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| NRT > SEC Filings for NRT > Form 10-K on 30-Dec-2008 | All Recent SEC Filings |
30-Dec-2008
Annual Report
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 engaging in such activities by the Trust Agreement. There are no requirements, therefore, for capital resources with which to make capital expenditures or investments in order to continue the receipt of royalty revenues by the Trust.
The properties of the Trust are described in Item 2. Properties of this report. Of particular importance with respect to royalty income are the two royalty agreements, the Mobil Agreement and the OEG Agreement. The Mobil Agreement covers gas sales from the western part of the Oldenburg concession. Under the Mobil Agreement, the Trust has traditionally received the majority of its royalty income due to the higher royalty rate of 4%. The OEG Agreement covers gas sales from the entire Oldenburg concession but the royalty rate of 0.6667% is significantly lower and gas royalties have been correspondingly lower.
Under the Mobil and OEG Agreements, 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 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, Ernst & Young AG 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 U.S. 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 less 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 contracted gas prices with a built-in delay of three to six months.
Seasonal demand factors affect the income from the Trust's royalty rights insofar as they relate to energy demands and increases or decreases in prices, but on average they are generally not material to the annual income received under the Trust's royalty rights.
The Trust has no means of ensuring continued income from overriding royalty rights at their present level or otherwise. The Trust's 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 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 of the funds on hand after provision is made for Trust expenses then anticipated.
Results: Fiscal 2008 versus Fiscal 2007
For fiscal 2008, the Trust's gross royalty income increased 26.05% to $34,645,159 from $27,484,254 in fiscal 2007. The increase in average gas prices along with the impact of a higher average exchange rate more than offset the decline in gas sales and combined to increase the amount of royalty income, which resulted in the higher distributions.
Under the Mobil Agreement, gas sales decreased 17.52% to 54.114 billion cubic feet ('Bcf') in fiscal 2008 from 65.606 Bcf in fiscal 2007. The continuing decline in western Oldenburg gas sales can most likely be accounted for by a drop in overall wellhead pressures that could not be offset by the additional wells added. In addition, the gas located in western Oldenburg is almost exclusively sour gas, which must be processed to have the hydrogen sulfide removed. As a consequence, the larger decline in the third quarter can be accounted for at least partially by a shutdown of the Grossenkneten desulfurization plant. This shutdown occurred in the third quarter of fiscal 2008 but there was no shutdown during fiscal 2007.
Quarterly and Yearly Gas Sales under the Mobil Agreement in Billion cu. ft. --------------------------------------------------------------------------- Fiscal Quarter 2008 Gas Sales 2007 Gas Sales Percentage Change -------------- ---------------- ---------------- ----------------- First 14.251 17.512 -18.62% Second 14.004 17.125 -18.22% Third 12.314 16.177 -23.88% Fourth 13.545 14.792 - 8.43% Fiscal Year Total 54.114 65.606 -17.52% |
Average gas prices for gas sold from this royalty area increased 28.01% to 2.3922 Eurocents per Kilowatt hour ('Ecents/Kwh') in fiscal 2008 from 1.8688 Ecents/Kwh in fiscal 2007. For fiscal 2008, the increase in worldwide oil prices pushed average gas prices higher as we progressed through the year.
Average Gas Prices under the Mobil Agreement in Euro cents per Kilowatt Hour ---------------------------------------------------------------------------- Fiscal Quarter 2008 Gas Prices 2007 Gas Prices Percentage Change -------------- ----------------- ----------------- ----------------- First 2.0876 2.2673 - 7.93% Second 2.2876 1.9950 14.67% Third 2.4704 1.5159 62.97% Fourth 2.7510 1.6366 68.09% Fiscal Year Avg. 2.3922 1.8688 28.01% |
Converting gas prices into more familiar terms using the average exchange rate yielded a price of $10.24 per thousand cubic feet ('Mcf'), a 42.02% increase over fiscal 2007's average price of $7.21/Mcf. For fiscal 2008, royalties paid under the Mobil Agreement were transferred at an average Euro exchange rate of $1.4883, an increase of 10.94% from the average Euro exchange rate of $1.3415 for fiscal 2007.
Excluding the effects of differences in prices and average exchange rates, the combination of royalty rates on gas sold from western Oldenburg results in an effective royalty rate approximately seven times higher than the royalty rate on gas sold from eastern Oldenburg. This is of particular significance to the Trust since gas sold from western Oldenburg provides the bulk of royalties paid to the Trust. For fiscal 2008, gas sales from western
Oldenburg accounted for only 40.81% of all gas sales. However, royalties on these gas sales provided approximately 83.31% or $26,617,819 out of a total of $31,948,697 in Oldenburg royalties attributable to gas.
In addition, as of the second quarter of fiscal 2008, the indexed base price of sulfur sold under the Mobil Agreement exceeded the threshold level and the payment of royalties attributable to sulfur sales resumed. During fiscal 2008, the Trust received $974,691 in sulfur royalties under this agreement.
Under the OEG Agreement, gas sales decreased 15.39% to 132.611 Bcf in fiscal 2008 from 156.736 Bcf in fiscal 2007. The continuing decline in concession-wide gas sales can most likely be accounted for by a drop in overall wellhead pressures that could not be offset by the additional wells added.
Quarterly and Yearly Gas Sales under the OEG Agreement in Billion cu. ft. ------------------------------------------------------------------------- Fiscal Quarter 2008 Gas Sales 2007 Gas Sales Percentage Change -------------- ---------------- ---------------- ----------------- First 34.716 41.976 -17.30% Second 33.680 40.518 -16.88% Third 31.045 37.982 -18.26% Fourth 33.170 36.260 - 8.52% Fiscal Year Total 132.611 156.736 -15.39% |
Average gas prices for gas sold from the entire Oldenburg concession increased 16.79% to 2.5066 Ecents/Kwh in fiscal 2008 from 2.1463 Ecents/Kwh in fiscal 2007. For fiscal 2008, the increase in worldwide oil prices pushed average gas prices higher as we progressed through the year.
Average Gas Prices under the OEG Agreement in Euro cents per Kilowatt Hour -------------------------------------------------------------------------- Fiscal Quarter 2008 Gas Prices 2007 Gas Prices Percentage Change -------------- ----------------- ----------------- ----------------- First 2.1921 2.4017 - 8.73% Second 2.3809 2.3038 3.35% Third 2.5699 1.8774 36.89% Fourth 2.9060 1.9568 48.50% Fiscal Year Avg. 2.5066 2.1463 16.79% |
Converting gas prices into more familiar terms using the average exchange rate yielded a price of $10.39/Mcf, a 28.59% increase over fiscal 2007's average price of $8.08/Mcf. For fiscal 2008, royalties paid under the OEG Agreement were transferred at an average Euro exchange rate of $1.4762, an increase of 10.09% from the average Euro exchange rate of $1.3409 for fiscal 2007.
Reflecting the significant drop in interest rates and despite the increase in cash available for short term investment, interest income for fiscal 2008 was substantially lower, decreasing 53.93% to $95,802 for fiscal 2008 from $207,932 for fiscal 2007. Trust expenses increased 12.95% to $1,075,823 in fiscal 2008 from $952,517 in fiscal 2007, largely due to higher costs related to the biennial examination of the German operating companies' royalty payments, various legal matters related thereto and higher Trustees' fees based on the formula specified in the Trust Agreement.
Results: Fiscal 2007 versus Fiscal 2006
For fiscal 2007, the Trust's gross royalty income decreased 11.57% to $27,484,254 from $31,079,122 in fiscal 2006. Declines in both gas prices and gas sales were only partially offset by an increase in average exchange rates and combined to decrease the amount of royalty income, which resulted in the lower distributions.
Under the Mobil Agreement, gas sales decreased 10.47% to 65.606 Bcf in fiscal 2007 from 73.282 Bcf in fiscal 2006. Weather proved to be a significant factor during fiscal 2007 by reducing overall demand across Germany and Europe in general.
Quarterly and Yearly Gas Sales under the Mobil Agreement in Billion cu. ft. --------------------------------------------------------------------------- Fiscal Quarter 2007 Gas Sales 2006 Gas Sales Percentage Change -------------- ---------------- ---------------- ----------------- First 17.512 Bcf 19.540 Bcf -10.38% Second 17.125 Bcf 19.016 Bcf - 9.95% Third 16.177 Bcf 17.613 Bcf - 8.15% Fourth 14.792 Bcf 17.113 Bcf -13.56% Fiscal Year Total 65.606 Bcf 73.282 Bcf -10.47% |
Average gas prices for gas sold under the Mobil Agreement decreased 11.76% to 1.8688 Ecents/Kwh in fiscal 2007 from 2.1178 Ecents/Kwh in fiscal 2006. Except for the first quarter of fiscal 2007, the average gas price for each quarter posted a decline over the prior year's corresponding quarter. The decline in world oil prices during late 2006, the increase in the value of the Euro as U.S. dollar denominated oil prices began to rise, and the weather related reduction in demand accounted for much of this decline.
Average Gas Prices under the Mobil Agreement in Euro cents per Kilowatt Hour ---------------------------------------------------------------------------- Fiscal Quarter 2007 Gas Prices 2006 Gas Prices Percentage Change -------------- ----------------- ----------------- ----------------- First 2.2673 2.0456 10.84% Second 1.9950 2.2743 -12.28% Third 1.5159 2.0417 -25.75% Fourth 1.6366 2.1046 -22.23% Fiscal Year Avg. 1.8688 2.1178 -11.76% |
Converting gas prices into more familiar terms, using the average exchange rate, yielded a price of $7.21/Mcf, a 3.89% decrease over fiscal 2006's average price of $7.50/Mcf. For fiscal 2007, the average value of the Euro based on the transfer of royalties received from western Oldenburg gas sales was $1.3415 up 8.95% from the average value of $1.2313 for fiscal 2006.
Under the OEG Agreement, gas sales decreased 12.18% to 156.736 Bcf from 178.472 Bcf in fiscal 2006 due primarily to weather.
Quarterly and Yearly Gas Sales under the OEG Agreement in Billion cu. ft. ------------------------------------------------------------------------- Fiscal Quarter 2007 Gas Sales 2006 Gas Sales Percentage Change -------------- ---------------- ---------------- ----------------- First 41.976 47.876 -12.32% Second 40.518 46.775 -13.38% Third 37.982 42.563 -10.76% Fourth 36.260 41.258 -12.11% Fiscal Year Total 156.736 178.472 -12.18% |
Average gas prices for gas sold under the OEG Agreement decreased 2.27% to 2.1463 Ecents/Kwh in fiscal 2007 from 2.1961 Ecents/Kwh in fiscal 2006. Except for the first quarter of fiscal 2007, the average gas price for each quarter posted a decline over the prior year's corresponding quarter. The decline in world oil prices during late 2006, the increase in the value of the Euro as U.S. dollar denominated oil prices began to rise, and the weather related reduction in demand accounted for much of this decline.
Average Gas Prices under the OEG Agreement in Euro cents per Kilowatt Hour -------------------------------------------------------------------------- Fiscal Quarter 2007 Gas Prices 2006 Gas Prices Percentage Change -------------- ----------------- ----------------- ----------------- First 2.4017 2.1240 13.08% Second 2.3038 2.3088 - 0.22% Third 1.8774 2.1900 -14.27% Fourth 1.9568 2.1582 - 9.33% Fiscal Year Avg. 2.1463 2.1961 - 2.27% |
Converting gas prices into more familiar terms using the average exchange rate yielded a price of $8.08/Mcf, a 6.09% increase over fiscal 2006's average price of $7.62/Mcf. For fiscal 2007, the average value of the Euro based on the transfer of royalties received from overall Oldenburg gas sales was $1.3409 up 8.47% from the average value of $1.2362 for fiscal 2006.
Reflecting both increased cash available for short term investment and higher interest rates, interest income for fiscal 2007 increased by 26.77% to $207,932 for fiscal 2007 from $164,021 for fiscal 2006. Trust expenses decreased 3.22% to $952,517 in fiscal 2007 from $984,199 in fiscal 2006.
Report on Exploration and Drilling
The Trust's German consultant meets periodically with representatives of the operating companies to inquire about their planned and proposed drilling and geophysical work and other general matters. The following is a summary of his account of the operating companies' responses to his inquiries. The Trust is not able to confirm the accuracy of any of these responses. In addition, the operating companies are not required to take any of the actions outlined and, if they change their plans with respect to any such actions, they are not obligated to inform the Trust. It is possible that the recent drop in world oil prices and other economic factors may have an impact on the operating companies' plans.
Goldenstedt Z-7a, which is the second well to explore the Carboniferous zone in eastern Oldenburg, completed re-drilling in July 2008. Since the Carboniferous zone is considered a 'tight' gas zone, seven individual hydraulic fracturing ('frac') treatments had been planned. The start of production is scheduled for December 2008. Varnhorn Z-7a, which is the third well to explore the Carboniferous zone in eastern Oldenburg, began drilling in August 2008. This well will be horizontally deviated out of an existing borehole. Once drilling is complete, six individual frac treatments are planned. Quaadmoor Z-5 is scheduled to begin drilling in December 2008, to explore the Zechstein (sour gas) formation. Generally, sour gas wells undergo acidizing treatments to improve the gas flow to the wellhead. Goldenstedt Z-10 will be the fourth well to explore the Carboniferous zone in eastern Oldenburg and is scheduled to begin drilling in March 2009. This well is located close to Goldenstedt Z-7a and is intended to explore a separate compartment of the Carboniferous reservoir. Goldenstedt Z-23 will be the fifth well to explore the Carboniferous zone in eastern Oldenburg. It is scheduled to begin drilling around May or June of 2009, and will be followed by five individual frac treatments.
Hemmelte NW T-1 will be located in the western part of Oldenburg and is an exploratory well intended to develop the Bunter (sweet gas) zone. While the start of drilling is scheduled for mid 2009, the well plans have not been confirmed as yet. The following wells, Goldenstedt Z-16a, Visbek Z-16a, Sage Z-5, Brinkholz Z-5 and Cappeln Z-6, are either tentatively scheduled for the latter half of 2009 and beyond or not yet scheduled. The first four will explore the Zechstein zone and the final well is the sixth well scheduled to explore the Carboniferous zone.
Critical Accounting Policies
The financial statements, appearing subsequently in this Report, 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 accounting is an accepted accounting method for royalty trusts such as the Trust. GAAP basis financial statements disclose income as earned and expenses as incurred, without regard to receipts or payments. The use of GAAP would require the Trust to accrue for expected royalty payments. This is exceedingly difficult since the Trust has very limited information on such payments until they are received. The Trust's cash basis financial statements disclose revenue when cash is received and expenses when cash is paid. The one modification of the cash basis of accounting is that the Trust accrues 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 provides a more meaningful presentation to unit owners of the results of operations of the Trust and presents to the unit owners a more accurate calculation of income and expenses for tax reporting purposes.
Off-Balance Sheet Arrangements
The Trust has no off-balance sheet arrangements.
Contractual Obligations
-----------------------
As shown below, the Trust had no contractual obligations as of
October 31, 2008 other than the distribution announced on October 30, 2008
and payable to unit owners on November 26, 2008, as reflected in the
statement of assets, liabilities and trust corpus.
Payments Due by Period
----------------------
Less than 1-3 3-5 More than
Total 1 Year Years Years 5 Years
------------- ------------- ------- ------- ---------
Distributions
payable to
unit owners $9,466,307.70 $9,466,307.70 $0 $0 $0
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This Report on Form 10-K 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, as well as those factors set forth above under Item 1A of this Report. Actual results and events may vary significantly from those discussed in the forward looking statements.
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