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| TELOZ > SEC Filings for TELOZ > Form 10-Q on 6-Nov-2009 | All Recent SEC Filings |
6-Nov-2009
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.
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.
Financial Review
In May 2007, the Trust engaged an independent oil and gas accounting firm 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. As part of this audit review process, certain adjustments to revenues, production volumes, prices and capital expenditures have occurred, and references below to a prior period audit adjustment, or an audit of prior periods, refers to the audit described in this paragraph. The adjustments resulting from such audit review were completed in the second quarter of 2009. See "-Operational Review".
Three Months Ended September 30, 2009 and 2008
There were no distributions to the Unit holders for the three months ended September 30, 2009 as compared to distributions of $5,470,387 or $1.151294 per Unit to the Unit holders for the same period in 2008.
Crude oil and condensate revenues decreased $12,725,234, or 82%, to $2,716,744 in the third quarter of 2009 as compared to $15,441,978 in the third quarter of 2008, due primarily to decreases in production resulting from damages caused by Hurricane Ike in September 2008. Oil volumes decreased 70% to 45,222 barrels in the third quarter of 2009 from 149,125 barrels in the third quarter of 2008.
The revenues and volumes for the third quarter of 2008 reflect credits of $127,886 in revenues and 23,878 barrels associated with an audit of prior periods. The average price received for crude oil and condensate decreased 42%, or $43.47, to $60.08 per barrel in the third quarter of 2009 from $103.55 per barrel in the third quarter of 2008. Prior to taking into account such adjustments to revenues and volumes in the third quarter of 2008, the average price received for crude oil and condensate would have been $122.27 in the third quarter of 2008.
Gas revenues decreased $4,049,839, or 99%, to $31,709 in the third quarter of 2009 from $4,081,548 in the third quarter of 2008, due primarily to decreases in production resulting from damages caused by Hurricane Ike in September 2008. Gas volumes decreased 97% to 8,255 Mcf in the third quarter of 2009 from 327,690 Mcf in the third quarter of 2008. The revenues and volumes for the third quarter of 2008 reflect credits of $414,319 in revenues and 29,725 Mcf of gas associated with an audit of prior periods. The average price received for natural gas decreased 69%, or $8.62, to $3.84 per Mcf in the third quarter of 2009 from $12.46 per Mcf in the third quarter of 2008. Prior to taking into account such adjustments to revenues and volumes in the third quarter of 2008, the average price received for natural gas would have been $12.31 per Mcf in the third quarter of 2008. Gas products revenue decreased $1,251,767, or 99%, to $3,764 in the third quarter of 2009 from $1,255,531 in the third quarter of 2008, due primarily to a decrease in production volume of 872,633 gallons, or 99%, to 4,515 gallons in the third quarter of 2009 from 877,148 gallons in the third quarter of 2008.
Capital expenditures increased $240,391, or 103%, from $233,124 in the third quarter of 2008 to $473,515 in the third quarter of 2009. The capital expenses in the third quarter of 2009 primarily relate to an oil tank replacement and a gas panel upgrade at Ship Shoal 182/183. The capital expenditures in 2008 primarily relate to field workovers at Ship Shoal 182/183 and Eugene Island 339 necessary to help improve production performance.
Operating expenses increased by $6,614,669, or 419%, from $1,577,986 in the third quarter of 2008 to $8,192,655 in the third quarter of 2009, primarily as a result of well and platform abandonment costs at Eugene Island 339 as a result of Hurricane Ike. Reflected within the operating expenses are management fees to Chevron, as Managing General Partner of the Partnership, of $681,346 and $342,842 for the third quarter of 2008 and the third quarter of 2009, respectively.
The Royalty Properties had undistributed net loss of $6,247,115 in the third quarter of 2009.
In the third quarter of 2009, no funds were released from or deposited into the Special Cost Escrow account. As of September 30, 2009, $4,306,985 remained in the Special Cost Escrow account. 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 funds released was $1,017,783. As of September 30, 2008, $4,335,777 remained in the Special Cost Escrow account. The funds held in the Special Cost Escrow account are not reflected in the financial statements of the Trust. The Special Cost Escrow account 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 account, see "-Special Cost Escrow Account" below.
Nine Months Ended September 30, 2009 and 2008
There were no distributions to the Unit holders for the nine months ended September 30, 2009 as compared to distributions of $12,558,805 or $2.643119 per Unit to the Unit holders for the same period in 2008.
Gas revenues decreased $9,521,303, or 92%, to $868,071 in the first nine months of 2009 from $10,389,374 for the same period in 2008, due primarily to damages caused by Hurricane Ike in September 2008. Gas volumes decreased 88% to 140,625 Mcf in the first nine months of 2009 from 1,134,953 Mcf for the same period in 2008. The revenues and volumes for the first nine months of 2009 reflect net credits of $808,484 in revenues and 127,711 Mcf of gas for prior adjustments; the revenues and volumes for the first nine months of 2008 reflect credits associated with an audit of prior periods for $1,075,436 in revenues and 116,700 Mcf of gas. The average price received for natural gas decreased 33%, or $3.07, to $6.17 per Mcf in the first nine months of 2009 from $9.24 per Mcf in the same period of 2008. Prior to taking into account such adjustments to revenues and volumes, the average price received for natural gas would have been $4.61 per Mcf in the first nine months of 2009 and $9.15 per Mcf in the first nine months of 2008. Gas products revenue decreased $2,842,328, or 93%, to $199,390 in the first nine months of 2009 from $3,041,718 in the same period of 2008, primarily due to a decrease in production volume of 2,049,244 gallons, or 92%, to 177,425 gallons in the first nine months of 2009 from 2,226,669 gallons in the same period of 2008.
Capital expenditures increased $641,951, or 540%, from $118,952 in the first nine months of 2008 to $760,903 in the same period of 2009. Reflected within the capital expenditures line item for 2008 is a refund of $495,600 from the Working Interest Owners for certain prior period adjustments. Reflected in the capital expenditures for the first nine months of 2009 is a refund of $59,794 for certain prior period audit adjustments.
Operating expenses increased by $18,487,239, or 264%, from $6,995,347 in the first nine months of 2008 to $25,482,586 in the first nine months of 2009, primarily as a result of well abandonment costs at Eugene Island 339 as a result of Hurricane Ike. Reflected in the operating expenses for the first nine months of 2009 are cost allocation refunds of an aggregate of $115,252 for certain prior period adjustments. Reflected within the operating expenses are management fees to Chevron, as Managing General Partner of the Partnership, of $1,711,587 and $950,091 for the first nine months of 2008 and the first nine months of 2009, respectively.
The Royalty Properties had undistributed net loss of $19,538,783 for the nine months ended September 30, 2009.
In the first nine months of 2009, no funds were released from or deposited into the Special Cost Escrow account. 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 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, is 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-month period ended September 30, 2009, the Trust used $776,355 from the reserve for current expenses, leaving a reserve balance of $1,456,936 as of September 30, 2009. The reserve balance of $1,456,936 as of September 30, 2009 is approximately l.9 times the average expenses of the Trust during each of the past 3 years.
Pursuant to the terms of the Trust Agreement, the Trustees are authorized to borrow funds, and pledge the assets of the Trust to secure payments of such borrowings, in the event that cash on hand is not sufficient to pay the liabilities of the Trust. In the event that the Trustees borrow funds to pay the liabilities of the Trust, no further distributions will be made to the Unit holders until the indebtedness created by such borrowings has been paid in full.
The Trust Agreement further provides that, if necessary to provide for the payment of specific liabilities of the Trust then due, the Trustees may without a vote of the Unit holders (a) sell all or a portion of the Trust's interest in the Partnership or any other assets of the Trust for such cash consideration as the Trustees shall deem appropriate, (b) exercise their rights under the Partnership Agreement to dissolve the Partnership, or (c) cause a sale by the Partnership of the overriding royalty interest owned by the Partnership.
Other
The amount of cash distributions by the Trust is dependent on, among other things, the quantities of oil and gas produced from the Royalty Properties and the sales prices therefor, as well as expenditures by the Working Interest Owners that may or may not be included in the Special Cost Escrow account. As described herein, production ceased at Eugene Island 339 and Ship Shoal 182 and 183 following damages inflicted by Hurricane Ike in September 2008. Chevron intends to pursue the redevelopment of platforms and wells at Eugene Island 339; however, such a redevelopment is not expected to be completed prior to October 2012 and there can be no assurance that production will be restored at Eugene Island 339. Production sales for both oil and natural gas at Ship Shoal 182 and 183 were restored on October 8, 2009 following completion of various ongoing repairs to the third-party transporter's natural gas pipeline. 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 gas, weather, industrial growth, conservation measures, competition, economic conditions generally and other variables. The Trust does not enter into any hedging transactions on future production.
Operational Review
The platforms and wells on Eugene Island 339 were completely 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 approximately 47% of such revenues for the nine months ended September 30, 2008. Eugene Island 339 contributed approximately 12% of the revenues from natural gas sales from the Royalty Properties in 2007 and approximately 41% of such revenues for the nine months ended September 30, 2008. Based on a prior year reserve study prepared by DeGolyer and MacNaughton, independent petroleum engineering consultants, Eugene Island 339 accounted for approximately 34% of the total future net revenues attributable to the Partnership's interest in the royalty as of October 31, 2007. Chevron is working on the plugging and abandonment of the existing wells, clearing debris and otherwise dealing with the remaining infrastructure, which activities are not expected to be completed until the first quarter of 2012. Chevron has informed the Corporate Trustee that Chevron presently intends to pursue the redevelopment of platforms and wells at Eugene Island 339 in accordance with the terms and conditions established by the Mineral Management Service (the "MMS") in response to Chevron's submission to the MMS of a program to restore production at Eugene Island 339. The activity schedule approved by the MMS contemplates, among other things, commencement of front-end engineering and design work by the end of January 2010, an awarding of fabrication contracts for platform, substructure and equipment by the end of November 2010, and commencement of production ultimately occurring by the end of October 2012. Chevron is required to provide the MMS with periodic updates on Chevron's progress on such redevelopment. The approval by the MMS expires by its terms on November 30, 2010, and Chevron would need to request an extension of such approval from the MMS in order to complete the proposed redevelopment, given that the activity schedule contemplates activity through October 2012. The costs for such a redevelopment would be significant. While Chevron has stated that it intends to pursue such a redevelopment, there is no obligation for Chevron to continue to pursue such redevelopment. Failure or inability to pursue such a redevelopment, and on the timeframes approved by the MMS, could result in a loss of the lease. At this time, there can be no assurance that production will be restored at Eugene Island 339.
Production at Ship Shoal 182/183 ceased following damage inflicted by Hurricane Ike in September 2008. While the hurricane 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. 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 approximately 51% of such revenues for the nine months ended September 30, 2008. Ship Shoal 182/183 contributed approximately 77% of the revenues from natural gas sales from the Royalty Properties in 2007 and approximately 42% of such revenues for the nine months ended September 30, 2008. A limited volume of oil production was restored in November 2008. The volume of oil production that can be produced is limited by the amount of gas that is also produced by the oil wells. The third-party transporter's natural gas pipeline repairs were completed and gas sales at Ship Shoal 182/183 were restored on June 26, 2009. However, the pipeline was shut down in mid-September for additional repairs. Production sales for both oil and natural gas at Ship Shoal 182 and 183 were restored on October 8, 2009 following completion of such additional repairs.
In addition, production from West Cameron 643 and East Cameron 371 ceased following damage inflicted by Hurricane Ike in September 2008 to third-party transporters' pipelines. Chevron, as the Managing General Partner of the Partnership, understands that the pipeline for West Cameron 643 is in the process of being restored, although such pipeline is not expected to be able to take production until at least the first quarter of 2010. At this point in time, there can be no assurance as to when, or if at all, production may be restored at West Cameron 643. The field operator for East Cameron 371 has
reported to Chevron that a review of the remaining reserves for East Cameron 371 has been conducted, and a decision regarding field abandonment, including the related wells, equipment platforms and any field infrastructure, may be made in the near term. At this point in time, there can be no assurance that production will ultimately be restored at East Cameron 371.
In May 2007, the Trust engaged an independent oil and gas accounting firm 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 the accounting firm, the Trustees believed that certain errors in the books and records had occurred and, through the second quarter of 2009, were involved in ongoing discussions with such Working Interest Owners to resolve these items. As part of this ongoing process, certain adjustments to revenues, production volumes, prices and capital expenditures have occurred, and references herein to an audit of prior periods refers to the audit described in this paragraph. Such audit resulted in an additional cash distribution to the Trust during the first quarter of 2008 and additional credits were made periodically for the benefit of the Trust through the second quarter of 2009, when all remaining audit adjustments were completed.
Three Months Ended September 30, 2009 and 2008
The following operational information has been based on information provided to the Corporate Trustee by Chevron, as the Managing General Partner of the Partnership, who received operational information from the other Working Interest Owners. The Trustees have no control over these operations or internal controls relating to this information.
Volumes and dollar amounts discussed below represent amounts recorded by the Working Interest Owners unless otherwise specified.
Ship Shoal 182/183 crude oil revenues decreased from $7,838,993 in the third quarter of 2008 to $2,638,386 in the third quarter of 2009, primarily due to a decrease in net crude oil production and a decrease in average crude oil prices. Net crude oil production decreased from 63,286 barrels in the third quarter of 2008 to 43,868 barrels in the third quarter of 2009. The average crude oil price decreased from $123.87 per barrel in the third quarter of 2008 to $60.14 per barrel for the same period in 2009. Gas revenues decreased from $1,613,142 in the third quarter of 2008 to $22,265 in the third quarter of 2009 due to a general cessation of gas production since September 2008 resulting from damages caused by Hurricane Ike. The repairs were completed and gas production began June 26, 2009. Gas volumes decreased to 5,759 Mcf in the third quarter of 2009 compared to production of 140,738 Mcf in the third quarter of 2008. The gas revenues and volumes for the third quarter of 2008 reflect credits of $223,767 and 24,894 Mcf associated with an audit of prior periods. The average gas sales price realized during the third quarter of 2009 was $3.87 per Mcf compared to $11.46 during the third quarter of 2008. Prior to taking into account such adjustments to revenues and volumes in the third quarter of 2008, the average gas sales price realized would have been $11.99 during the third quarter of 2008. Capital expenditures increased from $10,532 in the third quarter of 2008 to $473,116 in the third quarter of 2009. Operating expenses increased from $471,151 in the third quarter of 2008 to $611,048 for the same period in 2009 due to an increase in operating and repair costs related to damages inflicted by Hurricane Ike.
Eugene Island 339 net crude oil revenues decreased from $7,386,151 in the third quarter of 2008 to $0 for the same period in 2009 due to a decrease in volumes from 84,061 barrels in the third quarter of 2008 to 0 barrels in the third quarter of 2009. The crude oil revenues and volumes for the third
quarter of 2008 reflect credits of $124,691 and 23,845 barrels associated with an audit of prior periods. The average crude oil price was $87.87 per barrel in the third quarter of 2008 and $0 per barrel in the third quarter of 2009. Prior to taking into account such adjustments to revenues and volumes in the third quarter of 2008, the average crude oil price would have been $120.59 in the third quarter of 2008. Gas revenues decreased from $1,861,437 in the third quarter of 2008 to $0 in the third quarter of 2009 due to a decrease in volumes from 132,829 Mcf in the third quarter of 2008 to 0 Mcf in the third quarter of 2009. The gas revenues and volumes for the third quarter of 2008 reflect credits of $187,801 and 4,496 Mcf associated with an audit of prior periods. The average gas sales price realized during the third quarter of 2009 was $0 per Mcf compared to $14.01 per Mcf in the third quarter of 2008. Prior to taking into account such adjustments in the third quarter of 2008, the average gas sales price realized would have been $13.04 during the third quarter of 2008. Capital expenditures decreased from $186,687 in the third quarter of 2008 to $367 in the third quarter of 2009. There were limited capital expenditures during the third quarter of 2009 and the capital expenditures in the third quarter of 2008 primarily relate to repairs associated with a conversion to a water injector. Operating expenses increased from $915,360 in the third quarter of 2008 to $7,452,444 in the third quarter of 2009 due to well abandonment costs incurred as a result of Hurricane Ike.
West Cameron 643 gas revenues were $567,061 in the third quarter of 2008 and $0 in the third quarter of 2009. Gas production was 50,351 Mcf in the third quarter of 2008 and 0 Mcf in the third quarter of 2009. The average gas sales price realized during the third quarter of 2009 was $0 per Mcf compared to $11.22 per Mcf in the third quarter of 2008. Operating expenses decreased from $152,594 in the third quarter of 2008 to $121,969 for the same period in 2009 due primarily to the decrease in production. Capital expenditures were $7,884 in the third quarter of 2008 as a result of an adjustment related to an audit of prior periods and $0 for the same period in 2009.
East Cameron 371 crude oil revenues were ($125) in the third quarter of 2008 and $0 in the third quarter of 2009 as a result of the field being shut-in following Hurricane Ike in September 2008. Crude oil revenues in the third quarter of 2008 reflect a $125 credit related to a prior period audit adjustment. Gas revenues were $250 for the third quarter of 2008 and $0 for the third quarter of 2009, also due to the shut-in of the field. Capital expenditures were $0 for the third quarter 2008 and for the third quarter 2009. Operating expenses decreased from $3,811 in the third quarter of 2008 to $0 for the same period in 2009.
South Timbalier 36/37 crude oil revenues decreased from $198,103 in the third quarter of 2008 to $78,257 for the same period in 2009 primarily due to equipment issues that have since been repaired. There was a decrease in crude oil production volumes to 1,350 barrels in the third quarter of 2009 from 1,610 barrels in the third quarter of 2008. The average crude oil price was $123.05 per barrel in the third quarter of 2008 and $57.95 per barrel in the third quarter of 2009. Gas revenues decreased from $39,346 in the third quarter 2008 to $8,838 in the third quarter of 2009. There was a decrease in natural gas volumes from 3,527 Mcf in the third quarter of 2008 to 2,370 Mcf in the third quarter of 2009. The average gas sales price realized during the third quarter of 2009 was $3.73 per Mcf compared to $11.16 per Mcf in the third quarter of 2008. Capital expenditures decreased from $2,429 in the third quarter of 2008 to $32 in the third quarter of 2009. Operating expenses decreased from $34,490 in the third quarter of 2008 to $7,193 in the third quarter of 2009.
Volumes and dollar amounts discussed below represent amounts recorded by the Working Interest Owners unless otherwise specified.
Ship Shoal 182/183 crude oil revenues decreased from $19,206,631 in the first nine months of 2008 to $5,111,927 in the same period in 2009, primarily due to a decrease in net crude oil production from 183,449 barrels in the first nine months of 2008 to 95,057 in the same period of 2009. Included in the revenues and production for the first nine months of 2008 was an upward adjustment of $46,630 associated with an additional 178 barrels that were included from 2007 production. There was also a decrease in the average crude oil price from $104.70 per barrel in the first nine months of 2008 to $53.78 per barrel for the same period in 2009, excluding the immaterial audit adjustment made during 2008. Gas revenues decreased from $4,227,427 in the first nine months of 2008 to $747,985 in the same period of 2009. Gas production decreased from 477,435 Mcf in the first nine months of 2008, which included an upward adjustment of 44,893 Mcf relating to an audit of prior periods, to 5,759 Mcf in . . .
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