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| TELOZ > SEC Filings for TELOZ > Form 10-Q on 13-Nov-2008 | All Recent SEC Filings |
13-Nov-2008
Quarterly Report
Critical Accounting Policies
The financial statements of the Trust are prepared on the following basis:
º (a)
º Royalty income is recorded when received, including the effect of
overtaken or undertaken positions and negative or positive
adjustments, by the Corporate Trustee on the last business day of each
calendar quarter. In addition, Royalty income includes amounts related
to funds deposited or released from the Special Cost Escrow
account-see (c); and
º (b)
º Trust general and administrative expenses are recorded when paid,
except for the cash reserved for future general and administrative
expenses; and
º (c)
º The funds deposited or released from the Special Cost Escrow account
are recorded at the time of payment or receipt. The Special Cost
Escrow account is an account of the Working Interest Owners and is not
reflected in the financial statements of the Trust.
This manner of reporting income and expenses is considered to be the most meaningful because the quarterly distributions to Unit holders are based on net cash receipts received from the Working Interest Owners. The financial statements of the Trust differ from financial statements prepared in accordance with generally accepted accounting principles, because, under such principles, Royalty income and Trust general and administrative expenses for a quarter would be recognized on an accrual basis. In addition, amortization of the net overriding royalty interest, calculated on a units-of-production basis, is charged directly to Trust corpus since such amount does not affect distributable income.
On the last business day of each calendar quarter, the Working Interest Owners pay to the Partnership 25% of the Net Proceeds for the immediately preceding Quarterly Period. A Quarterly Period is each period of three months commencing on the first day of February, May, August and November. In turn, the Partnership distributes funds to its partners on the last business day of each calendar quarter. Cash distributions from the Trust are made in January, April, July and October of each year, and are payable to Unit holders of record as of the last business day of each calendar quarter. Thus, the cash conveyed to the Trust from the Royalty during the quarter ended September 30, 2008 substantially represents the revenues and expenses from the Royalty Properties from May through July 2008. The financial and operating information included in this Form 10-Q for the three months ended September 30, 2008 represents financial and operating information with respect to the Royalty Properties for the months of May, June and July 2008. Similarly, the financial and operating information included in this Form 10-Q for the nine months ended September 30, 2008 represents financial and operating information with respect to the Royalty Properties for the months of November 2007 through July 2008. Income from the Royalty is recorded by the Trust on a cash basis, when it is received by the Trust from the Partnership.
The Trustees, including the Corporate Trustee, have no authority over, have not evaluated and make no statement concerning, the internal control over financial reporting of the Working Interest Owners.
Three Months Ended September 30, 2008 and 2007
There were distributions of $5,470,387 or $1.151294 per Unit to the Unit holders for the three months ended September 30, 2008 as compared to distributions of $2,836,896 or $0.597051 per Unit to the Unit holders for the same period in 2007.
Crude oil and condensate revenues increased $6,131,506, or 66%, to $15,441,978 in the third quarter of 2008 from $9,310,472 in the third quarter of 2007. The increase was a result of a 9% increase in crude oil and condensate volume to 149,125 barrels in the third quarter of 2008 from 137,016 barrels in the third quarter of 2007 due to higher production volume, and a 52% increase in the average price of crude oil and condensate to $103.55 per barrel in the third quarter of 2008 from $67.95 per barrel in the third quarter of 2007.
Gas revenues increased $1,689,456, or 71%, to $4,081,548 in the third quarter of 2008 from $2,392,092 in the third quarter of 2007, due primarily to an increase in the average price received for natural gas from $7.78 per Mcf in the third quarter of 2007 to $12.46 per Mcf in the third quarter of 2008. Gas volumes increased 7% to 327,690 Mcf in the third quarter of 2008 from 307,288 Mcf in the third quarter of 2007. Gas products revenue increased to $1,255,531 in the third quarter of 2008 from $221,384 in the third quarter of 2007, primarily due to an increase in production volumes to 877,148 gallons in the third quarter of 2008, of which 223,130 gallons booked related to prior period adjustments for 2004 through 2007, from 208,868 gallons in the third quarter of 2007.
Capital expenditures increased $19,956, from $213,168 in the third quarter of 2007 to $233,124 in the third quarter of 2008. The capital expenditures for the third quarter of 2008 related primarily to field workovers to help improve production performance. The capital expenditures for the third quarter of 2007 related primarily to damages caused by Hurricanes Rita and Katrina.
The Royalty Properties received previously undistributed net income of $28,484 as of September 30, 2008.
In the third quarter of 2008, there was a net release of funds from the Special Cost Escrow account. The Trust's share of the net funds released was $1,017,783. As of September 30, 2008, the Trust's share of funds remaining in the Special Cost Escrow account was $4,335,777. The Special Cost Escrow is set aside for estimated abandonment costs and future capital expenditures, as provided for in the Conveyance. For additional information relating to the Special Cost Escrow, see "-Special Cost Escrow Account" below.
In the third quarter of 2007, there was a net release of funds from the Special Cost Escrow account. The Trust's share of the net funds released was $454,995.
Production from Eugene Island 339 and Ship Shoal 182 and 183, the two most significant Royalty Properties, ceased following damage inflicted by Hurricane Ike in September 2008. The platforms and wells on Eugene Island 339 were destroyed by Hurricane Ike. Chevron is assessing its alternatives and the economic feasibility for restoring production at the property. At this point in time, there can be no assurance as to how or when, or if at all, production may be restored at Eugene Island 339. While Hurricane Ike caused limited surface damage to the facilities at Ship Shoal 182/183, all of the wells at Ship Shoal 182/183 were shut-in following hurricane-related damage to a third-party transporter's natural gas pipeline. Each of Chevron and the natural gas transporter is assessing its alternatives and
the economic feasibility for restoring pipeline transportation. At this point in time, there can be no assurance as to how or when, or if at all, production may be restored at Ship Shoal 182/183. See "-Operational Review."
Nine Months Ended September 30, 2008 and 2007
There were distributions of $12,558,805 or $2.643119 per Unit to the Unit holders for the nine months ended September 30, 2008 as compared to distributions of $6,058,403 or $1.275048 per Unit to the Unit holders for the same period in 2007.
Crude oil and condensate revenues increased $10,611,417, or 39%, to $37,485,063 in the first nine months of 2008 from $26,873,646 for the same period in 2007, due to a 57% increase in the average price of crude oil and condensate to $97.19 per barrel in the first nine months of 2008 from $62.06 per barrel in the first nine months of 2007. This increase was partially offset by an 11% decrease in crude oil and condensate volume to 385,687 barrels from 433,006 barrels, respectively, during these periods.
Gas revenues increased $3,193,276, or 44%, to $10,389,374 in the first nine months of 2008 from $7,196,098 for the same period in 2007, due to an increase in gas volumes of 17% to 1,134,953 Mcf in the first nine months of 2008 from 968,347 Mcf for the same period in 2007 and a 24% increase in the average price received for natural gas to $9.24 per Mcf in the first nine months of 2008 from $7.43 per Mcf in the same period of 2007. Gas products revenue increased $2,523,817 or 487%, to $3,041,718 in the first nine months of 2008 from $517,901 in the same period of 2007, primarily due to an increase in production volume of 1,676,119 gallons, or 304%, to 2,226,669 gallons in the first nine months of 2008 from 550,550 gallons in the same period of 2007.
The decrease in crude oil and condensate volumes for the first nine months of 2008 was related in part to a three day field shut-in for repairs at Eugene Island 339 and to an entire production shut-in at Ship Shoal 182/183, platforms C and E, due to pipeline obstruction.
Increases in gas volumes and gas products production volumes resulted from Eugene Island 339 and East Cameron 643 coming back on-line during July 2007 after hurricane damages were repaired.
The Trust's share of capital expenditures decreased $1,268,940, from $1,387,892 in the first nine months of 2007 to $118,952 in the same period of 2008. The higher amount of capital expenditures for the first nine months of 2007 related primarily to damages caused by Hurricanes Rita and Katrina. Reflected within the capital expenditures line item for 2008 is a refund of $495,000 from the Working Interest Owners for certain prior period capital expenditures. The refund of prior period capital expenditures resulted from the review procedures performed by an outside auditor as further described below.
The Royalty Properties had an increase in undistributed net income of $59,631 as of 2008.
In the first nine months of 2008, there was a net release of funds from the Special Cost Escrow account. The Trust's share of the net funds released was $2,377,787. In the first nine months of 2007, there was a net deposit of funds into the Special Cost Escrow account. The Trust's share of the net funds deposited was $47,918. As of September 30, 2008, $4,335,777 remained in the Special Cost Escrow account. The Special Cost Escrow is set aside for estimated abandonment costs and future capital expenditures, as provided for in the Conveyance. For additional information relating to the Special Cost Escrow, see "-Special Cost Escrow Account" below.
Reserve for Future Trust Expenses
In accordance with the provisions of the Trust Agreement, generally all Royalty income received by the Trust, net of Trust general and administrative expenses and any cash reserves established for the payment of contingent or future obligations of the Trust, are distributed currently to the Unit holders. The Trust has previously determined that a cash reserve equal to approximately three times the average expenses of the Trust during each of the past three years was sufficient to provide for future administrative expenses in connection with the winding up of the Trust. During the nine months ended September 30, 2008, the Trust increased its reserve by $265,048 for a reserve balance of $2,148,774 at September 30, 2008. The reserve amount at December 31, 2007 was $1,883,726.
Other
The amount of cash distributed by the Trust is dependent on, among other things, the sales prices and quantities of oil and gas produced from the Royalty Properties as well as capital expenditures by the Working Interest Owners that may or may not be included in the Special Cost Escrow account. It should be noted that substantial uncertainties exist with regard to future oil and gas prices, which are subject to material fluctuations due to changes in production levels and pricing and other actions taken by major petroleum producing nations, as well as the regional supply and demand for oil and gas, weather, industrial growth, conservation measures, competition and other variables.
Operational Review
At the end of October 2005, approximately half of Chevron oil-equivalent production in the Gulf of Mexico remained shut-in due to damages from hurricanes in the third quarter. During 2006, several of the platforms and facilities on the Royalty Properties were restored, and by the third quarter of 2007 all but one of the platforms and facilities had been restored. On West Cameron 643, production was shut in from September 2005 following Hurricane Rita's major damage to various platforms, but limited gas production resumed in late July 2006 before the wells loaded up and additional repairs were required thus requiring the well to be shut in again during the second quarter 2006. Production at West Cameron 643 resumed May 2007.
One of the platforms and facilities on Eugene Island was destroyed from hurricanes in the third quarter of 2005 and has not been restored. Eugene Island 339 oil production increased during the second half of 2006 and the first quarter of 2007 as the B-5 well gas injection project, which allows the operator to increase oil production and to limit flaring of gas, was completed. However, the platforms
and wells on Eugene Island 339 were destroyed by Hurricane Ike in September 2008. Crude oil revenues from Eugene Island 339 represented approximately 48% of the crude oil and condensate revenues for the Royalty Properties in 2007 and for the third quarter in 2008. Eugene Island 339 contributed approximately 12% of the revenues from natural gas sales from the Royalty Properties in 2007 and approximately 45% of the revenues from natural gas sales in the third quarter of 2008. Chevron is assessing its alternatives and the economic feasibility for restoring production at the property. At this point in time, there can be no assurance as to how or when, or if at all, production may be restored at Eugene Island 339. Generally, if production ceases from an outer continental shelf lease, like that for Eugene Island 339, production must be restored or drilling operations must commence within 180 days of the cessation, or the lease will be terminated. A lease operator may seek approval from the regional supervisor of the Mineral Management Service to allow additional time to restore production. There can be no assurance that production at Eugene Island 339 will be restored or that the lease operator will seek any such extension within such 180 day period, or if sought, such an extension would be granted.
On Ship Shoal 182/183, gas production and sales resumed in July 2006 following the hurricanes in the third quarter of 2005, and full production resumed in the fourth quarter of 2006. However, production ceased following damage inflicted by Hurricane Ike in September 2008. While Hurricane Ike caused limited surface damage to the facilities at Ship Shoal 182/183, all of the wells at Ship Shoal 182/183 were shut-in following hurricane-related damage to a third-party transporter's natural gas pipeline. The more productive wells on the properties produce both oil and gas, and there is currently no downstream transmission available for any gas produced from the wells. Crude oil revenues from Ship Shoal 182/183 represented approximately 50% of the crude oil and condensate revenues for the Royalty Properties in 2007 and for the third quarter in 2008. Ship Shoal 182/183 contributed approximately 77% of the revenues from natural gas sales from the Royalty Properties in 2007 and approximately 39% of the revenues from natural gas sales in the third quarter of 2008. Each of Chevron and the natural gas transporter is assessing its alternatives and the economic feasibility for restoring pipeline transportation. At this point in time, there can be no assurance as to how or when, or if at all, production may be restored at Ship Shoal 182/183.
The Trust has engaged an outside auditor for the purpose of reviewing the books and records of certain Working Interest Owners with respect to the Royalty Properties and the related payments to the Trust. Based on the initial report of this auditor, the Trustees believe that certain errors have occurred and are involved in ongoing discussions with such Working Interest Owners to resolve these items. As part of this process, certain adjustments resulted in an additional cash distribution to the Trust during the first quarter of 2008. These amounts are comprised of a one-time increase of approximately $31,716 in gas revenues, a one-time increase of approximately $43,287 in oil revenues, and a one-time credit of approximately $123,900 in capital expenditures. An additional $127,973 related to the outside audit was included in the second quarter 2008 distribution. An additional $135,551 related to the outside audit was included in the third quarter 2008 distribution. No assurance can be provided as to the ultimate outcome of the remaining items under discussion.
Three Months Ended September 30, 2008 and 2007
The following operational information has been based on information provided to the Corporate Trustee by Chevron as the Managing General Partner of the Partnership and by the applicable Working Interest Owners. The Trustees have no control over these operations or internal controls relating to this information.
Ship Shoal 182/183 crude oil revenues increased from $4,744,516 in the third quarter of 2007 to $7,838,993 in the third quarter of 2008, due to an increase in the average crude oil price from $69.12 per barrel in the third quarter of 2007 to $123.87 per barrel for the same period in 2008. The increase was partially offset by a decrease in net crude oil production from 68,640 barrels in the third quarter of 2007 to 63,286 barrels in the third quarter of 2008. The decrease in volumes is primarily related to normal production decline. Gas revenues decreased from $1,968,734 in the third quarter of 2007 to $1,613,142 in the third quarter of 2008, primarily due to a decrease in gas volumes from 249,347 Mcf in the third quarter of 2007 to 140,738 Mcf in the third quarter of 2008. This decrease was partially offset by an increase in the natural gas sales price from $7.90 per Mcf in the third quarter of 2007 to $11.46 per Mcf in the third quarter of 2008. The decrease in volumes is primarily related to normal production decline. Capital expenditures decreased from $97,197 in the third quarter of 2007 to $10,532 in the third quarter of 2008. No significant projects occurred during the third quarter of 2008. Operating expenses decreased from $695,209 in the third quarter of 2007 to $471,151 for the same period in 2008 due to a decrease in production volumes.
Production from Ship Shoal 182 and 183 ceased following damage inflicted by Hurricane Ike in September 2008. While Hurricane Ike caused limited surface damage to the facilities at Ship Shoal 182/183, all of the wells at Ship Shoal 182/183 were shut-in following hurricane-related damage to a third-party transporter's natural gas pipeline. Each of Chevron and the natural gas transporter is assessing its alternatives and the economic feasibility for restoring pipeline transportation. At this point in time, there can be no assurance as to how or when, or if at all, production may be restored at Ship Shoal 182/183. See "-Operational Review."
Eugene Island 339 crude oil revenues increased from $4,398,230 in the third quarter of 2007 to $7,386,151 in the third quarter of 2008. There was an increase in crude oil production from 65,891 barrels in the third quarter of 2007 to 84,061 barrels in the third quarter of 2008 primarily as a result of a 23,845 barrel volume adjustment as a result of an external audit. There was also an increase in the average price of crude oil from $66.75 per barrel in the third quarter of 2007 to $87.87 in the third quarter of 2008. Gas revenues were $111,087 in the third quarter of 2007 and $1,861,437 in the third quarter 2008 mostly related to higher volumes in the third quarter of 2008 as compared to the third quarter of 2007. Repair of damages caused by Hurricanes Rita and Katrina caused gas production to increase from 16,360 Mcf in the third quarter of 2007 to 132,829 Mcf in the third quarter 2008. Capital expenditures increased from $52,909 in the third quarter of 2007 to $186,687 in the third quarter of 2008, primarily due to repairs associated with the conversion to a water injector. Operating expenses increased from $653,172 in the third quarter of 2007 to $915,360 for the same period in 2008, mostly due to workover expenses and an adjustment to correct costs from November 2006 and January 2007.
Production from Eugene Island 339 ceased following damage inflicted by Hurricane Ike in September 2008, as the platforms and wells on Eugene Island 339 were destroyed. Chevron is assessing its alternatives and the economic feasibility for restoring production at the property. At this point in time, there can be no assurance if production will be restored at Eugene Island 339. See "-Operational Review."
West Cameron 643 gas revenues increased from $264,332 in the third quarter of 2007 to $567,061 in the third quarter 2008 due mostly to higher gas prices. Following the repair of damage caused by Hurricanes Rita and Katrina, gas production increased from 35,389 Mcf in the third quarter of 2007 to 50,351 Mcf in the third quarter of 2008. Operating expenses decreased from $262,763 in the third quarter of 2007 to $152,594 for the same period in 2008. Capital expenditures were $0 in the third quarter of 2007 and $7,884 in the third quarter of 2008.
Volumes and dollar amounts discussed below represent amounts recorded by the Working Interest Owners unless otherwise specified.
Ship Shoal 182/183 crude oil revenues increased from $13,421,822 in the first nine months of 2007 to $19,206,631 in the first nine months of 2008, due to an increase in the average crude oil price from $64.35 per barrel in the first nine months of 2007 to $104.70 per barrel for the same period in 2008. The increase was partially offset by a decrease in crude oil production from 208,562 barrels in the first nine months of 2007 to 183,449 barrels in the first nine months of 2008. This production decline is related in part to a three day field shut-in for repairs at Ship Shoal 182/183. Gas revenues decreased from $6,453,632 in the first nine months of 2007 to $4,227,427 in first nine months of 2008 primarily due to a decrease in gas volumes from 854,183 Mcf in the first nine months of 2007 to 477,435 Mcf for the same period in 2008. This decrease in gas volumes was due to a shut-in as a result of an obstructed pipeline and the natural decline of production. The average natural gas sales price increased from $7.43 per Mcf in the first nine months of 2007 to $9.24 in the first nine months of 2008. Capital expenditures decreased from $675,220 in the first nine months of 2007 to ($455,967) in the same period of 2008, primarily due to an audit adjustment for prior periods. Operating expenses decreased from $2,547,168 for the first nine months of 2007 to $1,982,544 for the first nine months of 2008, due to a decrease in production.
Production from Ship Shoal 182 and 183 ceased following damage inflicted by Hurricane Ike in September 2008. While Hurricane Ike caused limited surface damage to the facilities at Ship Shoal 182/183, all of the wells at Ship Shoal 182/183 were shut-in following hurricane-related damage to a third-party transporter's natural gas pipeline. Each of Chevron and the natural gas transporter is assessing its alternatives and the economic feasibility for restoring pipeline transportation. At this point in time, there can be no assurance as to how or when, or if at all, production may be restored at Ship Shoal 182/183. See "-Operational Review."
Eugene Island 339 crude oil revenues increased from $13,004,475 in the first nine months of 2007 to $17,668,951 in the first nine months of 2008, due to an increase in the average crude oil price from $59.87 per barrel in the first nine months of 2007 to $90.32 per barrel in the first nine months of 2008. The increase was partially offset by a decrease in volumes from 217,197 barrels in the first nine months of 2007 to 195,633 barrels in the first nine months of 2008. This production decline is primarily related to a three day field shut-in for repairs at Eugene Island 339. Gas revenues increased from $111,087 in the first nine months of 2007 to $4,322,543 in the first nine months of 2008, primarily due to a increase in production from 16,360 Mcf for the first nine months of 2007 to 448,921 Mcf for the same period in 2008. The increase is a result of production coming back online after the completion of a third-party gas pipeline connection in July 2007. Capital expenditures increased from $182,651 in the first nine months of 2007 to $477,067 in the first nine months of 2008 due to the conversion to a water injector. Operating expenses increased from $1,540,940 for the first nine months of 2007 to $2,379,294 for the first nine months of 2008, primarily due to increased production.
Production from Eugene Island 339 ceased following damage inflicted by Hurricane Ike in September 2008, as the platforms and wells on Eugene Island 339 were destroyed. Chevron is assessing its alternatives and the economic feasibility for restoring production at the property. At this point in time, there can be no assurance if production may will restored at Eugene Island 339. See "-Operational Review."
Liquidity and Capital Resources
Production from Eugene Island 339 and Ship Shoal 182 and 183, the two most significant Royalty Properties, ceased following damage inflicted by Hurricane Ike in September 2008. The platforms and wells on Eugene Island 339 were destroyed by Hurricane Ike. Chevron is assessing its alternatives and the economic feasibility for restoring production at the property. At this point in time, there can be no assurance as to how or when, or if at all, production may be restored at Eugene Island 339. While Hurricane Ike caused limited surface damage to the facilities at Ship Shoal 182/183, all of the wells at Ship Shoal 182/183 were shut-in following hurricane-related damage to a third-party . . .
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