Item 1. Financial Statements.
ECA
Marcellus Trust I
Statements
of Assets, Liabilities, and Trust Corpus
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June 30,
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December 31,
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2020
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2019
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ASSETS:
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Cash
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$
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854,324
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$
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770,833
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Royalty income receivable
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306,801
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738,201
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Royalty interest in gas properties
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352,100,000
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352,100,000
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Accumulated
amortization
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(335,816,380
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)
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(335,055,782
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)
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Net royalty interest in gas properties
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16,283,620
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17,044,218
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Total
Assets
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$
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17,444,745
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$
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18,553,252
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LIABILITIES AND TRUST CORPUS:
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Liabilities:
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Distributions payable to unitholders
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$
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0
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$
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335,172
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Trust corpus; 17,605,000 common units authorized, issued and outstanding
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17,444,745
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18,218,080
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Total
Liabilities and Trust Corpus
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$
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17,444,745
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$
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18,553,252
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See
notes to the unaudited financial statements.
ECA
Marcellus Trust I
Statements
of Distributable Income
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Six Months Ended
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Three Months Ended
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June
30,
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June
30,
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2020
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2019
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2020
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2019
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Royalty income
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$
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780,477
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$
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2,692,050
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$
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306,801
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$
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1,013,069
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Net proceeds to Trust
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$
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780,477
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$
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2,692,050
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$
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306,801
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$
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1,013,069
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General and administrative expense
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(798,331
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)
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(697,115
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)
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(285,062
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)
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(271,538
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)
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Interest income
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4,437
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11,220
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884
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5,464
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Income available for distribution prior to cash reserves
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$
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(13,417
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)
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$
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2,006,155
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$
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22,623
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$
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746,995
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Cash reserves used (withheld) by Trustee
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16,082
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(215,916
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)
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(21,964
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)
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(90,000
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)
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Interest used (withheld) on cash
reserves
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(2,665
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)
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-
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(659
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)
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-
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Distributable income available to unitholders
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$
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-
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$
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1,790,239
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$
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0
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$
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656,995
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Distributable income per common unit
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(17,605,000 units authorized and outstanding)
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$
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0.000
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$
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0.101
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$
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0.000
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$
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0.037
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See
notes to the unaudited financial statements.
ECA
Marcellus Trust I
Statements
of Trust Corpus
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Three Months Ended
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June
30,
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2020
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2019
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Trust Corpus, Balance at April 1,
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$
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17,787,028
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$
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45,988,452
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Cash reserves (used) withheld, including interest
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22,623
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90,000
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Distributable income
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0
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656,995
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Distributions paid or payable to unitholders
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-
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(650,471
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)
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Amortization of royalty interest in gas properties
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(364,906
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)
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(976,996
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)
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Impairment of royalty interest in gas properties
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-
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-
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Trust Corpus, Balance at June
30,
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$
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17,444,745
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$
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45,107,980
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Six Months Ended
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June
30,
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2020
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2019
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Trust Corpus, Balance at January 1,
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$
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18,218,080
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$
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46,933,314
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Cash reserves (used) withheld, including interest
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(13,417
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)
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215,916
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Distributable income
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-
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1,790,239
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Distributions paid or payable to unitholders
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678
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(1,787,377
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)
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Amortization of royalty interest in gas properties
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(760,596
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)
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(2,044,112
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)
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Impairment of royalty interest in gas properties
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-
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-
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Trust Corpus, Balance at June
30,
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$
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17,444,745
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$
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45,107,980
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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, 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 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 six months ended June 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 June 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, LLC and certain of
its wholly-owned subsidiaries (“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:
|
•
|
risks incident to the operation of natural gas wells;
|
|
•
|
future production costs;
|
|
•
|
the effects of existing and future laws and regulatory
actions;
|
|
•
|
the effects of changes in commodity prices;
|
|
•
|
conditions in the capital markets;
|
|
•
|
competition in the energy industry;
|
|
•
|
the uncertainty of estimates of natural gas reserves and
production; and
|
|
•
|
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, 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 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 March 31, 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 Spnosor has been permitted to increase the
Post-Production Services Fee to the extent necessary to recover certain capital expenditures in the GCGS.
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.
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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. 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 COVID-19 is unknown and is rapidly evolving. The extent to which COVID-19 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 during the first
six months were $780,477. Greylock currently estimates, based on estimates of natural gas reserves and future prices for second
half of the year, that gross proceeds to the Trust attributable to Royalty Interest over the four consecutive quarters ended December
31,2020 is projected to exceed $1.5 million. Nevertheless, if production or market conditions were to decline below expectations
during 2020, gross proceeds to the Trust attributable to the Royalty Interest 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 June 30, 2020 compared to the
Three Months Ended June 30, 2019
Distributable income for the three months
ended June 30, 2020 decreased to $0 from $0.7 million for the three months ended June 30, 2019. Compared to the quarter ended
June 30, 2019, royalty income decreased by $0.7 million while general and administrative expenses remained relatively flat.
Royalty income decreased to $0.3 million
for the three months ended June 30, 2020 from $1.0 million for the three months ended June 30, 2019, a decrease of $0.7 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 June 30, 2020 decreased $0.90 per Mcf to $0.47 per Mcf as compared to $1.37 per Mcf for the three months ended June
30, 2019. The decrease in the average sales price realized for natural gas production was due primarily to a lower average sales
price and a slight increase in other post-production costs during the period. The average sales price, before post-production
costs, decreased from $2.36 per Mcf for the three months ended June 30, 2019 to $1.48 per Mcf for the three months ended June
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 $1.71 per MMBtu compared to the weighted average monthly closing NYMEX price of $2.64 per MMBtu for the three months
ended June 30, 2019. This decrease was partially offset due to an increase in the average Basis per MMBtu in the current period
at minus $0.27 per MMBtu compared to the prior period Basis of minus $0.35 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 $1.01 per Mcf in the current period
compared to $0.99 per Mcf for the three-month period ended June 30, 2019. These increased costs were partially offset
by slightly lower post-production electricity fees.
Production
decreased 12.3% from 739 MMcf for the three months ended June 30, 2019 to 649 MMcf for the three months ended June 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 June 30, 2020 remained flat at approximately $0.3 million for the three
months ended June 30, 2019 and 2020.
For the Six Months Ended June 30, 2020 compared to the Six
Months Ended June 30, 2019
Distributable income for the six months
ended June 30, 2020 decreased to $0 from $1.8 million for the six months ended June 30, 2019. Compared to the six months ended
June 30, 2019, royalty income decreased by $1.9 million and general and administrative expenses increased by $0.1 million.
Royalty income decreased to $0.8 million
for the six months ended June 30, 2020 from $2.7 million for the six months ended June 30, 2019, a decrease of $1.9 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 six months
ended June 30, 2020 decreased $1.16 per Mcf to $0.58 per Mcf as compared to $1.74 per Mcf for the six months ended June 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 $2.68 per Mcf for the six months ended June 30, 2019 to $1.59 per Mcf for the six months ended June 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 $1.84 per MMBtu compared to the weighted average monthly closing NYMEX price of $2.91 per MMBtu for the six months ended
June 30, 2019. This decrease was partially offset due to a slight improvement in the average Basis per MMBtu in the current period
at minus $0.29 per MMBtu compared to the prior period Basis of minus $0.31 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 $1.01 per Mcf in the current period
compared to $0.94 per Mcf for the six-month period ended June 30, 2019. During the six months ended June 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 12.6% from 1,547 MMcf
for the six months ended June 30, 2019 to 1,352 MMcf for the six months ended June 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 six months ended June 30, 2020 increased by $0.1 million to approximately $0.8 million compared
to $0.7 million for the six months ended June 30, 2019. This increase was the result of higher professional service fees. The
current addition to the cash reserve of $2,665 of interest also decreased distributable income for the six months ended June 30,
2020.
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. As there was no distribution available for the quarter ended June 30, 2020, the Trustee
withheld approximately $22,000 of the cash reserve and withheld $659 of interest earned on the cash reserve balance. The Trustee
has withheld from the funds otherwise available for distribution a total amount of $578,504 plus $5,151 of interest related to
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 March 31, 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.