SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended July 31, 2008 or
[ ] Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from __________ to ___________ .
Commission file number 1-8245
NORTH EUROPEAN OIL ROYALTY TRUST
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(Exact name of registrant as specified in its charter)
Delaware 22-2084119
----------------------- --------------------------
(State of organization) (I.R.S. Employer I.D. No.)
Suite 19A, 43 West Front Street, Red Bank, New Jersey 07701
-------------------------------------------------------------
(Address of principal executive offices)
(732) 741-4008
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes X No
----- -----
-2-
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer, or a
smaller reporting company. See the definitions of "large accelerated filer,"
"accelerated filer," and "smaller reporting company" in Rule 12b-2 of the
Exchange Act. (Check one):
Large accelerated filer Accelerated filer X
----- -----
Non-accelerated filer Smaller reporting company
----- -----
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act). Yes No X
----- -----
Class Outstanding at July 31, 2008
---------------------------- ------------------------------
Units of Beneficial Interest 9,190,590
-3-
PART I -- FINANCIAL INFORMATION
-------------------------------
Item 1. Financial Statements.
--------------------
STATEMENTS OF ASSETS, LIABILITIES AND TRUST CORPUS (NOTE 1)
-----------------------------------------------------------
JULY 31, 2008 AND OCTOBER 31, 2007
----------------------------------
2008 2007
----------------- ----------------
(Unaudited)
Current assets - - Cash and
cash equivalents $ 8,294,606 $ 5,912,620
Producing gas and oil royalty rights,
net of amortization (Notes 1 and 2) 1 1
------------ ------------
Total Assets $ 8,294,607 $ 5,912,621
============ ============
Current liabilities - - Distributions
to be paid to unit owners $ 8,179,625 $ 5,881,978
Trust corpus (Notes 1 and 2) 1 1
Undistributed earnings 114,981 30,642
------------ ------------
Total Liabilities and Trust Corpus $ 8,294,607 $ 5,912,621
============ ============
The accompanying notes are an integral part
of these financial statements.
-4-
STATEMENTS OF REVENUE COLLECTED AND EXPENSES PAID (NOTE 1)
-----------------------------------------------------------
FOR THE THREE MONTHS ENDED JULY 31, 2008 AND 2007
-------------------------------------------------
2008 2007
----------------- ----------------
(Unaudited)
German gas, oil and sulfur
royalties received $ 8,463,341 $ 5,402,889
------------ ------------
Interest income 17,332 57,459
------------ ------------
Trust expenses (253,814) (195,843)
------------ ------------
Net income $ 8,226,859 $ 5,264,505
============ ============
Net income per unit $ .90 $ .57
====== ======
Distributions per unit paid or
to be paid to unit owners $ .89 $ .58
====== ======
The accompanying notes are an integral part
of these financial statements.
-5-
STATEMENTS OF REVENUE COLLECTED AND EXPENSES PAID (NOTE 1)
------------------------------------------------------------
FOR THE NINE MONTHS ENDED JULY 31, 2008 AND 2007
--------------------------------------------------
2008 2007
----------------- -----------------
(Unaudited)
German gas, oil and sulfur
royalties received $25,039,400 $21,430,819
------------ ------------
Interest income 77,666 168,362
------------ ------------
Trust expenses (861,476) (741,048)
------------ ------------
Net income $24,255,590 $20,858,133
============ ============
Net income per unit $2.64 $2.27
====== ======
Distributions per unit paid or
to be paid to unit owners $2.63 $2.27
====== ======
The accompanying notes are an integral part
of these financial statements.
-6-
STATEMENTS OF UNDISTRIBUTED EARNINGS (NOTE 1)
---------------------------------------------
FOR THE NINE MONTHS ENDED JULY 31, 2008 AND 2007
------------------------------------------------
2008 2007
----------------- ----------------
(Unaudited)
Balance, beginning of period $ 30,642 $ 35,590
Net income 24,255,590 20,858,133
------------ ------------
24,286,232 20,893,723
Less:
Current year distributions paid or
to be paid to unit owners 24,171,251 20,862,639
------------ ------------
Balance, end of period $ 114,981 $ 31,084
============ ============
The accompanying notes are an integral part
of these financial statements.
-7-
STATEMENTS OF CHANGES IN CASH AND CASH EQUIVALENTS (NOTE 1)
-----------------------------------------------------------
FOR THE NINE MONTHS ENDED JULY 31, 2008 AND 2007
------------------------------------------------
2008 2007
----------------- ---------------
(Unaudited)
Sources of cash and cash equivalents:
German gas, oil and sulfur royalties $25,039,400 $21,430,819
Interest income 77,666 168,362
------------ ------------
25,117,066 21,599,181
------------ ------------
Uses of cash and cash equivalents:
Payment of Trust expenses 861,476 741,048
Distributions paid 21,873,604 22,700,757
------------ ------------
22,735,080 23,441,805
------------ ------------
Net increase (decrease) in cash and
cash equivalents during the period 2,381,986 (1,842,624)
Cash and cash equivalents,
beginning of period 5,912,620 7,204,250
------------ ------------
Cash and cash equivalents, end of period $ 8,294,606 $ 5,361,626
============ ============
The accompanying notes are an integral part
of these financial statements.
-8-
NORTH EUROPEAN OIL ROYALTY TRUST
--------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
(Unaudited)
-----------
(1) Summary of significant accounting policies:
------------------------------------------
Basis of accounting -
-------------------
The accompanying financial statements of North European Oil Royalty
Trust the "Trust") present financial statement balances and financial
results on a modified cash basis of accounting, which is a
comprehensive basis of accounting other than accounting principles
generally accepted in the United States ("GAAP basis"). Cash basis
financial statements disclose revenue when cash is received and
expenses when cash is paid. GAAP basis financial statements disclose
income as earned and expenses as incurred, without regard to receipts
or payments. The modified cash basis of accounting is utilized to
permit the accrual for distributions to be paid to unit owners (those
distributions approved by the Trustees for the Trust). The Trust's
distributable income represents royalty income received by the Trust
during the period plus interest income less any expenses incurred by
the Trust, all on a cash basis. In the opinion of the Trustees, the
use of the modified cash basis of accounting provides a more
meaningful presentation to unit owners of the results of operations of
the Trust.
Producing gas and oil royalty rights -
------------------------------------
The rights to certain gas and oil royalties in Germany were transferred
to the Trust at their net book value by North European Oil Company
(the "Company") (see Note 2). The net book value of the royalty rights
has been reduced to one dollar ($1) in view of the fact that the
remaining net book value of royalty rights is de minimis relative to
annual royalties received and distributed by the Trust and does not
bear any meaningful relationship to the fair value of such rights or
the actual amount of proved producing reserves.
Federal income taxes -
--------------------
The Trust, as a grantor trust, is exempt from Federal income taxes
under a private letter ruling issued by the Internal Revenue Service.
-9-
Cash and cash equivalents -
-------------------------
Included in cash and cash equivalents are amounts deposited in bank
accounts and amounts invested in certificates of deposit and U. S.
Treasury bills with original maturities of three months or less from
the date of purchase.
From time to time, the amounts deposited in the Trusts bank accounts
may exceed the federally-insured limit.
Net income per unit -
-------------------
Net income per unit is based upon the number of units outstanding at
the end of the period. As of both July 31, 2008 and 2007, there were
9,190,590 units of beneficial interest outstanding.
(2) Formation of the Trust:
-----------------------
The Trust was formed on September 10, 1975. As of September 30, 1975,
the Company was liquidated and the remaining assets and liabilities of
the Company, including its royalty rights, were transferred to the
Trust. The Trust, on behalf of the owners of beneficial interest in
the Trust, holds overriding royalty rights covering gas and oil
production in certain concessions or leases in the Federal Republic
of Germany. These rights are held under contracts with local German
exploration and development subsidiaries of ExxonMobil Corp. and the
Royal Dutch/Shell Group of Companies. Under these contracts, the
Trust receives various percentage royalties on the proceeds of the
sales of certain products from the areas involved. At the present
time, royalties are received for sales of gas well gas, oil well gas,
crude oil, condensate and sulfur.
(3) Related party transactions:
---------------------------
John R. Van Kirk, the Managing Director of the Trust, provides office
space and office services to the Trust at cost. For such office space
and office services, the Trust reimbursed the Managing Director $7,494
and $6,985 in the third quarter of fiscal 2008 and 2007, respectively.
For such office space and office services, the Trust reimbursed the
Managing Director $21,240 and $17,748 in the first nine months of
fiscal 2008 and 2007, respectively.
As of January 1, 2007, Lawrence A. Kobrin, a Trustee of the Trust, was
named Senior Counsel at Cahill Gordon & Reindel LLP which serves as
counsel to the Trust. Prior to such time, Mr. Kobrin was a partner at
Cahill Gordon & Reindel LLP. For the third quarter of fiscal 2008 and
2007, the Trust paid Cahill Gordon & Reindel LLP $15,685 and $12,589
for legal services, respectively. For the first nine months of fiscal
2008 and 2007, the Trust paid Cahill Gordon & Reindel LLP $101,064 and
$53,195 for legal services, respectively.
As of November 1, 2006, John H. Van Kirk, the former Managing Trustee of
the Trust and the father of John R. Van Kirk, was named to the position
of Founding Trustee Emeritus. For his service in such capacity, he
earned $2,500 in the third quarters of fiscal 2008 and 2007 and $7,500
in the first nine months of fiscal 2008 and 2007.
-10-
(4) Employee Benefit Plan:
----------------------
The Trust has established a savings incentive match plan for employees
(SIMPLE IRA) that is available to all employees of the Trust, including
the Managing Director. The Trustees have authorized the Trust to make
contributions to the accounts of the employees, on a matching basis, of
up to 3% of cash compensation paid to each employee effective as of
January 1, 2008.
-11-
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
-------------------------------------------------
Executive Summary
-----------------
The Trust is a passive fixed investment trust which holds overriding
royalty rights, receives income under those rights from certain operating
companies, pays its expenses and distributes the remaining net funds to its
unit owners. The Trust does not engage in any business or extractive
operations of any kind in the areas over which it holds royalty rights and
is precluded from any such involvement by the Trust Agreement. There are no
requirements, therefore, for capital resources with which to make capital
expenditures or investments in order to continue the receipt of royalty
revenues by the Trust.
The properties of the Trust, which the Trust and Trustees hold pursuant
to the Trust Agreement on behalf of the unit owners, are overriding royalty
rights on sales of gas, sulfur and oil under certain concessions or leases in
the Federal Republic of Germany. The actual leases or concessions are held
either by Mobil Erdgas-Erdol GmbH ("Mobil Erdgas"), a German operating
subsidiary of the ExxonMobil Corp. ("ExxonMobil"), or by Oldenburgische
Erdolgesellschaft ("OEG"). In 2002 Mobil Erdgas and BEB Erdgas und Erdol
GmbH ("BEB"), a joint venture of ExxonMobil and the Royal Dutch/Shell Group
of Companies, formed a company ExxonMobil Production Deutschland GmbH
("EMPG") to carry out all exploration, drilling and production activities.
All sales activities are still handled by the operating companies, either
Mobil Erdgas or BEB.
The operating companies pay monthly royalties to the Trust based on
their sales of natural gas, sulfur and oil. Of these three products, natural
gas provides approximately 98% of the total royalties. The amount of
royalties paid to the Trust is based on four primary factors: the amount of
gas sold, the price of that gas, the area from which the gas is sold and the
exchange rate. The Oldenburg concession is the primary area from which the
natural gas, sulfur and oil are extracted and provides nearly 100% of all the
royalties received by the Trust. The Oldenburg concession (1,398,000 acres)
covers virtually the entire former Principality of Oldenburg and is located
in the federal state of Lower Saxony.
Under one set of rights covering the western part of the Oldenburg
concession (approximately 662,000 acres), the Trust receives a royalty
payment of 4% on gross receipts from sales by Mobil Erdgas of gas well gas,
oil well gas, crude oil and condensate (the "Mobil Agreement"). Under the
Mobil Agreement there is no deduction of costs prior to the calculation of
royalties from gas well gas and oil well gas, which together account for
approximately 99% of all the royalties under this agreement. Historically,
the Trust has received significantly greater royalty payments under the
Mobil Agreement due to the higher royalty rate specified by that agreement.
The Mobil Agreement also provides for the payment of a 2% royalty on
gross receipts from sales of sulfur provided the sulfur price is above a
level determined through the application of an index to the price of sulfur
at the time the Mobil Agreement was amended in 1979. The Trust had received
no sulfur royalties under this agreement for over ten years until the
preceding fiscal quarter. In the second and third quarters of fiscal 2008,
the Trust received $259,771 and $266,168, respectively. The reason behind
-12-
this sudden resumption in payments has been the substantial increase in
sulfur commodity prices. The Trust is unable to determine how long sulfur
prices will remain above the threshold price level and thus how long these
sulfur royalties may continue.
Under another set of rights covering the entire Oldenburg concession and
pursuant to the agreement with OEG, the Trust receives royalties at the rate
of 0.6667% on gross receipts from sales by BEB of gas well gas, oil well gas,
crude oil, condensate and sulfur (removed during the processing of sour gas)
less a certain allowed deduction of costs (the "OEG Agreement"). Under the
OEG Agreement, 50% of the field handling, treatment and transportation costs,
as reported for state royalty purposes, are deducted from the gross sales
receipts prior to the calculation of the royalty to be paid to the Trust. On
November 23, 2007, N.V. Nederlandse Gasunie (the state owned Dutch gas
distribution company) announced that it had reached an agreement with BEB
regarding the purchase by Gasunie of BEB's North German gas distribution and
transmission network. Preliminary informal discussions with OEG personnel
indicate that the pipeline sale should not affect the method of royalty
calculations. The Trust is continuing discussions with the operator to
obtain a formal confirmation that the sale will not affect the method of
royalty calculation.
The Trust also receives small amounts of royalties from a private lease
area, Grosses Meer, outside the Oldenburg concession. The German authorities
have requested that the operating companies conduct a reservoir analysis to
determine whether the royalties are being properly allocated based on the
locations of the gas reserves. Until such time as this issue is settled, the
payment of royalties from Grosses Meer has been suspended. In fiscal 2007,
the Trust received $79,348 in total royalties from Grosses Meer. In fiscal
2008, the Trust received $37,612 in royalties in the first quarter from
Grosses Meer.
The gas is sold to various distributors under long-term contracts which
delineate, among other provisions, the timing, manner, volume and price of
the gas sold. The pricing mechanisms contained in these contracts include a
delay factor of three to six months and use the price of light heating oil in
Germany as one of the primary pricing components. Since Germany must import
a large percentage of its energy requirements, the U.S. dollar price of oil
on the international market has a significant impact on the price of light
heating oil and a delayed impact on the price of gas. The Trust itself does
not have access to the specific sales contracts under which gas from the
Oldenburg concession is sold. These contracts are reviewed periodically on
behalf of the Trust by Ernst & Young AG to verify the correctness of
application of the Agreement formulas for the computation of royalty payments.
For unit owners, changes in the value of the Euro have both an immediate
and long-term impact. The immediate impact is from the exchange rate that is
applied at the time the royalties, paid to the Trust in Euros, are converted
into dollars at the time of their transfer from Germany to the United States.
A higher exchange rate would yield more dollars and a lower exchange rate
fewer dollars. The long-term impact relates to the mechanism of gas pricing.
Since oil on the international market is priced in dollars, a weaker Euro
would mean that oil imported into Germany is more expensive. A stronger Euro
would mean that oil imported into Germany is less expensive. These changes
in the price of oil in Germany are subsequently reflected in the price of
light heating oil, which is used as a component in the calculation of gas
prices in the contracts under which the gas is sold. The changes in German
domestic light heating oil prices are in turn reflected in gas prices with a
built-in delay of three to six months.
-13-
Seasonal demand factors affect the income from royalty rights insofar
as they relate to energy demands and increases or decreases in prices, but
on average they are not material to the regular annual income received under
the royalty rights.
The Trust has no means of ensuring continued income from overriding
royalty rights at their present level or otherwise. The Trust's current
consultant in Germany provides general information to the Trust on the German
and European economies and energy markets. This information provides a
context in which to evaluate the actions of the operating companies. In his
position as consultant, he receives reports from the operating companies with
respect to current and planned drilling and exploration efforts. However,
the unified exploration and production venture, EMPG, which provides the
reports to the Trust's consultant, continues to limit the information flow
to that which is required by German law.
The relatively low level of administrative expenses of the Trust limits
the effect of inflation on its financial prospects. Continued price
inflation would be reflected in sales prices, which with sales volumes form
the basis on which the royalties paid to the Trust are computed. The impact
of inflation or deflation on energy prices in Germany is delayed by the use
in certain long-term gas sales contracts of a delay factor of three to six
months prior to the application of any changes in light heating oil prices
to gas prices.
As mandated by the Trust Agreement, distributions of income are made on
a quarterly basis. These distributions, as determined by the Trustees,
constitute substantially all the funds on hand after provision is made for
Trust expenses then anticipated.
Results: Third Quarter of Fiscal 2008 Versus Third Quarter of Fiscal 2007
-------------------------------------------------------------------------
For the third quarter of fiscal 2008, the Trust's net income was
$8,226,859, an increase of 56.27% from the net income of $5,264,505 for the
third quarter of fiscal 2007. Gross royalties received for the third quarter
of fiscal 2008 were $8,463,341, an increase of 56.64% as compared to
$5,402,889 for the third quarter of fiscal 2007. These royalties were
derived from sales of gas, sulfur and oil from the Trust's overriding royalty
areas in Germany during the second calendar quarter of 2008. A distribution
of 89 cents per unit was paid on August 27, 2008 to owners of record as of
August 14, 2008.
The amount of royalties paid to the Trust is based on four primary
factors: the amount of gas sold, the price of that gas, the area from which
the gas is sold and the exchange rate. Gas sales are measured in billion
cubic feet ("Bcf"). Gas prices are reported in Euro cents per Kilowatt hour
("Ecents/Kwh") and dollars per thousand cubic feet ("$/Mcf"). The primary
factor affecting royalty revenue for the quarter just ended was the increase
in gas prices under both the Mobil and the OEG Agreements. In addition, in
comparison to the third quarter of fiscal 2007, the higher average value of
the Euro relative to the dollar increased the number of dollars received when
the royalties paid in Euros were converted to dollars at the time of their
transfers to the U.S. The increase in gas prices along with the higher
average value of the Euro more than offset the decline in gas sales under
both royalty agreements.
-14-
Factors Affecting Royalties Paid under the Mobil Agreement
----------------------------------------------------------
Third Fiscal Qtr. Third Fiscal Qtr. Percentage
Ended 7/31/2008 Ended 7/31/2007 Change
---------------- ---------------- ----------
Gas Sales (Bcf) 12.314 Bcf 16.177 Bcf -23.88%
Gas Prices (Ecents/Kwh) 2.4704 Ecents/Kwh 1.5159 Ecents/Kwh +62.96%
Gas Prices ($/Mcf) $11.16/Mcf $5.90/Mcf +89.15%
Aver. Euro Exchange Rate $1.5688 $1.3540 +15.86%
If we exclude the effects of differences in prices and average exchange
rates, the combination of royalty rates on gas sold from western Oldenburg
results in an effective royalty rate approximately seven times higher than
the royalty rate on gas sold from eastern Oldenburg. This is of particular
significance to the Trust since gas sold from western Oldenburg provides the
bulk of royalties paid to the Trust. For the quarter just ended, gas sales
from western Oldenburg accounted for only 39.66% of all gas sales. However,
royalties on these gas sales provided approximately 71.98% or $5,498,327 out
of a total of $7,638,955 in Oldenburg royalties attributable to gas.
Factors Affecting Royalties Paid under the OEG Agreement
--------------------------------------------------------
Third Fiscal Qtr. Third Fiscal Qtr. Percentage
Ended 7/31/2008 Ended 7/31/2007 Change
---------------- ---------------- ----------
Gas Sales (Bcf) 31.045 Bcf 37.982 Bcf -18.26%
Gas Prices (Ecents/Kwh) 2.5699 Ecents/Kwh 1.8774 Ecents/Kwh +36.89%
Gas Prices ($/Mcf) $11.35/Mcf $7.10/Mcf +59.89%
Aver. Euro Exchange Rate $1.5730 $1.3455 +16.91%
During fiscal 2007, the operating companies performed no maintenance on
the Grossenkneten desulfurization plant. However, during the quarter just
ended, the operating companies conducted a six-week maintenance program on
this plant. During this period one-third of the plant was shut down for two
weeks on a rotating basis until the maintenance was completed. Sweet gas
production is normally reduced during the summer months due to a general
decline in demand. With the reduction in gas sold during the warmer summer
period, the partial shutdown at Grossenkneten had a significant impact on the
remaining gas sales.
Interest income was lower reflecting the decline in interest rates
applicable during the period. For the quarter just ended, Trust interest
income decreased 69.84% to $17,332 from $57,459 in the third quarter of
fiscal 2007. Trust expenses for the third quarter of fiscal 2008 increased
29.60% or $57,971 to $253,814 in comparison to the prior year's equivalent
period. The increase in costs is related to the biennial examination of the
German operating companies' royalty payments and various legal matters
related thereto.
The current Statement of Assets, Liabilities and Trust Corpus of the Trust at
July 31, 2008, compared to that at fiscal year-end (October 31, 2007), shows
an increase in assets due to the higher royalty receipts during the third
quarter of fiscal 2008 compared to the fourth quarter of fiscal 2007.
-15-
Results: First Nine Months of Fiscal 2008 Versus
------------------------------------------------
First Nine Months of Fiscal 2007
--------------------------------
For the nine month period, the Trust's net income was $24,255,590, an
increase of 16.29% from the net income of $20,858,133 for last year's
equivalent period. Gross royalties received for the first nine months of
fiscal 2008 were $25,039,400, an increase of 16.84% as compared to
$21,430,819 for the first nine months of fiscal 2007. These royalties were
derived from sales of gas, sulfur and oil from the Trust's overriding royalty
areas in Germany during the fourth calendar quarter of 2007 and the first two
calendar quarters of 2008. For the nine month period ended July 31, 2008,
total distributions were equal to $2.63 per unit compared to total
distributions of $2.27 for the first nine months of fiscal 2007.
The primary factors affecting royalty revenue for the nine months just
ended were increases in gas prices, increases in average exchange rates and
declines in gas sales under both the Mobil and the OEG Agreements. The
combination of these factors, particularly with regard to gas prices under
the Mobil Agreement, contributed to the increase in net income and cumulative
distribution payable.
Factors Affecting Royalties Paid under the Mobil Agreement
----------------------------------------------------------
Nine Months Nine Months Percentage
Ended 7/31/2008 Ended 7/31/2007 Change
---------------- ---------------- ----------
Gas Sales (Bcf) 40.569 Bcf 50.814 Bcf -20.16%
Gas Prices (Ecents/Kwh) 2.2729 Ecents/Kwh 1.9364 Ecents/Kwh +17.38%
Gas Prices ($/Mcf) $9.98/Mcf $7.38/Mcf +35.23%
Aver. Euro Exchange Rate $1.5244 $1.3269 +14.88%
If we exclude the effects of differences in prices and average exchange
rates, the combination of royalty rates on gas sold from western Oldenburg
results in an effective royalty rate approximately seven times higher than
the royalty rate on gas sold from eastern Oldenburg. This is of particular
significance to the Trust since gas sold from western Oldenburg provides the
bulk of royalties paid to the Trust. For the nine months just ended, gas
sales from western Oldenburg accounted for only 40.80% of all gas sales.
However, royalties on these gas sales provided approximately 72.45% or
$16,190,326 out of a total of $22,347,326 in Oldenburg royalties attributable
to gas.
Factors Affecting Royalties Paid under the OEG Agreement
--------------------------------------------------------
Nine Months Nine Months Percentage
Ended 7/31/2008 Ended 7/31/2007 Change
---------------- ---------------- ----------
Gas Sales (Bcf) 99.441 Bcf 120.476 Bcf -17.46%
Gas Prices (Ecents/Kwh) 2.3739 Ecents/Kwh 2.2034 Ecents/Kwh +7.74%
Gas Prices ($/Mcf) $10.21/Mcf $8.19/Mcf +24.66%
Aver. Euro Exchange Rate $1.5296 $1.3242 +15.51%
-16-
During fiscal 2007, the operating companies performed no maintenance on
the Grossenkneten desulfurization plant. However, during the quarter just
ended, the operating companies conducted a six-week maintenance program on
this plant. During this period one-third of the plant was shut down for two
weeks on a rotating basis until the maintenance was completed. In addition
to the impact of this shutdown, the decline in gas sales for the nine months
just ended can be partially explained by a general decline in energy demand
within Germany.
Interest income was lower reflecting the decline in interest rates
applicable during the period. Interest income for the nine month period
decreased 53.87% to $77,666 from $168,362 in the first nine months of fiscal
2007. Trust expenses for the nine month period increased 16.25% or $120,428
to $861,476 in comparison to the prior year's equivalent period. The
increase in expenses resulted primarily from an increase in legal expenses
related to the amendments to the Trust Agreement presented in the most recent
proxy and an increase in costs related to the biennial examination of the
German operating companies' royalty payments and various legal matters
related thereto.
-----------------------------------
This report on Form 10-Q contains forward looking statements concerning
business, financial performance and financial condition of the Trust. Many
of these statements are based on information provided to the Trust by the
operating companies or by consultants using public information sources.
These statements are subject to certain risks and uncertainties that could
cause actual results to differ materially from those anticipated in any
forward looking statements. These include uncertainties concerning levels
of gas production and gas prices, general economic conditions and currency
exchange rates and the risks described in Item 1A, "Risk Factors," in the
Trust's Annual Report on Form 10-K for the fiscal year ended October 31,
2007. Actual results and events may vary significantly from those discussed
in the forward looking statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
----------------------------------------------------------
The Trust does not engage in any trading activities with respect to
possible foreign exchange fluctuations. The Trust does not use any financial
instruments to hedge against possible risks related to foreign exchange
fluctuations. The market risk is negligible because standing instructions at
its German bank require the bank to process conversions and transfers of
royalty payments as soon as possible following their receipt. The Trust does
not engage in any trading activities with respect to possible commodity price
fluctuations.
-17-
Item 4. Controls and Procedures.
-----------------------
The Trust maintains disclosure controls and procedures that are designed
to ensure that information required to be disclosed by the Trust is recorded,
processed, summarized, accumulated and communicated to its management, which
consists of the Managing Director, to allow timely decisions regarding
required disclosure, and reported within the time periods specified in the
Securities and Exchange Commission's rules and forms.
The Managing Director has performed an evaluation of the effectiveness
of the design and operation of the Trust's disclosure controls and procedures
as of July 31, 2008. Based on that evaluation, the Managing Director
concluded that the Trust's disclosure controls and procedures were effective
as of July 31, 2008.
There have been no changes in our internal control over financial
reporting identified in connection with the evaluation described above that
occurred during the third quarter of fiscal 2008 that have materially
affected or are reasonably likely to materially affect our internal control
over financial reporting.
-18-
Part II -- OTHER INFORMATION
----------------------------
Item 6. Exhibits.
--------
Exhibit 31. Certification of Chief Executive Officer
and Chief Financial Officer
pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
Exhibit 32. Certification of Chief Executive and
Chief Financial Officers pursuant to
Section 906 of the Sarbanes-Oxley
Act of 2002
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NORTH EUROPEAN OIL ROYALTY TRUST
---------------------------------
(Registrant)
/s/ John R. Van Kirk
---------------------------------
John R. Van Kirk
Managing Director
Dated: August 28, 2008