SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended July 31, 2009 or
---------------
[ ] Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from __________ to ___________ .
Commission file number 1-8245
NORTH EUROPEAN OIL ROYALTY TRUST
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(Exact name of registrant as specified in its charter)
Delaware 22-2084119
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(State of organization) (I.R.S. Employer I.D. No.)
Suite 19A, 43 West Front Street, Red Bank, New Jersey 07701
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(Address of principal executive offices)
(732) 741-4008
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes X No
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-2-
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule
405 of Regulation S-T (Section 232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant was required to
submit and post such files). Yes No
----- -----
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer, or a
smaller reporting company. See the definitions of "large accelerated filer,"
"accelerated filer," and "smaller reporting company" in Rule 12b-2 of the
Exchange Act. (Check one):
Large accelerated filer Accelerated filer X
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Non-accelerated filer Smaller reporting company
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Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act). Yes No X
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Class Outstanding at July 31, 2009
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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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JULY 31, 2009 AND OCTOBER 31, 2008
-----------------------------------
2009 2008
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(Unaudited) (Audited)
Current assets - - Cash and
cash equivalents $5,430,425 $9,524,529
Producing gas and oil royalty rights,
net of amortization (Notes 1 and 2) 1 1
---------- ----------
Total Assets $5,430,426 $9,524,530
========== ==========
Current liabilities - - Distributions
to be paid to unit owners, paid
August 2009 and November 2008 $5,330,543 $9,466,308
Trust corpus (Notes 1 and 2) 1 1
Undistributed earnings 99,882 58,221
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Total Liabilities and Trust Corpus $5,430,426 $9,524,530
========== ==========
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 JULY 31, 2009 AND 2008
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2009 2008
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(Unaudited)
German gas, sulfur and oil
royalties received $5,466,337 $8,463,341
----------- -----------
Interest income 1,191 17,332
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Trust expenses ( 223,984) ( 253,814)
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Net income $5,243,544 $8,226,859
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Net income per unit $0.57 $0.90
===== =====
Distributions per unit
to be paid to unit owners $0.58 $0.89
===== =====
The accompanying notes are an integral part
of these financial statements.
-5-
STATEMENTS OF REVENUE COLLECTED AND EXPENSES PAID (NOTE 1)
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FOR THE NINE MONTHS ENDED JULY 31, 2009 AND 2008
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2009 2008
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(Unaudited)
German gas, sulfur and oil
royalties received $25,072,153 $25,039,400
Interest income 10,839 77,666
Trust expenses ( 870,079) ( 861,476)
----------- -----------
Net income $24,212,913 $24,255,590
=========== ===========
Net income per unit $2.63 $2.64
===== =====
Distributions per unit
to be paid to unit owners $2.63 $2.63
===== =====
The accompanying notes are an integral part
of these financial statements.
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STATEMENTS OF UNDISTRIBUTED EARNINGS (NOTE 1)
---------------------------------------------
FOR THE NINE MONTHS ENDED JULY 31, 2009 AND 2008
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2009 2008
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(Unaudited)
Balance, beginning of period $ 58,221 $ 30,642
Net income 24,212,913 24,255,590
----------- -----------
24,271,134 24,286,232
Less:
Current year distributions paid
or to be paid to unit owners 24,171,252 24,171,251
----------- -----------
Balance, end of period $ 99,882 $ 114,981
=========== ===========
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 NINE MONTHS ENDED July 31, 2009 AND 2008
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2009 2008
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(Unaudited)
Sources of cash and cash equivalents:
------------------------------------
German gas, sulfur and oil royalties $25,072,153 $25,039,400
Interest income 10,839 77,666
----------- -----------
25,082,992 25,117,066
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Uses of cash and cash equivalents:
---------------------------------
Payment of Trust expenses 870,079 861,476
Distributions paid 28,307,017 21,873,604
----------- ----------
29,177,096 22,735,080
----------- ----------
Net increase (decrease) in cash and
cash equivalents during the period (4,094,104) 2,381,986
Cash and cash equivalents,
beginning of period 9,524,529 5,912,620
----------- ----------
Cash and cash equivalents,
end of period $ 5,430,425 $ 8,294,606
============ ==========
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
-----------------------------
(Unaudited)
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(1) Summary of significant accounting policies:
-------------------------------------------
Basis of Accounting -
---------------------
The accompanying financial statements of North European Oil Royalty Trust
(the "Trust") present financial statement balances and financial results
on a modified cash basis of accounting, which is a comprehensive basis
of accounting other than accounting principles generally accepted in the
United States ("GAAP basis"). On a modified cash basis, revenue is
earned when cash is received and expenses are incurred when cash is
paid. GAAP basis financial statements disclose revenue as earned and
expenses as incurred, without regard to receipts or payments. The
modified cash basis of accounting is utilized to permit the accrual for
distributions to be paid to unit owners (those distributions approved by
the Trustees for the Trust). The Trust's distributable income
represents royalty income received by the Trust during the period plus
interest income less any expenses incurred by the Trust, all on a cash
basis. In the opinion of the Trustees, the use of the modified cash
basis of accounting provides a more meaningful presentation to unit
owners of the results of operations of the Trust.
These financial statements should be read in conjunction with the
financial statements that were included in the Trust's Annual Report
on Form 10-K for the period ended October 31, 2008. The Statement of
Assets, Liabilities and Trust Corpus included herein contains
information from the Trust's 2008 Form 10-K.
Producing gas and oil royalty rights -
--------------------------------------
The rights to certain gas and oil royalties in Germany were transferred
to the Trust at their net book value by North European Oil Company
(the "Company") (see Note 2). The net book value of the royalty rights
has been reduced to one dollar ($1) in view of the fact that the
remaining net book value of royalty rights is de minimis relative to
annual royalties received and distributed by the Trust and does not bear
any meaningful relationship to the fair value of such rights or the
actual amount of proved producing reserves.
Federal income taxes -
----------------------
The Trust, as a grantor trust, is exempt from federal income taxes
under a private letter ruling issued by the Internal Revenue Service.
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Cash and cash equivalents -
---------------------------
Included in cash and cash equivalents are amounts deposited in bank
accounts and amounts invested in certificates of deposit and U. S.
Treasury bills with original maturities of three months or less from
the date of purchase.
The amounts deposited in the Trust's bank accounts are covered under
the FDIC's Temporary Liquidity Guarantee Program.
Net income per unit -
---------------------
Net income per unit is based upon the number of units outstanding at the
end of the period. As of both July 31, 2009 and 2008, there were
9,190,590 units of beneficial interest outstanding.
New Accounting Pronouncements -
-------------------------------
In May 2009, the FASB issued Statement No. 165, Subsequent Events.
Statement 165 establishes general standards of accounting for and
disclosure of events that occur after the balance sheet date but before
the financial statements are issued or are available to be issued.
Statement 165 was effective for interim and annual periods ending after
June 15, 2009. The Trust evaluated events between the end of the most
recent quarter, July 31, 2009, and August 25, 2009, the date the
financial statements were issued. There were no subsequent events
during this period.
(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.
(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 $6,948
and $7,494 in the third quarter of fiscal 2009 and 2008, respectively.
For such office space and office services, the Trust reimbursed the
Managing Director $18,748 and $21,240 in the first nine months of
fiscal 2009 and 2008, 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
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Cahill Gordon & Reindel LLP. For the third quarter of fiscal 2009 and
2008, the Trust paid Cahill Gordon & Reindel LLP $15,267 and $15,685 for
legal services, respectively. For the first nine months of fiscal 2009
and 2008, the Trust paid Cahill Gordon & Reindel LLP $82,999 and
$101,064 for legal services, respectively.
As of November 1, 2006, John H. Van Kirk, the former Managing Trustee of
the Trust and the father of John R. Van Kirk, was named to the position
of Founding Trustee Emeritus. For his service in such capacity, he
earned $0 and $2,500 in the third quarters of fiscal 2009 and 2008 and
$5,000 and $7,500 in the first nine months of fiscal 2009 and 2008,
respectively. John H. Van Kirk, who served as President of North
European Oil Corporation and North European Oil Company from 1954-1975
and as Managing Trustee of the Trust from 1975-2006, passed away on
February 25, 2009.
(4) Employee Benefit Plan:
----------------------
As of January 1, 2008, the Trust established a savings incentive match
plan for employees (SIMPLE IRA) that is available to all employees of
the Trust, including the Managing Director. The Trustees have authorized
the Trust to make contributions to the accounts of the employees, on a
matching basis, of up to 3% of cash compensation paid to each employee
effective for the 2009 calendar year.
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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. 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 Principality of Oldenburg and is located
in the federal state of Lower Saxony.
There are two types of natural gas found within the Oldenburg
concession, "sweet" gas and "sour" gas. "Sweet" gas needs no treatment
before it can be sold. In recent years "sweet" gas has assumed the role of
swing producer. During periods of high demand the production of "sweet" gas
is increased as necessary. During the summer months "sweet" gas production
is reduced due to a general decline in demand. On the other hand, "sour" gas
must be processed at either the Grossenkneten or NEAG desulfurization plants
before it can be sold. The desulfurization process removes hydrogen sulfide
and other contaminants. The hydrogen sulfide in gaseous form is converted to
sulfur in a solid form and sold separately. For efficiency purposes, the
desulfurization plants are operated at capacity on a continual basis. Any
excess production from the plants is stored in underground storage for higher
demand periods. As needed, the operators conduct maintenance on the plants,
generally during the summer months when demand is lower.
-12-
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.
The Trust is also entitled under the Mobil Agreement to receive a
2% royalty on gross receipts of sales of sulfur obtained as a by-product of
sour gas produced from the western part of Oldenburg. The payment of the
sulfur royalty is conditioned upon sales of sulfur by Mobil Erdgas at a
selling price above an agreed upon base price. This base price is adjusted
annually by an inflation index. The Trust had received no sulfur royalties
under this agreement for over ten years until the second quarter of fiscal
2008, when the average selling price exceeded the indexed base price. During
the second through the fourth quarters of fiscal 2008, the Trust received
$259,770, $266,168 and $448,753 in royalties, respectively. In the first
quarter of fiscal 2009 the Trust received $244,874 in sulfur royalties under
the Mobil Agreement. However, the average selling price for sulfur once
again dropped below the indexed base price and no royalties based on sulfur
sales were received under the Mobil Agreement in the second or third quarters
of fiscal 2009.
Under another set of rights covering the entire Oldenburg
concession and pursuant to the agreement with OEG, the Trust receives
royalties at the rate of 0.6667% on gross receipts from sales by BEB of gas
well gas, oil well gas, crude oil, condensate and sulfur (removed during the
processing of sour gas) less a certain allowed deduction of costs (the
"OEG Agreement"). Under the OEG Agreement, 50% of the field handling,
treatment and transportation costs, as reported for state royalty purposes,
are deducted from the gross sales receipts prior to the calculation of the
royalty to be paid to the Trust. NV Nederlandse Gasunie (the state owned
Dutch gas distribution company) has completed the purchase of BEB's North
German gas distribution and transmission network. Preliminary informal
discussions with OEG personnel indicate that the pipeline sale should not
affect the method of royalty calculation. The Trust is continuing
discussions with the operator to obtain a formal confirmation that the sale
will not affect the method of royalty calculation.
The Trust also receives small amounts of royalties from a private
lease area, Grosses Meer, outside the Oldenburg concession. The German
authorities have requested that the operating companies conduct a reservoir
analysis to determine whether the royalties are being properly allocated
based on the locations of the gas reserves. During the period in which the
operating companies conducted this analysis, the payment of royalties to the
Trust was suspended. While this issue of allocation of royalties has been
resolved, the final accounting of royalties due the Trust has not been
completed and no royalties based on gas sales from Grosses Meer have been
paid to the Trust during fiscal 2009. The Trust received $37,612 in
royalties from Grosses Meer in the first quarter of fiscal 2008 and since
then has received no further royalties.
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
-13-
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. Working under a confidentiality agreement with
the operating companies, the Trust's German accountant reviews these
contracts periodically on behalf of the Trust to verify the correctness of
application of the Agreement formulas for the computation of royalty payments.
For unit owners, changes in the 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, together with sales
volumes, form the basis on which the royalties paid to the Trust are
computed. The impact of inflation or deflation on energy prices in Germany
is delayed by the use in certain long-term gas sales contracts of a delay
factor of three to six months prior to the application of any changes in
light heating oil prices to gas prices.
As mandated by the Trust Agreement, distributions of income are
made on a quarterly basis. These distributions, as determined by the
Trustees, constitute substantially all the funds on hand after provision is
made for Trust expenses then anticipated.
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Results: Third Quarter Fiscal 2009 Versus Third Quarter Fiscal 2008
----------------------------------------------------------
For the third quarter of fiscal 2009, the Trust's net income was
$5,243,544, a decrease of 36.26% from the net income of $8,226,859 for the
third quarter of fiscal 2008. Gross royalties received for the third quarter
of fiscal 2009 were $5,466,337, a decrease of 35.41% as compared to
$8,463,341 for the third quarter of fiscal 2008. These royalties were derived
from sales of gas, sulfur and oil from the Trust's overriding royalty areas
in Germany during the second calendar quarter of 2009. A distribution of
58 cents per unit was paid on August 26, 2009 to owners of record as of
August 14, 2009.
The amount of royalties paid to the Trust is based on four primary
factors: the amount of gas sold, the price of that gas, the area from which
the gas is sold and the exchange rate. Gas sales are measured in billion
cubic feet ("Bcf"). Gas prices are reported in Euro cents per Kilowatt hour
("Ecents/Kwh") and dollars per thousand cubic feet ("$/Mcf"). The primary
factor affecting royalty revenue for the quarter just ended was the decline
in gas prices under both the Mobil and the OEG Agreements. In addition, in
comparison to the third quarter of fiscal 2008, the lower average value of
the Euro relative to the dollar decreased the number of dollars received when
the royalties paid in Euros were converted to dollars at the time of their
transfers to the U.S. Gas sales were virtually unchanged in comparison to
the prior year's equivalent period.
Factors Affecting Royalties Paid under the Mobil Agreement
----------------------------------------------------------
3rd Fiscal Qtr. 3rd Fiscal Qtr. Percentage
Ended 7/31/2009 Ended 7/31/2008 Change
--------------- --------------- ----------
Gas Sales (Bcf) 12.290 12.314 - 0.20%
Gas Prices (Ecents/Kwh) 1.8579 2.4704 -24.79%
Gas Prices ($/Mcf) $ 7.52 $11.16 -32.62%
Average Euro Exchange Rate $1.4060 $1.5688 -10.38%
Factors Affecting Royalties Paid under the OEG Agreement
--------------------------------------------------------
3rd Fiscal Qtr. 3rd Fiscal Qtr. Percentage
Ended 7/31/2009 Ended 7/31/2008 Change
--------------- --------------- ----------
Gas Sales (Bcf) 31.205 31.045 + 0.51%
Gas Prices (Ecents/Kwh) 2.1681 2.5699 -15.63%
Gas Prices ($/Mcf) $ 8.48 $11.35 -25.29%
Average Euro Exchange Rate $1.3946 $1.5730 -11.34%
If we exclude the effects of differences in prices and average
exchange rates, the combination of royalty rates on gas sold from western
Oldenburg results in an effective royalty rate approximately seven times
higher than the royalty rate on gas sold from eastern Oldenburg. This is of
particular significance to the Trust since gas sold from western Oldenburg
provides the bulk of royalties paid to the Trust. For the quarter just
ended, gas sales from western Oldenburg accounted for only 39.38% of all gas
-15-
sales. However, royalties on these gas sales provided approximately 81.04%
or $4,360,454 out of a total of $5,380,602 in Oldenburg royalties attributable
to gas.
During fiscal 2009, the operating companies performed no
maintenance on the Grossenkneten desulfurization plant. However, during the
third quarter of fiscal 2008, the operating companies conducted a six-week
maintenance program on this plant. During this period one-third of the plant
was shut down for two weeks on a rotating basis until the maintenance was
completed. This reduction in processing capacity negatively affected gas
sales during the prior year's period.
Interest income was minimal due to the substantial decline in
interest rates applicable during the period. Per the terms of the Trust
Agreement, funds temporarily held by the Trust are invested in certificates
of deposit or U.S. Treasury Bills. For the quarter just ended, Trust
interest income decreased 93.13% to $1,191 from $17,332 in the third quarter
of fiscal 2008. Trust expenses for the third quarter of fiscal 2009
decreased 11.75% or $29,830 to $223,984 in comparison to the prior year's
equivalent period. This decline in expenses is related to the start-up
costs of and early work by the Trust's German counsel with respect to the
legal aspects arising from the examination of the German operating companies'
royalty payments in the prior year's period. This examination is conducted
every other year.
The current Statement of Assets, Liabilities and Trust Corpus of
the Trust at July 31, 2009, compared to that at fiscal year-end
(October 31, 2008), shows a decline in assets due to the lower royalty
receipts during the third quarter of fiscal 2009.
Results: First Nine Months of Fiscal 2009 Versus First Nine Months of
------------------------------------------------------------
Fiscal 2008
-----------
For the nine month period, the Trust's net income was $24,212,913,
a decrease of 0.18% from the net income of $24,255,590 for last year's
equivalent period. Gross royalties received for the first nine months of
fiscal 2009 were $25,072,153, an increase of 0.13% as compared to $25,039,400
for the first nine months of fiscal 2008. These royalties were primarily
derived from sales of gas, sulfur and oil from the Trust's overriding royalty
areas in Germany during the fourth calendar quarter of 2008 and the first two
calendar quarters of 2009. For both nine month periods ended July 31, 2009
and 2008, total distributions were equal to $2.63 per unit. As in prior
years, the Trust receives adjustments from the operating companies based on
their final calculations of royalties payable during the previous calendar
year. As an adjustment for the prior calendar year, the Trust received the
equivalent of $0.0964 and $0.1090 per unit during the first nine months of
fiscal 2008 and 2009, respectively. In addition, the total distribution for
the current nine month period includes a one-time adjustment covering the
period 2005-2007. During their verification, the Trust's German accountants
discovered errors related to calculation discrepancies in the determination
of average gas prices. Following the required recalculation, the Trust
received the equivalent of $0.1013 per unit as an adjustment.
The primary factors affecting royalty revenue for the nine months
just ended were increases in gas prices and decreases in average exchange
rates under both the Mobil and the OEG Agreements. The combination of these
-16-
factors, along with the slight decline in gas sales, resulted in only minor
changes in net income and no change in the cumulative distribution payable.
Factors Affecting Royalties Paid under the Mobil Agreement
----------------------------------------------------------
Nine Months Nine Months Percentage
Ended 7/31/2009 Ended 7/30/2008 Change
--------------- --------------- ----------
Gas Sales (Bcf) 38.827 40.569 - 4.29%
Gas Prices (Ecents/Kwh) 2.6086 2.2729 +14.77%
Gas Prices ($/Mcf) $10.11 $ 9.98 + 1.30%
Average Euro Exchange Rate $1.3454 $1.5244 -11.74%
Factors Affecting Royalties Paid under the OEG Agreement
--------------------------------------------------------
Nine Months Nine Months Percentage
Ended 7/31/2009 Ended 7/30/2008 Change
--------------- --------------- ----------
Gas Sales (Bcf) 97.971 99.441 - 1.48%
Gas Prices (Ecents/Kwh) 2.9499 2.3739 +24.26%
Gas Prices ($/Mcf) $11.07 $10.21 + 8.42%
Average Euro Exchange Rate $1.3368 $1.5296 -12.60%
If we exclude the effects of differences in prices and average
exchange rates, the combination of royalty rates on gas sold from western
Oldenburg results in an effective royalty rate approximately seven times
higher than the royalty rate on gas sold from eastern Oldenburg. This is of
particular significance to the Trust since gas sold from western Oldenburg
provides the bulk of royalties paid to the Trust. For the nine months just
ended, gas sales from western Oldenburg accounted for only 39.63% of all gas
sales. However, royalties on these gas sales provided approximately 81.68%
or $19,896,792 out of a total of $24,360,470 in Oldenburg royalties
attributable to gas.
During fiscal 2009, the operating companies performed no
maintenance on the Grossenkneten desulfurization plant. However, during the
third quarter of fiscal 2008, the operating companies conducted a six-week
maintenance program on this plant. During this period one-third of the plant
was shut down for two weeks on a rotating basis until the maintenance was
completed. This reduction in processing capacity negatively affected gas
sales during the prior year's period.
Interest income was lower reflecting the decline in interest rates
applicable during the period. Interest income for the nine month period
decreased 86.04% to $10,840 from $77,666 in the first nine months of fiscal
2008. Trust expenses for the nine month period increased 0.99% or $8,603 to
$870,079 in comparison to the prior year's equivalent period. The increase
in expenses resulted primarily from a timing issue in the payment of an
insurance fee.
-----------------------------------
-17-
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, 2008. 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 conversions and transfers of
royalty payments as soon as possible following their receipt. The Trust does
not engage in any trading activities with respect to possible commodity price
fluctuations.
Item 4. Controls and Procedures.
-----------------------
The Trust maintains disclosure controls and procedures that are
designed to ensure that information required to be disclosed by the Trust is
recorded, processed, summarized, accumulated and communicated to its
management, which consists of the Managing Director, to allow timely
decisions regarding required disclosure, and reported within the time periods
specified in the Securities and Exchange Commission's rules and forms.
The Managing Director has performed an evaluation of the
effectiveness of the design and operation of the Trust's disclosure controls
and procedures as of July 31, 2009. Based on that evaluation, the Managing
Director concluded that the Trust's disclosure controls and procedures were
effective as of July 31, 2009.
There have been no changes in our internal control over financial
reporting identified in connection with the evaluation described above that
occurred during the third quarter of fiscal 2009 that have materially
affected or are reasonably likely to materially affect our internal control
over financial reporting.
-18-
PART II -- OTHER INFORMATION
----------------------------
Item 6. Exhibits.
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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: August 27, 2009