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, 2009 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, 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
----- -----
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
----- -----
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, 2009 AND OCTOBER 31, 2008
-------------------------------------
2009 2008
----------------- ----------------
(unaudited)
Current assets - - Cash and
cash equivalents (Note 1) $ 9,904,690 $ 9,524,529
Producing gas and oil royalty rights,
net of amortization (Notes 1 and 2) 1 1
------------ ------------
Total Assets $ 9,904,691 $ 9,524,530
============ ============
Current liabilities - - Distributions
to be paid to unit owners, paid
February 2009 and November 2008 $ 9,742,025 $ 9,466,308
Trust corpus (Notes 1 and 2) 1 1
Undistributed earnings 162,665 58,221
------------ ------------
Total Liabilities and Trust Corpus $ 9,904,691 $ 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 JANUARY 31, 2009 AND 2008
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2009 2008
----------------- ----------------
(unaudited)
German gas, sulfur and oil
royalties received $10,180,979 $ 7,215,083
------------ ------------
Interest income 9,451 33,355
------------ ------------
Trust expenses ( 343,961) ( 269,113)
------------ ------------
Net income $ 9,846,469 $ 6,979,325
============ ============
Net income per unit $1.07 $ .76
====== ======
Distributions per unit
to be paid to unit owners $1.06 $ .76
====== ======
The accompanying notes are an integral part
of these financial statements.
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STATEMENTS OF UNDISTRIBUTED EARNINGS (NOTE 1)
---------------------------------------------
FOR THE THREE MONTHS ENDED JANUARY 31, 2009 AND 2008
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2009 2008
----------------- ----------------
(unaudited)
Balance, beginning of period $ 58,221 $ 30,642
Net income 9,846,469 6,979,325
------------ ------------
9,904,690 7,009,967
Less:
Current year distributions paid
or to be paid to unit owners 9,742,025 6,984,848
------------ ------------
Balance, end of period $ 162,665 $ 25,119
============ ============
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, 2009 AND 2008
----------------------------------------------------
2009 2008
----------------- ---------------
(unaudited)
Sources of cash and cash equivalents:
------------------------------------
German gas, sulfur and oil royalties $10,180,979 $ 7,215,083
Interest income 9,451 33,355
------------ ------------
10,190,430 7,248,438
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Uses of cash and cash equivalents:
---------------------------------
Payment of Trust expenses 343,961 269,113
Distributions paid 9,466,308 5,881,978
------------ ------------
9,810,269 6,151,091
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Net increase (decrease) in cash and
cash equivalents during the period 380,161 1,097,347
Cash and cash equivalents,
beginning of period 9,524,529 5,912,620
------------ ------------
Cash and cash equivalents,
end of period $ 9,904,690 $ 7,009,967
============ ============
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") 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.
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 -
---------------------------
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.
Since December 10, 2008, all funds deposited in the Trust's bank
accounts have been fully covered under the FDIC's Temporary
Liquidity Guarantee Program.
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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, 2009 and 2008, there
were 9,190,590 units of beneficial interest outstanding.
(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
$5,778 and $8,922 in the first quarter 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 Cahill Gordon & Reindel LLP. For the first quarter of fiscal 2009
and 2008, the Trust paid Cahill Gordon & Reindel LLP $33,029 and
$56,692 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 $2,500 in the first quarter of fiscal 2009 and
2008.
(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.
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.
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From that point forward, the average selling price for sulfur again exceeded
the indexed base price and the payment of sulfur royalties under the Mobil
Agreement resumed. In the first quarters of fiscal 2009 and 2008, the Trust
received $244,874 and $0, respectively. The reason behind this sudden
resumption in payments has been the substantial increase in sulfur commodity
prices. The Trust is unable to determine how long sulfur prices will remain
above the threshold price level and thus how long these sulfur royalties may
continue.
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 seeking 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. Until such time as this issue
is settled, the payment of royalties from Grosses Meer has been suspended
effective as of the second calendar quarter of 2008. In the first quarters
of fiscal 2009 and 2008, the Trust received $0 and $37,612 in royalties from
Grosses Meer, respectively.
The gas is sold to various distributors under long-term contracts
which delineate, among other provisions, the timing, manner, volume and price
of the gas sold. The pricing mechanisms contained in these contracts include
a delay factor of three to six months and use the price of light heating oil
in Germany as one of the primary pricing components. Since Germany must
import a large percentage of its energy requirements, the U.S. dollar price
of oil on the international market has a significant impact on the price of
light heating oil and a delayed impact on the price of gas. The Trust does
not have access to the specific sales contracts under which gas from the
Oldenburg concession is sold. Working under a confidentiality agreement with
the operating companies, the Trust's German auditor 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
-11-
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 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, which would be reflected in sales prices, along with sales volumes
form the basis on which the royalties paid to the Trust are computed. The
impact of inflation or deflation on energy prices in Germany is delayed by
the use, in certain long-term gas sales contracts, of a delay factor of three
to six months prior to the application of any changes in light heating oil
prices to gas prices.
As mandated by the Trust Agreement, distributions of income are
made on a quarterly basis. These distributions, as determined by the
Trustees, constitute substantially all the funds on hand after provision is
made for Trust expenses then anticipated.
Results: First Quarter Fiscal 2009 Versus First Quarter Fiscal 2008
-------------------------------------------------------------------
For the first quarter of fiscal 2009, the Trust's net income was
$9,846,469, an increase of 41.08% from the net income of $6,979,325 for the
first quarter of fiscal 2008. Gross royalties received for the first quarter
of fiscal 2009 were $10,180,979, an increase of 41.11% as compared to
$7,215,083 for the first 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 fourth calendar quarter of 2008. A distribution
of $1.06 per unit was paid on February 25, 2009 to owners of record as of
February 13, 2009.
The amount of royalties paid to the Trust is based on four primary
factors: the amount of gas sold, the price of that gas, the area from which
the gas is sold and the exchange rate. Gas sales are measured in billion
cubic feet ("Bcf"). Gas prices are reported in Euro cents per Kilowatt hour
("Ecents/Kwh") and dollars per thousand cubic feet ("$/Mcf"). The primary
factor affecting royalty revenue for the quarter just ended was the increase
in gas prices under both the Mobil and the OEG Agreements. In addition, in
comparison to the first quarter of fiscal 2008, the lower average value of
the Euro relative to the dollar reduced the number of dollars received when
the royalties paid in Euros were converted to dollars at the time of their
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transfers to the U.S. The increase in gas prices more than offset the lower
average value of the Euro and the decline in gas sales under both royalty
agreements.
Factors Affecting Royalties Paid under the Mobil Agreement
----------------------------------------------------------
First Fiscal Qtr. First Fiscal Qtr. Percentage
Ended 1/31/2009 Ended 1/31/2008 Change
---------------- ---------------- ----------
Gas Sales (Bcf) 13.699 14.251 - 3.87%
Gas Prices (Ecents/Kwh) 3.1861 2.0876 +52.62%
Gas Prices ($/Mcf) $12.30 $ 8.83 +39.35%
Average Euro Value $1.3404 $1.4693 - 8.77%
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 39.88% of all gas sales.
However, royalties on these gas sales provided approximately 81.93% or
$7,896,998 out of a total of $9,638,306 in Oldenburg royalties attributable
to gas.
Factors Affecting Royalties Paid under the OEG Agreement
--------------------------------------------------------
First Fiscal Qtr. First Fiscal Qtr. Percentage
Ended 1/31/2009 Ended 1/31/2008 Change
---------------- ---------------- ----------
Gas Sales (Bcf) 34.351 34.716 - 1.05%
Gas Prices (Ecents/Kwh) 3.4411 2.1921 +56.98%
Gas Prices ($/Mcf) $12.93 $ 9.06 +42.66%
Average Euro Value $1.3382 $1.4697 - 8.95%
Interest income was lower reflecting the decline in interest rates
applicable during the period. For the quarter just ended, Trust interest
income decreased 71.67% to $9,451 from $33,355 in the first quarter of fiscal
2008. Trust expenses for the first quarter of fiscal 2009 increased 27.81%
or $74,848 to $343,961 in comparison to the prior year(s equivalent period.
The increase in costs reflects various legal matters related to the
examination of the German operating companies' royalty payments that is made
every two years, higher Trustees fees calculated based upon the provisions of
the Trust Agreement and variations in the timing of the receipt of invoices
for payment.
The current Statement of Assets, Liabilities and Trust Corpus of
the Trust at January 31, 2009, compared to that at fiscal year-end (October
31, 2008), shows an increase in assets due to the higher royalty receipts
during the first quarter of fiscal 2009.
-----------------------------------
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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.
----------------------------------------------------------
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, 2009. Based on that evaluation, the
Managing Director concluded that the Trust's disclosure controls and
procedures were effective as of January 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 first quarter of fiscal 2009 that have materially
affected or are reasonably likely to materially affect our internal control
over financial reporting.
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PART II -- OTHER INFORMATION
----------------------------
Item 5. Submission of Matters to a Vote of Security Holders.
----------------------------------------------------
The Annual Meeting of Unit Owners was held on February 10, 2009.
The following persons were elected as Trustees of the Trust to
serve until the next Annual Meeting of Unit Owners:
Robert P. Adelman (7,647,626 votes for; 228,415 withheld)
Samuel M. Eisenstat (7,683,044 votes for; 192,997 withheld)
Lawrence A. Kobrin (7,582,767 votes for; 293,274 withheld)
Willard B. Taylor (7,709,647 votes for; 166,394 withheld)
Rosalie J. Wolf (7,687,812 votes for; 188,229 withheld)
Item 6. Exhibits.
--------
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 26, 2009