Item 2.
Managements Discussion and Analysis of Financial Condition and Results of
Operations
Periods of Three and Six Months ended June 30, 2014 and June 30, 2013
The Trust owns interest
in 12,033 acres on the Mesabi Iron Range Formation in northeastern Minnesota,
most of which are under lease to major iron ore producing companies. With the
properties and offices all located in Minnesota, the Trust and matters
affecting the Trust are under the jurisdiction of the Ramsey County District
Court (the Court) in Saint Paul, Minnesota. Due to the Trustees election
pursuant to Section 646 of the Tax Reform Act of 1986, as amended, commencing
with year 1989 the Trust is not subject to federal and Minnesota corporate
income taxes. The Trust is now a grantor trust. Shares of beneficial interest
in the Trust are traded on the New York Stock Exchange under the ticker symbol
GNI (CUSIP No. 391064102).
The terms of the Great
Northern Iron Ore Properties Trust Agreement, created December 7, 1906, state
that the Trust shall continue for twenty years after the death of the last
survivor of eighteen persons named in the Trust Agreement. The last survivor of
these eighteen persons died on April 6, 1995. Accordingly, the Trust terminates
twenty years from April 6, 1995, that being April 6, 2015.
Upon
the termination date of the Trust on April 6, 2015, the certificates of
beneficial interest (shares) in the Trust will cease to trade on the New York
Stock Exchange and thereafter will represent only the right to receive certain
distributions payable to the certificate holders of record at the time of the
termination of the Trust. Upon Trust termination and after the wind-down
process is completed, the Trust is obligated to distribute ratably to these
certificate holders the net monies remaining in the hands of the Trustees
(after paying and providing for all expenses and obligations incurred through
the Trusts termination and wind-down process), plus the balance in the
Principal Charges account (this account is explained in the Trusts
Annual Report sent to all certificate holders every year), all of which are subject to the final
accounting and approval of the Ramsey County District Court. All other Trust
property (most notably the Trusts mineral properties and the active leases)
must be conveyed and transferred to the reversioner (currently Glacier Park
Company, a wholly owned subsidiary of ConocoPhillips Company), without further
payment or remuneration to the certificate holders, under the terms of the
Trust Agreement. The wind-down process of the Trust is anticipated to
extend into the calendar year following its termination date in order to
complete the various year-end audits, court and regulatory filings, tax
returns, conveyances of non-cash properties to the reversioner, etc., relative
thereto. Subject to the guidance and approval of the Ramsey County District
Court and assuming the wind-down process with the reversioner proceeds
efficiently and that no other complications arise during this time period, we
anticipate the wind-down process, final distribution and dissolution of the
Trust will be completed by the end of 2016.
The
exact final distribution, though not determinable at this time, will generally
consist of the sum of the Trusts net monies (essentially, total assets less
liabilities and less properties) and the balance in the Principal Charges
account, less any and all expenses and obligations incurred through the Trusts
termination and wind-down process. To offer a hypothetical example, without
factoring in any expenses and obligations incurred through the Trusts
termination and wind-down process, and using the financial statement values as
of December 31, 2013, the net monies were approximately $9,790,000 and the
Principal Charges account balance was approximately $4,789,000, resulting in a
final distribution payable of approximately $14,579,000, or about $9.72 per
share. Upon the termination of the Trust, the certificates of beneficial
interest (shares) would be cancelled and have no further value with the exception
of the final distribution. It is important to note, however, that the actual
net monies on hand and the Principal Charges account balance will most likely
fluctuate during the ensuing years and will not be final until after the
termination and wind-down process of the Trust is completed. The Trust offers
this example to further inform investors about the conceptual nature of the
final distribution and does not imply or guarantee a specific known final
distribution amount.
Results of
Operations:
Royalties increased
$308,483 during the three month period ended June 30, 2014, as compared to the
same period in 2013, due mainly to increased taconite shipments from Trust
lands and increased tailings revenues, offset in part by a lower overall
average earned royalty rate caused by our lessees mining more taconite from our
partial fee interest lands resulting in royalties representative of our
ownership interest and less net minimum royalties. Royalties decreased $94,061
during the six month period ended June 30, 2014, as compared to the same period
in 2013, due mainly to a lower overall average earned royalty rate caused by
our lessees mining more taconite from our partial fee interest lands resulting
in royalties representative of our ownership interest and less net minimum
royalties, offset in part by overall increased taconite shipments from Trust
lands and increased tailings revenues.
Interest and other income
decreased $7,042 during the three month period ended June 30, 2014, as compared
to the same period in 2013, due mainly to less miscellaneous license fees
generated. Interest and other income increased $248,466 during the six month
period ended June 30, 2014, as compared to the same period in 2013, due mainly
to the higher aggregate (mineral rock) sales.
Costs and expenses
increased $76,672 and $48,724 during the three and six month periods ended June
30, 2014, respectively, as compared to the same periods in 2013, due mainly to
increased legal expenditures related to Trust termination matters, offset in
part by less net periodic pension cost associated with the Trusts defined
benefit pension plan. The reduction in pension expense was primarily due to the
Trust not being required to amortize unrecognized net loss, pursuant to pension
accounting rules, since the remaining unrecognized net loss was less than ten
percent of the greater of the projected benefit obligation or the fair market
value of plan assets as of the beginning of the year (known as the corridor for delayed recognition).
-8-
At their meeting held on
June 16, 2014, the Trustees declared a distribution of $2.50 per share,
amounting to $3,750,000 payable July 31, 2014, to certificate holders of record
at the close of business on June 30, 2014. Following payment of this quarterly
distribution, there will be three (3) more regular quarterly distributions
declared (two in 2014 and one in 2015) before the termination date of the Trust
on April 6, 2015. While there will be some income allocated to the second
quarter of 2015 (representing six days of business), it is expected that this
amount will be nominal and will likely be included with the final distribution
to certificate holders that will be made subsequent to the termination date and
upon completion of the wind-down process and final accounting. The final distribution will essentially
represent the remaining net monies plus the balance in the Principal Charges
account, as approved by the Ramsey County District Court. Upon Trust
termination, the shares will be cancelled and have no further value other than
the final distribution.
The
Trustees have now declared two quarterly distributions in 2014. The first, in
the amount of $2.25 per share, was paid on April 30, 2014, to certificate
holders of record on March 31, 2014; and the second being the current
distribution. The first and second quarter 2013 distributions were $2.25 and
$2.50 per share, respectively. The Trustees intend to continue quarterly
distributions and set the record date as of the last business day of each
quarter. The next distribution will be paid October 31, 2014 to certificate
holders of record on September 30, 2014.
A mining agreement dated
January 1, 1959, with U.S. Steel Corporation provides that one-half of annual
earned royalty income, after satisfaction of minimum royalty payments, shall be
applied, in lieu of royalty payments, to reimburse the lessee for a portion of
its cost of acquisition of surface lands overlying the leased mineral deposits,
which surface lands are then conveyed to the Trustees. There are surface lands
yet to be purchased, the costs of which are yet unknown and will not be known
until the actual purchases are made.
Liquidity:
In the interest of
preservation of principal of Court-approved reserves and guided by the
restrictive provisions of Section 646 of the Tax Reform Act of 1986, as
amended, monies are invested primarily in United States Treasury securities
with maturity dates not to exceed three years and, along with cash flows from
operations, are deemed adequate to meet currently foreseeable liquidity needs.