UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| þ |
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
| |
|
for
the quarterly period ended September 30, 2020 |
OR
| o |
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
| |
|
for
the transition period from
to
|
Commission File Number: 001-34800
ECA MARCELLUS TRUST I
(Exact name of registrant as specified in its charter)
|
Delaware |
27-6522024 |
(State
or other jurisdiction of
incorporation or organization) |
(I.R.S.
Employer
Identification No.) |
| |
|
| The
Bank of New York Mellon |
|
| Trust
Company, N.A., Trustee |
|
| Global
Corporate Trust |
|
| 601
Travis Street, 16th Floor |
|
| Houston,
Texas |
77002 |
| (Address
of principal executive offices) |
(Zip
Code) |
(512)
236-6555
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the
Act: None
Indicate
by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes þ No o
Indicate
by check mark whether the registrant has submitted electronically
every Interactive Data File required to be submitted pursuant to
Rule 405 of Regulation S-T (§232.405 of this chapter)
during the preceding 12 months (or for such shorter period
that the registrant was required to submit such files). Yes
o No o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer, a
smaller reporting company, or an emerging growth company. See the
definitions of “large accelerated filer,” “accelerated filer,”
“smaller reporting company” and “emerging growth company” in
Rule 12b-2 of the Exchange Act.
|
Large
accelerated filer o |
Accelerated
filer o |
Non-accelerated
filer þ |
Smaller
reporting company þ |
Emerging
growth company o |
If an
emerging growth company, indicate by check mark if the registrant
has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided
pursuant to Section 13(a) of the Exchange Act.
o
Indicate
by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act). Yes o No þ
As of November 13, 2020, 17,605,000 Common Units of Beneficial
Interest in ECA Marcellus Trust I were outstanding.
TABLE OF CONTENTS
References to the “Trust” in this document refer to ECA Marcellus
Trust I. As discussed in Item 1 – Business – “Introduction,” in
November 2017 Greylock Energy, LLC, and certain of its wholly
owned subsidiaries acquired substantially all of the gas production
and midstream assets of Energy Corporation of America, including
all of the interests of Legacy ECA (as defined below) in certain
natural gas properties that are subject to the royalty interests
held by ECA Marcellus Trust I (the “Acquisition”). References to
“Greylock Energy” in this document refer to Greylock Energy, LLC
and certain of its wholly-owned subsidiaries, including Greylock
Production, LLC (“Greylock Production”), which serves as operator
of the subject wells, and Greylock Midstream, LLC (“Greylock
Midstream”), whose subsidiaries market and gather certain of the
gas. References to “Legacy ECA” in this document refer to Energy
Corporation of America and its wholly-owned subsidiaries, and, when
discussing the conveyance documents, the Private Investors (as
defined in “Glossary of Certain Terms”), as such entities existed
prior to the asset acquisition by Greylock Energy. References to
the “Sponsor” in this document refer to Legacy ECA for periods
prior to the Acquisition, and to Greylock Energy for periods after
the Acquisition.
PART I-FINANCIAL INFORMATION
Item 1. Financial Statements.
ECA
Marcellus Trust I
Statements of Assets,
Liabilities, and Trust Corpus
| |
|
September 30, |
|
|
December 31, |
|
| |
|
2020 |
|
|
2019 |
|
| ASSETS: |
|
|
|
|
|
|
|
|
|
Cash |
|
$ |
1,037,282 |
|
|
$ |
770,833 |
|
|
Royalty income receivable |
|
|
339,480 |
|
|
|
738,201 |
|
|
Royalty interest in gas properties |
|
|
352,100,000 |
|
|
|
352,100,000 |
|
|
Accumulated amortization |
|
|
(336,191,508 |
) |
|
|
(335,055,782 |
) |
|
Net royalty interest in gas properties |
|
|
15,908,492 |
|
|
|
17,044,218 |
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
17,285,254 |
|
|
$ |
18,553,252 |
|
| |
|
|
|
|
|
|
|
|
|
LIABILITIES AND TRUST CORPUS: |
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
Distributions payable to unitholders |
|
$ |
(0 |
) |
|
$ |
335,172 |
|
|
Trust corpus; 17,605,000 common units authorized, issued and
outstanding |
|
|
17,285,254 |
|
|
|
18,218,080 |
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Trust Corpus |
|
$ |
17,285,254 |
|
|
$ |
18,553,252 |
|
See notes to
the unaudited financial statements.
ECA Marcellus Trust
I
Statements of
Distributable Income
| |
|
Nine
Months Ended |
|
|
Three Months Ended |
|
| |
|
September 30, |
|
|
September 30, |
|
| |
|
2020 |
|
|
2019 |
|
|
2020 |
|
|
2019 |
|
|
Royalty income |
|
$ |
1,119,957 |
|
|
$ |
3,407,384 |
|
|
$ |
339,480 |
|
|
$ |
715,334 |
|
|
Net proceeds to Trust |
|
$ |
1,119,957 |
|
|
$ |
3,407,384 |
|
|
$ |
339,480 |
|
|
$ |
715,334 |
|
|
General and administrative expense |
|
|
(922,251 |
) |
|
|
(951,606 |
) |
|
|
(123,920 |
) |
|
|
(254,491 |
) |
|
Interest income |
|
|
4,514 |
|
|
|
16,211 |
|
|
|
77 |
|
|
|
4,991 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income available for distribution prior to cash reserves |
|
$ |
202,220 |
|
|
$ |
2,471,989 |
|
|
$ |
215,637 |
|
|
$ |
465,834 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash reserves withheld by Trustee |
|
|
(199,503 |
) |
|
|
(305,916 |
) |
|
|
(215,585 |
) |
|
|
(90,000 |
) |
|
Interest withheld on cash reserves |
|
|
(2,716 |
) |
|
|
(578 |
) |
|
|
(51 |
) |
|
|
(578 |
) |
|
Distributable income available to unitholders |
|
$ |
0 |
|
|
$ |
2,165,495 |
|
|
$ |
0 |
|
|
$ |
375,256 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributable income per common unit (17,605,000 units authorized
and outstanding) |
|
$ |
(0.000 |
) |
|
$ |
0.085 |
|
|
$ |
(0.000 |
) |
|
$ |
0.021 |
|
See notes to
the unaudited financial statements.
ECA
Marcellus Trust I
Statements of Trust
Corpus
| |
|
Three Months Ended |
|
| |
|
September 30, |
|
| |
|
2020 |
|
|
2019 |
|
|
Trust Corpus, Balance at July 1, |
|
$ |
17,444,745 |
|
|
$ |
45,107,980 |
|
|
Cash reserves withheld, including interest |
|
|
215,637 |
|
|
|
90,578 |
|
|
Distributable income |
|
|
0 |
|
|
|
375,256 |
|
|
Distributions paid or payable to unitholders |
|
|
(0 |
) |
|
|
(369,646 |
) |
|
Amortization of royalty interest in gas properties |
|
|
(375,128 |
) |
|
|
(991,889 |
) |
|
Impairment of royalty interest in gas properties |
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
Trust Corpus, Balance at September 30, |
|
$ |
17,285,254 |
|
|
$ |
44,212,279 |
|
| |
|
Nine
Months Ended |
|
| |
|
September 30, |
|
| |
|
2020 |
|
|
2019 |
|
|
Trust Corpus, Balance at January 1, |
|
$ |
18,218,080 |
|
|
$ |
46,933,314 |
|
|
Cash reserves withheld, including interest |
|
|
202,220 |
|
|
|
306,494 |
|
|
Distributable income |
|
|
0 |
|
|
|
2,165,495 |
|
|
Distributions paid or payable to unitholders |
|
|
678 |
|
|
|
(2,157,023 |
) |
|
Amortization of royalty interest in gas properties |
|
|
(1,135,724 |
) |
|
|
(3,036,001 |
) |
|
Impairment of royalty interest in gas properties |
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
Trust Corpus, Balance at September 30, |
|
$ |
17,285,254 |
|
|
$ |
44,212,279 |
|
See notes to
the unaudited financial statements.
ECA MARCELLUS TRUST I
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. Organization of the Trust
ECA Marcellus Trust I is a Delaware statutory trust formed in
March 2010 by Energy Corporation of America (“Legacy ECA”) to
own royalty interests in 14 producing horizontal natural gas wells
producing from the Marcellus Shale formation, all of which are
online and are located in Greene County, Pennsylvania (the
“Producing Wells”), and royalty interests in 52 horizontal natural
gas development wells subsequently drilled to the Marcellus Shale
formation (the “PUD Wells”) within the “Area of Mutual Interest”,
or “AMI”, comprising approximately 9,300 acres held by Legacy ECA,
of which it owned substantially all of the working interests, in
Greene County, Pennsylvania. The effective date of the Trust was
April 1, 2010; consequently, the Trust received the proceeds
of production attributable to the PDP Royalty Interest (defined
herein) from that date even though the PDP Royalty Interest was not
conveyed to the Trust until the closing of the initial public
offering on July 7, 2010. The total number of units the Trust
is authorized to issue is 17,605,000 units, all of which are now
common units. The royalty interests were conveyed from Legacy ECA’s
working interest in the Producing Wells and the PUD Wells limited
to the Marcellus Shale formation (the “Underlying Properties”). In
November 2017, Greylock Energy, LLC and certain of its wholly
owned subsidiaries (“Greylock Energy”), including Greylock
Production, LLC (“Greylock Production”), which serves as operator
of the subject wells, and Greylock Midstream, LLC (“Greylock
Midstream”), whose subsidiaries market and gather certain of the
gas, acquired substantially of the assets of Legacy ECA, as
described in Note 4.
The royalty interest in the Producing Wells (the “PDP Royalty
Interest”) entitles the Trust to receive 90% of the proceeds
(exclusive of any production or development costs but after
deducting post-production costs and any applicable taxes) from the
sale of production of natural gas attributable to the Sponsor’s
initial interest in the Producing Wells. The royalty interest in
the PUD Wells (the “PUD Royalty Interest” and collectively with the
PDP Royalty Interest, the “Royalty Interests”) entitles the Trust
to receive 50% of the proceeds (exclusive of any production or
development costs but after deducting post-production costs and any
applicable taxes) from the sale of production of natural gas
attributable to the Sponsor’s initial interest in the PUD
Wells.
The Trust’s cash receipts in respect of the Royalty Interests are
determined after deducting post-production costs and any applicable
taxes associated with the Perpetual Royalty Interests. The Trust’s
cash available for distribution is reduced by Trust administrative
expenses. Post-production costs generally consist of costs incurred
to gather, compress, transport, process, treat, dehydrate and
market the natural gas produced. Charges (the “Post-Production
Services Fee”) payable to the Sponsor for such post-production
costs on the Greene County Gathering System (“GCGS”) were limited
to $0.52 per MMBtu gathered until Legacy ECA fulfilled its drilling
obligation in 2011; since then the Sponsor has been permitted to
increase the Post-Production Services Fee to the extent necessary
to recover certain capital expenditures in the GCGS. Additionally,
if electric compression is utilized in lieu of gas as fuel in the
compression process, the Trust will be charged for the electric
usage as provided for in the Trust conveyance documents.
The trust agreement provides that the Trust will terminate if gross
proceeds to the Trust attributable to the Royalty Interests over
any four consecutive quarters are less than $1.5 million. If
this early termination event occurs, the trust agreement will
require the Trustee to sell the Royalty Interests, either by
private sale or public auction, subject to Greylock
Energy's right of first refusal to purchase the Royalty
Interests. After the sale of all of the Royalty Interests, payment
of all Trust liabilities and establishment of reasonable provisions
for the payment of additional anticipated or contingent Trust
expenses or liabilities, the Trustee will distribute the net
proceeds of the sale to the Trust unitholders.
Gross proceeds to the Trust attributable to the Royalty Interests
during the first three quarters of 2020 were $1,119,957. Gross
proceeds to the Trust attributable to the Royalty Interests over
the four consecutive quarters ending December 31, 2020 may
fall below $1.5 million, which would require the Trust to commence
termination by January 2021. If that occurs, the Trustee would
be required to sell all of the Trust’s remaining assets and
liquidate the Trust.
The Trust makes quarterly cash distributions of substantially all
of its cash receipts, after deducting Trust administrative
expenses, including the costs incurred as a result of being a
publicly traded entity, on or about the 60th day
following the completion of each quarter. Unless sooner terminated,
the Trust will begin to liquidate on or about March 31, 2030
(the “Termination Date”) and will soon thereafter wind up its
affairs and terminate. At the termination of the Trust, 50% of each
of the PDP Royalty Interest and the PUD Royalty Interest will
revert automatically to Greylock Production. The remaining 50% of
each of the PDP Royalty Interest and the PUD Royalty Interest will
be sold, and the net proceeds will be distributed pro rata to the
unitholders soon after the termination of the Trust. Greylock
Production will have a right of first refusal to purchase the
remaining 50% of the Royalty Interests at the termination of the
Trust.
The business and affairs of the Trust are administered by The Bank
of New York Mellon Trust Company, N.A., as Trustee. Although
Greylock Production operates all of the Producing Wells and all of
the PUD Wells, Greylock Production has no ability to manage or
influence the management of the Trust. Neither the Trust nor the
Trustee has any authority or responsibility for, or any involvement
with or influence over, any aspect of the operations on or relating
to the properties to which the Royalty Interests relate.
NOTE 2. Basis of Presentation
The preparation of financial statements requires the Trust to make
estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenue and expenses during the reporting
period. Without limiting the foregoing statement, the information
furnished is based upon certain estimates of the revenues
attributable to the Trust from natural gas production for the three
and nine months ended September 30, 2020 and 2019 and is
therefore subject to adjustment in future periods to reflect actual
production for the periods presented.
The information furnished reflects all normal and recurring
adjustments which are, in the opinion of the Trustee, necessary for
a fair presentation of the results for the interim period
presented. The accompanying unaudited interim financial statements
should be read in conjunction with the audited financial statements
and notes thereto included in the Trust’s Annual Report on
Form 10-K for the year ended December 31, 2019. The
December 31, 2019 condensed balance sheet data was derived
from audited financial statements, but does not include all
applicable financial statement disclosures.
NOTE 3. Significant Accounting Policies
The accompanying unaudited financial information has been prepared
by the Trustee in accordance with the instructions to
Form 10-Q. The financial statements of the Trust differ from
financial statements prepared in accordance with generally accepted
accounting principles in the United States of America (“GAAP”)
because certain cash reserves may be established for contingencies,
which would not be accrued in financial statements prepared in
accordance with GAAP. Amortization of the investment in overriding
royalty interests calculated on a unit-of-production basis is
charged directly to Trust Corpus. This comprehensive basis of
accounting other than GAAP corresponds to the accounting permitted
for royalty trusts by the U.S. Securities and Exchange Commission
(“SEC”) as specified by Accounting Standard Codification (“ASC”)
Topic 932, Extractive Activities—Oil and Gas: Financial Statements
of Royalty Trusts. Income determined on the basis of GAAP would
include all expenses incurred for the period presented. However,
the Trust serves as a pass-through entity, with expenses for
depreciation, depletion, and amortization, interest and income
taxes being based on the status and elections of the Trust
unitholders. General and administrative expenses, production taxes
or any other allowable costs are charged to the Trust only when
cash has been paid for those expenses. In addition, the Royalty
Interests are not burdened by field and lease operating expenses.
Thus, the statement shows distributable income, defined as income
of the Trust available for distribution to the Trust unitholders
before application of those additional expenses, if any, for
depreciation, depletion, and amortization, interest and income
taxes. The revenues are presented net of existing royalties and
overriding royalties and have been reduced by
gathering/post-production expenses.
Cash:
Cash may include highly liquid instruments maturing in three months
or less from the date acquired.
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. Actual results could differ
from those estimates.
Revenue and Expenses:
The Trust serves as a pass-through entity, with items of depletion,
interest income and expense, and income tax attributes being based
upon the status and election of the unitholders. Thus, the
Statements of Distributable Income show Income available for
distribution before application of those unitholders’ additional
expenses, if any, for depletion, interest income and expense, and
income taxes.
The Trust uses the accrual basis to recognize revenue, with royalty
income recorded as reserves are extracted from the Underlying
Properties and sold. Expenses are recognized when paid.
Royalty Interest in Gas Properties:
The Royalty interest in gas properties is assessed to determine
whether the net capitalized cost is impaired, whenever events or
changes in circumstances indicate that its carrying amount may not
be recoverable, pursuant to ASC Topic 360, Property, Plant and
Equipment. The Trust determines whether an impairment charge is
necessary to its investment in the Royalty interest in gas
properties if total capitalized costs, less accumulated
amortization, exceed undiscounted future net revenues attributable
to proved gas reserves of the Underlying Properties. Determination
as to whether and how much an asset is impaired involves estimates
of fair value, which is determined based on discounted cash flow
techniques using assumptions including projected revenues, future
commodity prices, production costs, and market-specific average
cost of capital. Estimates of undiscounted future net revenues
attributable to proved gas reserves utilize NYMEX forward pricing
curves. If required, the Trust will recognize an impairment charge
to the extent that the net capitalized costs exceed the discounted
fair value of the investment in net profits interests attributable
to proved gas reserves of the Underlying Properties. Any such
impairment charge would not reduce Distributable Income, although
it would reduce Trust Corpus. At December 31, 2019, the
Underlying Properties were impaired by approximately $25 million
primarily as a result of the decrease in the futures prices of
natural gas. No impairment in the Underlying Properties has been
recognized during 2020. Significant dispositions or abandonment of
the Underlying Properties are charged to Royalty Interests and the
Trust Corpus.
Amortization of the Royalty interest in gas properties is
calculated on a units-of-production basis, whereby the Trust’s cost
basis in the properties is divided by Trust total 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 conveyance of the Royalty Interest to the Trust was accounted
for as a purchase transaction. The $352,100,000 reflected in the
Statements of Assets, Liabilities and Trust Corpus as Royalty
interests in gas properties represents 17,605,000 Trust units
valued at $20.00 per unit. The carrying value of the Trust’s
investment in the Royalty Interests is not necessarily indicative
of the fair value of such Royalty Interests.
NOTE
4. Reaffirmation Agreement
On November 29, 2017, Greylock Energy acquired substantially
all of the gas production and midstream assets of Legacy ECA,
including Legacy ECA’s interests in certain natural gas properties
that are subject to royalty interests held by the Trust.
In
connection with the transaction, Greylock Production assumed all
of Legacy ECA’s obligations under the Amended and Restated
Trust Agreement among the Trust, Legacy ECA and the Trustee (the
“Trust Agreement”), and other instruments to which Legacy ECA and
the Trustee were parties, including (1) the Administrative
Services Agreement by and among Legacy ECA, the Trust and the
Trustee dated July 7, 2010, and (2) a letter agreement
between Legacy ECA and the Trustee regarding certain loans to be
made by Legacy ECA to the Trust as necessary to enable the Trust to
pay its liabilities as they become due (the “Letter Agreement”). In
addition, Legacy ECA, Greylock Production, and the Trustee entered
into a Reaffirmation and Amendment of Mortgage, Assignment of
Leases, Security Agreement, Fixture Filing and Financing Statement
(the “Reaffirmation Agreement”), pursuant to which, among other
things, Greylock Production (1) reaffirmed the liens and the
security interest granted pursuant to the existing mortgage
securing the interests in the subject properties, as well as the
mortgage and the obligations of Legacy ECA under the mortgage, and
(2) assumed the obligations of Legacy ECA under the Letter
Agreement.
NOTE 5. Income Taxes
The Trust is a Delaware statutory trust, which is taxed as a
partnership for federal and state income taxes. Accordingly, no
provision for federal or state income taxes has been made.
Uncertain tax positions are accounted for under ASC Topic
740, Income Taxes (“ASC 740”), which prescribes a
recognition threshold and measurement attribute for financial
statement disclosure of tax positions taken or expected to be taken
on a tax return. Additionally, ASC 740 provides guidance on
derecognition, classification, interest and penalties, accounting
in interim periods, disclosure, and transition. The Trust has not
identified any uncertain tax positions through the period ended
September 30, 2020.
NOTE 6. Related Party Transactions
Trustee Administrative Fee:
Under the terms of the Trust Agreement, the Trustee charges an
annual administrative fee, subject to adjustment each year, that
was $150,000 from inception through 2017. The annual fee in 2019
was $154,605 and is expected to be $156,060 in 2020. The Trust
deducts these costs, as well as those to be paid to Greylock
Production pursuant to the Administrative Services Agreement
referred to below, in the period paid.
Administrative Services Fee:
The Trust and Greylock Production are parties to an Administrative
Services Agreement that obligates the Trust to pay Greylock
Production an administrative services fee for accounting,
bookkeeping and informational services to be performed by Greylock
Production on behalf of the Trust relating to the Royalty
Interests. The annual fee of $60,000 is payable in equal quarterly
installments. Under certain circumstances, Greylock Production and
the Trustee each may terminate the Administrative Services
Agreement at any time following delivery of notice no less than 90
days prior to the date of termination.
Item 2.
Trustee's Discussion and Analysis
of Financial Condition and Results of Operations.
References to the “Trust” in this document refer to ECA Marcellus
Trust I. As discussed in “Overview” below, Greylock Energy acquired
substantially all of the assets of Energy Corporation of America in
November 2017. References to “Legacy ECA” in this document
refer to Energy Corporation of America and its wholly-owned
subsidiaries and, when discussing the conveyance documents, the
Private Investors, as such entities existed prior to the asset
acquisition by Greylock Energy. The following review of the Trust’s
financial condition and results of operations should be read in
conjunction with the financial statements and notes thereto and the
audited financial statements and notes thereto included in the
Trust’s Annual Report on Form 10-K for the year ended
December 31, 2019 (the “2019 Form 10-K”). The Trust’s
annual reports on Form 10-K, quarterly reports on
Form 10-Q, current reports on Form 8-K and all amendments
to those reports are available on the SEC’s website at www.sec.gov
and also at www.businesswire.com/cnn/ect.htm. Certain terms used
herein are defined in Appendix A. All information regarding
operations has been provided to the Trustee by Greylock Energy.
Note Regarding Forward-Looking Statements
This report contains “forward-looking statements” about Greylock
Energy and the Trust and other matters discussed herein that are
subject to risks and uncertainties. All statements other than
statements of historical fact included in this document, including,
without limitation, statements under “Trustee’s Discussion and
Analysis of Financial Condition and Results of Operations” and
“Risk Factors” regarding the financial position, business strategy,
production and reserve growth, development activities and costs and
other plans and objectives for the future operations of Greylock
Energy and all matters relating to the Trust are forward-looking
statements. Actual outcomes and results may differ materially from
those projected.
When used in this document, the words “believes,” “expects,”
“anticipates,” “intends” or similar expressions, are intended to
identify such forward-looking statements. Further, all statements
regarding future circumstances or events are forward-looking
statements. The following important factors, in addition to those
discussed elsewhere in this document, could affect the future
results of the energy industry in general, and Greylock Energy and
the Trust in particular, and could cause those results to differ
materially from those expressed in such forward-looking
statements:
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risks incident to the operation of natural gas wells; |
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future production costs; |
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the effects of existing and future laws and regulatory
actions; |
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the effects of changes in commodity prices; |
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conditions in the capital markets; |
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competition in the energy industry; |
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the uncertainty of estimates of natural gas reserves and
production; and |
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other risks described under the caption “Risk Factors” in
Part I, Item 1A of the 2019 Form 10-K and in
Part II, Item 1A of this report. |
This report describes other important factors that could cause
actual results to differ materially from expectations of Greylock
Energy and the Trust. All subsequent written and oral
forward-looking statements attributable to Greylock Energy or the
Trust or persons acting on behalf of Greylock Energy or the Trust
are expressly qualified in their entirety by such factors. The
Trust assumes no obligation, and disclaims any duty, to update
these forward-looking statements.
Overview
The
Trust is a statutory trust created under the Delaware Statutory
Trust Act. The Bank of New York Mellon Trust Company, N.A.
serves as Trustee. The Trust does not conduct any operations or
activities. The Trust’s purpose is, in general, to hold the Royalty
Interests (described below), to distribute to the Trust unitholders
cash that the Trust receives in respect of the Royalty Interests
after payment of Trust expenses and to perform certain
administrative functions in respect of the Royalty Interests and
the Trust units. The Trustee has no authority or responsibility
for, and no involvement with, any aspect of the oil and gas
operations on the properties to which the Royalty Interests relate.
The Trust derives all or substantially all of its income and cash
flows from the Royalty Interests. The Trust is treated as a
partnership for federal and state income tax purposes.
In
November 2017, Greylock Energy and certain of its wholly owned
subsidiaries, including Greylock Production, LLC, which
serves as operator of the subject wells, and Greylock Midstream,
LLC, whose subsidiaries market and gather certain of the gas,
acquired substantially all of the gas production and midstream
assets of Legacy ECA, including all of Legacy ECA’s interests in
certain natural gas properties that are subject to royalty
interests held by the Trust.
In
connection with the transaction, Greylock Production assumed all
of Legacy ECA’s obligations under the Trust Agreement and
other instruments to which Legacy ECA and the Trustee were parties,
including (1) the Administrative Services Agreement by and
among Legacy ECA, the Trust and the Trustee dated July 7,
2010, and (2) a letter agreement between Legacy ECA and the
Trustee regarding certain loans to be made by Legacy ECA to the
Trust as necessary to enable the Trust to pay its liabilities as
they become due (the “Letter Agreement”). In addition, Legacy ECA,
Greylock Production, and the Trustee entered into a Reaffirmation
and Amendment of Mortgage, Assignment of Leases, Security
Agreement, Fixture Filing and Financing Statement (the
“Reaffirmation Agreement”), pursuant to which, among other things,
Greylock Production (1) reaffirmed the liens and the security
interest granted pursuant to the existing mortgage securing the
interests in the subject properties, as well as the mortgage and
the obligations of Legacy ECA under the mortgage, and
(2) assumed the obligations of Legacy ECA under the Letter
Agreement.
As part of the initial acquisition of substantially all of Legacy
ECA’s assets, neither Greylock Energy nor Greylock Production
acquired title ownership of Legacy ECA’s working interest in two
wells in which the Trust also has an interest, the Penneco Morrow
#1MH and Penneco Morrow #2MH wells. In March 2019 Legacy ECA
sold the title ownership and working interest in these two wells to
Greylock Production.
The
Royalty Interests were conveyed to the Trust from the working
interest now held by Greylock Production in the Producing Wells and
the PUD Wells limited to the Underlying Properties. The PDP Royalty
Interest entitles the Trust to receive 90% of the proceeds
(exclusive of any production or development costs but after
deducting post-production costs and any applicable taxes) from the
sale of production of natural gas attributable to the Sponsor’s
initial interest in the Producing Wells for a period of
20 years commencing on April 1, 2010 and 45% thereafter.
The PUD Royalty Interest entitles the Trust to receive 50% of the
proceeds (exclusive of any production or development costs but
after deducting post-production costs and any applicable taxes)
from the sale of production of natural gas attributable to the
Sponsor’s initial interest in the PUD Wells for a period of
20 years commencing on April 1, 2010 and 25%
thereafter.
Legacy ECA was obligated to drill all of the PUD Wells by
March 31, 2014. As of November 30, 2011, Legacy ECA had
fulfilled its drilling obligation to the Trust by drilling 40 PUD
Wells (52.06 Equivalent PUD Wells), calculated as provided in the
Development Agreement. Consequently, no additional wells will be
drilled for the Trust. The Trust was not responsible for any costs
related to the drilling of development wells or any other
development or operating costs. As of September 30, 2020, the
Trust owns royalty interests in 14 Producing Wells and the 40
development wells (52.06 Equivalent PUD Wells) that are now
completed and in production.
The
Trust’s cash receipts in respect of the Royalty Interests are
determined after deducting post-production costs and any applicable
taxes associated with the Royalty Interests, and the Trust’s cash
available for distribution is reduced by Trust administrative
expenses and any amounts reserved for administrative
expenses. Post-production costs generally consist of costs
incurred to gather, compress, transport, process, treat, dehydrate
and market the natural gas produced. Charges (the “Post-Production
Services Fee”) payable to Legacy ECA for such post-production
costs on the related GCGS were limited to $0.52 per MMBtu gathered
until Legacy ECA fulfilled its drilling obligation in 2011; since
then the Sponsor has been permitted to increase the Post-Production
Services Fee to the extent necessary to recover certain capital
expenditures in the GCGS.
During September 2020, Greylock Production and Columbia Gas
Transmission, LLC (“TCO”) agreed to amend a firm
transportation agreement downstream of the GCGS to extend the term
from July 31, 2021 to December 31, 2024. The reserved
transportation quantities and tariff rates under this agreement
were not affected by this amendment. Greylock Production and TCO
also agreed to modify a separate firm transportation agreement
associated with transport on TCO’s Mountaineer Xpress Pipeline (the
“MXP Agreement”). The termination date for the MXP Agreement was
changed to December 31, 2022 from January 2034. In
addition, the transportation quantities reserved for Greylock
Production were reduced from 100,000 MMBtu per day to 52,550 MMBtu
per day. The previously existing negotiated reservation rate will
remain in place for all months other than September 2020 and
December 2021. Firm transportation utilized as to the Trust’s
interests is a chargeable post-production cost, and the Trust bears
its proportionate share of such costs; however, the Trust will not
be charged for the costs associated with modifying the firm
transportation agreements with TCO, including the difference
between the base negotiated rate and the increased negotiated rate
in September 2020 and December 2021 under the MXP
Agreement.
Generally, the percentage of production proceeds to be received by
the Trust with respect to a well equals the product of (i) the
percentage of proceeds to which the Trust is entitled under the
terms of the conveyances (90% for the Producing Wells and 50% for
the PUD Wells) multiplied by (ii) Greylock Production’s net
revenue interest in the well. Greylock Production on average owns
an 81.53% net revenue interest in the Producing Wells. Therefore,
the Trust is entitled to receive on average 73.37% of the proceeds
of production from the Producing Wells. With respect to the PUD
Wells, the conveyance related to the PUD Royalty Interest provides
that the proceeds from the PUD Wells will be calculated on the
basis that the underlying PUD Wells are burdened only by interests
that in total would not exceed 12.5% of the revenues from such
properties, regardless of whether the royalty interest owners are
actually entitled to a greater percentage of revenues from such
properties. As an example, assuming Greylock Production owns a 100%
working interest in a PUD Well, the applicable net revenue interest
is calculated by multiplying Greylock Production’s percentage
working interest in the 100% working interest well by the
unburdened interest percentage (87.5%), and such well would have a
minimum 87.5% net revenue interest. Accordingly, the Trust is
entitled to a minimum of 43.75% of the production proceeds from the
well provided in this example. To the extent Greylock Production’s
working interest in a PUD Well is less than 100%, the Trust’s share
of proceeds would be proportionately reduced.
The Trust makes quarterly cash distributions of substantially all
of its cash receipts, after deducting Trust administrative expenses
and costs and reserves therefor, on or about the 60th
day following the completion of each quarter. Unless sooner
terminated, the Trust will begin to liquidate in March 2030
and will soon thereafter wind up its affairs and terminate.
The amount of Trust revenues and cash distributions to Trust
unitholders depends on, among other things:
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natural gas prices received; |
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the volume and Btu rating of natural gas produced and
sold; |
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post-production costs and any applicable taxes; and |
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administrative expenses of the Trust including expenses
incurred as a result of being a publicly traded entity and any
changes in amounts reserved for such expenses. |
The markets for natural gas are volatile, as demonstrated by
significant price swings experienced during 2019 and further
declines in 2020 attributable primarily to the economic effects of
the global outbreak of the novel form of coronavirus known as
COVID-19 and its development into a global pandemic. COVID-19 and
the responses by federal, state and local governmental authorities
to the pandemic have also resulted in significant business and
operational disruptions, including business closures, supply chain
disruptions, travel restrictions, stay-at-home orders and
limitations on the availability of workforces. The full impact of
the COVID-19 pandemic is unknown and is rapidly evolving. The
extent to which the COVID-19 pandemic negatively impacts Greylock
Energy will depend on the severity, location and duration of the
effects and spread of COVID-19, the actions undertaken by federal,
state and local governments and health officials to contain the
virus or treat its effects, and how quickly and to what extent
economic conditions improve and normal business and operating
conditions resume. A prolonged period of low natural gas prices
will adversely affect Greylock Energy. As a result, there can be no
assurance that prices for natural gas, and therefore the Trust’s
quarterly cash distributions, will be maintained for any
significant period of time. There were no distributions to
unitholders for the quarters ended March 31, 2020 or
June 30, 2020, as Trust expenses exceeded net revenues to the
Trust. Continued low natural gas prices will reduce revenues to the
Trust, which will reduce the amount of cash available for
distribution to unitholders and in certain periods could result in
no distributions to unitholders
The effective date of the Trust was April 1, 2010, meaning the
Trust has received the proceeds of production attributable to the
PDP Royalty Interest from that date even though the PDP Royalty
Interest was not conveyed to the Trust until July 7, 2010. The
amount of the quarterly distributions fluctuates from quarter to
quarter, depending on the proceeds received by the Trust, among
other factors. There is no minimum required distribution.
Pursuant to IRC Section 1446, withholding tax on income
effectively connected to a United States trade or business
allocated to non-U.S. persons (“ECI”) should be made at the highest
marginal rate. Under IRC Section 1441, withholding tax on
fixed, determinable, annual, periodic income from United States
sources allocated to non-U.S. persons should be made at 30% of
gross income unless the rate is reduced by treaty. Nominees and
brokers should withhold at the highest marginal rate on the
distribution made to non-U.S. persons. As a result of the Tax Cuts
and Jobs Act enacted in December 2017, a non-U.S. holder’s
gain on the sale of Trust units is now treated as ECI to the extent
such holder would have had ECI if the Trust had sold all of its
assets at fair market value on the date of the exchange. The new
legislation also requires the transferee of units to withhold 10%
of the amount realized on the sale of exchange of units (generally,
the purchase price) unless the transferor certifies that it is not
a nonresident alien individual or foreign corporation.
Delisting
of Trust Units from The New York Stock Exchange. As
previously disclosed, on November 21, 2019, ECA Marcellus
Trust I (the “Trust”) received written notification from The New
York Stock Exchange (“NYSE”) that the Trust no longer satisfied the
continued listing compliance standards set forth under
Rule 802.01C of the NYSE Listed Company Manual because the
average closing price of the Trust units fell below $1.00 over a 30
consecutive trading-day period that ended November 21, 2019.
As the Trust was unable to regain compliance with the applicable
standards within a cure period that concluded on July 30,
2020, the NYSE announced the suspension of trading of the Trust
units due to non-compliance with Rule 802.01C of the NYSE
Listed Company Manual, effective as of the close of trading on
July 30, 2020, and announced that it was initiating
proceedings to delist the Trust units.
As a result of the suspension, the Trust units began trading on
July 31, 2020 under the symbol “ECTM” on the OTC Pink Market,
which is operated by OTC Markets Group Inc. (“OTC Pink”). To be
quoted on OTC Pink, a market maker must sponsor the security and
comply with SEC Rule 15c2-11 before it can initiate a quote in
a specific security. OTC Pink is a significantly more limited
market than the NYSE, and the quotation of the Trust units on OTC
Pink may result in a less liquid market available for existing and
potential unitholders and could further depress the trading price
of the Trust units. There is no assurance that an active market in
the Trust units will develop on OTC Pink, or whether broker-dealers
will continue to provide public quotes of the Trust units on this
market, whether the trading volume of the Trust units will be
sufficient to provide for an efficient trading market or whether
quotes for the Trust units may be blocked by OTC Markets Group in
the future.
Potential
Early Termination of the Trust. The trust agreement
provides that the Trust will terminate if gross proceeds to the
Trust attributable to the Royalty Interests over any four
consecutive quarters are less than $1.5 million. If this early
termination event occurs, the trust agreement will require the
Trustee to sell the Royalty Interests, either by private sale or
public auction, subject to Greylock Energy's right of first
refusal to purchase the Royalty Interests. After the sale of all of
the Royalty Interests, payment of all Trust liabilities and
establishment of reasonable provisions for the payment of
additional anticipated or contingent Trust expenses or liabilities,
the Trustee will distribute the net proceeds of the sale to the
Trust unitholders.
Gross proceeds to the Trust attributable to the Royalty Interests
during the first three quarters of 2020 were $1,119,957. Greylock
Energy currently estimates, based on estimates of natural gas
reserves and future prices for the remainder of the year, that
gross proceeds to the Trust attributable to Royalty Interests over
the four consecutive quarters ending December 31,2020 are
projected to exceed $1.5 million. Nevertheless, if production or
market conditions were to decline below expectations during the
remainder of 2020, gross proceeds to the Trust attributable to the
Royalty Interests over the four consecutive quarters ending
December 31, 2020 may fall below $1.5 million, which would
require the Trust to commence termination by January 2021. If
that occurs, the Trustee would be required to sell all of the
Trust’s remaining assets and liquidate the Trust.
Results of Trust Operations
For the Three Months Ended September 30, 2020 compared to
the Three Months Ended September 30, 2019
Distributable income for the three months ended September 30,
2020 decreased to $0 from $0.4 million for the three months ended
September 30, 2019. Compared to the quarter ended
September 30, 2019, royalty income decreased by $0.4 million
while general and administrative expenses decreased by $0.1
million.
Royalty income decreased to $0.3 million for the three months ended
September 30, 2020 from $0.7 million for the three months
ended September 30, 2019, a decrease of $0.4 million. This
decrease was due to a decrease in the average sales price between
periods as well as lower production between periods.
The average price realized for the three months ended
September 30, 2020 decreased $0.44 per Mcf to $0.51 per Mcf as
compared to $0.95 per Mcf for the three months ended
September 30, 2019. The decrease in the average sales price
realized for natural gas production was due primarily to a lower
average sales price partially offset by a slight decrease in other
post-production costs during the period. The average sales price,
before post-production costs, decreased from $1.97 per Mcf for the
three months ended September 30, 2019 to $1.46 per Mcf for the
three months ended September 30, 2020. The decrease in price
was the result of a decrease in the weighted average monthly
closing NYMEX price for the current period to $1.97 per MMBtu
compared to the weighted average monthly closing NYMEX price of
$2.23 per MMBtu for the three months ended September 30, 2019.
This decrease was also due to a decrease in the average Basis per
MMBtu in the current period at minus $0.56 per MMBtu compared to
the prior period Basis of minus $0.32 per MMBtu.
Post-production costs consist of a post-production services fee
together with a charge for electricity used in lieu of gas for
compression on the gathering system and firm transportation charges
on interstate gas pipelines. Overall, average post-production costs
decreased to $0.95 per Mcf in the current period compared to
$1.02 per Mcf for the three-month period ended
September 30, 2019.
Production decreased 11.2% from 751 MMcf for the three months ended
September 30, 2019 to 667 MMcf for the three months ended
September 30, 2020. The decreased production was the result of
natural production declines that occur during the life of a
well.
General and administrative expenses paid by the Trust for the three
months ended September 30, 2020 decreased by $0.1 million to
approximately $0.1 million compared to $0.2 million for the three
months ended September 30, 2019 and 2020. This decrease was
the result of timing in professional service fees. Cash reserves of
$0.2 million were withheld for the three months ended
September 30, 2020 as compared to $0.1 million for the three
months ended September 30, 2019.
For the Nine Months Ended September 30, 2020 compared to
the Nine Months Ended September 30, 2019
Distributable income for the nine months ended September 30,
2020 decreased to $0 from $2.2 million for the nine months ended
September 30, 2019. Compared to the nine months ended
September 30, 2019, royalty income decreased by $2.3 million
while general and administrative expenses remained flat at $0.9
million.
Royalty income decreased to $1.1 million for the nine months ended
September 30, 2020 from $3.4 million for the nine months ended
September 30, 2019, a decrease of $2.3 million. This decrease
was due to a decrease in the average sales price between periods as
well as lower production between periods.
The average price realized for the nine months ended
September 30, 2020 decreased $0.93 per Mcf to $0.55 per Mcf as
compared to $1.48 per Mcf for the nine months ended
September 30, 2019. The decrease in the average sales price
realized for natural gas production was due primarily to a lower
average sales price and higher post-production costs associated
with firm transportation during the period. The average sales
price, before post-production costs, decreased from $2.44 per Mcf
for the nine months ended September 30, 2019 to $1.54 per Mcf
for the nine months ended September 30, 2020. The decrease in
price was the result of a decrease in the weighted average monthly
closing NYMEX price for the current period to $1.88 per MMBtu
compared to the weighted average monthly closing NYMEX price of
$2.69 per MMBtu for the nine months ended September 30, 2019.
This decrease was also due to a slight decrease in the average
Basis per MMBtu in the current period at minus $0.39 per MMBtu
compared to the prior period Basis of minus $0.32 per MMBtu.
Post-production costs consist of a post-production services fee
together with a charge for electricity used in lieu of gas for
compression on the gathering system and firm transportation charges
on interstate gas pipelines. Overall, average post-production costs
increased to $0.99 per Mcf in the current period compared to
$0.96 per Mcf for the nine-month period ended
September 30, 2019. During the nine months ended
September 30, 2020, there was an increase in firm
transportation fees related to the Mountaineer Xpress Project that
were charged to the Trust beginning with February 2019
production. These increased costs were partially offset by slightly
lower post-production electricity fees.
Production decreased 12.2% from 2,298 MMcf for the nine months
ended September 30, 2019 to 2,019 MMcf for the nine months
ended September 30, 2020. The decreased production was the
result of natural production declines that occur during the life of
a well.
General and administrative expenses paid by the Trust for the nine
months ended September 30, 2019 and 2020 remained steady at
$0.9 million for the periods. Cash reserves of $0.2 million were
withheld for the nine months ended September 30, 2020 as
compared to $0.3 million for the nine months ended
September 30, 2019.
Liquidity and Capital Resources
The Trust has no source of liquidity or capital resources other
than net cash flows from the Royalty Interests. Other than Trust
administrative expenses, including, if applicable, expense
reimbursements to Greylock Production and any reserves established
by the Trustee for future liabilities, the Trust’s only use of cash
is for distributions to Trust unitholders. Administrative expenses
include payments to the Trustee and the Delaware Trustee as well as
a quarterly fee of $15,000 to Greylock Production pursuant to the
Administrative Services Agreement. Each quarter, the Trustee
determines the amount of funds available for distribution.
Available funds are the excess cash, if any, received by the Trust
from the Royalty Interests and other sources (such as interest
earned on any amounts reserved by the Trustee) that quarter, over
the Trust’s expenses for that quarter. Available funds are reduced
by any cash the Trustee determines to hold as a reserve against
future expenses or liabilities. The Trustee, on behalf of the
Trust, may borrow funds required to pay expenses or liabilities if
the Trustee determines that the cash on hand and the cash to be
received are insufficient to cover the Trust’s expenses or
liabilities. If the Trustee borrows funds, the Trust unitholders
will not receive distributions until the borrowed funds are
repaid.
Commencing
with the distribution paid to unitholders in the first quarter of
2019, the Trustee has been gradually building a cash reserve for
the payment of future expenses and liabilities of approximately
$1.8 million by withholding cash reserve amounts from each
quarterly distribution equal to the greater of $90,000 or 10% of
the amount distributable to unitholders. In February 2020, the
Trustee withheld $90,000 from funds otherwise available for
distribution. These withholdings are in addition to the existing
cash reserve of $0.5 million, which is determined prior to
the payments of quarterly expenses. The Trustee may increase or
decrease the targeted amount at any time, and may increase or
decrease the rate at which it is withholding funds to build the
cash reserve at any time, without advance notice to the
unitholders. After the
approximately $1.8 million has been withheld, the Trustee will have
cash reserves of approximately $2.3 million. Cash held in reserve
will be invested as required by the Trust Agreement. Any cash
reserved in excess of the amount necessary to pay or provide for
the payment of future known, anticipated or contingent expenses or
liabilities eventually will be distributed to unitholders, together
with interest earned on the funds. For the quarter ended
September 30, 2020, the Trustee withheld approximately $0.2
million from the funds otherwise available for distribution and
withheld $51 of interest earned on the cash reserve balance. The
Trustee has withheld from the funds otherwise available for
distribution a total amount of $0.8 million plus $5,202 of interest
toward the building of the $1.8 million cash reserve.
Payments to the Trust in respect of the Royalty Interests are based
on the complex provisions of the various conveyances held by the
Trust, copies of which are filed as exhibits to the 2019
Form 10-K, and reference is hereby made to the text of the
conveyances for the actual calculations of amounts due to the
Trust.
The Trust does not have any transactions, arrangements or other
relationships with unconsolidated entities or persons that could
materially affect the Trust’s liquidity or the availability of
capital resources.
Significant Accounting Policies
The
financial statements of the Trust differ from financial statements
prepared in accordance with generally accepted accounting
principles in the United States of America (“GAAP”) because, among
other differences, certain cash reserves may be established for
contingencies, which would not be accrued in financial statements
prepared in accordance with GAAP. Amortization of the investment in
overriding royalty interests calculated on a unit-of-production
basis is charged directly to Trust Corpus. This comprehensive basis
of accounting other than GAAP corresponds to the accounting
permitted for royalty trusts by the SEC as specified by ASC Topic
932 Extractive Activities—Oil and Gas: Financial Statements
of Royalty Trusts.
Income determined on the basis of GAAP would include all expenses
incurred for the period presented. However, the Trust serves as a
pass-through entity, with expenses for depreciation, depletion, and
amortization, interest and income taxes being based on the status
and elections of the Trust unitholders. General and administrative
expenses, production taxes or any other allowable costs are charged
to the Trust only when cash has been paid for those expenses. In
addition, the Royalty Interests are not burdened by field and lease
operating expenses. Thus, the statement shows distributable income,
defined as income of the Trust available for distribution to the
Trust unitholders before application of those unitholders’
additional expenses, if any, for depreciation, depletion, and
amortization, interest and income taxes. The revenues are reflected
net of existing royalties and overriding royalties and have been
reduced by gathering/post-production expenses.
Revenue and Expenses:
The Trust serves as a pass-through entity, with items of depletion,
interest income and expense, and income tax attributes being based
upon the status and election of the unitholders. Thus, the
Statements of Distributable Income show income available for
distribution before application of those unitholders’ additional
expenses, if any, for depletion, interest income and expense, and
income taxes.
The Trust uses the accrual basis to recognize revenue, with royalty
income recorded as reserves are extracted from the Underlying
Properties and sold. Expenses are recognized when paid.
Royalty Interest in Gas Properties:
The
Royalty interest in gas properties is assessed to determine whether
the net capitalized cost is impaired, whenever events or changes in
circumstances indicate that its carrying amount may not be
recoverable, pursuant to ASC Topic 360, Property, Plant
and Equipment. The Trust determines whether an impairment
charge is necessary to its investment in the Royalty interest in
gas properties if total capitalized costs, less accumulated
amortization, exceed undiscounted future net revenues attributable
to proved gas reserves of the Underlying Properties. Determination
as to whether and how much an asset is impaired involves estimates
of fair value, which is determined based on discounted cash flow
techniques using assumptions including projected revenues, future
commodity prices, production costs, and market-specific average
cost of capital. Estimates of undiscounted future net revenues
attributable to proved gas reserves utilize NYMEX forward pricing
curves. If required, the Trust will recognize an impairment charge
to the extent that the net capitalized costs exceed the discounted
fair value of the investment in net profits interests attributable
to proved gas reserves of the Underlying Properties. Any such
impairment charge would not reduce Distributable Income, although
it would reduce Trust Corpus. At December 31, 2019, the
Underlying Properties were impaired by approximately $25 million
primarily as a result of the decrease in the futures prices of
natural gas. No impairment in the Underlying Properties has been
recognized during the quarter ended September 30, 2020.
Significant dispositions or abandonment of the Underlying
Properties are charged to Royalty Interests and the Trust
Corpus.
Amortization of the Royalty interest in gas properties is
calculated on a units-of-production basis, whereby the Trust’s cost
basis in the properties is divided by Trust total 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 conveyance of the Royalty Interests to the Trust was accounted
for as a purchase transaction. The $352,100,000 reflected in the
Statements of Assets, Liabilities and Trust Corpus as Royalty
interest in gas properties represents 17,605,000 Trust units valued
at $20.00 per unit. The carrying value of the Trust’s investment in
the Royalty Interests is not necessarily indicative of the fair
value of such Royalty Interests.
Item 3. Quantitative and Qualitative
Disclosures about Market Risk.
As a “smaller reporting company” as defined in Item 10 of
Regulation S-K, the Trust is not required to provide information
required by this Item.
Item 4. Controls and
Procedures.
Evaluation
of Disclosure Controls and Procedures. The Trustee
maintains disclosure controls and procedures designed to ensure
that information required to be disclosed by the Trust in the
reports that it files or submits under the Securities Exchange Act
of 1934, as amended (the “Act”), is recorded, processed, summarized
and reported within the time periods specified in the SEC’s
rules and forms promulgated by the SEC. Disclosure controls
and procedures include controls and procedures designed to ensure
that information required to be disclosed by the Trust in the
reports that it files or submits under the Act is accumulated and
communicated by Greylock Production to The Bank of New York Mellon
Trust Company, N.A., as Trustee of the Trust, and its employees who
participate in the preparation of the Trust’s periodic reports as
appropriate to allow timely decisions regarding required
disclosure.
As of the end of the period covered by this report, the Trustee
carried out an evaluation of the Trustee’s disclosure controls and
procedures. Sarah Newell, as Trust Officer of the Trustee, has
concluded that the disclosure controls and procedures of the Trust
are effective.
Certain
characteristics of the Trust may limit the effectiveness of the
disclosure controls and procedures established by the
Trustee. The limitations include the facts that:
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Greylock Production and its consolidated subsidiaries manage
virtually all of the information relating to the Trust, including
all information regarding (i) historical operating data,
production volumes, the number of producing wells and acreage, the
marketing and sale of production, operating and capital
expenditures, environmental matters and other potential expenses
and liabilities, and the effects of regulatory matters and changes,
(ii) plans for future operating and capital expenditures and
(iii) geological data relating to reserves, and the Trustee
necessarily relies on Greylock Production for all such information;
and |
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The Trustee necessarily relies upon the independent reserve
engineer as an expert with respect to the annual reserve report,
which includes projected production, operating expenses and capital
expenses. |
Other
than reviewing the financial and other information provided to the
Trust by Greylock Production and the independent reserve
engineer, the Trustee has made no independent or direct
verification of this financial or other information.
The Trustee does not intend to expand its responsibilities beyond
those permitted or required by the Trust Agreement and those
required under applicable law.
The
Trustee does not expect that the Trustee’s disclosure controls and
procedures or the Trustee’s internal control over financial
reporting will prevent all errors or all fraud. Further, the design
of disclosure controls and procedures and internal control
over financial reporting must reflect the fact that there are
resource constraints, and the benefits of controls must be
considered relative to their costs. Because of the inherent
limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of
fraud, if any, have been detected.
Changes
in Internal Control over Financial Reporting. During the
quarter ended September 30, 2020, there was no change in the
Trustee’s internal control over financial reporting that has
materially affected, or is reasonably likely to materially affect,
the Trustee’s internal control over financial reporting relating to
the Trust. The Trustee notes for purposes of clarification that it
has no authority over, and makes no statement concerning, the
internal control over financial reporting of Greylock Energy.
PART II-OTHER
INFORMATION
Item 1A. Risk Factors.
Risk factors relating to the Trust are contained in Item 1A of the
2019 Form 10-K. Except as set forth below, no material changes
to such risk factors have occurred since the filing of such
report.
The COVID-19 pandemic could materially adversely affect
proceeds to the Trust and cash distributions to
unitholders.
The recent outbreak of the novel form
of coronavirus known as COVID-19 and its development into a global
pandemic has had, and is likely to continue to have, a negative
impact on worldwide economic and commercial activity and financial
markets, as well as global demand for natural gas. COVID-19 and the
responses by federal, state and local governmental authorities to
the pandemic have also resulted in significant business and
operational disruptions, including business closures, supply chains
disruptions, travel restrictions, stay-at-home orders and
limitations on the availability of workforces. The full impact of
the COVID-19 pandemic is unknown and is rapidly evolving. The
extent to which the COVID-19 pandemic negatively impacts Greylock
Energy will depend on the severity, location and duration of the
effects and spread of COVID-19, the actions undertaken by federal,
state and local governments and health officials to contain the
virus or treat its effects, and how quickly and to what extent
economic conditions improve and normal business and operating
conditions resume. A prolonged period of low natural gas prices
will adversely affect Greylock Energy. If commodity prices for
natural gas remain at reduced levels, cash distributions to
unitholders will be substantially lower than historical
distributions, and in certain periods in which cash proceeds to the
Trust are insufficient to cover Trust expenses, there may be no
distribution to unitholders, which could result in the early
termination of the Trust as discussed in “Overview—Potential Early
Termination of the Trust” in Part I, Item 2 of this
report. For example, there were no distributions to unitholders for
the quarters ended March 31, 2020 or June 30, 2020, as
Trust expenses exceeded net revenues to the Trust. Moreover,
continued low natural gas prices may ultimately reduce the amount
of natural gas that is economic to produce from the Underlying
Properties. As a result, the operator of any of the
Underlying Properties
could determine during periods of low natural gas prices to shut in
or curtail production from wells on the Underlying Properties. In
addition, the operator of the Underlying Properties could determine
during periods of low natural gas prices to plug and abandon
marginal wells that otherwise may have been allowed to continue to
produce for a longer period under conditions of higher prices.
Specifically, Greylock Production may abandon any well or property
if it reasonably believes that the well or property can no longer
produce natural gas in commercially economic quantities. This could
result in termination of the portion of the royalty interest
relating to the abandoned well or property, and Greylock Production
would have no obligation to drill a replacement well. In making
such decisions, Greylock Production is required under the
applicable conveyance to act as a reasonably prudent operator in
the AMI under the same or similar circumstances as it would act if
it were acting with respect to its own properties, disregarding the
existence of the Royalty Interests as burdens affecting such
property. The volatility of natural gas prices also reduces the
accuracy of estimates of future cash distributions to Trust
unitholders.
To the extent the COVID-19 pandemic adversely affects production
from the Underlying Properties or Greylock
Energy’s business, results of
operations and financial condition, it may also have the effect of
heightening many of the other risks described in the Trust’s 2019
Form 10-K.
The Trust units have been delisted from the New York Stock
Exchange and are traded on the OTC market. It will likely be more
difficult for unitholders to sell the Trust units or to obtain
accurate quotations of the Trust units.
The
Trust units ceased trading on the NYSE on July 30, 2020 and
transitioned to OTC Pink Market, which is operated by OTC
Markets Group Inc. (“OTC Pink”), effective with the opening of
trading on July 31, 2020 under the trading symbol “ECTM”. The
Trust can provide no assurance that any trading market for the
Trust units will exist on the OTC Pink or that current trading
levels will be sustained or not diminish. Securities traded on the
over-the-counter markets are typically less liquid than stocks that
trade on the NYSE. Trading on the OTC Pink may negatively affect
the trading price and liquidity of the Trust units and could result
in larger spreads in the bid and ask prices for Trust units.
Unitholders may find it difficult to resell their Trust units due
to the delisting.
Item 6.
Exhibits.
The exhibits below are filed or furnished herewith or incorporated
herein by reference.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
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ECA
MARCELLUS TRUST I |
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By: |
THE
BANK OF NEW YORK MELLON TRUST |
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COMPANY,
N.A., trustee |
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By: |
/s/
SARAH
NEWELL |
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Sarah
Newell |
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Vice President |
Date: November 16, 2020
The registrant, ECA Marcellus Trust I, has no principal executive
officer, principal financial officer, board of directors or persons
performing similar functions. Accordingly, no additional signatures
are available, and none have been provided. In signing the report
above, the Trustee does not imply that it has performed any such
function or that such function exists pursuant to the terms of the
Trust agreement under which it serves.
APPENDIX A
GLOSSARY OF CERTAIN TERMS
The following are definitions of certain significant terms used in
this report. Other terms are defined in the text of this
report.
AMI
- The area of mutual interest, or AMI, consisted of the Marcellus
Shale formation in approximately 121 square miles of property
located in Greene County, Pennsylvania in which Legacy ECA had
leased approximately 9,300 acres and owned substantially all
of the working interests at the date of formation of the Trust.
Legacy ECA was obligated to drill the 52 development wells from
drill sites on approximately 9,300 leased acres in the AMI. Until
Legacy ECA satisfied its drilling obligation on November 30,
2011, it was not permitted to drill and complete any well in the
Marcellus Shale formation within the AMI for its own account.
Basis
- The difference between the spot or cash price and the futures
price of the same or related commodity. For natural gas, basis
equals the local cash market price minus the price of the nearby
NYMEX natural gas futures contract.
Completion
- (or its derivatives) means that the well has been perforated,
stimulated, tested and permanent equipment for the production of
natural gas has been installed.
Development
Agreement - An agreement under which Legacy ECA was
obligated to drill all of the PUD Wells no later than
March 31, 2014. In order to secure the estimated amount of the
drilling costs for the Trust’s interests in the PUD Wells, Legacy
ECA granted to the Trust a lien on Legacy ECA’s interest in the
Marcellus Shale formation in the AMI, excluding the Producing Wells
and any other wells which were producing and not subject to the
Royalty Interests.
Equivalent
PUD Well - is defined as a well that is drilled
horizontally in the Marcellus formation for a lateral distance of
2,500 feet measured from the midpoint of the curve to the end of
the lateral multiplied by the working interest held by Legacy
ECA. Wells with a horizontal lateral less than 2,500 feet
count as fractional wells in proportion to the total lateral length
divided by 2,500 feet. Wells with a horizontal lateral
greater than 2,500 feet (subject to a maximum of 3,500 feet) count
as fractional wells in proportion to the total lateral length
divided by 2,500 feet.
Gas
- means natural gas and all other gaseous hydrocarbons, excluding
condensate, butane, and other liquid and liquefiable components
that are actually removed from the Gas stream by separation,
processing or other means.
MMBtu
- One million British Thermal Units.
Mcf
- One thousand cubic feet of natural gas.
MMcf
- One million cubic feet of natural gas.
Perpetual
Royalty Interests—a term that collectively references
the Perpetual PDP Royalty Interests and the Perpetual PUD Royalty
Interests.
Private
Investors - the persons described
as the “Private Investors” in the Prospectus.
Prospectus
- the prospectus dated July 1, 2010 and filed on July 1,
2020 with the SEC pursuant to Rule 424(b) under the
Securities Act of 1933, as amended, relating to the initial public
offering of the Trust units.
SEC
- means the United States Securities and Exchange Commission.
Subject
Gas - means Gas from the Marcellus Shale formation from
any Producing Well or PUD Well.
Working
Interest - The right granted to the lessee of a property
to explore for and to produce and own oil, gas, or other minerals.
The working interest owners bear the exploration, development and
operating costs on either a cash, penalty or carried basis.
