Item 1. Financial Statements.
ECA Marcellus Trust I |
Statements of Assets, Liabilities, and Trust Corpus |
| |
March 31, | | |
December 31, | |
| |
2023 | | |
2022 | |
| |
| (Unaudited) | | |
| | |
ASSETS: | |
| | | |
| | |
Cash | |
$ | 2,070,672 | | |
$ | 2,169,420 | |
Royalty income receivable | |
| 1,165,543 | | |
| 2,387,846 | |
Royalty interest in gas properties | |
| 352,100,000 | | |
| 352,100,000 | |
Accumulated amortization | |
| (339,769,886 | ) | |
| (339,477,839 | ) |
Net royalty interest in gas properties | |
| 12,330,114 | | |
| 12,622,161 | |
| |
| | | |
| | |
Total Assets | |
$ | 15,566,329 | | |
$ | 17,179,427 | |
| |
| | | |
| | |
LIABILITIES AND TRUST CORPUS: | |
| | | |
| | |
Liabilities: | |
| | | |
| | |
Distributions payable to unitholders | |
$ | 755,157 | | |
$ | 2,187,332 | |
Trust corpus; 17,605,000 common units authorized, issued and
outstanding | |
| 14,811,172 | | |
| 14,992,095 | |
| |
| | | |
| | |
Total Liabilities and Trust Corpus | |
$ | 15,566,329 | | |
$ | 17,179,427 | |
See notes to the unaudited financial statements.
ECA Marcellus Trust I |
Statements of Distributable Income |
(Unaudited) |
| |
Three Months Ended | |
| |
March 31 | |
| |
2023 | | |
2022 | |
Royalty income | |
$ | 1,165,543 | | |
$ | 2,100,831 | |
| |
| | | |
| | |
Net proceeds to Trust | |
$ | 1,165,543 | | |
$ | 2,100,831 | |
| |
| | | |
| | |
General and administrative expense | |
| (333,080 | ) | |
| (357,043 | ) |
Interest income | |
| 29,507 | | |
| 59 | |
| |
| | | |
| | |
Income available for distribution prior to cash reserves | |
$ | 861,970 | | |
$ | 1,743,847 | |
| |
| | | |
| | |
Cash reserves withheld by Trustee | |
| (90,000 | ) | |
| (90,000 | ) |
Interest withheld on cash reserves | |
| (16,813 | ) | |
| (33 | ) |
| |
| | | |
| | |
Distributable income available to unitholders | |
$ | 755,157 | | |
$ | 1,653,814 | |
| |
| | | |
| | |
Distributable income per common unit (17,605,000 units
authorized and outstanding) | |
$ | 0.043 | | |
$ | 0.094 | |
See notes to the unaudited financial statements.
ECA Marcellus Trust I |
Statements of Trust Corpus |
(Unaudited) |
| |
Three Months Ended | |
| |
March 31, | |
| |
2023 | | |
2022 | |
Trust Corpus, Balance at January 1, | |
$ | 14,992,095 | | |
$ | 15,892,890 | |
Cash reserves withheld, including interest | |
| 106,813 | | |
| 90,033 | |
Distributable income | |
| 755,157 | | |
| 1,653,814 | |
Distributions paid or payable to unitholders | |
| (750,845 | ) | |
| (1,657,598 | ) |
Amortization of royalty interest in gas properties | |
| (292,047 | ) | |
| (339,212 | ) |
Impairment of royalty interest in gas properties | |
| - | | |
| - | |
| |
| | | |
| | |
Trust Corpus, Balance at March 31, | |
$ | 14,811,172 | | |
$ | 15,639,928 | |
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.
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 months ended March 31, 2023 and 2022 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, 2022. The December 31,
2022 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 estimates of future pricing, which are generally developed based on 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. No impairment in the Underlying
Properties was recognized during 2022 or during the three months ended March 31, 2023. 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. As of March 31, 2023, no amounts have been loaned to the Trust pursuant
to 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 March 31, 2023.
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. The annual fee was $167,027 in 2022 and is $171,743 in 2023. 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, 2022 (the “2022
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 at http://ect.q4web.com/home/default.aspx.
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; |
| • | the
occurrence or threat of epidemic or pandemic diseases, such as the COVID-19 pandemic, or
any government response to such occurrence or threat; |
| • | the armed conflict between Russia and Ukraine and the potential
destabilizing effect such conflict may pose for global natural gas 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 2022 Form 10-K. |
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.
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, 2022, 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.
Greylock Production has an agreement with Columbia
Gas Transmission, LLC (“Columbia”) to provide firm transportation downstream of the GCGS for 45,000 MMBtu per day (the
“Transportation Agreement”). The Transportation Agreement has been in effect since August 1, 2011 and provides for firm
transportation at Columbia’s filed tariff rate, which is currently $0.3154 per MMBtu at one hundred percent load factor. As amended
by Greylock Production and Columbia in September 2020, the Transportation Agreement will terminate on December 31, 2024.
Greylock Production and Columbia had an additional
agreement, as amended in September 2020, to provide firm transportation downstream of the GCGS for 52,550 MMBtu per day that will
utilize Columbia’s Mountaineer XPress Project (the “MXP Agreement”). This firm transportation arrangement went into
effect on January 18, 2019, and was at a fixed demand rate of $0.50 per MMBtu at one hundred percent load factor plus applicable
Columbia tariff surcharges until its termination on December 31, 2022.
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 was not
charged for the costs associated with modifying the firm transportation agreements with Columbia, including the difference between the
base negotiated rate and the increased negotiated rate in September 2020 and December 2021 under the MXP Agreement.
On July 31, 2020 Columbia submitted an application
to the Federal Energy Regulatory Commission (“FERC”) to increase certain tariff rates effective February 1, 2021. The
FERC issued an Order Accepting and Suspending Filing, Subject to Refund on August 31, 2021. As proposed, this tariff filing would
have increased the tariff rate from $0.23/MMBtu to $0.41/MMBtu on the applicable contracts. The tariff filing was protested at the FERC,
and on February 25, 2022, the FERC approved the Stipulation and Agreement of Settlement and Motion for Shortened Comment Period
submitted by Columbia, which resolved all remaining issues set for hearing in the consolidated proceedings and adjusted the tariff rate
to $0.3154/MMBtu effective December 1, 2021, requiring Columbia to issue a refund on the difference between the initial increased
rate and the final rate. Greylock Production received the refund from Columbia in April 2022 and distributed a refund of $102,075
to the Trust, which was reflected in Royalty Income during the year ended December 31, 2022.
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:
| • | natural gas prices received; |
| • | the volume and Btu rating of natural gas produced and sold; |
| • | post-production costs and any applicable taxes; and |
| • | 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 2020 and 2021 attributable primarily to the economic effects of the COVID-19 pandemic,
followed by the gradual return of demand for natural gas as economies reopened. COVID-19 and the responses by federal, state and local
governmental authorities to the pandemic 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. Meanwhile, the
outbreak of armed conflict between Russia and Ukraine in February 2022 and the subsequent sanctions imposed on Russia and other
actions have created significant market uncertainties, including uncertainties around potential supply disruption for oil and natural
gas, which has further enhanced the volatility in natural gas prices since early 2022. The extent and duration of the military action,
sanctions and resulting market disruptions could be significant, including significant volatility in commodity prices, supply of energy
resources, instability in financial markets, supply chain interruptions, political and social instability, changes in consumer or purchaser
preferences as well as increases in cyberattacks and espionage, each of which could have a substantial impact on the global economy and
consequently the Trust’s business for an unknown period of time. Although these events are not currently expected to have a material
impact on the Trust’s business, cash flows, liquidity or financial condition, neither Greylock nor the Trustee can predict the
progress or outcome of the military conflict in Ukraine, as the conflict, and any resulting government reactions, are evolving and beyond
the control of Greylock or the Trust. The recent rise in the rate of inflation, leading to increases in interest rates and a potentially
recessionary economic environment in the United States, also could have a negative effect on the demand for natural gas. Given the dynamic
nature of these events, neither Greylock Energy nor the Trust can reasonably estimate the period of time that these market conditions
will persist. As a result, prices for natural gas, and therefore the Trust’s quarterly cash distributions, might not be maintained
for any significant period of time. 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. For example, there were no distributions
to unitholders for the quarters ended March 31, 2020, June 30, 2020, or September 30, 2020 as Trust expenses exceeded
net revenues to the Trust.
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 Section 1446 of the Internal
Revenue Code of 1986 (the “IRC”), 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 a 30% rate 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. The Tax Cuts and Jobs Act (the “TCJA”) enacted in December 2017 treats a non-U.S. holder’s gain on the
sale of Trust units 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 sale of such Trust units. The TCJA also requires a 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 or another exception is available. Pursuant to final Treasury Regulations issued on October 7, 2020, this
withholding obligation applies to transfers of units in publicly traded partnerships such as the Trust (which is classified as a partnership
for federal and state income tax purposes) occurring on or after January 1, 2022.
Results of Trust Operations
For the Three Months Ended March 31, 2023 compared to the
Three Months Ended March 31, 2022
Distributable income for the three months ended
March 31, 2023 decreased to $0.8 million from $1.7 million for the three months ended March 31, 2022. Compared to the quarter
ended March 31, 2022, royalty income decreased by $0.9 million while general and administrative expenses remained flat.
Royalty income decreased to $1.2 million for the
three months ended March 31, 2023 from $2.1 million for the three months ended March 31, 2022, a decrease of $0.9 million.
This decrease was due to a decrease in the average sales price between periods and a decrease in production.
The average price realized for the three months
ended March 31, 2023 decreased $1.31 per Mcf to $2.18 per Mcf as compared to $3.49 per Mcf for the three months ended March 31,
2022. The decrease in the average sales price realized for natural gas production was due to a lower average sales price offset partially
from a decrease in other post-production costs during the period. The average sales price, before post-production costs, decreased from
$4.39 per Mcf for the three months ended March 31, 2022 to $2.77 per Mcf for the three months ended March 31, 2023. The decrease
in price was the result of a decrease in the weighted average monthly closing NYMEX price for the current period to $3.44 per MMBtu
compared to the weighted average monthly closing NYMEX price of $4.92 per MMBtu for the three months ended March 31, 2022. The average
Basis per MMBtu realized for the three months ended March 31, 2023 decreased $0.09 per Mcf to minus $0.77 per Mcf as compared to
minus $0.68 per Mcf for the three months ended March 31, 2022.
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 $0.59 per Mcf in the current period compared
to $0.90 per Mcf for the three-month period ended March 31, 2022 primarily related to a decrease in firm transportation
cost.
Production decreased 11.3% from 602 MMcf for the
three months ended March 31, 2022 to 533 MMcf for the three months ended March 31, 2023 due to normal production declines.
General and administrative
expenses paid by the Trust for each of the three-month periods ended March 31, 2022 and March 31, 2023 were $0.3 million. Cash
reserves of $0.1 million were withheld for each of the three-month periods ended March 31, 2022 and March 31, 2023.
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.
Since
the first quarter of 2019, the Trustee has been gradually building a cash reserve for the payment of future expenses and liabilities
of the Trust to 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 November 2021,
the Trustee notified the Sponsor that the Trustee had determined to increase the targeted cash reserve to approximately $3.8 million.
The Trustee achieved its initial target of $1.8 million in the quarter ended December 31, 2022 and currently plans to withhold
$90,000 per quarter until a total of approximately $3.8 million in cash reserves is withheld. For
the quarter ended March 31, 2023, the Trustee withheld $90,000 from the funds otherwise available for distribution and withheld
a minimal amount of interest earned on the cash reserve balance. As of March 31, 2023, the Trustee has withheld from the funds otherwise
available for distribution a total amount of approximately $1.9 million plus a minimal amount of interest toward the building of the
$3.8 million cash reserve. 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.
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 2022 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 estimates of future pricing,
which are generally developed based upon 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. No impairment in the Underlying Properties was recognized during the quarter ended March 31, 2023. 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.