandoned well or property, and Greylock
Production would have no obligation to drill a replacement well. In making such
decisions, Greylock Production is required under the applicable conveyance to
act as a reasonably prudent operator in the AMI under the same or similar
circumstances as it would act if it were acting with respect to its own
properties, disregarding the existence of the Royalty Interests as burdens
affecting such property. The volatility of natural gas prices also reduces the
accuracy of estimates of future cash distributions to Trust unitholders.
The effective date of the Trust was April 1, 2010, meaning the Trust has
received the proceeds of production attributable to the PDP Royalty Interest
from that date even though the PDP Royalty Interest was not conveyed to the
Trust until July 7, 2010. The amount of the quarterly distributions fluctuates
from quarter to quarter, depending on the proceeds received by the Trust, among
other factors. There is no minimum required distribution.
13
Pursuant to Section 1446 of the Internal Revenue Code of 1986 (the "IRC"),
withholding tax on income effectively connected to a United States trade or
business allocated to non-U.S. persons ("ECI") should be made at the highest
marginal rate. Under IRC Section 1441, withholding tax on fixed, determinable,
annual, periodic income from United States sources allocated to non-U.S. persons
should be made at a 30% rate unless the rate is reduced by treaty. Nominees and
brokers should withhold at the highest marginal rate on the distribution made to
non-U.S. persons. The Tax Cuts and Jobs Act (the "TCJA") enacted in
December 2017 treats a non-U.S. holder's gain on the sale of Trust units as ECI
to the extent such holder would have had ECI if the Trust had sold all of its
assets at fair market value on the date of the sale of such Trust units. The
TCJA also requires a transferee of units to withhold 10% of the amount realized
on the sale of exchange of units (generally, the purchase price) unless the
transferor certifies that it is not a nonresident alien individual or foreign
corporation or another exception is available. Pursuant to final Treasury
Regulations issued on October 7, 2020, this new withholding obligation will
become applicable to transfers of units in publicly traded partnerships such as
the Trust (which is classified as a partnership for federal and state income tax
purposes) occurring on or after January 1, 2022.
Potential Early Termination of the Trust. The trust agreement provides that the
Trust will terminate if gross proceeds to the Trust attributable to the Royalty
Interests over any four consecutive quarters are less than $1.5 million. If this
early termination event occurs, the trust agreement will require the Trustee to
sell the Royalty Interests, either by private sale or public auction, subject to
Greylock Energy's right of first refusal to purchase the Royalty Interests.
After the sale of all of the Royalty Interests, payment of all Trust liabilities
and establishment of reasonable provisions for the payment of additional
anticipated or contingent Trust expenses or liabilities, the Trustee will
distribute the net proceeds of the sale to the Trust unitholders. Gross proceeds
to the Trust attributable to the Royalty Interests during the last three
quarters of 2020 were $1,229,372 with additional proceeds of $1,035,139 for the
current quarter, for a total of $2,264,511 for the last four consecutive
quarters.
Results of Trust Operations
For the Three Months Ended March 31, 2021 compared to the Three Months Ended
March 31, 2020
Distributable income for the three months ended March 31, 2021 increased to $0.5
million from $0 for the three months ended March 31, 2020. Compared to the
quarter ended March 31, 2020, royalty income increased by $0.6 million while
general and administrative expenses decreased by $0.1 million.
Royalty income increased to $1.0 million for the three months ended March 31,
2021 from $0.5 million for the three months ended March 31, 2020, an increase of
$0.5 million. This increase was due to an increase in the average sales price
between periods partially offset by lower production between periods.
The average price realized for the three months ended March 31, 2021 increased
$0.91 per Mcf to $1.59 per Mcf as compared to $0.67 per Mcf for the three months
ended March 31, 2020. The increase in the average sales price realized for
natural gas production was due primarily to a higher average sales price and a
decrease in other post-production costs during the period. The average sales
price, before post-production costs, increased from $1.69 per Mcf for the three
months ended March 31, 2020 to $2.43 per Mcf for the three months ended
March 31, 2021. The increase in price was the result of a decrease in the
weighted average monthly closing NYMEX price for the current period to $2.67 per
MMBtu compared to the weighted average monthly closing NYMEX price of $1.96 per
MMBtu for the three months ended March 31, 2020. The average Basis per MMBtu in
the current and prior period was minus $0.32 per MMBtu.
Post-production costs consist of a post-production services fee together with a
charge for electricity used in lieu of gas for compression on the gathering
system and firm transportation charges on interstate gas pipelines. Overall,
average post-production costs decreased to $0.84 per Mcf in the current period
compared to $1.01 per Mcf for the three-month period ended March 31, 2020.
Production decreased 7.2% from 703 MMcf for the three months ended March 31,
2020 to 652 MMcf for the three months ended March 31, 2021. The decreased
production was the result of natural production declines that occur during the
life of a well.
14
General and administrative expenses paid by the Trust for the three months ended
March 31, 2021 decreased by $0.1 million to approximately $0.4 million compared
to $0.5 million for the three months ended March 30, 2020. This decrease was the
result of timing in professional service fees. Cash reserves of $0.1 million
were withheld for the three months ended March 31, 2021 as compared to $0 for
the three months ended March 31, 2020.
Liquidity and Capital Resources
The Trust has no source of liquidity or capital resources other than net cash
flows from the Royalty Interests. Other than Trust administrative expenses,
including, if applicable, expense reimbursements to Greylock Production and any
reserves established by the Trustee for future liabilities, the Trust's only use
of cash is for distributions to Trust unitholders. Administrative expenses
include payments to the Trustee and the Delaware Trustee as well as a quarterly
fee of $15,000 to Greylock Production pursuant to the Administrative Services
Agreement. Each quarter, the Trustee determines the amount of funds available
for distribution. Available funds are the excess cash, if any, received by the
Trust from the Royalty Interests and other sources (such as interest earned on
any amounts reserved by the Trustee) that quarter, over the Trust's expenses for
that quarter. Available funds are reduced by any cash the Trustee determines to
hold as a reserve against future expenses or liabilities. The Trustee, on behalf
of the Trust, may borrow funds required to pay expenses or liabilities if the
Trustee determines that the cash on hand and the cash to be received are
insufficient to cover the Trust's expenses or liabilities. If the Trustee
borrows funds, the Trust unitholders will not receive distributions until the
borrowed funds are repaid.
Commencing with the distribution paid to unitholders in the first quarter of
2019, the Trustee has been gradually building a cash reserve for the payment of
future expenses and liabilities of approximately $1.8 million by withholding
cash reserve amounts from each quarterly distribution equal to the greater of
$90,000 or 10% of the amount distributable to unitholders. In February 2021, the
Trustee withheld $160,497 from funds otherwise available for distribution. These
withholdings are in addition to the existing cash reserve of $0.8 million, which
is determined prior to the payments of quarterly expenses. The Trustee may
increase or decrease the targeted amount at any time, and may increase or
decrease the rate at which it is withholding funds to build the cash reserve at
any time, without advance notice to the unitholders. After the approximately
$1.8 million has been withheld, the Trustee will have cash reserves of
approximately $2.3 million. Cash held in reserve will be invested as required by
the Trust Agreement. Any cash reserved in excess of the amount necessary to pay
or provide for the payment of future known, anticipated or contingent expenses
or liabilities eventually will be distributed to unitholders, together with
interest earned on the funds. For the quarter ended March 31, 2021, the Trustee
withheld approximately $0.1 million from the funds otherwise available for
distribution and withheld a minimal amount of interest earned on the cash
reserve balance. The Trustee has withheld from the funds otherwise available for
distribution a total amount of $1.1 million plus $5,241 of interest toward the
building of the $1.8 million cash reserve.
Payments to the Trust in respect of the Royalty Interests are based on the
complex provisions of the various conveyances held by the Trust, copies of which
are filed as exhibits to the 2020 Form 10-K, and reference is hereby made to the
text of the conveyances for the actual calculations of amounts due to the Trust.
The Trust does not have any transactions, arrangements or other relationships
with unconsolidated entities or persons that could materially affect the Trust's
liquidity or the availability of capital resources.
Significant Accounting Policies
The financial statements of the Trust differ from financial statements prepared
in accordance with generally accepted accounting principles in the United States
of America ("GAAP") because, among other differences, certain cash reserves may
be established for contingencies, which would not be accrued in financial
statements prepared in accordance with GAAP. Amortization of the investment in
overriding royalty interests calculated on a unit-of-production basis is charged
directly to Trust Corpus. This comprehensive basis of accounting other than GAAP
corresponds to the accounting permitted for royalty trusts by the SEC as
specified by ASC Topic 932 Extractive Activities-Oil and Gas: Financial
Statements of Royalty Trusts.
15
Income determined on the basis of GAAP would include all expenses incurred for
the period presented. However, the Trust serves as a pass-through entity, with
expenses for depreciation, depletion, and amortization, interest and income
taxes being based on the status and elections of the Trust unitholders. General
and administrative expenses, production taxes or any other allowable costs are
charged to the Trust only when cash has been paid for those expenses. In
addition, the Royalty Interests are not burdened by field and lease operating
expenses. Thus, the statement shows distributable income, defined as income of
the Trust available for distribution to the Trust unitholders before application
of those unitholders' additional expenses, if any, for depreciation, depletion,
and amortization, interest and income taxes. The revenues are reflected net of
existing royalties and overriding royalties and have been reduced by
gathering/post-production expenses.
Revenue and Expenses:
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
election of the unitholders. Thus, the Statements of Distributable Income show
income available for distribution 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 reserves are extracted from the Underlying Properties and sold.
Expenses are recognized when paid.
Royalty Interest in Gas Properties:
The Royalty interest in gas properties is assessed to determine whether the net
capitalized cost is impaired, whenever events or changes in circumstances
indicate that its carrying amount may not be recoverable, pursuant to ASC Topic
360, Property, Plant and Equipment. The Trust determines whether an impairment
charge is necessary to its investment in the Royalty interest in gas properties
if total capitalized costs, less accumulated amortization, exceed undiscounted
future net revenues attributable to proved gas reserves of the Underlying
Properties. Determination as to whether and how much an asset is impaired
involves estimates of fair value, which is determined based on discounted cash
flow techniques using assumptions including projected revenues, future commodity
prices, production costs, and market-specific average cost of capital. Estimates
of undiscounted future net revenues attributable to proved gas reserves utilize
NYMEX forward pricing curves. If required, the Trust will recognize an
impairment charge to the extent that the net capitalized costs exceed the
discounted fair value of the investment in net profits interests attributable to
proved gas reserves of the Underlying Properties. Any such impairment charge
would not reduce Distributable Income, although it would reduce Trust Corpus. No
impairment in the Underlying Properties was recognized during the quarter ended
March 31, 2021. Significant dispositions or abandonment of the Underlying
Properties are charged to Royalty Interests and the Trust Corpus.
Amortization of the Royalty interest in gas properties is calculated on a
units-of-production basis, whereby the Trust's cost basis in the properties is
divided by Trust total proved reserves to derive an amortization rate per
reserve unit. Such amortization does not reduce Distributable Income, rather it
is charged directly to Trust Corpus. Revisions to estimated future
units-of-production are treated on a prospective basis beginning on the date
significant revisions are known.
The conveyance of the Royalty Interests to the Trust was accounted for as a
purchase transaction. The $352,100,000 reflected in the Statements of Assets,
Liabilities and Trust Corpus as Royalty interest in gas properties represents
17,605,000 Trust units valued at $20.00 per unit. The carrying value of the
Trust's investment in the Royalty Interests is not necessarily indicative of the
fair value of such Royalty Interests.
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