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 January 31, 2008 or
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[ ] 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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Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer or a non-accelerated filer.
See definition of accelerated filer and large accelerated filer in
Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer Accelerated filer X Non-accelerated filer
---- ---- ----
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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 January 31, 2008
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Units of Beneficial Interest 9,190,590
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PART I -- FINANCIAL INFORMATION
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Item 1. Financial Statements.
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STATEMENTS OF ASSETS, LIABILITIES AND TRUST CORPUS (NOTE 1)
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JANUARY 31, 2008 AND OCTOBER 31, 2007
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2008 2007
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(unaudited)
Current assets - - Cash and
cash equivalents (Note 1) $ 7,009,967 $ 5,912,620
Producing gas and oil royalty rights 1 1
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Total Assets $ 7,009,968 $ 5,912,621
============ ============
Current liabilities - - Distributions
payable to unit owners $ 6,987,848 $ 5,881,978
Trust corpus (Notes 1 and 2) 1 1
Undistributed earnings 25,119 30,642
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Total Liabilities and Trust Corpus $ 7,009,968 $ 5,912,621
============ ============
The accompanying notes are an integral part
of these financial statements.
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STATEMENTS OF REVENUE COLLECTED AND EXPENSES PAID (NOTE 1)
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FOR THE THREE MONTHS ENDED JANUARY 31, 2008 AND 2007
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2008 2007
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(unaudited)
German gas, sulfur and oil
royalties received $ 7,215,083 $ 8,483,387
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Interest income 33,355 53,693
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Trust expenses ( 269,113) ( 276,894)
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Net income $ 6,979,325 $ 8,260,186
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Net income per unit $ .76 $ .90
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Distributions per unit
to be paid to unit owners $ .76 $ .89
====== ======
The accompanying notes are an integral part
of these financial statements.
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STATEMENTS OF UNDISTRIBUTED EARNINGS (NOTE 1)
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FOR THE THREE MONTHS ENDED JANUARY 31, 2008 AND 2007
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2008 2007
----------------- ----------------
(unaudited)
Balance, beginning of period $ 30,642 $ 35,590
Net income 6,979,325 8,260,186
------------ ------------
7,009,967 8,295,776
Less:
Current year distributions
to be paid to unit owners 6,984,848 8,179,625
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Balance, end of period $ 25,119 $ 116,151
============ ============
The accompanying notes are an integral part
of these financial statements.
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STATEMENTS OF CHANGES IN CASH AND CASH EQUIVALENTS (NOTE 1)
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FOR THE THREE MONTHS ENDED JANUARY 31, 2008 AND 2007
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2008 2007
----------------- ---------------
(unaudited)
Sources of cash and cash equivalents:
German gas, sulfur and oil royalties $ 7,215,083 $ 8,483,387
Interest income 33,355 53,693
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7,248,438 8,537,080
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Uses of cash and cash equivalents:
Payment of Trust expenses 269,113 276,894
Distributions paid 5,881,978 7,168,660
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6,151,091 7,445,554
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Net increase (decrease) in cash and
cash equivalents during the period 1,097,347 1,091,526
Cash and cash equivalents,
beginning of period 5,912,620 7,204,250
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Cash and cash equivalents, end of period $ 7,009,967 $ 8,295,776
============ ============
The accompanying notes are an integral part
of these financial statements.
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NORTH EUROPEAN OIL ROYALTY TRUST
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NOTES TO FINANCIAL STATEMENTS
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(Unaudited)
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(1) Summary of significant accounting policies:
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Basis of Accounting -
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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"). Cash basis
financial statements disclose revenue when cash is received and
expenses when cash is paid. GAAP basis financial statements disclose
income 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.
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.
Cash and cash equivalents -
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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 three months or less from
the date of purchase.
From time to time, the amounts deposited in the Trust's bank accounts
may exceed the federally insured limit.
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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 January 31, 2008 and 2007, there
were 9,190,590 units of beneficial interest outstanding,
respectively.
(2) Formation of the Trust:
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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 ExxonMobil 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
$8,922 and $7,629 in the first quarter of fiscal 2008 and 2007,
respectively.
As of January 1, 2007, Lawrence A. Kobrin, a Trustee of the Trust, was
named Senior Counsel at Cahill Gordon & Reindel LLP which serves as
counsel to the Trust. Prior to such time, Mr. Kobrin was a partner
at Cahill Gordon & Reindel LLP. For the first quarter of fiscal
2008 and 2007, the Trust paid Cahill Gordon & Reindel LLP $56,692
and $31,875 for legal services.
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, the Trust paid him $2,500 in each of the first quarters
of fiscal 2008 and 2007.
(4) Employee Benefit Plan:
----------------------
The Trust has 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
making of contributions by the Trust to the accounts of employees,
on a matching basis, of up to 3% of cash compensation paid to each
such employee effective as of January 1, 2008.
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Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
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Executive Summary
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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 ExxonMobil Corp. ("ExxonMobil"), or by
Oldenburgische Erdolgesellschaft ("OEG"). In 2002 Mobil Erdgas and BEB
Erdgas und Erdol GmbH ("BEB"), a joint venture of ExxonMobil and the Royal
Dutch/Shell Group of Companies, formed a company ExxonMobil 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 State of Oldenburg and is located in the
federal state of Lower Saxony.
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 due to the higher royalty rate specified by that agreement.
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
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costs, as reported for state royalty purposes, are deducted from the gross
sales receipts prior to the calculation of the royalty to be paid to the
Trust. After the close of the fiscal year, on November 23, 2007,
N.V. Nederlandse Gasunie (the state owned Dutch gas distribution company)
announced that it had reached an agreement with BEB regarding the purchase
by Gasunie of BEB's North German gas distribution and transmission network.
Preliminary informal discussions with OEG personnel indicate that the
pipeline sale should not affect the method of royalty calculations.
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 itself
does not have access to the specific sales contracts under which gas from the
Oldenburg concession is sold. These contacts are reviewed periodically on
behalf of the Trust by Ernst & Young AG to verify the correctness of
application of the Agreement formulas for the computation of royalty payments.
For unit owners, changes in the 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 dollars at the time of their transfer from Germany to the
United States. A higher exchange rate would yield more dollars and a lower
exchange rate fewer dollars. The long term impact relates to the mechanism
of gas pricing. Since oil on the international market is priced in dollars,
a weaker Euro would mean that oil imported into Germany is more expensive.
A stronger Euro would mean that oil imported into Germany is less expensive.
These changes in the price of oil in Germany are subsequently reflected in
the price of light heating oil, which is used as a component in the
calculation of gas prices in the contracts under which the gas is sold.
The changes in German domestic light heating oil prices are in turn
reflected in gas prices with a built-in delay of three to six months.
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 current
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 relatively low level of administrative expenses of the Trust
limits the effect of inflation on its financial prospects. Continued price
inflation would be reflected in sales prices, which 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.
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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 of the funds on hand after provision is made for
Trust expenses then anticipated.
Results: First Quarter Fiscal 2008 Versus First Quarter Fiscal 2007
-------------------------------------------------------------------
Net Trust income for the first quarter of fiscal 2008 was $6,979,325
as compared to $8,260,186 for the first quarter of fiscal 2007. This level
of income permitted a distribution of 76 cents per unit which was paid on
February 27, 2008 to owners of record as of February 15, 2008. Gross royalty
income of $7,215,083 for the quarter ended January 31, 2008 decreased by
14.95% from gross royalty income of $8,483,387 received during last year's
equivalent period. This royalty income was based on sales of gas, oil and
sulfur from the Trust's overriding royalty areas in Germany during the fourth
calendar quarter of 2007.
In comparison to the first quarter of fiscal 2007, the combination
of lower gas sales and lower gas prices reduced gross royalty income in Euros
by 24.44%. When the positive impact of the higher average exchange rates
were factored in, gross royalty income in dollars decreased by the 14.95%
mentioned above.
For the quarter just ended, gas sales under the Mobil Agreement
decreased by 18.62% to 14.251 billion cubic feet ("Bcf") from 17.512 Bcf in
the first quarter of fiscal 2007. For the same period, the average price of
gas sold under the Mobil Agreement decreased 7.93% to 2.0876 Euro cents/Kwh
("Ecents/Kwh") from 2.2673 Ecents/Kwh in the first quarter of fiscal 2007.
The combination of these two factors resulted in a decline of 24.60% in the
amount of royalties in Euros received under the Mobil Agreement during the
first quarter of fiscal 2008. When the impact of the higher average value
of the Euro is considered, amount of royalties in Euros received under the
Mobil Agreement during the first quarter of fiscal 2008 declined by 15.16%.
For the quarter just ended, overall gas sales covered under the OEG
Agreement decreased by 17.30% to 34.716 Bcf from 41.976 Bcf in the first
quarter of fiscal 2007. For the same period, the average price of gas sold
under the OEG Agreement decreased 8.73% to 2.1921 Ecents/Kwh from 2.4017
Ecents/Kwh. The combination of these two factors resulted in a decline of
24.06% in the amount of royalties in Euros received under the OEG Agreement
during the first quarter of fiscal 2008. When the impact of the higher
average value of the Euro is considered, amount of royalties in Euros
received under the OEG Agreement during the first quarter of fiscal 2008
declined by 14.44%.
While gas prices continued to show declines when compared to the
prior year's equivalent period, gas prices have increased from their recent
low point in the third quarter of fiscal 2007. From the third quarter of
fiscal 2007 through the first quarter of fiscal 2008, the average prices of
gas under the Mobil and OEG Agreements increased 37.71% and 16.76%,
respectively.
Based on the conversion and transfer of the royalties paid during
the quarter under both the Mobil and OEG Agreements, the weighted average
values of the Euro increased 12.52% and 12.67% to dollar equivalent values
of $1.4693 and $1.4697, respectively. If we apply this weighted average
value to the average price of gas during the quarter just ended, we can
convert the average gas prices into more familiar terms. For the first
quarter of fiscal 2008, the average gas prices for gas sold under both the
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Mobil and OEG Agreements were $8.83/Mcf and $9.06/Mcf respectively. The
corresponding prices for the first quarter of fiscal 2007 were $8.51/Mcf
and $8.80/Mcf respectively.
Trust expenses for the first quarter of fiscal 2008 were $269,113,
a decrease of $7,781 or 2.8% from the prior year. Interest income
decreased, reflecting both the reduced funds available for investment and
the lower interest rates on those funds.
The current Statement of Assets, Liabilities and Trust Corpus of
the Trust at January 31, 2008 compared to that at fiscal year end
(October 31, 2007) shows an increase in assets due to higher royalty
receipts during the quarter.
-----------------------------------
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, 2007. 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
its German bank require the bank to process 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 January 31, 2008. Based on that evaluation, the
Managing Director concluded that the Trust's disclosure controls and
procedures were effective as of January 31, 2008.
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There have been no changes in our internal control over financial
reporting identified in connection with the evaluation described above that
occurred during the first quarter of fiscal 2008 that have materially
affected or are reasonably likely to materially affect our internal control
over financial reporting.
PART II -- OTHER INFORMATION
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Item 5. Submission of Matters to a Vote of Security Holders.
----------------------------------------------------
The Annual Meeting of Unit Owners was held on February 13, 2008.
The following persons were elected as Trustees of the Trust to
serve until the next Annual Meeting of Unit Owners:
Robert P. Adelman (7,861,154 votes for; 146,311 withheld)
Samuel M. Eisenstat (7,937,547 votes for; 69,918 withheld)
Lawrence A. Kobrin (7,886,994 votes for; 120,471 withheld)
Willard B. Taylor (7,921,897 votes for; 85,568 withheld)
Rosalie J. Wolf (7,936,111 votes for; 71,354 withheld)
In addition to voting for the Trustees of the Trust, two sets of
amendments to the Trust Agreement were proposed for approval by
the Unit Owners. Each of these sets of amendments were approved
by the Unit Owners.
The first set of amendments clarified that units of beneficial
interest in the Trust may be issued in uncertificated or book entry
form. The results of the voting on this set of amendments are as
follows:
(7,789,373 votes for; 120,392 votes against and 97,700 votes abstained)
The second set of amendments provided that the Trust shall have a
perpetual life. The results of the voting on this set of
amendments are as follows:
(7,854,172 votes for; 76,742 votes against and 76,551 votes abstained)
North European Oil Royalty Trust has rescheduled the date of the
2009 annual meeting from February 13, 2009 to February 10, 2009. The dates
for submission of proposals by unit owners remain as set forth in the proxy
statement dated January 10, 2008.
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Item 6. Exhibits.
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Exhibit 3. North European Oil Royalty Trust Agreement,
dated September 10, 1975, as amended through
February 13, 2008 (incorporated by reference
to Exhibit 3.1 to Current Report on Form 8-K,
filed February 15, 2008 (File No. 0-8378)).
Exhibit 31. Certification of Chief Executive Officer
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
---------
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: February 28, 2008