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, 2006 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
----- -----
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer or a non-accelerated filer.
See definition of "accelerated filer and large accelerated filer" in
Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer Accelerated filer X Non-accelerated filer
---- ---- ----
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Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act). Yes No X
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Class Outstanding at July 31, 2006
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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. Condensed Financial Statements.
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STATEMENTS OF ASSETS, LIABILITIES AND TRUST CORPUS (NOTE 1)
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JULY 31, 2006 AND OCTOBER 31, 2005
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2006 2005
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(unaudited)
Current assets - - Cash and
cash equivalents (Note 1) $ 7,169,812 $ 3,920,267
Producing gas and oil royalty rights,
net of amortization (Notes 1 and 2) 1 1
------------ ------------
Total Assets $ 7,169,813 $ 3,920,268
============ ============
Current liabilities - - Cash distributions
payable to unit owners $ 7,076,754 $ 3,855,968
Contingent liability (Note 3)
Trust corpus (Notes 1 and 2) 1 1
Undistributed earnings 93,058 64,299
------------ ------------
Total Liabilities and Trust Corpus $ 7,169,813 $ 3,920,268
============ ============
The accompanying notes are integral to the condensed financial statements
and should be read in conjunction therewith.
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STATEMENTS OF REVENUE COLLECTED AND EXPENSES PAID (NOTE 1)
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FOR THE THREE MONTHS ENDED JULY 31, 2006 AND 2005
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2006 2005
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(unaudited)
German gas, oil and sulfur
royalties received $ 7,312,458 $ 5,419,524
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Interest income 53,882 20,056
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Trust expenses ( 225,639) ( 219,905)
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Net income on a cash basis $ 7,140,701 $ 5,219,675
============ ============
Net income per unit on a cash basis $ .78 $ .57
====== ======
Cash distributions paid or to be paid:
Dividends and distributions per unit paid
to formerly unlocated shareholders (Note 3) $ .00 $ .00
====== ======
Distributions per unit paid or
to be paid to unit owners $ .77 $ .57
====== ======
STATEMENTS OF REVENUE COLLECTED AND EXPENSES PAID (NOTE 1)
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FOR THE NINE MONTHS ENDED JULY 31, 2006 AND 2005
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2006 2005
----------------- -----------------
(unaudited)
German gas, oil and sulfur
royalties received $23,794,149 $16,906,627
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Interest income 108,578 35,874
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Trust expenses ( 754,975) ( 750,317)
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Net income on a cash basis $23,147,752 $16,192,184
============ ============
Net income per unit on a cash basis $2.52 $1.77
====== ======
Cash distributions paid or to be paid:
Dividends and distributions per unit paid
to former unlocated shareholders (Note 3) $ .02 $ .00
====== ======
Distributions per unit paid or
to be paid to unit owners $2.50 $1.80
====== ======
The accompanying notes are integral to the condensed financial statements
and should be read in conjunction therewith.
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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, 2006 AND 2005
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2006 2005
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(unaudited)
Sources of cash and cash equivalents:
German gas, oil and sulfur royalties $23,794,149 $16,906,627
Interest income 108,578 35,874
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23,902,727 16,942,501
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Uses of cash and cash equivalents:
Payment of Trust expenses 754,975 750,317
Distributions and dividends paid (Note 3) 19,898,207 13,944,289
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20,653,182 14,694,606
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Net increase (decrease) in cash and
cash equivalents during the period 3,249,545 2,247,895
Cash and cash equivalents,
beginning of period 3,920,267 3,014,386
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Cash and cash equivalents, end of period $ 7,169,812 $ 5,262,281
============ ============
STATEMENTS OF UNDISTRIBUTED EARNINGS (NOTE 1)
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FOR THE NINE MONTHS ENDED JULY 31, 2006 AND 2005
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2006 2005
----------------- ----------------
(unaudited)
Balance, beginning of period $ 64,299 $ 66,394
Net income on a cash basis 23,147,752 16,192,184
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23,212,051 16,258,578
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Less:
Dividends and distributions paid to
formerly unlocated shareholders (Note 3) 148,097 8,116
Current year distributions paid or
to be paid to unit owners (Note 3) 22,970,896 16,214,050
------------ ------------
23,118,993 16,222,166
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Balance, end of period $ 93,058 $ 36,412
============ ============
The accompanying notes are integral to the condensed financial statements
and should be read in conjunction therewith.
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NORTH EUROPEAN OIL ROYALTY TRUST
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NOTES TO CONDENSED FINANCIAL STATEMENTS
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(1) Summary of significant
accounting policies:
----------------------
Basis of Accounting -
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The accompanying condensed financial statements of North European Oil
Royalty Trust (the "Trust") present financial statement balances and
financial results on a modified cash basis of accounting, which is a
comprehensive basis of accounting other than accounting principles
generally accepted in the United States ("GAAP basis"). Cash basis
financial statements disclose revenue when cash is received and
expenses when cash is paid. GAAP basis financial statements disclose
income as earned and expenses as incurred, without regard to receipts
or payments. The modified cash basis of accounting is utilized to
permit the accrual for distributions to be paid to unit owners (those
distributions approved by the Trustees for the Trust). The Trust's
distributable income represents royalty income received by the Trust
during the period plus interest income less any expenses incurred by
the Trust, all on a cash basis. In the opinion of the Trustees, the
use of the modified cash basis of accounting provides a more
meaningful presentation to unit owners of the results of operations
of the Trust.
Producing gas and oil royalty rights -
------------------------------------
The rights to certain gas and oil royalties in Germany were transferred
to the Trust at their net book value by North European Oil Company
(the "Company") (see Note 2). The net book value of the royalty rights
has been reduced to one dollar ($1) in view of the fact that the
remaining net book value of royalty rights is de minimis relative to
annual royalties received and distributed by the Trust and does not
bear any meaningful relationship to the fair value of such rights or
the actual amount of proved producing reserves.
Federal income taxes -
--------------------
The Trust, as a grantor trust, is exempt from Federal income taxes
under a private letter ruling issued by the Internal Revenue Service.
Cash and cash equivalents -
-------------------------
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.
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Net income per unit
on the cash basis -
-------------------
Net income per unit on the cash basis is based upon the number of units
outstanding at the end of the period. As of July 31, 2006 and 2005,
there were 9,190,590 and 9,168,192 units of beneficial interest
outstanding respectively.
(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, distillate and sulfur.
(3) Contingent liability:
---------------------
From its inception in 1975 until June 30, 2005, the Trust had served as
fiduciary for certain unlocated or unknown shareholders of North
European Oil Corporation (the "Corporation") and North European Oil
Company, corporate predecessors of the Trust. Pursuant to an order of
the Delaware Court of Chancery dated February 26, 1996 (the "Chancery
Court Order"), from and after July 1, 2005, the Trust has no further
obligation with respect to unlocated or unknown owners and is no
longer required to make payments of dividends or distributions
attributable to any unexchanged Corporate and Company shares.
From the liquidation of the Company to October 31, 2005, 726,611 Trust
units were issued in exchange for Corporate or Company shares and
dividends of $357,035 and distributions of $4,472,371 were paid to
formerly unlocated Corporation and Company shareholders. For the
nine-month period ended July 31, 2006, the Trust issued 3,150 units in
exchanges and paid $1,769 in dividends and $146,328 in distributions.
The dividends and distributions were paid to formerly unlocated
Corporation shareholders who had submitted a claim prior to
July 1, 2005. That claim had been conditionally approved by the
Trustees subject to the successful submission of the required
documentation and bond.
As of July 31, 2006, the total number of authorized units, 9,190,590,
were issued and outstanding.
(4) Related party transactions:
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John R. Van Kirk, the Managing Director of the Trust, provides office
space and office services to the Trust at cost. During the third
quarter of fiscal 2006, the Trust reimbursed him a total of $4,539 for
such office space and office services.
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Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
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The Trust is a passive fixed investment trust which holds overriding
royalty rights, receives income under those rights from certain operating
companies, pays its expenses and distributes the remaining net funds to its
unit owners. The Trust does not engage in any business or extractive
operations of any kind in the areas over which it holds royalty rights and
is precluded from any such involvement by the Trust Agreement. There are no
requirements, therefore, for capital resources with which to make capital
expenditures or investments in order to continue the receipt of royalty
revenues by the Trust.
The properties of the Trust, which the Trust and Trustees hold pursuant
to the Trust Agreement on behalf of the unit owners, are overriding royalty
rights on sales of gas, sulfur and oil under certain concessions or leases in
the Federal Republic of Germany. The actual leases or concessions are held
either by Mobil Erdgas-Erdol GmbH ("Mobil Erdgas"), a German operating
subsidiary of the ExxonMobil Corp., or by Oldenburgische Erdolgesellschaft
("OEG"). In 2002 Mobil Erdgas and BEB Erdgas und Erdol GmbH ("BEB"), a joint
venture of ExxonMobil Corp. and the Royal Dutch/Shell Group of Companies,
formed a company ExxonMobil Production Deutschland GmbH ("EMPG") to carry out
all exploration, drilling and production activities. All sales activities
are still handled by the operating companies, either Mobil Erdgas or BEB.
The operating companies pay monthly royalties to the Trust based on
their sales of natural gas, sulfur and oil. Of these three products, natural
gas provides approximately 98% of the total royalties. The amount of
royalties paid to the Trust is based on four primary factors: the amount of
gas sold, the price of that gas, the area from which the gas is sold and the
exchange rate. The Oldenburg concession is the primary area from which the
natural gas, sulfur and oil are extracted and provides nearly 100% of all the
royalties received by the Trust. The Oldenburg concession (1,398,000 acres)
covers virtually the entire former State of Oldenburg and is located in the
federal state of Lower Saxony.
Under one series 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. Under the royalty agreement with
Mobil Erdgas, there is no deduction of costs prior to the calculation of
royalties from gas well gas and oil well gas. Royalties from gas sold under
this agreement provide the Trust with the bulk of its royalties.
Under another series of rights covering the entire Oldenburg concession
and pursuant to an agreement with OEG, the Trust receives royalties at the
rate of 0.6667% on gross receipts from sales 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. Under the agreement with OEG, 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.
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
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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. Although the Trust
itself does not have access to the specific sales contracts under which the
Oldenburg gas is sold, these contracts are reviewed periodically by
Ernst & Young AG.
For unit owners, changes in the value of the Euro have both an immediate
and a long term impact. The immediate impact relates to the determination
of the number of dollars the Trust receives when Euros are converted into
dollars at the time of the transfer of the royalties from Germany to the
United States. At the time of the exchange, a higher exchange rate would
yield more dollars and a lower exchange rate less dollars. The long term
impact comes into play through the mechanism of gas pricing. With the price
of light heating oil used as a component in the calculation of gas prices in
the various contracts under which the gas is sold, changes in world crude
oil prices are eventually reflected in gas prices. Since oil on the
international market is priced in dollars, a lower exchange rate for the Euro
means that oil imported into Germany is more expensive which results in
higher local oil prices. A higher exchange rate for the Euro means that oil
imported into Germany is less expensive which results in lower local oil
prices. These higher or lower local oil prices are in turn reflected in
higher or lower gas prices.
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.
As mandated by the Trust Agreement, distributions of income are made on
a quarterly basis. These distributions, as determined by the Trustees,
constitute substantially all of the funds on hand after provision is made
for Trust expenses then anticipated.
Results of Operations
---------------------
The primary factor affecting royalty revenue for the quarter just ended
was the significant increase in gas prices under both the higher royalty rate
agreement covering western Oldenburg and the lower royalty rate agreement
covering the entire Oldenburg concession. While overall gas sales increased
slightly, gas sales from western Oldenburg declined. The increases in the
average dollar values of the Euro based on total royalty transfers over the
prior year was minor. All comparisons, unless otherwise noted, are to the
prior year's equivalent period.
The recent high world oil prices continue to impact gas prices within
Germany. For gas sales under the higher royalty rate agreement from western
Oldenburg for the quarter just ended, the average price increased 38.5% from
1.4738 Euro cents per Kilowatt hour ("Ecents/Kwh") to 2.0417 Ecents/Kwh.
When we convert this quarter's price into more familiar terms using the
average exchange rate for the quarter, the average price for gas sold under
this agreement was $7.42 per Mcf compared to $5.18 per Mcf. This represents
a 43.2% increase from the prior year. Gas sales under this agreement
declined by 3.9% from 18.325 billion cubic feet ("Bcf") to 17.613 Bcf. At
this level, gas sales from western Oldenburg accounted for 41.4% of total
-10-
Oldenburg gas sales. The decline in gas sales can be attributed to the
reduction in through-put caused by the partial shutdown of the Grossenkneten
desulfurization plant. In the current fiscal year this reduction occurred in
the third fiscal quarter in contrast to the prior year when it occurred in
the fourth fiscal quarter.
The lower royalty rate agreement between the Trust and BEB covers gas
sales from the entire Oldenburg concession. Under this agreement the average
gas price for the quarter just ended increased 43.9% from 1.5216 Ecents/Kwh
to 2.1900 Ecents/Kwh. When we convert this quarter's gas price into more
familiar terms using the average exchange rate for the quarter, the average
price for gas sold under this agreement was $7.75 per Mcf compared to $5.25
per Mcf. This represents a 47.6% increase from the prior year. Overall gas
sales from the Oldenburg concession increased by 1.6% from 41.91 Bcf to
42.56 Bcf.
Based on the transfer from Germany of royalties received under the
higher and lower royalty rate agreements, the average value of the Euro for
the quarter just ended increased 4.8% and 2.9%, respectively, to a dollar
equivalent of $1.2631 and $1.2615, respectively. The higher value of the
Euro has the immediate impact of increasing the amount of dollars received at
the time of the transfer of royalties from Germany. However, because of the
use of light heating oil as a pricing factor in the gas sales contracts, the
higher value of the Euro also works to decrease the price of gas within
Germany by making imported oil prices in dollars less expensive.
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 41.4% of all gas sales. However,
royalties on these gas sales provided 84.1% or $6,125,183 out of a total of
$7,284,732 in Oldenburg royalties. For the nine months just ended gas sales
from western Oldenburg accounted for only 40.9% of all gas sales. However,
royalties on these gas sales provided 82.5% or $19,566,921 out of a total of
$23,731,088 in Oldenburg royalties.
For the nine-month period under the higher and lower royalty rate
agreements, average gas prices increased 47.9% and 45.9%, respectively, to
2.1218 and 2.2074 Ecents/Kwh, respectively. For the nine-month period under
the higher and lower royalty rate agreements, gas sales increased 5.4% and
6.2%, respectively, to 56.17 and 137.21 Bcf, respectively. Based on the
transfer from Germany of royalties received under the higher and lower
royalty rate agreements, the average value of the Euro for the nine months
just ended decreased 4.8% and 4.3% to a dollar equivalent of $1.2205 and
$1.2266, respectively.
Interest income for the third quarter and the nine-month period was
higher due to both the increased funds available for investment and the
continued rise in interest rates in the U.S. Trust expenses for the third
quarter of fiscal 2006 increased by 2.6% from the prior year amount to
$225,639. The increased expenses were due to higher Trustees' fees
(calculated under the formula specified in the Trust Agreement). For the
nine-month period Trust expenses increased by 0.6% from the prior year to
$754,975.
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The current Statement of Assets, Liabilities and Trust Corpus of the
Trust at July 31, 2006, compared to that at fiscal year end (October 31,
2005), shows an increase in assets due to the higher royalty receipts during
the quarter.
-----------------------------------
This report on Form 10-Q contains forward looking statements concerning
business, financial performance and financial condition of the Trust. Many
of these statements are based on information provided to the Trust by the
operating companies or by consultants using public information sources.
These statements are subject to certain risks and uncertainties that could
cause actual results to differ materially from those anticipated in any
forward looking statements. These include uncertainties concerning levels
of gas production and gas sale prices, general economic conditions and
currency exchange rates. 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 the Trust's 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.
-----------------------
As of the end of the period covered by this report, an evaluation was
carried out under the supervision and with the participation of the Trust's
management, which consists of the Managing Trustee and the Managing Director,
of the effectiveness of the design and operation of the Trust's disclosure
controls and procedures pursuant to Rule 13a-15 of the Securities Exchange
Act of 1934. Based upon that evaluation, the Managing Trustee and the
Managing Director concluded that the Trust's disclosure controls and
procedures were effective, in all material respects, with respect to the
recording, processing, summarizing and reporting, within the time periods
specified in the Securities and Exchange Commission's rules and forms, of
information required to be disclosed by the Trust's management in the reports
that are filed or submitted under the Exchange Act.
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 2006 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 6. Exhibits.
--------
(a) Exhibits.
Exhibit 31.1. Certification of Chief Executive Officer
pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
Exhibit 31.2. Certification of Chief Financial Officer
pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
Exhibit 32. Certification of Chief Executive and
Chief Financial Officers 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 thereunto duly authorized.
NORTH EUROPEAN OIL ROYALTY TRUST
---------------------------------
(Registrant)
/s/ John R. Van Kirk
---------------------------------
John R. Van Kirk
Managing Director
Dated: August 30, 2006