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 January 31, 2017 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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-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 January 31, 2017
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Units of Beneficial Interest 9,190,590
-3-
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, 2017 AND OCTOBER 31, 2016
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(Unaudited)
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2017 2016
----------------- ----------------
ASSETS
Current assets -- Cash and
cash equivalents $ 1,537,493 $ 1,165,347
Producing gas and oil royalty rights,
net of amortization (Notes 1 and 2) 1 1
------------ ------------
Total Assets $ 1,537,494 $ 1,165,348
============ ============
LIABILITIES AND TRUST CORPUS
Current liabilities -- Distributions
to be paid to unit owners, paid
February 2017 and November 2016 $ 1,378,589 $ 1,102,871
Trust corpus (Notes 1 and 2) 1 1
Undistributed earnings 158,904 62,476
------------ ------------
Total Liabilities and Trust Corpus $ 1,537,494 $ 1,165,348
============ ============
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 JANUARY 31, 2017 AND 2016
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(Unaudited)
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2017 2016
----------------- ----------------
Gas, sulfur and oil
royalties received $ 1,724,686 $ 1,832,471
Interest income 790 1,100
------------ ------------
Trust Income $ 1,725,476 $ 1,833,571
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Non-related party expenses (225,038) (235,343)
Related party expenses (Note 3) (25,421) (24,541)
------------ ------------
Trust Expenses (250,459) (259,884)
------------ ------------
Net Income $ 1,475,017 $ 1,573,687
============ ============
Net income per unit $ .16 $ .17
====== ======
Distributions per unit paid or
to be paid to unit owners $ .15 $ .16
====== ======
The accompanying notes are an integral part
of these financial statements.
-5-
STATEMENTS OF UNDISTRIBUTED EARNINGS (NOTE 1)
---------------------------------------------
FOR THE THREE MONTHS ENDED JANUARY 31, 2017 AND 2016
----------------------------------------------------
(Unaudited)
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2017 2016
----------------- ----------------
Balance, beginning of period $ 62,476 $ 79,030
Net income 1,475,017 1,573,687
------------ ------------
1,537,493 1,652,717
Less:
Current year distributions paid
or to be paid to unit owners 1,378,589 1,470,494
------------ ------------
Balance, end of period $ 158,904 $ 182,223
============ ============
The accompanying notes are an integral part
of these financial statements.
-6-
STATEMENTS OF CHANGES IN CASH AND CASH EQUIVALENTS (NOTE 1)
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FOR THE THREE MONTHS ENDED JANUARY 31, 2017 AND 2016
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(Unaudited)
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2017 2016
----------------- ---------------
Sources of Cash and Cash Equivalents:
------------------------------------
Gas, sulfur and oil royalties received $ 1,724,686 $ 1,832,471
Interest income 790 1,100
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1,725,476 1,833,571
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Uses of Cash and Cash Equivalents:
---------------------------------
Payment of Trust expenses 250,459 259,884
Distributions paid 1,102,871 2,113,835
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1,353,330 2,373,719
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Net increase (decrease) in cash and
cash equivalents during the period 372,146 (540,148)
Cash and cash equivalents,
beginning of period 1,165,347 2,192,865
------------ ------------
Cash and cash equivalents,
end of period $ 1,537,493 $ 1,652,717
============ ============
The accompanying notes are an integral part
of these financial statements.
-7-
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 -
---------------------
The accompanying financial statements of North European Oil Royalty Trust
(the "Trust") are prepared in accordance with the rules and regulations of the
SEC. Financial statement balances and financial results are presented 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"). In the opinion of management, all adjustments that are considered
necessary for a fair presentation of these financial statements, including
adjustments of a normal, recurring nature, have been included.
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.
The results of any interim period are not necessarily indicative of the
results to be expected for the fiscal year. 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, 2016 (the
"2016 Form 10-K"). The Statements of Assets, Liabilities and Trust Corpus
included herein contain information from the Trust's 2016 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.
-8-
Federal and state 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. The
Trust has no state income tax obligations.
Cash and cash equivalents -
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Cash and cash equivalents are defined as amounts deposited in bank accounts
and amounts invested in certificates of deposit and U. S. Treasury bills with
original maturities generally of three months or less from the date of purchase.
The investment options available to the Trust are limited in accordance with
specific provisions of the Trust Agreement. As of January 31, 2017, the
uninsured amount held in the Trust's U.S. bank accounts was $1,286,567. In
addition, the Trust held Euros 9,451, the equivalent of $10,202, in its German
bank account at January 31, 2017.
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, 2017 and 2016, there were
9,190,590 units of beneficial interest outstanding.
New accounting pronouncements -
-------------------------------
The Trust is not aware of any recently issued, but not yet effective,
accounting standards that would be expected to have a significant impact
on the Trust's financial position or results of operations.
(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 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.
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(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 $6,404 and $5,273 in the
first quarter of fiscal 2017 and 2016, respectively.
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 first
quarter of fiscal 2017 and 2016, the Trust paid Cahill Gordon & Reindel LLP
$19,017 and $19,268 for legal services, respectively.
(4) Employee benefit plan:
----------------------
The Trust has established a savings incentive match plan for employees
(SIMPLE IRA) that is available to both employees of the Trust, one of whom
is 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 2017 and
2016 calendar years.
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Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
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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. 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.
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
engaging in such activities 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"). The Oldenburg concession is the primary area from
which the natural gas, sulfur and oil are extracted and currently provides 100%
of all the royalties received by the Trust. The Oldenburg concession
approximately (1,386,000 acres) covers virtually the entire former Grand Duchy
of Oldenburg and is located in the German federal state of Lower Saxony.
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.
Vermilion Energy Inc. ("Vermilion"), a Canadian based international
oil and gas producer, entered into a Farm-In Agreement (the "Farm-In Agreement")
with Mobil Erdgas and BEB. The Trust has been advised by EMPG that the Farm-In
Agreement specifies that Vermilion has acquired an interest in various portions
of a concession or areas owned by Mobil Erdgas and BEB. Three of these licenses
cover the three northernmost areas of the Oldenburg concession. The Farm-In
Agreement commits Vermilion to financial participation at a 50% level in 11
gross exploratory wells over the next five years. If Vermilion conducts any
successful drilling within the confines of the Oldenburg concession, sales of
that gas or oil would be subject to the relevant royalty contract. The Trust's
German consultant has confirmed for the Trust that Vermilion will lead the
development of its first well within the Oldenburg concession with a possible
start time in 2019. The well is tentatively located in the western portion of
the area designated Oldenburg-Land, the southernmost area of the three areas
within the concession subject to Vermilion's Farm-In Agreement. Vermilion's
well is intended to develop the Rotliegend (Red Sandstone) formation, a
previously undeveloped productive zone within the concession.
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
-11-
provided approximately 94% of the cumulative royalty income received in fiscal
2017. The amount of royalties paid to the Trust is primarily based on four
factors: the amount of gas sold, the price of that gas, the area from which the
gas is sold and the exchange rate.
On 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 is divided into thirds
and forms the monthly royalty payments (payable on the 15th of each month) to
the Trust for its upcoming fiscal quarter. At the same time that the operating
companies determine the actual amount of royalties that were payable for the
prior calendar quarter, they look at the actual amount of royalties that were
paid to the Trust for that period and calculate the difference between what was
paid and what was payable. Additional amounts payable by the operating
companies would be paid immediately and any overpayment would be deducted from
the payment for the first month of the following fiscal quarter. In September
of each year, the operating companies make the final determination of any
necessary royalty adjustments for the prior calendar year with a positive or
negative adjustment made accordingly. The Trust's German accountants review
the royalty calculations on a biennial basis.
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. Sour gas, in comparison, must be
processed at the Grossenkneten desulfurization plant 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. As needed, EMPG conducts maintenance on the plant generally
during the summer months when demand is lower. The operating companies have
informed the Trust that, to promote greater efficiency and cost effectiveness,
the production capacity of Grossenkneten will be reduced beginning in 2017.
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 accounted for approximately
98% of the cumulative royalty income received under this agreement in fiscal
2017. 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 Sulfur 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. In the first quarter of fiscal 2017, the Trust received
$41,421 in sulfur royalties under this agreement. In the first quarter of
fiscal 2016, the Trust received no sulfur royalties under this agreement.
The Trust was entitled to receive royalties attributable to sulfur sales during
the third and fourth quarters of fiscal 2015. However, the operating companies
made an accounting error by including eastern Oldenburg sulfur sales for the
fourth quarter of 2011, all of 2012 and the first quarter of 2015 in the
calculation of the western sulfur royalties under the Mobil Sulfur Agreement.
This error resulted in an overpayment of sulfur royalties previously paid to
the Trust, which more than offset the sulfur royalties payable.
-12-
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 and treatment 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.
In addition to the Oldenburg area, the Trust also holds overriding
royalties at various rates on a number of currently non-producing leases of
various sizes in other areas of Germany. One of these leases, Grosses Meer, was
formerly active but provided no royalties during fiscal 2016, 2015 and 2014.
On August 26, 2016, the Trust executed amendments to its existing
royalty agreements with OEG and Mobil establishing a new base for the
determination of gas prices upon which the Trust's royalties are determined.
This new base is set as the state assessment base for natural gas used by the
operating companies in their calculation of royalties payable to the State of
Lower Saxony. Currently, this change reflects a shift from the use of gas ex-
field prices ("contractual prices") to the prices calculated for the German
Border Import gas Price ("GBIP"). For simplification purposes, we will use
"GBIP" when referring to the current state assessment base.
The change to the GBIP is intended to be revenue neutral for the
Trust. Additionally, this change should reduce the scope and cost of the
accounting examination, eliminate ongoing disputes with OEG and Mobil regarding
sales to related parties, and reduce prior year adjustments to the normally
scheduled year-end reconciliation. The new pricing basis will also eliminate
certain costs (transportation and plant gas storage) that were previously
deductible prior to the royalty calculation under the agreement with OEG.
Actual gas sales from the prior calendar quarter will be multiplied by
the average GBIP for a period starting two months earlier and will provide the
basis for royalty payments to the Trust during its fiscal quarter. The average
GBIP for the corresponding period of actual sales is not available due to the
delay in its calculation. For calendar 2016 and forward, the average GBIP
under the Mobil and OEG Royalty Agreements will be increased by 1% and 3%,
respectively. In March of the following calendar year, an average GBIP for the
prior calendar year (weighted on a monthly basis by the respective volume of
imported gas) is published. In September of the following calendar year, EMPG
will make a final reconciliation based upon the published yearly average GBIP
increased by the respective percentage factor and the total volume of gas sold
under the royalty agreements during the prior calendar year. Required additions
to royalty amounts already paid will be paid immediately. Required deductions
from royalty amounts already paid will be deducted from the next royalty
payment due.
The new basis for oil prices would be the published price from the
State Authority for Mining, Energy and Geology. There are no percentage
adjustments factored into the oil royalty calculation. There was no change in
the previous methodology used with regard to the determination of royalties
attributable to sales of sulfur.
The Trust itself does not have access to the specific sales contracts
under which gas from the Oldenburg concession is sold. However, working under
a confidentiality agreement with the operating companies, the Trust's German
accountants review the spot market sales, the intra-company sales and the
contractual sales periodically on behalf of the Trust to verify their
-13-
correctness. The Trust's accountants in Germany will begin their next
examination of the operating companies for the 2015 and 2016 period in November
2017.
For unit owners, changes in the dollar value of the Euro have an
immediate impact. This impact occurs at the time the royalties, which are paid
to the Trust in Euros, are converted into U.S. dollars at the applicable
exchange rate and transferred from Germany to the United States. In relation
to the dollar, a stronger Euro would yield more dollars and a weaker Euro would
yield less dollars.
Seasonal demand factors affect the income from the Trust's royalty
rights insofar as they relate to energy demands and increases or decreases in
prices, but on average they are generally not material to the annual income
received under the Trust's 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. The Trust's consultant
receives reports from EMPG with respect to current and planned drilling and
exploration efforts. However, EMPG and the operating companies continue 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 costs. Sustained price inflation would be reflected in
sales prices. Sales prices along with sales volumes form the basis on which
the royalties paid to the Trust are computed.
Results: First Quarter of Fiscal 2017 Versus First Quarter of Fiscal 2016
-------------------------------------------------------------------------
Total royalty income received during the first quarter of fiscal 2017
was derived from sales of gas, sulfur and oil from the Trust's overriding
royalty areas in Germany during the fourth calendar quarter of 2016. The
distribution of $0.15 per unit was paid on February 22, 2017 to owners of
record as of February 17, 2017. Comparisons of total royalty income and net
income for the first quarter of fiscal 2017 and 2016 are shown below.
1st Fiscal Qtr. 1st Fiscal Qtr. Percentage
Ended 1/31/2017 Ended 1/31/2016 Change
-----------------------------------------------------------------------------
Total Royalty Income $1,724,686 $1,832,471 - 5.88%
Net Income $1,475,017 $1,573,687 - 6.27%
Distribution per Unit $0.15 $0.16 - 6.25%
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The decline in net income between the first quarter of fiscal 2017 and
the first quarter of fiscal 2016 resulted primarily from lower gas sales, lower
gas prices and lower average exchange rates under both the Mobil and OEG
Agreements as shown in the table below.
Total royalty income also reflects the inclusion of various positive
and negative adjustments that the operators made during the quarter, including
corrections from prior periods, as well as the inclusion of Mobil sulfur
-14-
royalties. The total adjustments for the first quarter of fiscal 2017
increased total royalties received by $23,796. By comparison, in the first
quarter of fiscal 2016 total royalties received were reduced by $560,902.
The table below is intended to illustrate trends based on actual gas
sales in each quarter. Gas royalties shown in the table below are determined
based on the actual physical gas sales that occurred during the fourth calendar
quarter of 2016 and the average German Border Import gas Price for the period of
August through October 2016. No adjustments for prior periods are reflected in
the gas royalties.
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Quarterly Gas Data Providing Basis for Fiscal Quarter Royalties
-----------------------------------------------------------------------------
4th Calendar Qtr. 4th Calendar Qtr. Percentage
Mobil Agreement Ended 12/31/2016 Ended 12/31/2015 Change
-----------------------------------------------------------------------------
Gas Sales (Bcf)(1) 6.489 6.604 - 1.74%
Gas Prices(2)(Ecents/Kwh)(3) 1.4789 1.8649 - 20.70%
Average Exchange Rates(4) 1.0582 1.0881 - 2.75%
Gas Royalties $1,164,964 $1,538,701 - 24.29%
Gas Prices ($/Mcf)(5) $ 4.49 $ 5.82 - 22.85%
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OEG Agreement
-----------------------------------------------------------------------------
Gas Sales (Bcf) 20.060 20.507 - 2.18%
Gas Prices (Ecents/Kwh) 1.5081 1.9803 - 23.84%
Average Exchange Rates 1.0590 1.0874 - 2.61%
Gas Royalties $466,168 $668,112 - 30.23%
Gas Prices ($/Mcf) $ 4.48 $ 6.04 - 25.83%
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(1) Billion cubic feet
(2) Gas prices derived from August-October period
(3) Euro cents per Kilowatt hour
(4) Based on average exchanges rates of cumulative royalty transfers
(5) Dollars per thousand cubic feet
Excluding 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 first quarter of fiscal 2017, gas
sales from western Oldenburg accounted for only 32.35% of all gas sales from
the Oldenburg concession. However, royalties on these gas sales provided
approximately 81.17% or $1,309,544 out of a total of $1,613,272 in Oldenburg
royalties attributable to gas.
Trust expenses for the first quarter of fiscal 2017 decreased 3.63%
or $9,425 to $250,459 in comparison to $259,884 in the first quarter of fiscal
2016. The reduction in expenses reflects the absence of current costs relating
to the biennial examination of the royalty statements by the Trust's German
accountants because 2017 is an alternate year. Additionally, the decrease in
the amount of Trustee fees as specified in the Trust Agreement contributed to
lower expenses. Trust interest income received in the first quarter of fiscal
2017 was $790, a decrease from interest income of $1,100 received in the first
quarter of fiscal 2016 due to reduced funds available.
-15-
The current Statement of Assets, Liabilities and Trust Corpus of the
Trust at January 31, 2017, compared to that at fiscal year-end (October 31,
2016), shows an increase in assets due to higher royalty receipts during the
first quarter of fiscal 2017.
-----------------------------------
This report on Form 10-Q may contain forward-looking statements
intended to qualify for the safe harbor from liability established by the
Private Securities Litigation Reform Act of 1995. Such statements address
future expectations and events or conditions concerning 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:
1. risks and uncertainties concerning levels of gas production
and gas sale prices, general economic conditions and currency
exchange rates;
2. the ability or willingness of the operating companies to
perform under their contractual obligations with the Trust;
3. potential disputes with the operating companies and the
resolution thereof; and
4. the risk factors set forth under Item 1A of the Trust's Annual
Report on Form 10-K for the year ended October 31, 2016.
All such factors are difficult to predict, contain uncertainties
that may materially affect actual results, and are generally beyond the
control of the Trust. New factors emerge from time to time and it is not
possible for the Trust to predict all such factors or to assess the impact
of each such factor on the Trust. Any forward-looking statement speaks only
as of the date on which such statement is made, and the Trust does not
undertake any obligation to update any forward-looking statement to reflect
events or circumstances after the date on which such statement is made.
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.
-16-
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, 2017 based on the criteria for effective internal control over
financial reporting described in the standards promulgated by the Public Company
Accounting Oversight Board and the Internal Control-Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Based on that evaluation, the Managing Director concluded that the Trust's
disclosure controls and procedures were effective as of January 31, 2017.
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 first quarter of fiscal 2017 that have materially
affected or are reasonably likely to materially affect the Trust's internal
control over financial reporting.
PART II -- OTHER INFORMATION
----------------------------
Item 1. Legal Proceedings.
-----------------
The Trust is not a party to any pending legal proceedings.
Item 4. Mine Safety Disclosure.
----------------------
Not applicable.
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
-17-
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
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(Registrant)
/s/ John R. Van Kirk
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John R. Van Kirk
Managing Director
February 27, 2017