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| NGT > SEC Filings for NGT > Form 10-K on 13-Mar-2009 | All Recent SEC Filings |
13-Mar-2009
Annual Report
General
The Trust does not conduct any operations or activities. The Trust's purpose is, in general, to hold the Net Profits Interests, to distribute to Unitholders cash which the Trust receives in respect of the Net Profits Interests and to perform certain administrative functions in respect of the Net Profits Interests and the Depositary Units. The Trust derives substantially all of its income and cash flows from the Net Profits Interests.
Under the Gas Purchase Contract, Eastern Marketing purchases gas from the Trust at a variable price for any quarter equal to the Henry Hub Average Spot Price (as defined) per MMBtu plus $0.30 per MMBtu, multiplied by 110% to effect a fixed adjustment for Btu content. The Henry Hub Average
Spot Price is defined as the price per MMBtu determined for any calendar quarter equal to the price obtained with respect to each of the three months in such quarter, in the manner specified below, and then taking the average of the prices determined for each of such three months. The price determined for any month of such quarter is equal to the average of (i) the final settlement price per MMBtu for Henry Hub Gas Futures Contracts (as defined), as reported in The Wall Street Journal, for such contracts which expired in each of the five months prior to such month, (ii) the final settlement price per MMBtu for Henry Hub Gas Futures Contracts, as reported in The Wall Street Journal, for such contracts which expire during such month and (iii) the closing settlement price per MMBtu of Henry Hub Gas Futures Contracts determined as of the contract settlement date for such month, as reported in The Wall Street Journal, for such contracts which expire in each of the six months following such month. A Henry Hub Gas Futures Contract is defined as a gas futures contract for gas to be delivered to the Henry Hub which is traded on the New York Mercantile Exchange.
Accordingly, the price payable to the Trust for production may vary based on fluctuations in natural gas futures prices during the relevant calculation period. The price payable to the Trust will have a direct impact, positively or negatively, on the quarterly distributions payable by the Trust to the Unitholders.
Over the remaining life of the Trust, wells may be disposed of from time to time in accordance with the documents governing the Trust.
The Trust is responsible for paying the Trustee's fees and all legal, accounting, engineering and stock exchange fees, printing costs and other administrative expenses incurred by or at the direction of the Trustee. The total of all Trustee fees and Trust administrative expenses for 2008 was $755,198, including the Trustee's fee of $108,000. In addition to such expenses, in 2008, the Trust paid Eastern American an overhead reimbursement of $351,824. The overhead reimbursement increases by 3.5% per year and is payable quarterly.
On December 8, 2004, the Trust announced approval by the Trust Unitholders of a proposal to elect JPMorgan Chase to serve as successor trustee of the Trust upon the effective date of the resignation of The Bank of New York as trustee of and depositary for the Trust and to amend the Trust Agreement to change the compensation of the Trustee. The resignation of The Bank of New York took effect on January 1, 2005. As successor trustee, JPMorgan Chase received annual compensation of $108,000 plus fees and expenses. Effective October 2, 2006, The Bank of New York Trust Company, N.A. (now known as The Bank of New York Mellon Trust Company, N.A.) acquired the corporate trust business of JPMorgan Chase Bank, N.A. Consequently, The Bank of New York Mellon Trust Company, N.A., currently serves as Trustee of the Trust. The Trustee's annual compensation did not change as a result of the October 2, 2006 acquisition by The Bank of New York Trust Company, N.A. of the corporate trust business of JPMorgan Chase.
During 2006, the Trust incurred substantially increased fees for professional services relating to the exchange offers made by Ensource Energy Income Fund LP during 2005 and 2006. Expenses relating to the Ensource exchange offers incurred by the Trust during 2006 totaled approximately $701,606, including $387,923 for fees and expenses the Trust paid to a financial advisory firm in connection with its analysis of the Ensource exchange offers. The Trust did not incur any expenses relating to the exchange offers during 2007 or 2008.
The costs the Trust incurs in the future will fluctuate depending primarily on the expenses the Trust incurs for professional services, particularly legal, accounting and engineering services.
Critical Accounting Policies
The following is a summary of the critical accounting policies followed by the Trust.
Basis of Accounting:
The financial statements of the Trust differ from financial statements prepared in accordance with accounting principles generally accepted in the United States of America due to the following: (i) certain cash reserves may be established for contingencies which were not accrued in the financial statements; (ii) amortization of the Net Profits Interests in gas properties is charged directly to Trust Corpus; and (iii) the sale of the Net Profits Interests is reflected in the Statements of Distributable Income as cash proceeds to the Trust.
Net Profits Interests in Gas Properties:
The Net Profits Interests in gas properties are assessed to determine whether their net capitalized cost is impaired, whenever events or changes in circumstances indicate that its carrying amount may not be recoverable, pursuant to Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets ("SFAS 144"). The Trust will determine if a writedown is necessary to its investment in the Net Profits Interests in gas properties to the extent that total capitalized costs, less accumulated amortization, exceed undiscounted future net revenues attributable to proved gas reserves of the Underlying Properties. The Trust will then provide a writedown to the extent that the net capitalized costs exceed the fair value of the investment in net profits interests attributable to proved gas reserves of the Underlying Properties. Any such writedown would not reduce Distributable Income, although it would reduce Trust Corpus.
Significant dispositions or abandonment of the Underlying Properties are charged to Net Profits Interests and the Trust Corpus.
Amortization of the Net Profits Interests in gas properties is calculated on a units-of-production basis, whereby the Trust's cost basis in the properties is divided by total Trust proved reserves to derive an amortization rate per reserve unit. Such amortization does not reduce Distributable Income, rather it is charged directly to Trust Corpus. Revisions to estimated future units-of-production are treated on a prospective basis beginning on the date significant revisions are known.
The Net Profits Interest impairment test and the determination of amortization rates are dependent on estimates of proved gas reserves attributable to the Trust. Numerous uncertainties are inherent in estimating reserve volumes and values, including economic and operating conditions, and such estimates are subject to change as additional information becomes available.
Use of Estimates in the Preparation of Financial Statements:
The preparation of financial statements requires the Trust to make estimates and assumptions that affect the reported amounts of assets and liabilities and the reported amounts of revenues and expenses during the reporting period. The estimates include an estimate of the revenues attributable to the Trust from natural gas production for the last several months of the year, as the revenues from natural gas sales are typically received several months after delivery. Actual results could differ from those estimates.
Income Taxes:
Tax counsel to the Trust advised the Trust at the time of formation that, under then current tax laws, the Trust would be classified as a grantor trust for federal and state income tax purposes and, therefore, would not be subject to taxation at the Trust level. The Trust continues to be tax exempt. Accordingly, no provision for federal or state income taxes has been made. However, the opinion of tax counsel is not binding on taxing authorities.
Liquidity and Capital Resources
The Trust has no source of liquidity or capital resources other than the distributions received from the Net Profits Interests.
In accordance with the provisions of the Conveyances, generally all revenues received by the Trust, net of Trust administrative expenses and the amount of established reserves, are distributed currently to the Unitholders.
The Trust did not have any contractual obligations as of December 31, 2008. At December 31, 2008, the Trust had General and Administrative Expenses Payable of $286,764 and Distributions Payable of $3,018,398.
Results of Operations
2008 Compared with 2007
The Trust's Distributable Income was $14,049,648 for the year ended December 31, 2008 as compared to $12,006,605 for the year ended December 31, 2007. This increase was due to an increase in Royalty Income for the year ended December 31, 2008 ($17,028,373) as compared to the year ended December 31, 2007 ($14,660,909). The increase in Royalty Income was due to an increase in the average price payable to the Trust under the Gas Purchase Contract as discussed below ($10.406 per Mcf for the year ended December 31, 2008 as compared to $8.339 per Mcf for the year ended December 31, 2007). The increase was partially offset due to a decrease in production of gas attributable to the Net Profits Interests for the year ended December 31, 2008 (1,637 Mmcf) as compared to the year ended December 31, 2007 (1,758 Mmcf). The decline in production is primarily attributable to natural production declines. Taxes on Production and Property were $1,254,139 for the year ended December 31, 2008 as compared to $1,104,557 for the year ended December 31, 2007. The increase in taxes is due directly to the increase in Royalty Income as discussed above. Trust General and Administrative Expenses were $1,107,022 for the year ended December 31, 2008 as compared to $961,587 for the year ended December 31, 2007. The increase in General and Administrative Expenses was due primarily to an increase in professional fees incurred.
During the year ended December 31, 2008, the Trustee did not refund any amount from the Cash Reserve balance compared to the refunding of $500,000 from the cash reserve for the year ended December 31, 2007. This Reserve was established to facilitate the payment of vendor invoices on a timely basis. Amortization of Net Profits Interests in Gas Properties was $2,558,284 for the year ended December 31, 2008 as compared to $2,938,058 for the year ended December 31, 2007. This decrease was due to the decrease in production volumes and a decrease in the depletion rate to $1.5627 for the year ended December 31, 2008 from $1.6709 for the year ended December 31, 2007.
The average price payable to the Trust for gas production attributable to the Net Profits Interests was $10.406 per Mcf for the year ended December 31, 2008 and $8.339 per Mcf for the year ended December 31, 2007. The price per Mcf was higher for the year ended December 31, 2008 than for the year ended December 31, 2007 due to an increase in the average spot market price for gas delivered at the Henry Hub near Henry, Louisiana ($9.160 per Dth for the year ended December 31, 2008 as compared to $7.281 per Dth for the year ended December 31, 2007).
2007 Compared with 2006
The Trust's Distributable Income was $12,006,605 for the year ended December 31, 2007 as compared to $14,158,872 for the year ended December 31, 2006. This decrease was due to a decrease in Royalty Income for the year ended December 31, 2007 ($14,660,909) as compared to the year ended December 31, 2006 ($17,663,792). The decrease in Royalty Income was mostly due to a decrease in production of gas attributable to the Net Profits Interests for the year ended December 31, 2007 (1,758 Mmcf) as compared to the year ended December 31, 2006 (1,847 Mmcf). This decrease was also due to
a decrease in the average price payable to the Trust under the Gas Purchase Contract as discussed below ($8.339 per Mcf for the year ended December 31, 2007 as compared to $9.538 per Mcf for the year ended December 31, 2006). The decline in production is primarily attributable to natural production declines. Taxes on Production and Property were $1,104,557 for the year ended December 31, 2007 as compared to $1,297,539 for the year ended December 31, 2006. The decrease in taxes is due directly to the decrease in Royalty Income as discussed above. Trust General and Administrative Expenses were $961,587 for the year ended December 31, 2007 as compared to $1,646,313 for the year ended December 31, 2006. The decrease in General and Administrative Expenses was due primarily to a decrease in professional fees incurred as a direct result of the exchange offers made by Ensource Energy Income Fund LP, which were terminated on September 15, 2006.
During the year ended December 31, 2007, the Trustee refunded $500,000 from the Cash Reserve balance compared to the refunding of $500,000 from the cash reserve for the year ended December 31, 2006. This Reserve was established to facilitate the payment of vendor invoices on a timely basis. Amortization of Net Profits Interests in Gas Properties was $2,938,058 for the year ended December 31, 2007 as compared to $2,942,047 for the year ended December 31, 2006. This decrease was due to the decrease in production volumes, offset by an increase in the depletion rate to $1.6709 for the year ended December 31, 2007 from $1.5932 for the year ended December 31, 2006.
The average price payable to the Trust for gas production attributable to the Net Profits Interests was $8.339 per Mcf for the year ended December 31, 2007 and $9.538 per Mcf for the year ended December 31, 2006. The price per Mcf was lower for the year ended December 31, 2007 than for the year ended December 31, 2006 due to a decrease in the average spot market price for gas delivered at the Henry Hub near Henry, Louisiana ($7.281 per Dth for the year ended December 31, 2007 as compared to $8.371 per Dth for the year ended December 31, 2006).
Off-Balance Sheet Arrangements
The Trust does not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on the Trust's financial condition, changes in financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.
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