**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 
| **(Mark One)** |
|----------------|
| **ý**     | **QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)  OF THE SECURITIES EXCHANGE ACT OF 1934** |
| ** **     | ** ** |
| ** **     | **For the  quarterly period ended September 30, 2004** |
|           |   |
|           | **OR** |
|           | ** ** |
| **o**          | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15  (d)  OF THE SECURITIES EXCHANGE ACT OF 1934** |
|           |   |
|           | **For the  transition period from                to              ** |
|           |   |
|           | **Commission  File Number 1-11748** |

 

**EASTERN AMERICAN NATURAL GAS TRUST**

(Exact name of registrant as specified in itscharter)

 

| **Delaware**                    | **36-7034603**      |
|---------------------------------|---------------------|
| (State or other jurisdiction of | (I.R.S. Employer    |
| incorporation or organization)  | Identification No.) |

 

**The Bank of New YorkCare of BNY Midwest Trust Company2 North Lasalle StreetChicago, Illinois 60602**

(Address of principal executive offices)

(Zip Code)

 

**(312) 827-8500**

(Registrant’s telephone number, includingarea code)

 

Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports) and (2) has been subject to suchfiling requirements for the past 90 days.
| Yes   o | No   ý |
|------------------------|------------------------------------|

 

Indicate by check mark whether the registrant is an accelerated filer(as defined in Rule 12b-2 of the Act).
| Yes   ý | No   o |
|-----------------------------|-----------------------|

 

As of November 8, 2004, 5,900,000 Units ofBeneficial Interest in Eastern American Natural Gas Trust were outstanding.

 

 

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# **PART I – FINANCIAL INFORMATION**

# ** **

## **ITEM 1.  Financial Statements**

 

**EASTERN AMERICAN NATURAL GAS TRUST**

** **

**CONDENSED STATEMENTS OF DISTRIBUTABLE INCOME**

*(Unaudited)*

 
| ** **                                                                    | ** ** | **Nine Months Ended  September 30** | ** ** | **Three Months Ended  September 30** | ** ** |
|-------------------------------------------------------------------------------|------------|-------------------------------------|------------|--------------------------------------|------------|
|                                                                          |       | **2004**                            | ** ** | **2003**                             | ** ** | **2004** | ** ** | **2003** |   |
|                                                                          |       |                                |       |                                 |       |   |   |   |   |
| Royalty Income                                                                |       | $                                   | 10,024,331 |                                 | $          | 10,165,525 |   | $ | 3,452,442 |   | $ | 3,521,454 |   |
|                                                                          |       |                                |       |                                 |       |   |   |   |   |
| Operating Expenses:                                                           |       |                                |       |                                 |       |   |   |   |   |
| Taxes on production and property                                              |       | 683,658                             |       | 692,070                              |       | 232,004 |   | 239,370 |   |
| Operating cost charges                                                        |       | 389,950                             |       | 382,627                              |       | 129,280 |   | 127,405 |   |
|                                                                          |       |                                |       |                                 |       |   |   |   |   |
| Total Operating Expenses                                                      |       | 1,073,608                           |       | 1,074,697                            |       | 361,284 |   | 366,775 |   |
|                                                                          |       |                                |       |                                 |       |   |   |   |   |
| Net Proceeds to the Trust                                                     |       | 8,950,723                           |       | 9,090,828                            |       | 3,091,158 |   | 3,154,679 |   |
|                                                                          |       |                                |       |                                 |       |   |   |   |   |
| General and Administrative Expenses                                           |       | (651,903                            | )          | (671,255                             | )          | (242,168 | ) | (140,679 | ) |
|                                                                          |       |                                |       |                                 |       |   |   |   |   |
| Interest Income                                                               |       | 838                                 |       | 748                                  |       | 405 |   | 259 |   |
|                                                                          |       |                                |       |                                 |       |   |   |   |   |
| Cash Proceeds on Sale of Net Profits  Interests                               |       | 80,205                              |       | 10,293                               |       | 0 |   | 0 |   |
|                                                                          |       |                                |       |                                 |       |   |   |   |   |
| Distributable Income                                                          |       | 8,379,863                           |       | 8,430,614                            |       | 2,849,395 |   | 3,014,259 |   |
|                                                                          |       |                                |       |                                 |       |   |   |   |   |
| Cash Reserve                                                                  |       | (100,000                            | )          | (115,000                             | )          | 0 |   | 0 |   |
|                                                                          |       |                                |       |                                 |       |   |   |   |   |
| Quarterly Distribution Amount                                                 |       | $                                   | 8,279,863  |                                 | $          | 8,315,614 |   | $ | 2,849,395 |   | $ | 3,014,259 |   |
|                                                                          |       |                                |       |                                 |       |   |   |   |   |
| Distributable Income Per Unit (5,900,000 units  authorized and outstanding)   |       | $                                   | 1.4203     |                                 | $          | 1.4289 |   | $ | 0.4829 |   | $ | 0.5109 |   |
|                                                                          |       |                                |       |                                 |       |   |   |   |   |
| Quarterly Distribution Per Unit (5,900,000 units  authorized and outstanding) |       | $                                   | 1.4034     |                                 | $          | 1.4094 |   | $ | 0.4829 |   | $ | 0.5109 |   |
|                                                                               |            |                                     |            |                                      |            |  |  |  |  |  |  |  |  |  |

# ** **

# **The accompanying notes are an integral part of thesefinancial statements.**

 

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**EASTERN AMERICAN NATURAL GAS TRUST**

 

**CONDENSED STATEMENTS OF ASSETS, LIABILITIES AND TRUST CORPUS**

 
|                                                             |   | **September 30, 2004** | ** ** | **December 31, 2003** |   |
|------------------------------------------------------------------|--------|------------------------|------------|-----------------------|--------|
| * *                                                         |   | **(Unaudited)**        |       |                  |   |
|                                                             |   |                   |       |                  |   |
| Assets:                                                          |   |                   |       |                  |   |
|                                                             |   |                   |       |                  |   |
| Cash                                                             |   | $                      | 284,732    |                  | $      | 115,205 |   |
| Net Proceeds Receivable                                          |   | 3,091,158              |       | 2,678,769             |   |
| Net Profits Interests in Gas Properties                          |   | 93,162,180             |       | 93,162,180            |   |
| Accumulated Amortization                                         |   | (61,304,604            | )          | (58,519,514           | )      |
|                                                             |   |                   |       |                  |   |
| Total Assets                                                     |   | $                      | 35,233,466 |                  | $      | 37,436,640 |   |
|                                                             |   |                   |       |                  |   |
| Liabilities and Trust Corpus:                                    |   |                   |       |                  |   |
|                                                             |   |                   |       |                  |   |
| Trust General and Administrative                                 |   |                   |       |                  |   |
| Expenses Payable                                                 |   | $                      | 211,495    |                  | $      | 161,772 |   |
| Distributions Payable                                            |   | 2,849,395              |       | 2,417,202             |   |
| Trust Corpus (5,900,000 Trust Units authorized  and outstanding) |   | 32,172,576             |       | 34,857,666            |   |
|                                                             |   |                   |       |                  |   |
| Total Liabilities and Trust Corpus                               |   | $                      | 35,233,466 |                  | $      | 37,436,640 |   |
|                                                                  |        |                        |            |                       |        |  |  |  |

 

**The accompanying notes are an integral partof these financial statements.**

 

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**EASTERN AMERICAN NATURAL GAS TRUST**

** **

**CONDENSED STATEMENTS OF CHANGES IN TRUST CORPUS**

*(Unaudited)*

 
| ** **                               | ** ** | **Nine Months  Ended  September 30, 2004** | ** ** | **Nine Months  Ended  September 30, 2003** | ** ** |
|------------------------------------------|------------|--------------------------------------------|------------|--------------------------------------------|------------|
|                                     |       |                                       |       |                                       |       |
| Trust Corpus, Beginning of Period        |       | $                                          | 34,857,666 |                                       | $          | 38,695,799 |   |
| Distributable Income                     |       | 8,379,863                                  |       | 8,430,614                                  |       |
| Distributions Payable to Unitholders     |       | (8,279,863                                 | )          | (8,315,614                                 | )          |
| Amortization of Net Profits Interests in |       |                                       |       |                                       |       |
| Gas Properties                           |       | (2,785,090                                 | )          | (3,065,998                                 | )          |
|                                     |       |                                       |       |                                       |       |
| Trust Corpus, End of Period              |       | $                                          | 32,172,576 |                                       | $          | 35,744,801 |   |

 

**The accompanying notes are an integral partof these financial statements.**

 

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**EASTERN AMERICAN NATURAL GAS TRUST**

 

**NOTES TO UNAUDITED CONDENSED FINANCIALSTATEMENTS**

 

NOTE 1. Organization of the Trust

 

The EasternAmerican Natural Gas Trust (the “Trust”) was formed under the Delaware BusinessTrust Act pursuant to a Trust Agreement (the “Trust Agreement”) among EasternAmerican Energy Corporation (“Eastern American”), as grantor, Bank of MontrealTrust Company, as Trustee (“Trustee”), and Wilmington Trust Company, asDelaware Trustee (the “Delaware Trustee”). Effective May 8, 2000, The Bank of New York acquired the corporate trustbusiness of the then current Trustee and consequently is currently serving asTrustee.

 

The Trust wasformed to acquire and hold net profits interests (the “Net Profits Interests”)created from the working interests owned by Eastern American in 650 producinggas wells and 65 proved development well locations (the “Development Wells”) inWest Virginia and Pennsylvania (the “Underlying Properties”).

 

On March 15, 1993, 5,900,000 Depositary Units were issued in a publicoffering at an initial public offering price of $20.50 per DepositaryUnit.  Each Depositary Unit consists ofbeneficial ownership of one unit of beneficial interest (“Trust Unit”) in theTrust and a $20 face amount beneficial ownership interest in a $1,000 faceamount zero coupon United States Treasury Obligation (“Treasury Obligation”)maturing on May 15, 2013.  The financialstatements of the Trust to which these notes relate do not incorporateinformation concerning the Treasury Obligations, the beneficial interest inwhich is held for the Unitholders by the Depositary.

 

The Net Profits Interests are passive in nature, and neither theTrustee nor the Delaware Trustee has management control or authority over, norany responsibility relating to, the operation of the properties subject to theNet Profits Interests.  The TrustAgreement provides, among other things, that the Trust shall not engage in anybusiness or commercial activity or acquire any asset other than the Net ProfitsInterests initially conveyed to the Trust; the Trustee may establish a reservefor payment of any liability that is contingent, uncertain in amount or is notcurrently due and payable; the Trustee is authorized to borrow funds requiredto pay liabilities of the Trust, provided that such borrowings are repaid infull prior to further distributions to Unitholders; and the Trustee will makequarterly cash distributions to Unitholders from funds of the Trust.

 

After the Trust was formed, 59 of the 65 Development Wells were drilledand completed. The remaining six Development Wells were not drilled. Cleartitle to two of the Development Wells could not be established, and they wereexcluded from the Trust in accordance with the conveyance transferring them tothe Trust. Eastern American asserted the remaining four undrilled DevelopmentWells, if drilled, would be too close to then existing wells on the property oran adjoining property, and thereafter settled its dispute with the Trust aboutdrilling those four Development Wells by agreeing instead to pay the Trustannually for the annual volume of gas projected to be produced from thoseDevelopment Wells as if they had been drilled.

 

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The NetProfits Interests initially consisted of a royalty interest (“Royalty NPI”) in322 wells and a term interest (“Term NPI”) in the remaining wells andlocations. As of September 30, 2004, the Trust held Net Profits Interests in672 wells, consisting of Royalty NPI in 317 wells and Term NPI in the remainingwells. The Term NPI expire by their terms on May 15, 2013, or such earlier timeas 41,683 MMcf of gas has been produced that is attributable to Eastern American’snet revenue interest in the properties burdened by the Term NPI. As of December31, 2003, based on the Independent Petroleum Engineer’s Report, 19,548 MMcf ofthe maximum 41,683 MMcf has been produced.

 

Between May15, 2012, and May 15, 2013 (the “Liquidation Date”), the Trustee is required tosell all the Royalty NPI and liquidate the Trust. Under the Trust Agreement,Eastern American has the right of first refusal to purchase any of the RoyaltyNPI the Trustee is required to sell after the Liquidation Date. If it exercisesthis right, Eastern American must pay the appraised Fair Value (as defined inthe Trust Agreement) of the Royalty NPI, or the relevant third party offerprice if a third party has offered to purchase the Royalty NPI. Unitholders ofrecord on the relevant record dates will receive the net proceeds from sellingthe Royalty NPI in accordance with the Trust Agreement, and also will receivetheir respective share of the matured face amount of the Treasury Obligationsheld by the Depositary.

 

NOTE 2.  Basis of Presentation

 

Theinformation furnished is based upon certain estimates of production for theperiods presented and is therefore subject to adjustment in future periods toreflect actual production for the periods presented.  The information furnished reflects alladjustments which are, in the opinion of the Trustee, necessary for a fairpresentation of the results for the interim periods presented.  The accompanying financial statements areunaudited interim financial statements, and should be read in conjunction withthe audited financial statements and notes thereto included in the Trust’sAnnual Report on Form 10-K, as amended, for the year ended December 31, 2003.

 

NOTE 3.  Trust AccountingPolicies

 

The Trust serves as a pass-through entity, with items of depletion,interest income and expense, and income tax attributes being based upon thestatus and elections of Unitholders. Thus, the Statements of Distributable Income show Distributable Income,defined as Trust income available for distribution to Unitholders subject toTrustees Cash Reserves described in Part I, Item 2 before application of thoseUnitholders’ additional expenses, if any, for depletion, interest expense, andincome taxes.  The Trust uses the accrualbasis to recognize revenue, with Royalty Income recognized as reserves areextracted from properties and sold. Expenses are also presented on an accrual basis.  Actual cash receipts will vary from theaccrual of revenues due to, among other reasons, the payment provisions of thegas purchase contract between the Trust and Eastern Marketing Corporation  (a subsidiary of Eastern American), whichrequires payment with respect

 

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to gas production for a calendar quarter to be made to the Trust on orbefore the tenth day of the third month following such quarter.

 

The Net Profits Interests are assessed annually to determine whethertheir net capitalized cost is impaired. The Trust will determine if a writedown is necessary to its investmentin the Net Profits Interests in gas properties to the extent that totalcapitalized costs, less accumulated amortization, exceed undiscounted futurenet revenues attributable to proved gas reserves of the Underlying Properties.  The Trust will then provide a writedown tothe extent that the net capitalized costs exceed the discounted future netrevenues attributable to proved gas reserves of the Underlying Properties.   Any such writedown would not reducedistributable income, although it would reduce Trust Corpus.

 

Amortization of the Net Profits Interests in Gas Properties iscalculated on a units-of-production basis, whereby the Trust’s cost basis inthe properties is divided by total Trust proved reserves to derive anamortization rate per reserve unit.  Suchamortization does not reduce distributable income, rather it is chargeddirectly to Trust Corpus.

 

The financial statements of the Trust differ from financial statementsprepared in accordance with accounting principles generally accepted in theUnited States of America due to the following; i) certain cash reserves may beestablished for contingencies which were not accrued in the financialstatements; ii) amortization of the Net Profits Interests in gas properties ischarged directly to Trust Corpus; and iii) the sale of the Net ProfitsInterests is reflected in the Statements of Distributable Income as cashproceeds to the Trust.

 

NOTE 4. Income Taxes

 

The Trust is a grantor trust and is not required to pay federal orstate income taxes.  Accordingly, noprovision for federal or state income taxes has been made.  All income is taxed to the Unitholders of theTrust.

 

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ITEM 2.  Management’s Discussionand Analysis of Financial Condition and Results of Operations

 

Cautionary Statement

 

The Trust, theTrustee and Eastern American, its officers or its agents on behalf of the Trustmay, from time to time, make forward-looking statements (other than statementsof historical fact).  When used herein,the words “anticipates,” “expects,” “believes,” “intends” or “projects” andsimilar expressions are intended to identify forward-looking statements.  To the extent that any forward-lookingstatements are made, neither the Trust, the Trustee or Eastern American is ableto predict future changes in gas prices, gas production levels, economicactivity, legislation and regulation, and certain changes in expenses of theTrust.  In addition, the Trust’s futureresults of operations and other forward looking statements contained in thisitem and elsewhere in this report involve a number of risks anduncertainties.  As a result of variationsin such factors, actual results may differ materially from any forward-lookingstatements.  Some of these factors aredescribed below.  The Trust, the Trusteeand Eastern American disclaim any obligations to update forward lookingstatements and all such forward-looking statements in this document areexpressly qualified in their entirety by the cautionary statements in thisparagraph and by the statements in the Annual Report on Form 10-K.

 

General

 

The Trust does not conduct any operations or activities.  The Trust’s purpose is, in general, to holdthe Net Profits Interests, to distribute the cash proceeds to Unitholders whichthe Trust receives in respect of the Net Profits Interests (net of Trustexpenses), and to perform certain administrative functions in respect of theNet Profits Interests and the Depositary Units. Accordingly, the Trust derives substantially all of its income and cashflows from the Net Profits Interests. The Trust has no source of liquidity or capital resources other than thecash flows from the Net Profits Interests.

 

The Net Profits Interests were created pursuant to conveyances (the “Conveyances”)from Eastern American to the Trust.  Inconnection therewith, Eastern American assigned its rights under a gas purchasecontract (the “Gas Purchase Contract”) which obligates Eastern MarketingCorporation, a subsidiary of Eastern American, to purchase all of the naturalgas produced from the Underlying Properties that is attributable to the NetProfits Interests.

 

The Conveyancesand the Gas Purchase Contract entitle the Trust to receive an amount of cashfor each calendar quarter equal to the Net Proceeds for such quarter.  “Net Proceeds” for any calendar quartergenerally means an amount of cash equal to (a) 90% of a volume of gas equal to(i) the volume of gas produced during such quarter attributable to theUnderlying Properties less (ii) a volume of gas equal to “Chargeable Costs” forsuch quarter, multiplied by (b) the applicable price for such quarter under theGas Purchase Contract.  “Chargeable Costs”is that volume of gas which equates in value, determined by reference to therelevant sales price under the Gas Purchase Contract or the Conveyances, asapplicable, to the sum of the “Operating Cost Charge”, “Capital Costs” and “Taxes”.

 

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The “OperatingCost Charge” for 2004 is based on an annual rate of $521,340, and for 2003 wasan annual rate of $510,444.  As providedin the Conveyances, the Operating Cost Charge will fluctuate based on thelesser of (A) five percent (5%) or (B) a percentage, not less than zero percent(0%), equal to the percentage increase, if any, in the average weekly earningsof Crude Petroleum and Gas Production Workers for the last calendar year, asshown by the index of average weekly earnings of Crude Petroleum and GasProduction Workers, as published by the United States Department of Labor,Bureau of Labor Statistics, based on December-to-December comparison.  During 2003, the United States Department ofLabor, Bureau of Labor Statistics converted all of its industry-basedstatistics to a different reporting system that was developed in cooperationwith the United States’ North American Free Trade Agreement Partners, Canadaand Mexico, in an effort to standardize and modernize reporting codes.  As a result of this conversion, the CrudePetroleum and Gas Production Workers index is no longer available for use inthe annual calculation of overhead adjustment called for in the various Councilof Petroleum Accountants Societies, or COPAS, model forms after March 2003.

 

Research by COPAScovering the past ten years indicated that by blending the Oil and GasExtraction Index with the Professional and Technical Services Index, theresults approximate the data from the old Crude Petroleum and Natural GasWorkers Index.  Accordingly, COPAS hascalculated the percentage change in the simple average of the Oil andExtraction Index and the Professional and Technical Services Index, commencingin April 2004.  This “Overhead AdjustmentIndex” has been provided as a guidance to the industry as a replacement indexfor use in calculating the overhead adjustment. The adjustment for the effective time period is 2.3%.  Since the Conveyance Documents do notspecifically provide for a replacement index if the Crude Petroleum and GasProduction Workers Index was no longer published, Eastern American believes,and advised the Trustee, that the “Overhead Adjustment Index” as calculated byCOPAS is a reasonable index to utilize since the industry is generally adoptingthe same as a replacement.  EasternAmerican, with the concurrence of the Trustee, will utilize this “OverheadAdjustment Index” to adjust the “Operating Cost Charge” so long as such indexis published by COPAS.  The OperatingCost Charge was not increased as Development Wells were completed but isreduced for each well that is sold (free of the Net Profits Interests) orplugged and abandoned.  “Capital Costs”means Eastern American’s working interest share of capital costs for operationson the Underlying Properties, but only for items having a useful life of atleast three years, and not including any capital costs incurred in drilling theDevelopment Wells.  “Taxes” means advalorem taxes, production and severance taxes, and other taxes imposed on theTrust’s interest in the Underlying Properties, or production therefrom.

 

Pursuant to the Gas Purchase Contract, Eastern Marketing is obligatedto purchase such gas production at a purchase price per Mcf equal to the IndexPrice.  The Index Price for any quarteris determined solely by reference to the Variable Price component.  The Variable Price for any quarter is equalto the Henry Hub Average Spot Price (as defined) per MMBtu plus $0.30 perMMBtu, multiplied by 110% to effect a fixed adjustment for Btu content.  The Henry Hub Average Spot Price is defined asthe price per MMBtu determined for any calendar quarter equal to the priceobtained with respect to each of the three months in such quarter, in themanner specified below, and then taking the average of the prices determinedfor each of such three months.  The pricedetermined for

 

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any month of such quarter is equal to the average of (i) the finalsettlement price per MMBtu for Henry Hub Gas Futures Contracts (as defined), asreported in *The Wall Street Journal*, for suchcontracts which expired in each of the five months prior to such month, (ii)the final settlement price per MMBtu for Henry Hub Gas Futures Contracts, asreported in *The Wall Street Journal*, for suchcontracts which expire during such month and (iii) the closing settlement priceper MMBtu of Henry Hub Gas Futures Contracts determined as of the contractsettlement date for such month, as reported in *The WallStreet Journal*, for such contracts which expire in each of the sixmonths following such month.  A Henry HubGas Futures Contract is defined as a gas futures contract for gas to bedelivered to the Henry Hub that is traded on the New York Mercantile Exchange.

 

Accordingly, the Index Price payable to the Trust for production may behigher or lower based on the fluctuations in natural gas futures prices duringthe relevant calculation period.  Theprice payable to the Trust will have a direct impact, positively or negatively,on the quarterly distributions payable by the Trust to its unit holders.

 

Eastern Americanhad a disagreement with the Trust over Eastern American’s obligation to drillcertain Development Wells that were closely offset by third parties.  The Trust agreed that in lieu of drillingthese closely offset Development Wells that Eastern American could provide the Trust,on an annual basis commencing on April 1, 1997, and over the remaining life ofthe Trust, a volume of gas which is equal to the projected volumes of the wellsas if they had been drilled.  Thesevolumes have been estimated by Ryder Scott Company, independent petroleumengineers.  During the quarter endedSeptember 30, 2004, an additional volume of 4,457 Mcf was delivered to theTrust, as compared to 4,822 Mcf for the quarter ended September 30, 2003.  These additional volumes fulfill EasternAmerican’s obligation to provide volumes for Development Wells that had beenclosely offset by third parties.

 

Eastern American has fulfilled its obligation with respect to thedrilling of the Development Wells. Since the inception of the Trust, Easternhas drilled a total of 59 Development Wells, which are online andproducing.  (See the Trust’s Form 10-K,as amended, for the fiscal year ended December 31, 2003 for a more completedescription of the Development Wells.)

 

During the quarter ended March 31, 2003, a Coal Lessee contactedEastern American and inquired as to whether it would sell the U.S. Steel Well #26, which is a well in which the Trust owns a Net Profits Interests.  The Coal Lessee stated that the well would materiallyinterfere with the Coal Lessee’s proposed mining operations.  Eastern American reviewed the Trust Agreementand production from this well to determine if it could cause the Trust to sellits Net Profits Interest in the well. Upon review, it was discovered that the Net Profits Interests associatedwith the U.S. Steel #26 well accounted for less than 0.25% of the totalproduction from the Underlying Properties for the prior twelve (12) monthperiod.  Eastern American advised theCoal Lessee that it could sell this well. Eastern American received $11,437 for the sale of the U.S Steel Well#26.  The effective date of the sale wasMarch 1, 2003.  However, the transactiondid not close until April 17, 2003. Therefore, the Trust’s share of the proceeds of $10,293 was included inthe Distributable Income of the Trust during the quarter ended June 30, 2003.

 

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During the quarter ended June 30, 2004, an oil and gas companycontacted Eastern American and inquired as to whether it would sell certainassets situated in Centre County, Pennsylvania including the Horne #1, Horne #2and Horne #15 wells (the Horne Underlying Properties), which are wells in whichthe Trust owns a Net Profits Interests. Eastern American reviewed the Trust Agreement and certified to theTrustee that:  (i) the gross purchaseprice to be received by Eastern American for the sale of the Horne UnderlyingProperties in a single transaction or a series of related transactions is lessthan $500,000; (ii) the Assignee of the Horne Underlying Properties is not anAffiliate of Eastern American; (iii) the aggregate sale proceeds of $80,205 tobe received by the Trust from Eastern American (the Trust’s Horne SaleProceeds) represents the fair value to the Trust for Net Profits Interests tobe released by the Trustee in connection with Eastern American’s sale of theHorne Underlying Properties; and (iv) the Trust’s Horne Sale Proceeds plus theaggregate sale proceeds received by the Trust pursuant to Section 3.02(b)(ii)of the Trust Agreement with respect to all other Net Profits Interestspreviously released by the Trustee pursuant to Section 3.02(b) during the mostrecently completed twelve calendar months does not exceed Five Hundred Thousandand 00/100 Dollars ($500,000).  EasternAmerican advised the oil and gas company that it could sell these wells.  The effective date of the sale was May 1,2004.  The Trust’s share of the proceedsof $80,205 was included in the Distributable Income of the Trust during thequarter ending June 30, 2004.

 

Over the remaining life of the Trust, additional wells may be disposedof for similar reasons.

 

**Critical AccountingPolicies**

** **

The following is a summary of the critical accounting policies followedby the Trust.

 

*Basis of Accounting:*

 

The financial statements of the Trust differ from financial statementsprepared in accordance with accounting principles generally accepted in theUnited States of America due to the following; i) certain cash reserves may beestablished for contingencies which were not accrued in the financialstatements; ii) amortization of the Net Profits Interests in gas properties ischarged directly to Trust Corpus; and iii) the sale of the Net ProfitsInterests is reflected in the Statements of Distributable Income as cashproceeds to the Trust.

 

*Net Profits Interests in Gas Properties:*

 

The Net Profits Interests in gas properties are periodically assessedto determine whether their net capitalized cost is impaired.  The Trust will determine if a writedown isnecessary to its investment in the Net Profits Interests in gas properties tothe extent that total capitalized costs, less accumulated amortization, exceedundiscounted future net revenues attributable to proved gas reserves of theUnderlying Properties.  The Trust willthen provide a writedown to the extent that the net capitalized costs exceedthe discounted future net revenues attributable to proved gas reserves of theUnderlying Properties.  Any suchwritedown would not reduce distributable income, although it would reduce TrustCorpus.

 

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Amortization of the Net Profits Interests in gas properties iscalculated on a units-of-production basis, whereby the Trust’s cost basis inthe properties is divided by total Trust proved reserves to derive anamortization rate per reserve unit.  Suchamortization does not reduce distributable income, rather it is chargeddirectly to Trust Corpus.  Revisions toestimated future units-of-production are treated on a prospective basisbeginning on the date significant revisions are known.

 

The Net Profits Interest impairment test and the determination ofamortization rates are dependent on estimates of proved gas reservesattributable to the Trust.  Numerousuncertainties are inherent in estimating reserve volumes and values, includingeconomic and operating conditions, and such estimates are subject to change asadditional information becomes available.

 

**Liquidity and CapitalResources**

** **

The Trust has no source of liquidity or capital resources other thanthe distributions received from the Net Profits Interests.

 

In accordance with the provisions of the Conveyances, generally allrevenues received by the Trust, net of Trust administrative and operatingexpenses and the amount of established reserves, are distributed currently tothe Unitholders.

 

The Trust did not have any contractual obligations as of September 30,2004.  At September 30, 2004, the Trusthad accounts payable of $211,495 and distributions payable of $2,849,395.

 

Comparison ofResults of Operations for Three Months Ended September 30, 2004 and ThreeMonths Ended September 30, 2003

 

The Trust’s distributable income was $2,849,395 for the three monthsended September 30, 2004 as compared to $3,014,259 for the three months endedSeptember 30, 2003.  This decrease wasdue to a decrease in Royalty Income for the three months ended September 30,2004 ($3,452,442) as compared to the three months ended September 30, 2003($3,521,454).  The decrease in RoyaltyIncome was due to a decrease in production of gas attributable to the NetProfits Interests for the three months ended September 30, 2004 (485 Mmcf) ascompared to the three months ended September 30, 2003 (552 Mmcf).  This decrease in production was offset by anincrease in the price payable to the Trust under the Gas Purchase Contract asdiscussed below ($7.106 per Mcf for the three months ended September 30, 2004;$6.381 per Mcf for the three months ended September 30, 2003).  The decline in production is primarilyattributable to natural production declines and the sale of wells.  Taxes on production and property were$232,004 for the three months ended September 30, 2004 as compared to $239,370for the three months ended September 30, 2003. The decrease in taxes is duedirectly to the decrease in Royalty Income as discussed above.  Trust general and administrative expenseswere $242,168 for the three months ended September 30, 2004 as compared to$140,679 for the three months ended September 30, 2003.  This increase in general and administrativeexpense was due primarily to an increase in legal fees of $79,716, due toadditional

 

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filings, pressreleases, costs associated with the implementation of Section 404 ofSarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”) and work associated in connectionwith a proxy solicitation to approve the selection of a successor trustee forthe Trust.  Also, an increase inadditional administrative expenses of $15,269 occurred due to additional costsassociated with the implementation of Section 404 of Sarbanes-Oxley Act of2002.

 

The price payable to the Trust for gas production attributable to theNet Profits Interests was $7.106 per Mcf for the three months ended September30, 2004 and $6.381 per Mcf for the three months ended September 30, 2003.  The price per Mcf was higher for the threemonths ended September 30, 2004 than for the corresponding three month periodended September 30, 2003 due to an increase in the average spot market pricefor gas delivered at the Henry Hub near Henry, Louisiana ($6.160 per Dth forthe three months ended September 30, 2004; $5.501 per Dth for the three monthsended September 30, 2003).

 

Comparison ofResults of Operations for Nine Months Ended September 30, 2004 and Nine Months EndedSeptember 30, 2003

 

The Trust’s distributable income was $8,379,863 for the nine monthsended September 30, 2004 as compared to $8,430,614 for the nine months endedSeptember 30, 2003.  The Trust’sdistributable amount was $8,279,863 for the nine months ended September 30,2004 compared to $8,315,614 for the nine months ended September 30, 2003.  The difference in distributable income anddistributable amount is due to the cash reserve established during the ninemonths ended September 30, 2003 to facilitate the payment of vendor invoices ona timely basis.  During the nine monthsended September 30, 2004, the Trustee added an additional $100,000 to thereserve as compared to $115,000 for the nine months ended September 30,2003.  The decrease in distributableincome was due to a decrease in Royalty Income for the nine months endedSeptember 30, 2004 ($10,024,331) as compared to the nine months ended September30, 2003 ($10,165,525).  The decrease inRoyalty Income was due to a decrease in production of gas attributable to theNet Profits Interests for the nine months ended September 30, 2004 (1,508 Mmcf)as compared to the nine months ended September 30, 2003 (1,635 Mmcf).  This decrease was offset by an increase inthe average price payable to the Trust under the Gas Purchase Contract asdiscussed below ($6.645 per Mcf for the nine months ended September 30, 2004;$6.207 per Mcf for the nine months ended September 30, 2003).  The decline in production is primarilyattributable to natural production declines and the sale of wells.  Taxes on production and property were$683,658 for the nine months ended September 30, 2004 as compared to $692,070for the nine months ended September 30, 2003. The decrease in taxes is due directly to the decrease in Royalty Incomeas discussed above.    The distributableincome includes Cash Proceeds on Sale of Net Profits Interests of $80,205 forthe nine months ended September 30, 2004, while $10,293 was recognized in thecorresponding nine months of the prior year. Amortization of Net Profits Interests in Gas Properties was $2,785,090for the nine months ended September 30, 2004 as compared to $3,065,998 for thenine months ended September 30, 2003. This decrease was primarily due to the decrease in production volumes.

 

The average price payable to the Trust for gas production attributableto the Net Profits Interests was $6.645 per Mcf for the nine months endedSeptember 30, 2004 and $6.207 per Mcf for the nine

 

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months ended September 30, 2003. The price per Mcf was higher for the nine months ended September 30,2004 than for the corresponding nine month period ended September 30, 2003 dueto an increase in the average spot market price for gas delivered at the HenryHub near Henry, Louisiana ($5.741 per Dth for the nine months ended September30, 2004; $5.342 per Dth for the nine months ended September 30, 2003).

 

**Off-Balance SheetArrangements**

 

The Trust does not have any off-balance sheet arrangements that have orare reasonably likely to have a current or future effect on the Trust’sfinancial condition, changes in financial condition, revenue or expenses,results of operations, liquidity, capital expenditures or capital resourcesthat is material to investors.

 

ITEM 3.  Quantitative andQualitative Disclosures about Market Risk

 

The Trust does not engage in any operations, and does not utilizemarket risk sensitive instruments, either for trading purposes or for otherthan trading purposes.  As describedelsewhere herein, the Depositary Units consist of beneficial ownership of oneunit of beneficial interest in the Trust and a $20 face amount beneficialownership interest in a $1,000 face amount zero coupon Treasury Obligationmaturing on May 15, 2013.  High and lowprice information for the Treasury Obligations is included under Part II Item5.  As described elsewhere herein, gasproduction attributable to the Net Profits Interest is sold to a wholly ownedsubsidiary of Eastern American pursuant to the Gas Purchase Contract describedherein.

 

ITEM 4.  Controls and Procedures

 

*Evaluation of Disclosure Controls andProcedures. *TheTrustee maintains disclosure controls and procedures designed to ensure thatinformation required to be disclosed by the Trust in the reports that it filesor submits under the Securities Exchange Act of 1934, as amended, is recorded,processed, summarized and reported within the time periods specified in the SEC’srules and regulations.  Disclosurecontrols and procedures include controls and procedures designed to providereasonable assurance that information required to be disclosed by the Trust isaccumulated and communicated by several parties, including without limitation,the working interest owner, Eastern American Energy Corporation (“Eastern American”),and the independent reserve engineer to The Bank of New York, as Trustee of theTrust, and its employees who participate in the preparation of the Trust’speriodic reports as appropriate to allow timely decisions regarding requireddisclosure.

 

As of September 30, 2004, the Trustee carried out an evaluation of theTrustee’s disclosure controls and procedures. Patrick Tadie, a Vice President of the Trustee, has concluded that thecontrols and procedures are effective at the reasonable assurance level, whilenoting certain limitations on disclosure controls and procedures as set forthbelow.

 

Due to the contractual arrangements of (i) the Trust Agreement, and(ii) the rights of the Trustee under the Conveyances regarding informationfurnished by Eastern American, there are

 

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certain potential weaknesses that may limit the effectiveness ofdisclosure controls and procedures established by the Trustee or its employeesand their ability to verify the accuracy of certain financial information.  The contractual limitations creatingpotential weaknesses in disclosure controls and procedures may be deemed to include:

 

•      EasternAmerican and its consolidated subsidiaries manage (i) historical operatingdata, including production volumes, marketing of products, operating andcapital expenditures, environmental and other liabilities, the effects ofregulatory changes and the number of producing wells and acreage, (ii) plansfor future operating and capital expenditures and (iii) geological datarelating to reserves.  While the Trusteerequests material information for use in periodic reports as part of itsdisclosure controls and procedures, the Trustee does not manage thisinformation, and relies entirely on Eastern American to provide accurate andtimely information when requested for use in the Trust’s reports.

•      Underthe terms of the Trust Agreement, the Trustee is entitled to, and in fact does,rely upon certain experts in good faith, including (i) the independent reserveengineer with respect to the annual reserve report, which includes projectedproduction, operating expenses and capital expenses, and (ii) the independentauditors the Trustee has contracted with respect to the annual audit and quarterlyreviews of financial data provided by Eastern American.  Other than contracting independent auditorsand reviewing the financial and other information provided to the Trust byEastern American on a quarterly basis, the Trustee makes no independent or directverification of this financial or other information. While the Trustee has noreason to believe its reliance upon experts is unreasonable, this reliance onexperts and restricted access to information may be viewed as a weakness.

 

The Trustee does not intend to expand its responsibilities beyond thosepermitted or required by the Trust Agreement and those required underapplicable law.

 

**Changes inInternal Controls**

 

To the knowledge of the Trustee, there have been no significant changesin the Trust’s internal controls that could significantly affect the Trust’sinternal controls subsequent to the date the Trustee completed itsevaluation.  The Trustee notes forpurposes of clarification that it has no authority over, and makes no statementconcerning, the internal controls of Eastern American.

 

### **PARTII – OTHER INFORMATION**

### ** **

| ITEM 1. | Legal Proceedings.                                           |
|---------|--------------------------------------------------------------|
|    |                                                         |
|    | None.                                                        |
|    |                                                         |
| ITEM 2. | Unregistered Sales of Equity Securities and Use of Proceeds. |
|    |                                                         |
|    | None.                                                        |

 

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| ITEM 3. | Defaults Upon Senior Securities.                     |
|---------|------------------------------------------------------|
|    |                                                 |
|    | None.                                                |
|    |                                                 |
| ITEM 4. | Submission of Matters to a Vote of Security Holders. |
|    |                                                 |
|    | None.                                                |
|    |                                                 |
| ITEM 5. | Other Information.                                   |

 

For the calendar quarter ended September 30, 2004, the high and lowclosing prices of the Treasury Obligations (which have $1,000 face principalamount), as quoted in the over-the-counter market for United States Treasuryobligations were $704.20 and $660.00 respectively.  On September 30, 2004 the closing price ofthe Treasury Obligations, as quoted on such market, was $696.90.

 

**The Trust provides Unitholders with the option to separatethe related Treasury Obligation from the Trust Units.  Upon exercising this option, the Trusteetransfers such Trust Units from the name of the Depositary to the name of thewithdrawing Unitholder.  As of September30, 2004, this option was exercised on 119,900 Trust Units.  (See the Trust’s 10-K, as amended, for thefiscal year ended December 31, 2003 for a more complete description of theWithdrawal of Trust Units and Restriction on Transfer.)**

** **

The Bank of New York has given notice of its intention to resign as Trusteeand Depositary for the Eastern American Natural Gas Trust in accordance with(1) the Second Amended and Restated Trust Agreement of Eastern American NaturalGas Trust pursuant to which the Eastern American Natural Gas Trust was formed(the “Trust Agreement”) and (2) the Depositary Agreement (the “DepositaryAgreement”) under which Trust Units and Treasury Obligations (as defined in theTrust Agreement) are held for Trust Unitholders. Proxy materials for theappointment of a successor trustee at a meeting of Trust Unitholders onNovember 30, 2004 were mailed to Trust Unitholders on or before October 5,2004.  If Trust Unitholders approve theappointment of the successor trustee, the resignation of The Bank of New Yorkand the appointment of the successor trustee will take effect on January 1,2005.  The successor trustee will alsoreplace The Bank of New York as depositary.

 

On May 14, 2004, the Trust filed an amended annual report on Form 10-Kfor the year ended December 31, 2003. The amended annual report corrected the gas volume estimates of netproved reserves attributable to the Trust’s royalty and term net profitsinterests that were previously provided to the Trust and reported in the Trust’sannual report.  The Trust was informed bythe independent petroleum consultant who provided the Trust with the gasreserve information reported in the Trust’s 2003 annual report that theinformation was incorrect.  The filing ofthe amended annual report followed the Trust’s receipt of corrected estimatesfrom the independent petroleum consultant upon completion of that consultant’sreview.

 

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ITEM 6.   Exhibits.

 

(a)

 
| **Exhibit   Number** |   | **Description**                                                                                                                                  |   |
|----------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|                 |   |                                                                                                                                             |   |
| 3.1*                 |   | Second Amended and Restated Trust Agreement of Eastern American  Natural Gas Trust                                                               |   |
|                 |   |                                                                                                                                             |   |
| 4.1*                 |   | Specimen Depositary Receipt                                                                                                                      |   |
|                 |   |                                                                                                                                             |   |
| 4.2*                 |   | Form of NPI Royalty Deposit Agreement                                                                                                            |   |
|                 |   |                                                                                                                                             |   |
| 10.1*                |   | Form of Conveyance                                                                                                                               |   |
|                 |   |                                                                                                                                             |   |
| 10.2*                |   | Form of Term NPI Conveyance                                                                                                                      |   |
|                 |   |                                                                                                                                             |   |
| 10.3*                |   | Form of Gas Purchase Contact between Eastern American Energy  Corporation, Eastern Marketing Corporation and Eastern American Natural Gas  Trust |   |
|                 |   |                                                                                                                                             |   |
| 10.5*                |   | Form of Conveyance of Production Payment/Assignment of Production  from Eastern American Natural Gas Trust to Eastern Marketing Corporation      |   |
|                 |   |                                                                                                                                             |   |
| 10.6*                |   | Form of Assignment and Standby Performance Agreement                                                                                             |   |
|                 |   |                                                                                                                                             |   |
| 31.                  |   | Rule 13a-14(a)/15d-14(a) Certification                                                                                                           |   |
|                 |   |                                                                                                                                             |   |
| 32.                  |   | Section 1350 Certification                                                                                                                       |   |

 

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*      Incorporated by reference tothe indicated exhibits to filings previously made by the registrant with theSecurities and Exchange Commission.  Allreferences are to the registrant’s Registration Statement on Form S-1,Registration No. 33-56336, except for Exhibit 3.1, which is incorporated byreference to the Registrant’s Annual report on Form 10-K for the year endedDecember 31, 1994.

 

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### **SIGNATURES**

### ** **

Pursuant to the requirements of the Securities Exchange Act of 1934,the Registrant has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.

 
|   | EASTERN AMERICAN NATURAL GAS TRUST |
|--------|------------------------------------|
|   |                               |
|   | By: The Bank of New York, Trustee  |
|   |                               |
|   |                               | /s/   Patrick Tadie |   |
|   | Name:                              | Patrick Tadie |
|   | Title:                             | Vice President |
|   |                               | The Bank of New York |
|        |                                    |  |  |  |

 

Date:  November 8, 2004

 

The Registrant, Eastern American Natural Gas Trust, has no principalexecutive officer, principal financial officer, board of directors or personsperforming similar functions. Accordingly no additional signatures are available and none have beenprovided.

 

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