Item 1. Financial Statements.
ECA Marcellus Trust I
Statements of Assets, Liabilities, and Trust Corpus
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September 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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1,037,282
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$
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770,833
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Royalty income receivable
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339,480
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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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(336,191,508
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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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15,908,492
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17,044,218
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Total Assets
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$
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17,285,254
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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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$
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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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17,285,254
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18,218,080
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Total Liabilities and Trust Corpus
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$
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17,285,254
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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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Nine Months Ended
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Three Months Ended
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September 30,
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September 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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1,119,957
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$
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3,407,384
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$
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339,480
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$
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715,334
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Net proceeds to Trust
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$
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1,119,957
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$
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3,407,384
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$
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339,480
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$
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715,334
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General and administrative expense
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(922,251
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)
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(951,606
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)
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(123,920
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)
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(254,491
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)
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Interest income
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4,514
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16,211
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77
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4,991
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Income available for distribution prior to cash reserves
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$
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202,220
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$
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2,471,989
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$
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215,637
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$
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465,834
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Cash reserves withheld by Trustee
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(199,503
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)
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(305,916
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)
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(215,585
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)
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(90,000
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)
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Interest withheld on cash reserves
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(2,716
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)
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(578
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)
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(51
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)
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(578
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)
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Distributable income available to unitholders
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$
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0
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$
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2,165,495
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$
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0
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$
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375,256
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Distributable income per common unit (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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$
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0.085
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$
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(0.000
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)
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$
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0.021
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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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September 30,
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2020
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2019
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Trust Corpus, Balance at July 1,
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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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Cash reserves withheld, including interest
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215,637
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90,578
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Distributable income
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0
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375,256
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Distributions paid or payable to unitholders
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(0
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)
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(369,646
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)
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Amortization of royalty interest in gas properties
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(375,128
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)
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(991,889
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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 September 30,
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$
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17,285,254
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$
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44,212,279
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Nine Months Ended
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September 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 withheld, including interest
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202,220
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306,494
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Distributable income
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0
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2,165,495
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Distributions paid or payable to unitholders
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678
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(2,157,023
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)
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Amortization of royalty interest in gas properties
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(1,135,724
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)
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(3,036,001
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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 September 30,
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$
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17,285,254
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$
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44,212,279
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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 (“Greylock Energy”),
including Greylock Production, LLC (“Greylock Production”), which serves as operator of the subject wells, and Greylock
Midstream, LLC (“Greylock Midstream”), whose subsidiaries market and gather certain of the gas, acquired substantially
of the assets of Legacy ECA, as described in Note 4.
The royalty interest in the Producing Wells
(the “PDP Royalty Interest”) entitles the Trust to receive 90% of the proceeds (exclusive of any production or development
costs but after deducting post-production costs and any applicable taxes) from the sale of production of natural gas attributable
to the Sponsor’s initial interest in the Producing Wells. The royalty interest in the PUD Wells (the “PUD Royalty Interest”
and collectively with the PDP Royalty Interest, the “Royalty Interests”) entitles the Trust to receive 50% of the proceeds
(exclusive of any production or development costs but after deducting post-production costs and any applicable taxes) from the
sale of production of natural gas attributable to the Sponsor’s initial interest in the PUD Wells.
The Trust’s cash receipts in respect
of the Royalty Interests are determined after deducting post-production costs and any applicable taxes associated with the Perpetual
Royalty Interests. The Trust’s cash available for distribution is reduced by Trust administrative expenses. Post-production
costs generally consist of costs incurred to gather, compress, transport, process, treat, dehydrate and market the natural gas
produced. Charges (the “Post-Production Services Fee”) payable to the Sponsor for such post-production costs on the
Greene County Gathering System (“GCGS”) were limited to $0.52 per MMBtu gathered until Legacy ECA fulfilled its drilling
obligation in 2011; since then the Sponsor has been permitted to increase the Post-Production Services Fee to the extent necessary
to recover certain capital expenditures in the GCGS. Additionally, if electric compression is utilized in lieu of gas as fuel in
the compression process, the Trust will be charged for the electric usage as provided for in the Trust conveyance documents.
The trust agreement provides that the Trust
will terminate if gross proceeds to the Trust attributable to the Royalty Interests over any four consecutive quarters are less
than $1.5 million. If this early termination event occurs, the trust agreement will require the Trustee to sell the Royalty
Interests, either by private sale or public auction, subject to Greylock Energy's right of first refusal to purchase the Royalty
Interests. After the sale of all of the Royalty Interests, payment of all Trust liabilities and establishment of reasonable provisions
for the payment of additional anticipated or contingent Trust expenses or liabilities, the Trustee will distribute the net proceeds
of the sale to the Trust unitholders.
Gross proceeds to the Trust attributable
to the Royalty Interests during the first three quarters of 2020 were $1,119,957. Gross proceeds to the Trust attributable to the
Royalty Interests over the four consecutive quarters ending December 31, 2020 may fall below $1.5 million, which would require
the Trust to commence termination by January 2021. If that occurs, the Trustee would be required to sell all of the Trust’s
remaining assets and liquidate the Trust.
The Trust makes quarterly cash distributions
of substantially all of its cash receipts, after deducting Trust administrative expenses, including the costs incurred as a result
of being a publicly traded entity, on or about the 60th day following the completion of each quarter. Unless sooner
terminated, the Trust will begin to liquidate on or about March 31, 2030 (the “Termination Date”) and will soon
thereafter wind up its affairs and terminate. At the termination of the Trust, 50% of each of the PDP Royalty Interest and the
PUD Royalty Interest will revert automatically to Greylock Production. The remaining 50% of each of the PDP Royalty Interest and
the PUD Royalty Interest will be sold, and the net proceeds will be distributed pro rata to the unitholders soon after the termination
of the Trust. Greylock Production will have a right of first refusal to purchase the remaining 50% of the Royalty Interests at
the termination of the Trust.
The business and affairs of the Trust are
administered by The Bank of New York Mellon Trust Company, N.A., as Trustee. Although Greylock Production operates all of the Producing
Wells and all of the PUD Wells, Greylock Production has no ability to manage or influence the management of the Trust. Neither
the Trust nor the Trustee has any authority or responsibility for, or any involvement with or influence over, any aspect of the
operations on or relating to the properties to which the Royalty Interests relate.
NOTE 2. Basis of Presentation
The preparation of financial statements
requires the Trust to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during
the reporting period. Without limiting the foregoing statement, the information furnished is based upon certain estimates of the
revenues attributable to the Trust from natural gas production for the three and nine months ended September 30, 2020 and
2019 and is therefore subject to adjustment in future periods to reflect actual production for the periods presented.
The information furnished reflects all normal
and recurring adjustments which are, in the opinion of the Trustee, necessary for a fair presentation of the results for the interim
period presented. The accompanying unaudited interim financial statements should be read in conjunction with the audited financial
statements and notes thereto included in the Trust’s Annual Report on Form 10-K for the year ended December 31,
2019. The December 31, 2019 condensed balance sheet data was derived from audited financial statements, but does not include
all applicable financial statement disclosures.
NOTE 3. Significant Accounting Policies
The accompanying unaudited financial information
has been prepared by the Trustee in accordance with the instructions to Form 10-Q. The financial statements of the Trust differ
from financial statements prepared in accordance with generally accepted accounting principles in the United States of America
(“GAAP”) because certain cash reserves may be established for contingencies, which would not be accrued in financial
statements prepared in accordance with GAAP. Amortization of the investment in overriding royalty interests calculated on a unit-of-production
basis is charged directly to Trust Corpus. This comprehensive basis of accounting other than GAAP corresponds to the accounting
permitted for royalty trusts by the U.S. Securities and Exchange Commission (“SEC”) as specified by Accounting Standard
Codification (“ASC”) Topic 932, Extractive Activities—Oil and Gas: Financial Statements of Royalty Trusts. Income
determined on the basis of GAAP would include all expenses incurred for the period presented. However, the Trust serves as a pass-through
entity, with expenses for depreciation, depletion, and amortization, interest and income taxes being based on the status and elections
of the Trust unitholders. General and administrative expenses, production taxes or any other allowable costs are charged to the
Trust only when cash has been paid for those expenses. In addition, the Royalty Interests are not burdened by field and lease operating
expenses. Thus, the statement shows distributable income, defined as income of the Trust available for distribution to the Trust
unitholders before application of those additional expenses, if any, for depreciation, depletion, and amortization, interest and
income taxes. The revenues are presented net of existing royalties and overriding royalties and have been reduced by gathering/post-production
expenses.
Cash:
Cash may include highly liquid instruments
maturing in three months or less from the date acquired.
Use of Estimates in the Preparation
of Financial Statements:
The preparation of financial statements
requires the Trust to make estimates and assumptions that affect the reported amounts of assets and liabilities and the reported
amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Revenue and Expenses:
The Trust serves as a pass-through entity,
with items of depletion, interest income and expense, and income tax attributes being based upon the status and election of the
unitholders. Thus, the Statements of Distributable Income show Income available for distribution before application of those unitholders’
additional expenses, if any, for depletion, interest income and expense, and income taxes.
The Trust uses the accrual basis to recognize
revenue, with royalty income recorded as reserves are extracted from the Underlying Properties and sold. Expenses are recognized
when paid.
Royalty Interest in Gas Properties:
The Royalty interest in gas properties is
assessed to determine whether the net capitalized cost is impaired, whenever events or changes in circumstances indicate that its
carrying amount may not be recoverable, pursuant to ASC Topic 360, Property, Plant and Equipment. The Trust determines whether
an impairment charge is necessary to its investment in the Royalty interest in gas properties if total capitalized costs, less
accumulated amortization, exceed undiscounted future net revenues attributable to proved gas reserves of the Underlying Properties.
Determination as to whether and how much an asset is impaired involves estimates of fair value, which is determined based on discounted
cash flow techniques using assumptions including projected revenues, future commodity prices, production costs, and market-specific
average cost of capital. Estimates of undiscounted future net revenues attributable to proved gas reserves utilize NYMEX forward
pricing curves. If required, the Trust will recognize an impairment charge to the extent that the net capitalized costs exceed
the discounted fair value of the investment in net profits interests attributable to proved gas reserves of the Underlying Properties.
Any such impairment charge would not reduce Distributable Income, although it would reduce Trust Corpus. At December 31, 2019,
the Underlying Properties were impaired by approximately $25 million primarily as a result of the decrease in the futures prices
of natural gas. No impairment in the Underlying Properties has been recognized during 2020. Significant dispositions or abandonment
of the Underlying Properties are charged to Royalty Interests and the Trust Corpus.
Amortization of the Royalty interest in
gas properties is calculated on a units-of-production basis, whereby the Trust’s cost basis in the properties is divided
by Trust total proved reserves to derive an amortization rate per reserve unit. Such amortization does not reduce Distributable
Income, rather it is charged directly to Trust Corpus. Revisions to estimated future units-of-production are treated on a prospective
basis beginning on the date significant revisions are known.
The conveyance of the Royalty Interest to
the Trust was accounted for as a purchase transaction. The $352,100,000 reflected in the Statements of Assets, Liabilities and
Trust Corpus as Royalty interests in gas properties represents 17,605,000 Trust units valued at $20.00 per unit. The carrying value
of the Trust’s investment in the Royalty Interests is not necessarily indicative of the fair value of such Royalty Interests.
NOTE
4. Reaffirmation Agreement
On November 29, 2017, Greylock Energy
acquired substantially all of the gas production and midstream assets of Legacy ECA, including Legacy ECA’s interests in
certain natural gas properties that are subject to royalty interests held by the Trust.
In
connection with the transaction, Greylock Production assumed all of Legacy ECA’s obligations under the Amended and
Restated Trust Agreement among the Trust, Legacy ECA and the Trustee (the “Trust Agreement”), and other instruments
to which Legacy ECA and the Trustee were parties, including (1) the Administrative Services Agreement by and among Legacy
ECA, the Trust and the Trustee dated July 7, 2010, and (2) a letter agreement between Legacy ECA and the Trustee regarding
certain loans to be made by Legacy ECA to the Trust as necessary to enable the Trust to pay its liabilities as they become due
(the “Letter Agreement”). In addition, Legacy ECA, Greylock Production, and the Trustee entered into a Reaffirmation
and Amendment of Mortgage, Assignment of Leases, Security Agreement, Fixture Filing and Financing Statement (the “Reaffirmation
Agreement”), pursuant to which, among other things, Greylock Production (1) reaffirmed the liens and the security interest
granted pursuant to the existing mortgage securing the interests in the subject properties, as well as the mortgage and the obligations
of Legacy ECA under the mortgage, and (2) assumed the obligations of Legacy ECA under the Letter Agreement.
NOTE 5. Income Taxes
The Trust is a Delaware statutory trust,
which is taxed as a partnership for federal and state income taxes. Accordingly, no provision for federal or state income taxes
has been made. Uncertain tax positions are accounted for under ASC Topic 740, Income Taxes (“ASC 740”),
which prescribes a recognition threshold and measurement attribute for financial statement disclosure of tax positions taken or
expected to be taken on a tax return. Additionally, ASC 740 provides guidance on derecognition, classification, interest and penalties,
accounting in interim periods, disclosure, and transition. The Trust has not identified any uncertain tax positions through the
period ended September 30, 2020.
NOTE 6. Related Party Transactions
Trustee Administrative Fee:
Under the terms of the Trust Agreement,
the Trustee charges an annual administrative fee, subject to adjustment each year, that was $150,000 from inception through 2017.
The annual fee in 2019 was $154,605 and is expected to be $156,060 in 2020. The Trust deducts these costs, as well as those to
be paid to Greylock Production pursuant to the Administrative Services Agreement referred to below, in the period paid.
Administrative Services Fee:
The Trust and Greylock Production are parties
to an Administrative Services Agreement that obligates the Trust to pay Greylock Production an administrative services fee for
accounting, bookkeeping and informational services to be performed by Greylock Production on behalf of the Trust relating to the
Royalty Interests. The annual fee of $60,000 is payable in equal quarterly installments. Under certain circumstances, Greylock
Production and the Trustee each may terminate the Administrative Services Agreement at any time following delivery of notice no
less than 90 days prior to the date of termination.
Item 2.
Trustee's Discussion and Analysis of Financial Condition and Results of Operations.
References to the “Trust” in
this document refer to ECA Marcellus Trust I. As discussed in “Overview” below, Greylock Energy acquired substantially
all of the assets of Energy Corporation of America in November 2017. References to “Legacy ECA” in this document
refer to Energy Corporation of America and its wholly-owned subsidiaries and, when discussing the conveyance documents, the Private
Investors, as such entities existed prior to the asset acquisition by Greylock Energy. The following review of the Trust’s
financial condition and results of operations should be read in conjunction with the financial statements and notes thereto and
the audited financial statements and notes thereto included in the Trust’s Annual Report on Form 10-K for the year ended
December 31, 2019 (the “2019 Form 10-K”). The Trust’s annual reports on Form 10-K, quarterly reports
on Form 10-Q, current reports on Form 8-K and all amendments to those reports are available on the SEC’s website
at www.sec.gov and also at www.businesswire.com/cnn/ect.htm. Certain terms used herein are defined in Appendix A. All information
regarding operations has been provided to the Trustee by Greylock Energy.
Note Regarding Forward-Looking Statements
This report contains “forward-looking
statements” about Greylock Energy and the Trust and other matters discussed herein that are subject to risks and uncertainties.
All statements other than statements of historical fact included in this document, including, without limitation, statements under
“Trustee’s Discussion and Analysis of Financial Condition and Results of Operations” and “Risk Factors”
regarding the financial position, business strategy, production and reserve growth, development activities and costs and other
plans and objectives for the future operations of Greylock Energy and all matters relating to the Trust are forward-looking statements.
Actual outcomes and results may differ materially from those projected.
When used in this document, the words “believes,”
“expects,” “anticipates,” “intends” or similar expressions, are intended to identify such forward-looking
statements. Further, all statements regarding future circumstances or events are forward-looking statements. The following important
factors, in addition to those discussed elsewhere in this document, could affect the future results of the energy industry in general,
and Greylock Energy and the Trust in particular, and could cause those results to differ materially from those expressed in such
forward-looking statements:
|
•
|
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 and certain of its wholly owned subsidiaries, including Greylock Production, LLC, which
serves as operator of the subject wells, and Greylock Midstream, LLC, whose subsidiaries market and gather certain of the gas,
acquired substantially all of the gas production and midstream assets of Legacy ECA, including all of Legacy ECA’s interests
in certain natural gas properties that are subject to royalty interests held by the Trust.
In
connection with the transaction, Greylock Production assumed all of Legacy ECA’s obligations under the Trust Agreement
and other instruments to which Legacy ECA and the Trustee were parties, including (1) the Administrative Services Agreement
by and among Legacy ECA, the Trust and the Trustee dated July 7, 2010, and (2) a letter agreement between Legacy ECA
and the Trustee regarding certain loans to be made by Legacy ECA to the Trust as necessary to enable the Trust to pay its liabilities
as they become due (the “Letter Agreement”). In addition, Legacy ECA, Greylock Production, and the Trustee entered
into a Reaffirmation and Amendment of Mortgage, Assignment of Leases, Security Agreement, Fixture Filing and Financing Statement
(the “Reaffirmation Agreement”), pursuant to which, among other things, Greylock Production (1) reaffirmed the
liens and the security interest granted pursuant to the existing mortgage securing the interests in the subject properties, as
well as the mortgage and the obligations of Legacy ECA under the mortgage, and (2) assumed the obligations of Legacy ECA under
the Letter Agreement.
As part of the
initial acquisition of substantially all of Legacy ECA’s assets, neither Greylock Energy nor Greylock Production acquired
title ownership of Legacy ECA’s working interest in two wells in which the Trust also has an interest, the Penneco Morrow
#1MH and Penneco Morrow #2MH wells. In March 2019 Legacy ECA sold the title ownership and working interest in these two wells
to Greylock Production.
The
Royalty Interests were conveyed to the Trust from the working interest now held by Greylock Production in the Producing Wells and
the PUD Wells limited to the Underlying Properties. The PDP Royalty Interest entitles the Trust to receive 90% of the proceeds
(exclusive of any production or development costs but after deducting post-production costs and any applicable taxes) from the
sale of production of natural gas attributable to the Sponsor’s initial interest in the Producing Wells for a period
of 20 years commencing on April 1, 2010 and 45% thereafter. The PUD Royalty Interest entitles the Trust to receive 50%
of the proceeds (exclusive of any production or development costs but after deducting post-production costs and any applicable
taxes) from the sale of production of natural gas attributable to the Sponsor’s initial interest in the PUD Wells for a period
of 20 years commencing on April 1, 2010 and 25% thereafter.
Legacy ECA was
obligated to drill all of the PUD Wells by March 31, 2014. As of November 30, 2011, Legacy ECA had fulfilled its drilling
obligation to the Trust by drilling 40 PUD Wells (52.06 Equivalent PUD Wells), calculated as provided in the Development Agreement.
Consequently, no additional wells will be drilled for the Trust. The Trust was not responsible for any costs related to the drilling
of development wells or any other development or operating costs. As of September 30, 2020, the Trust owns royalty interests
in 14 Producing Wells and the 40 development wells (52.06 Equivalent PUD Wells) that are now completed and in production.
The
Trust’s cash receipts in respect of the Royalty Interests are determined after deducting post-production costs and any
applicable taxes associated with the Royalty Interests, and the Trust’s cash available for distribution is reduced by
Trust administrative expenses and any amounts reserved for administrative expenses. Post-production costs generally
consist of costs incurred to gather, compress, transport, process, treat, dehydrate and market the natural gas produced.
Charges (the “Post-Production Services Fee”) payable to Legacy ECA for such post-production
costs on the related GCGS were limited to $0.52 per MMBtu gathered until Legacy ECA fulfilled its drilling obligation in
2011; since then the Sponsor has been permitted to increase the Post-Production Services Fee to the extent necessary to
recover certain capital expenditures in the GCGS.
During September 2020, Greylock Production
and Columbia Gas Transmission, LLC (“TCO”) agreed to amend a firm transportation agreement downstream of the GCGS
to extend the term from July 31, 2021 to December 31, 2024. The reserved transportation quantities and tariff rates under
this agreement were not affected by this amendment. Greylock Production and TCO also agreed to modify a separate firm transportation
agreement associated with transport on TCO’s Mountaineer Xpress Pipeline (the “MXP Agreement”). The termination
date for the MXP Agreement was changed to December 31, 2022 from January 2034. In addition, the transportation quantities
reserved for Greylock Production were reduced from 100,000 MMBtu per day to 52,550 MMBtu per day. The previously existing negotiated
reservation rate will remain in place for all months other than September 2020 and December 2021. Firm transportation
utilized as to the Trust’s interests is a chargeable post-production cost, and the Trust bears its proportionate share of
such costs; however, the Trust will not be charged for the costs associated with modifying the firm transportation agreements with
TCO, including the difference between the base negotiated rate and the increased negotiated rate in September 2020 and December 2021
under the MXP Agreement.
Generally, the
percentage of production proceeds to be received by the Trust with respect to a well equals the product of (i) the percentage
of proceeds to which the Trust is entitled under the terms of the conveyances (90% for the Producing Wells and 50% for the PUD
Wells) multiplied by (ii) Greylock Production’s net revenue interest in the well. Greylock Production on average owns
an 81.53% net revenue interest in the Producing Wells. Therefore, the Trust is entitled to receive on average 73.37% of the proceeds
of production from the Producing Wells. With respect to the PUD Wells, the conveyance related to the PUD Royalty Interest provides
that the proceeds from the PUD Wells will be calculated on the basis that the underlying PUD Wells are burdened only by interests
that in total would not exceed 12.5% of the revenues from such properties, regardless of whether the royalty interest owners are
actually entitled to a greater percentage of revenues from such properties. As an example, assuming Greylock Production owns a
100% working interest in a PUD Well, the applicable net revenue interest is calculated by multiplying Greylock Production’s
percentage working interest in the 100% working interest well by the unburdened interest percentage (87.5%), and such well would
have a minimum 87.5% net revenue interest. Accordingly, the Trust is entitled to a minimum of 43.75% of the production proceeds
from the well provided in this example. To the extent Greylock Production’s working interest in a PUD Well is less than 100%,
the Trust’s share of proceeds would be proportionately reduced.
The Trust makes
quarterly cash distributions of substantially all of its cash receipts, after deducting Trust administrative expenses and costs
and reserves therefor, on or about the 60th day following the completion of each quarter. Unless sooner terminated,
the Trust will begin to liquidate in March 2030 and will soon thereafter wind up its affairs and terminate.
The amount of Trust revenues and cash distributions
to Trust unitholders depends on, among other things:
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natural gas prices received;
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the volume and Btu rating of natural gas produced and sold;
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post-production costs and any applicable taxes; and
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administrative expenses of the Trust including expenses incurred as a result of being a publicly traded entity and any changes
in amounts reserved for such expenses.
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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 and its development into a global pandemic.
COVID-19 and the responses by federal, state and local governmental authorities to the pandemic have also resulted in significant
business and operational disruptions, including business closures, supply chain disruptions, travel restrictions, stay-at-home
orders and limitations on the availability of workforces. The full impact of the COVID-19 pandemic is unknown and is rapidly evolving.
The extent to which the COVID-19 pandemic negatively impacts Greylock Energy will depend on the severity, location and duration
of the effects and spread of COVID-19, the actions undertaken by federal, state and local governments and health officials to contain
the virus or treat its effects, and how quickly and to what extent economic conditions improve and normal business and operating
conditions resume. A prolonged period of low natural gas prices will adversely affect Greylock Energy. As a result, there can be
no assurance that prices for natural gas, and therefore the Trust’s quarterly cash distributions, will be maintained for
any significant period of time. There were no distributions to unitholders for the quarters ended March 31, 2020 or June 30,
2020, as Trust expenses exceeded net revenues to the Trust. Continued low natural gas prices will reduce revenues to the Trust,
which will reduce the amount of cash available for distribution to unitholders and in certain periods could result in no distributions
to unitholders
The effective date of the Trust was April 1,
2010, meaning the Trust has received the proceeds of production attributable to the PDP Royalty Interest from that date even though
the PDP Royalty Interest was not conveyed to the Trust until July 7, 2010. The amount of the quarterly distributions fluctuates
from quarter to quarter, depending on the proceeds received by the Trust, among other factors. There is no minimum required distribution.
Pursuant to IRC Section 1446, withholding
tax on income effectively connected to a United States trade or business allocated to non-U.S. persons (“ECI”) should
be made at the highest marginal rate. Under IRC Section 1441, withholding tax on fixed, determinable, annual, periodic income
from United States sources allocated to non-U.S. persons should be made at 30% of gross income unless the rate is reduced by treaty.
Nominees and brokers should withhold at the highest marginal rate on the distribution made to non-U.S. persons. As a result of
the Tax Cuts and Jobs Act enacted in December 2017, a non-U.S. holder’s gain on the sale of Trust units is now treated
as ECI to the extent such holder would have had ECI if the Trust had sold all of its assets at fair market value on the date of
the exchange. The new legislation also requires the transferee of units to withhold 10% of the amount realized on the sale of exchange
of units (generally, the purchase price) unless the transferor certifies that it is not a nonresident alien individual or foreign
corporation.
Delisting
of Trust Units from The New York Stock Exchange. As previously disclosed, on November 21, 2019, ECA Marcellus Trust
I (the “Trust”) received written notification from The New York Stock Exchange (“NYSE”) that the Trust
no longer satisfied the continued listing compliance standards set forth under Rule 802.01C of the NYSE Listed Company Manual
because the average closing price of the Trust units fell below $1.00 over a 30 consecutive trading-day period that ended November 21,
2019. As the Trust was unable to regain compliance with the applicable standards within a cure period that concluded on July 30,
2020, the NYSE announced the suspension of trading of the Trust units due to non-compliance with Rule 802.01C of the NYSE
Listed Company Manual, effective as of the close of trading on July 30, 2020, and announced that it was initiating proceedings
to delist the Trust units.
As a result of the suspension, the Trust
units began trading on July 31, 2020 under the symbol “ECTM” on the OTC Pink Market, which is operated by OTC
Markets Group Inc. (“OTC Pink”). To be quoted on OTC Pink, a market maker must sponsor the security and comply with
SEC Rule 15c2-11 before it can initiate a quote in a specific security. OTC Pink is a significantly more limited market than
the NYSE, and the quotation of the Trust units on OTC Pink may result in a less liquid market available for existing and potential
unitholders and could further depress the trading price of the Trust units. There is no assurance that an active market in the
Trust units will develop on OTC Pink, or whether broker-dealers will continue to provide public quotes of the Trust units on this
market, whether the trading volume of the Trust units will be sufficient to provide for an efficient trading market or whether
quotes for the Trust units may be blocked by OTC Markets Group in the future.
Potential
Early Termination of the Trust. The trust agreement provides that the Trust will terminate if gross proceeds to the
Trust attributable to the Royalty Interests over any four consecutive quarters are less than $1.5 million. If this early termination
event occurs, the trust agreement will require the Trustee to sell the Royalty Interests, either by private sale or public auction,
subject to Greylock Energy's right of first refusal to purchase the Royalty Interests. After the sale of all of the Royalty
Interests, payment of all Trust liabilities and establishment of reasonable provisions for the payment of additional anticipated
or contingent Trust expenses or liabilities, the Trustee will distribute the net proceeds of the sale to the Trust unitholders.
Gross proceeds to the Trust attributable
to the Royalty Interests during the first three quarters of 2020 were $1,119,957. Greylock Energy currently estimates, based on
estimates of natural gas reserves and future prices for the remainder of the year, that gross proceeds to the Trust attributable
to Royalty Interests over the four consecutive quarters ending December 31,2020 are projected to exceed $1.5 million. Nevertheless,
if production or market conditions were to decline below expectations during the remainder of 2020, gross proceeds to the Trust
attributable to the Royalty Interests over the four consecutive quarters ending December 31, 2020 may fall below $1.5 million,
which would require the Trust to commence termination by January 2021. If that occurs, the Trustee would be required to sell
all of the Trust’s remaining assets and liquidate the Trust.
Results of Trust Operations
For the Three Months Ended September 30, 2020 compared
to the Three Months Ended September 30, 2019
Distributable income for the three months
ended September 30, 2020 decreased to $0 from $0.4 million for the three months ended September 30, 2019. Compared to
the quarter ended September 30, 2019, royalty income decreased by $0.4 million while general and administrative expenses decreased
by $0.1 million.
Royalty income decreased to $0.3 million
for the three months ended September 30, 2020 from $0.7 million for the three months ended September 30, 2019, a decrease
of $0.4 million. This decrease was due to a decrease in the average sales price between periods as well as lower production between
periods.
The average price realized for the three
months ended September 30, 2020 decreased $0.44 per Mcf to $0.51 per Mcf as compared to $0.95 per Mcf for the three months
ended September 30, 2019. The decrease in the average sales price realized for natural gas production was due primarily to
a lower average sales price partially offset by a slight decrease in other post-production costs during the period. The average
sales price, before post-production costs, decreased from $1.97 per Mcf for the three months ended September 30, 2019 to $1.46
per Mcf for the three months ended September 30, 2020. The decrease in price was the result of a decrease in the weighted
average monthly closing NYMEX price for the current period to $1.97 per MMBtu compared to the weighted average monthly closing
NYMEX price of $2.23 per MMBtu for the three months ended September 30, 2019. This decrease was also due to a decrease in
the average Basis per MMBtu in the current period at minus $0.56 per MMBtu compared to the prior period Basis of minus $0.32 per
MMBtu.
Post-production costs consist of a post-production
services fee together with a charge for electricity used in lieu of gas for compression on the gathering system and firm transportation
charges on interstate gas pipelines. Overall, average post-production costs decreased to $0.95 per Mcf in the current period compared
to $1.02 per Mcf for the three-month period ended September 30, 2019.
Production decreased 11.2% from 751 MMcf
for the three months ended September 30, 2019 to 667 MMcf for the three months ended September 30, 2020. The decreased
production was the result of natural production declines that occur during the life of a well.
General and administrative
expenses paid by the Trust for the three months ended September 30, 2020 decreased by $0.1 million to approximately $0.1 million
compared to $0.2 million for the three months ended September 30, 2019 and 2020. This decrease was the result of timing in
professional service fees. Cash reserves of $0.2 million were withheld for the three months ended September 30, 2020 as compared
to $0.1 million for the three months ended September 30, 2019.
For the Nine Months Ended September 30, 2020 compared
to the Nine Months Ended September 30, 2019
Distributable income for the nine months
ended September 30, 2020 decreased to $0 from $2.2 million for the nine months ended September 30, 2019. Compared to
the nine months ended September 30, 2019, royalty income decreased by $2.3 million while general and administrative expenses
remained flat at $0.9 million.
Royalty income decreased to $1.1 million
for the nine months ended September 30, 2020 from $3.4 million for the nine months ended September 30, 2019, a decrease
of $2.3 million. This decrease was due to a decrease in the average sales price between periods as well as lower production between
periods.
The average price realized for the nine
months ended September 30, 2020 decreased $0.93 per Mcf to $0.55 per Mcf as compared to $1.48 per Mcf for the nine months
ended September 30, 2019. The decrease in the average sales price realized for natural gas production was due primarily to
a lower average sales price and higher post-production costs associated with firm transportation during the period. The average
sales price, before post-production costs, decreased from $2.44 per Mcf for the nine months ended September 30, 2019 to $1.54
per Mcf for the nine months ended September 30, 2020. The decrease in price was the result of a decrease in the weighted average
monthly closing NYMEX price for the current period to $1.88 per MMBtu compared to the weighted average monthly closing NYMEX
price of $2.69 per MMBtu for the nine months ended September 30, 2019. This decrease was also due to a slight decrease in
the average Basis per MMBtu in the current period at minus $0.39 per MMBtu compared to the prior period Basis of minus $0.32 per
MMBtu.
Post-production costs consist of a post-production
services fee together with a charge for electricity used in lieu of gas for compression on the gathering system and firm transportation
charges on interstate gas pipelines. Overall, average post-production costs increased to $0.99 per Mcf in the current period compared
to $0.96 per Mcf for the nine-month period ended September 30, 2019. During the nine months ended September 30,
2020, there was an increase in firm transportation fees related to the Mountaineer Xpress Project that were charged to the Trust
beginning with February 2019 production. These increased costs were partially offset by slightly lower post-production electricity
fees.
Production decreased 12.2% from 2,298 MMcf
for the nine months ended September 30, 2019 to 2,019 MMcf for the nine months ended September 30, 2020. The decreased
production was the result of natural production declines that occur during the life of a well.
General and administrative
expenses paid by the Trust for the nine months ended September 30, 2019 and 2020 remained steady at $0.9 million for the periods.
Cash reserves of $0.2 million were withheld for the nine months ended September 30, 2020 as compared to $0.3 million for the
nine months ended September 30, 2019.
Liquidity and Capital Resources
The Trust has no source of liquidity or
capital resources other than net cash flows from the Royalty Interests. Other than Trust administrative expenses, including, if
applicable, expense reimbursements to Greylock Production and any reserves established by the Trustee for future liabilities, the
Trust’s only use of cash is for distributions to Trust unitholders. Administrative expenses include payments to the Trustee
and the Delaware Trustee as well as a quarterly fee of $15,000 to Greylock Production pursuant to the Administrative Services Agreement.
Each quarter, the Trustee determines the amount of funds available for distribution. Available funds are the excess cash, if any,
received by the Trust from the Royalty Interests and other sources (such as interest earned on any amounts reserved by the Trustee)
that quarter, over the Trust’s expenses for that quarter. Available funds are reduced by any cash the Trustee determines
to hold as a reserve against future expenses or liabilities. The Trustee, on behalf of the Trust, may borrow funds required to
pay expenses or liabilities if the Trustee determines that the cash on hand and the cash to be received are insufficient to cover
the Trust’s expenses or liabilities. If the Trustee borrows funds, the Trust unitholders will not receive distributions until
the borrowed funds are repaid.
Commencing
with the distribution paid to unitholders in the first quarter of 2019, the Trustee has been gradually building a cash reserve
for the payment of future expenses and liabilities of approximately $1.8 million by withholding cash reserve amounts from
each quarterly distribution equal to the greater of $90,000 or 10% of the amount distributable to unitholders. In February 2020,
the Trustee withheld $90,000 from funds otherwise available for distribution. These withholdings are in addition to the existing
cash reserve of $0.5 million, which is determined prior to the payments of quarterly expenses. The Trustee may increase
or decrease the targeted amount at any time, and may increase or decrease the rate at which it is withholding funds to build the
cash reserve at any time, without advance notice to the unitholders. After
the approximately $1.8 million has been withheld, the Trustee will have cash reserves of approximately $2.3 million. Cash held
in reserve will be invested as required by the Trust Agreement. Any cash reserved in excess of the amount necessary to pay or provide
for the payment of future known, anticipated or contingent expenses or liabilities eventually will be distributed to unitholders,
together with interest earned on the funds. For the quarter ended September 30, 2020, the Trustee withheld approximately $0.2
million from the funds otherwise available for distribution and withheld $51 of interest earned on the cash reserve balance. The
Trustee has withheld from the funds otherwise available for distribution a total amount of $0.8 million plus $5,202 of interest
toward the building of the $1.8 million cash reserve.
Payments to the Trust in respect of the
Royalty Interests are based on the complex provisions of the various conveyances held by the Trust, copies of which are filed as
exhibits to the 2019 Form 10-K, and reference is hereby made to the text of the conveyances for the actual calculations of
amounts due to the Trust.
The Trust does not have any transactions,
arrangements or other relationships with unconsolidated entities or persons that could materially affect the Trust’s liquidity
or the availability of capital resources.
Significant Accounting Policies
The
financial statements of the Trust differ from financial statements prepared in accordance with generally accepted accounting principles
in the United States of America (“GAAP”) because, among other differences, certain cash reserves may be established
for contingencies, which would not be accrued in financial statements prepared in accordance with GAAP. Amortization of the investment
in overriding royalty interests calculated on a unit-of-production basis is charged directly to Trust Corpus. This comprehensive
basis of accounting other than GAAP corresponds to the accounting permitted for royalty trusts by the SEC as specified by ASC Topic
932 Extractive Activities—Oil and Gas: Financial Statements of Royalty Trusts.
Income determined on the basis of GAAP would
include all expenses incurred for the period presented. However, the Trust serves as a pass-through entity, with expenses for depreciation,
depletion, and amortization, interest and income taxes being based on the status and elections of the Trust unitholders. General
and administrative expenses, production taxes or any other allowable costs are charged to the Trust only when cash has been paid
for those expenses. In addition, the Royalty Interests are not burdened by field and lease operating expenses. Thus, the statement
shows distributable income, defined as income of the Trust available for distribution to the Trust unitholders before application
of those unitholders’ additional expenses, if any, for depreciation, depletion, and amortization, interest and income taxes.
The revenues are reflected net of existing royalties and overriding royalties and have been reduced by gathering/post-production
expenses.
Revenue and Expenses:
The Trust serves as a pass-through entity,
with items of depletion, interest income and expense, and income tax attributes being based upon the status and election of the
unitholders. Thus, the Statements of Distributable Income show income available for distribution before application of those unitholders’
additional expenses, if any, for depletion, interest income and expense, and income taxes.
The Trust uses the accrual basis to recognize
revenue, with royalty income recorded as reserves are extracted from the Underlying Properties and sold. Expenses are recognized
when paid.
Royalty Interest in Gas Properties:
The
Royalty interest in gas properties is assessed to determine whether the net capitalized cost is impaired, whenever events or changes
in circumstances indicate that its carrying amount may not be recoverable, pursuant to ASC Topic 360, Property, Plant
and Equipment. The Trust determines whether an impairment charge is necessary to its investment in the Royalty interest in
gas properties if total capitalized costs, less accumulated amortization, exceed undiscounted future net revenues attributable
to proved gas reserves of the Underlying Properties. Determination as to whether and how much an asset is impaired involves estimates
of fair value, which is determined based on discounted cash flow techniques using assumptions including projected revenues, future
commodity prices, production costs, and market-specific average cost of capital. Estimates of undiscounted future net revenues
attributable to proved gas reserves utilize NYMEX forward pricing curves. If required, the Trust will recognize an impairment charge
to the extent that the net capitalized costs exceed the discounted fair value of the investment in net profits interests attributable
to proved gas reserves of the Underlying Properties. Any such impairment charge would not reduce Distributable Income, although
it would reduce Trust Corpus. At December 31, 2019, the Underlying Properties were impaired by approximately $25 million primarily
as a result of the decrease in the futures prices of natural gas. No impairment in the Underlying Properties has been recognized
during the quarter ended September 30, 2020. Significant dispositions or abandonment of the Underlying Properties are charged
to Royalty Interests and the Trust Corpus.
Amortization of the Royalty interest in
gas properties is calculated on a units-of-production basis, whereby the Trust’s cost basis in the properties is divided
by Trust total proved reserves to derive an amortization rate per reserve unit. Such amortization does not reduce Distributable
Income, rather it is charged directly to Trust Corpus. Revisions to estimated future units-of-production are treated on a prospective
basis beginning on the date significant revisions are known.
The conveyance of the Royalty Interests
to the Trust was accounted for as a purchase transaction. The $352,100,000 reflected in the Statements of Assets, Liabilities and
Trust Corpus as Royalty interest in gas properties represents 17,605,000 Trust units valued at $20.00 per unit. The carrying value
of the Trust’s investment in the Royalty Interests is not necessarily indicative of the fair value of such Royalty Interests.