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| NRT > SEC Filings for NRT > Form 10-K on 28-Dec-2012 | All Recent SEC Filings |
28-Dec-2012
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. 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.
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.
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 92% of the total royalties. The amount of royalties paid to the Trust is primarily based on four factors: the amount of gas sold, the price of that gas, the area from which the gas is sold and the exchange rate.
Effective with the Trust's third quarter of fiscal 2010, a new royalty payment schedule was fully implemented. At approximately the 25th of the months of January, April, July and October, the operating companies calculate the amount of gas sold during the previous calendar quarter and determine the amount of royalties that were payable to the Trust based on those sales. This amount forms the basis for royalty payments for the Trust's upcoming fiscal quarter and for any adjustment for the prior calendar quarter. For example, on January 25th the operating companies calculate gas sales and attributable royalties payable for the months of October through December. This amount is divided into thirds and forms the monthly royalty payments (payable on the 15th of each month) to the Trust for its fiscal quarter running from February through April. Continuing in this example, at the same time that the operating companies determine the actual amount of royalties that were payable for the months of October through December, they look at the actual amount of royalties that were paid to the Trust during that same period and calculate the difference between what was paid and what was payable. Additional amounts payable by the operating companies would be paid immediately in January and any overpayment would be deducted from the February payment. The operating companies continue their calculations through the
calendar year. In September of each year, the operating companies make the final determination of any necessary royalty adjustments for the prior calendar year. The Trust's German accountants review the royalty calculations on a biennial basis.
There are two types of natural gas found within the Oldenburg concession, sweet gas and sour gas. Sweet gas has little or no contaminants and needs no treatment before it can be sold. In recent years, sweet gas has assumed the role of swing producer. During periods of high demand, the production of sweet gas is increased as necessary. During the summer months, sweet gas production is reduced due to a general decline in demand. Sour gas, in comparison, sour gas must be processed at either the Grossenkneten or the Norddeutsche Erdgas-Aufbereitungs GmbH ("NEAG") desulfurization plants before it can be sold. The desulfurization process removes hydrogen sulfide and other contaminants. The hydrogen sulfide in gaseous form is converted to sulfur in a solid form and sold separately. For efficiency purposes, Grossenkneten is operated at capacity on a continual basis. Any excess production from the plants is stored in underground storage for higher demand periods. As needed, the operators conduct maintenance on the plants, generally during the summer months when demand is 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. Additionally, there are efforts underway to decouple the linkage between oil prices and gas prices. Through 2010 based upon the royalty examination conducted by the Trust's accountants in Germany, the basic structure of the gas supply contracts had not changed and such decoupling, as of that point, had not occurred. 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, the Trust's German accountants review these contracts periodically on behalf of the Trust to verify the correctness of application of the Agreement formulas for the computation of royalty payments. The Trust's accountants in Germany have concluded their examination of the operating companies for 2009 and 2010 and did not identify any material errors in royalty amounts payable.
For unit owners, changes in the dollar 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. In relation to the dollar, a stronger Euro would yield more dollars and a weaker Euro would yield less dollars. The long-term impact relates to the mechanism of gas pricing contained in the gas sales contracts negotiated by the operating companies. These gas sales contracts often use the price of German light heating oil as one of the primary pricing factors by which the price of gas is determined. The price of German light heating oil, which is a refined product, is largely determined by the price of the imported crude oil from which it was refined. Oil on the international market is priced in dollars. However, when oil is imported into Germany it is purchased in Euros, and at this point the dollar value of the Euro becomes relevant. A weaker Euro would buy less oil making that oil and the subsequently refined light heating oil more expensive. A stronger Euro would
buy more oil making that oil and the subsequently refined light heating oil less expensive. Since changes in the price of German light heating oil are subsequently reflected in the price of gas through the gas sales contracts, the dollar/Euro relationship can make the prices of gas higher or lower. The changes in gas prices that result from changes in the prices of German light heating oil are only reflected after a built-in delay of three to six months as specified in the individual gas sales contracts.
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 low level of administrative expenses of the Trust limits the effect of inflation on costs. Sustained 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.
Results: Fiscal 2012 versus Fiscal 2011
For fiscal 2012, the Trust's gross royalty income decreased 5.87% to $23,672,808 from $25,148,523 in fiscal 2011. The decrease in royalty income is due to declines in gas sales and average exchange rates. The impact of these factors was reduced but not completely offset by the increase in gas prices. The decrease in the amount of royalty income resulted in the lower distributions. The total distribution for fiscal 2012 was $2.46 per unit compared to $2.63 per unit for fiscal 2011. As in prior years, the Trust receives adjustments from the operating companies based on their final calculations of royalties payable during the previous calendar year. In the fourth quarter of fiscal 2012, the prior year adjustment represented a negative impact of approximately $0.0189 per unit. In the fourth fiscal quarter of 2011, the Trust received only a nominal prior year adjustment.
Under the Mobil Agreement, gas sales declined 13.62% to 37.539 Billion cubic feet ("Bcf") in fiscal 2012 from 43.456 Bcf in fiscal 2011. Since the Trust does not receive information about the decision making process of the operating companies, it is impossible to determine to what extent, if any, which factors may have impacted gas sales. According to the Trust's consultant in Germany, it is possible that the decline in gas production is due to the normal reduction in well pressure that is experienced over time which has not been fully offset by the addition of new wells and production capacity.
Quarterly and Yearly Gas Sales under the Mobil Agreement in Billion cubic feet ------------------------------------------------------------------------------ Fiscal Quarter 2012 Gas Sales 2011 Gas Sales Percentage Change -------------- ---------------- ---------------- ----------------- First 9.749 11.707 -16.73% Second 9.632 11.057 -12.89% Third 9.140 10.671 -14.35% Fourth 9.018 10.021 -10.01% -------------- ---------------- ---------------- ----------------- Fiscal Year Total 37.539 43.456 -13.62% |
Average prices for gas sold under the Mobil Agreement increased 10.61% to 2.7015 Ecents/kWh in fiscal 2012 from 2.4424 Ecents/kWh in fiscal 2011.
Average Gas Prices under the Mobil Agreement in Euro cents per Kilowatt Hour ------------------------------------------------------------------------------ Fiscal Quarter 2012 Gas Prices 2011 Gas Prices Percentage Change -------------- ----------------- ----------------- ----------------- First 2.8563 2.3753 +20.25% Second 2.8708 2.5087 +14.43% Third 2.6666 2.3838 +11.86% Fourth 2.3884 2.5102 - 4.85% -------------- ----------------- ----------------- ----------------- Fiscal Year Avg. 2.7015 2.4424 +10.61% |
Converting gas prices into more familiar terms, using the average exchange rate, yielded a price of $9.97 per Mcf, a 2.68% increase over fiscal 2011's average price of $9.71/Mcf. For fiscal 2012, royalties paid under the Mobil Agreement were transferred at an average Euro/dollar exchange rate of $1.2854, a decrease of 7.34% from the average Euro/dollar exchange rate of $1.3872 for fiscal 2011.
Average Euro Exchange Rate under the Mobil Agreement
----------------------------------------------------------------------------
2012 Average 2011 Average
Fiscal Quarter Euro Exchange Rate Euro Exchange Rate Percentage Change
-------------- ------------------ ------------------ -----------------
First 1.3017 1.3431 - 3.08%
Second 1.3024 1.3962 - 6.72%
Third 1.2530 1.4091 -11.08%
Fourth 1.2824 1.3938 - 7.99%
-------------- ------------------ ------------------ -----------------
Fiscal Year Avg. 1.2854 1.3872 - 7.34%
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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 2012, gas sales from western Oldenburg accounted for only 35.26% of all gas sales. However, western Oldenburg gas royalties provided approximately 81.56% or $17,702,882 out of a total of $21,705,858 in overall Oldenburg gas royalties.
Under the OEG Agreement, gas sales decreased 10.22% to 106.457 Bcf in fiscal 2012 from 118.577 Bcf in fiscal 2011. Since the Trust does not receive information about the decision making process of the operating
companies, it is impossible to determine to what extent, if any, which factors may have impacted gas sales. According to the Trust's consultant in Germany, it is possible that the decline in gas production is due to the normal reduction in well pressure that is experienced over time which has not been fully offset by the addition of new wells and production capacity.
Quarterly and Yearly Gas Sales under the OEG Agreement in Billion cubic feet ---------------------------------------------------------------------------- Fiscal Quarter 2012 Gas Sales 2011 Gas Sales Percentage Change -------------- ---------------- ---------------- ----------------- First 28.187 30.213 - 6.71% Second 26.104 30.098 -13.27% Third 26.254 29.595 -11.29% Fourth 25.912 28.671 - 9.62% -------------- ---------------- ---------------- ----------------- Fiscal Year Total 106.457 118.577 -10.22% |
Average gas prices for gas sold under the OEG Agreement increased 5.74% to 2.7900 Ecents/kWh in fiscal 2012 from 2.6386 Ecents/kWh in fiscal 2011.
Average Gas Prices under the OEG Agreement in Euro cents per Kilowatt Hour ---------------------------------------------------------------------------- Fiscal Quarter 2012 Gas Prices 2011 Gas Prices Percentage Change -------------- ----------------- ----------------- ----------------- First 2.9205 2.5404 +14.96% Second 3.0872 2.6826 +15.08% Third 2.5079 2.5379 - 1.18% Fourth 2.6346 2.7998 - 5.90% -------------- ----------------- ----------------- ----------------- Fiscal Year Avg. 2.7900 2.6386 + 5.74% |
Converting gas prices into more familiar terms, using the average exchange rate, yielded a price of $10.04/Mcf, a 1.95% decrease over fiscal 2011's average price of $10.24/Mcf. For fiscal 2012, royalties paid under the OEG Agreement were transferred at an average Euro/dollar exchange rate of $1.2854, a decrease of 7.49% from the average Euro/dollar exchange rate of $1.3894 for fiscal 2011.
Average Euro Exchange Rate under the OEG Agreement
----------------------------------------------------------------------------
2012 Average 2011 Average
Fiscal Quarter Euro Exchange Rate Euro Exchange Rate Percentage Change
-------------- ------------------ ------------------ -----------------
First 1.3028 1.3436 - 3.04%
Second 1.3019 1.3989 - 6.93%
Third 1.2488 1.4148 -11.73%
Fourth 1.2485 1.3929 - 7.78%
-------------- ------------------ ------------------ -----------------
Fiscal Year Avg. 1.2854 1.3894 - 7.49%
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Reflecting a shift in May 2011 to royalty receipts being deposited in a Money Market account versus being used to purchase T-Bills, interest income for fiscal 2012 increased 53.07% to $40,156 as compared to $26,233 for fiscal 2011. Trust expenses increased 12.68% to $1,103,003 in fiscal 2012 from $978,849 in fiscal 2011 primarily due to the payment of final legal costs associated with the litigation in Germany and the final billing with respect to the biennial royalty examination for the years 2009 and 2010 by the Trust's German accountants.
Results: Fiscal 2011 versus Fiscal 2010
For fiscal 2011, the Trust's gross royalty income increased 28.01% to $25,148,523 from $19,645,331 in fiscal 2010. The increase in royalty income was primarily the result of increases in gas prices under both royalty agreements. Increased gas sales under the OEG Agreement and increases in the average Euro/dollar exchange rates also positively impacted royalty income. A moderate decline in gas sales under the Mobil Agreement partially offset these positive factors. The total distribution for fiscal 2011 was $2.63 per unit compared to $2.04 per unit for fiscal 2010. As in prior years, the Trust receives adjustments from the operating companies based on their final calculations of royalties payable during the previous calendar year. As an adjustment for the prior calendar year, the Trust received the equivalent of $0.0473 per unit during fiscal 2010. The prior year adjustments for fiscal 2011 were negligible.
Under the Mobil Agreement, gas sales declined 0.24% to 43.456 Bcf in fiscal 2011 from 43.561 Bcf in fiscal 2010. Since there was no maintenance conducted at the Grossenkneten desulfurization plant in the fourth quarter of fiscal 2011, sales were not impacted. This contrasts with the prior year which saw an 18 day shutdown of the plant for maintenance in the fourth quarter of fiscal 2010.
Quarterly and Yearly Gas Sales under the Mobil Agreement in Billion cubic feet ------------------------------------------------------------------------------ Fiscal Quarter 2011 Gas Sales 2010 Gas Sales Percentage Change -------------- ---------------- ---------------- ----------------- First 11.707 11.861 - 1.30% Second 11.057 11.331 - 2.42% Third 10.671 11.770 - 9.34% Fourth 10.021 8.599 +16.54% -------------- ---------------- ---------------- ----------------- Fiscal Year Total 43.456 43.561 - 0.24% |
Average prices for gas sold under the Mobil Agreement increased 27.88% to 2.4424 Eurocents per Kilowatt hour ("Ecents/kWh") in fiscal 2011 from 1.9099 Ecents/kWh in fiscal 2010. With the exception of a brief decline in the third quarter of fiscal 2011, the price of gas sold under the Mobil Agreement has increased each quarter since the first quarter of fiscal 2010.
Average Gas Prices under the Mobil Agreement in Euro cents per Kilowatt Hour ----------------------------------------------------------------------------- Fiscal Quarter 2011 Gas Prices 2010 Gas Prices Percentage Change -------------- ---------------- ----------------- ----------------- First 2.3753 1.6491 +44.04% Second 2.5087 1.9035 +31.79% Third 2.3838 1.9666 +21.21% Fourth 2.5102 2.2021 +13.99% -------------- ---------------- ----------------- ----------------- Fiscal Year Avg. 2.4424 1.9099 +27.88% |
Converting gas prices into more familiar terms, using the average exchange rate, yielded a price of $9.71 per thousand cubic feet ("Mcf"), a 31.75% increase over fiscal 2010's average price of $7.37/Mcf. For fiscal 2011, total royalties paid under the Mobil Agreement were transferred at an
average Euro/dollar exchange rate of $1.3872, an increase of 3.36% from the average Euro/dollar exchange rate of $1.3421 for fiscal 2010.
Average Euro Exchange Rate under the Mobil Agreement
----------------------------------------------------------------------------
2011 Average 2010 Average
Fiscal Quarter Euro Exchange Rate Euro Exchange Rate Percentage Change
-------------- ------------------ ------------------ -----------------
First 1.3431 1.4499 - 7.37%
Second 1.3962 1.3586 + 2.77%
Third 1.4091 1.2522 +12.53%
Fourth 1.3938 1.3262 + 5.10%
-------------- ------------------ ------------------ -----------------
Fiscal Year Avg. 1.3872 1.3421 + 3.36%
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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 2011, gas sales from western Oldenburg accounted for only 36.65% of all gas sales. However, western Oldenburg gas royalties provided approximately 80.69% or $19,318,494 out of a total of $23,941,457 in overall Oldenburg gas royalties.
Under the OEG Agreement, gas sales increased 4.08% to 118.577 Bcf in fiscal 2011 from 113.924 Bcf in fiscal 2010. The increase in gas sales was likely the result of ongoing drilling in eastern Oldenburg and the lack of maintenance at the Grossenkneten desulfurization plant. The customary six week biennial shutdown of the Grossenkneten desulfurization plant took place during fiscal 2010.
Quarterly and Yearly Gas Sales under the OEG Agreement in Billion cubic feet ---------------------------------------------------------------------------- Fiscal Quarter 2011 Gas Sales 2010 Gas Sales Percentage Change -------------- ---------------- ---------------- ----------------- First 30.213 30.616 - 1.32% Second 30.098 30.083 + 0.05% Third 29.595 30.131 - 1.78% Fourth 28.671 23.094 +24.15% -------------- ---------------- ---------------- ----------------- Fiscal Year Total 118.577 113.924 + 4.08% |
Average gas prices for gas sold under the OEG Agreement increased 25.67% to 2.6386 Ecents/kWh in fiscal 2011 from 2.0996 Ecents/kWh in fiscal 2010. With the exception of a brief decline in the third quarter of fiscal 2011, the price of gas sold under the OEG Agreement has increased each quarter since the first quarter of fiscal 2010.
Average Gas Prices under the OEG Agreement in Euro cents per Kilowatt Hour ---------------------------------------------------------------------------- Fiscal Quarter 2011 Gas Prices 2010 Gas Prices Percentage Change -------------- ----------------- ----------------- ----------------- First 2.5404 1.9151 +32.65% Second 2.6826 2.0857 +28.62% Third 2.5379 2.1186 +19.79% Fourth 2.7998 2.3395 +19.68% -------------- ----------------- ----------------- ----------------- Fiscal Year Avg. 2.6386 2.0996 +25.67% |
Converting gas prices into more familiar terms, using the average exchange rate, yielded a price of $10.24/Mcf, a 29.95% increase over fiscal 2010's average price of $7.88/Mcf. For fiscal 2011, total royalties paid under the OEG Agreement were transferred at an average Euro/dollar exchange rate of $1.3894, an increase of 3.08% from the average Euro/dollar exchange rate of $1.3479 for fiscal 2010.
Average Euro Exchange Rate under the OEG Agreement
----------------------------------------------------------------------------
2011 Average 2010 Average
Fiscal Quarter Euro Exchange Rate Euro Exchange Rate Percentage Change
-------------- ------------------ ------------------ -----------------
First 1.3436 1.4405 - 6.73%
Second 1.3989 1.3403 + 4.37%
Third 1.4148 1.2596 +12.32%
Fourth 1.3929 1.3305 + 4.69%
-------------- ------------------ ------------------ -----------------
Fiscal Year Avg. 1.3894 1.3479 + 3.08%
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Reflecting both the increase in funds available for short-term investment and the shift to a money market account from T-bills and CD's, interest income for fiscal 2011 increased to $26,233 from $7,359 for fiscal 2010. Trust expenses increased 4.98% to $978,849 in fiscal 2011 from $932,425 in fiscal 2010, primarily due to higher Trustees' fees, which are determined based on a percentage allocation specified in accordance with the provisions of the Trust Agreement.
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 represents a summary of the Trust's German consultant's . . .
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