**UNITEDSTATESSECURITIES 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 June 30, 2004**                                                                                                              |
|                                                                                                                                                          |                                                                                            |
| **OR**                                                                                                                                                        |
|                                                                                                                                                          |                                                                                            |
| ** ̈**                                                                                                                                                    | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15 (d)  OF THE SECURITIES EXCHANGE ACT OF 1934** |
|                                                                                                                                                          |                                                                                            |
| **For the transition period  from          to          ** |
|                                                                                                                                                          |
| **Commission File Number 1-11748**                                                                                                                            |

 

| **EASTERN  AMERICAN NATURAL GAS TRUST**                                                                      |
|--------------------------------------------------------------------------------------------------------------|
| (Exact name of  registrant as specified in its charter)                                                      |
|                                                                                                         |   |   |
| **Delaware**                                                                                                 |   | **36-7034603** |
| (State or other jurisdiction of  incorporation or organization)                                              |   | (I.R.S. Employer  Identification No.) |
|                                                                                                         |   |   |
| **The Bank of New York  Care of BNY Midwest Trust Company  2 North Lasalle Street  Chicago, Illinois 60602** |
| (Address of principal executive offices)                                                                     |
| (Zip Code)                                                                                                   |
|                                                                                                         |
| **(312) 827-8500**                                                                                           |
| (Registrant’s telephone number, including  area 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 August 6, 2004, 5,900,000 Units of Beneficial Interest in EasternAmerican Natural Gas Trust were outstanding.

 

The Registrant inadvertently did not file reports on Form 8-K for its2003 quarterly press release announcing quarterly distributable income anddistribution amounts.

 

 

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**PARTI – FINANCIAL INFORMATION**

## ** **

## **ITEM 1.  Financial Statements**

 

**EASTERN AMERICAN NATURAL GAS TRUST**

 

**CONDENSED STATEMENTSOF DISTRIBUTABLE INCOME**

*(Unaudited)*

 
|                                                                          |   | **Six Months  Ended  June 30** |      | **Three  Months Ended  June 30** |   |
|-------------------------------------------------------------------------------|--------|--------------------------------|-----------|----------------------------------|--------|
|                                                                          |   | **2004**                       |      | **2003**                         |   | **2004** |   | **2003** |   |
|                                                                          |   |                           |      |                             |   |   |   |   |   |
| Royalty Income                                                                |   | $                              | 6,571,889 |                             | $      | 6,644,071 |   | $ | 3,491,809 |   | $ | 3,645,266 |   |
|                                                                          |   |                           |      |                             |   |   |   |   |   |
| Operating Expenses:                                                           |   |                           |      |                             |   |   |   |   |   |
| Taxes on production and property                                              |   | 451,654                        |      | 452,700                          |   | 239,050 |   | 247,887 |   |
| Operating cost charges                                                        |   | 260,670                        |      | 255,222                          |   | 130,335 |   | 127,611 |   |
|                                                                          |   |                           |      |                             |   |   |   |   |   |
| Total Operating Expenses                                                      |   | 712,324                        |      | 707,922                          |   | 369,385 |   | 375,498 |   |
|                                                                          |   |                           |      |                             |   |   |   |   |   |
| Net Proceeds to the Trust                                                     |   | 5,859,565                      |      | 5,936,149                        |   | 3,122,424 |   | 3,269,768 |   |
|                                                                          |   |                           |      |                             |   |   |   |   |   |
| General and Administrative Expenses                                           |   | (409,735                       | )         | (530,576                         | )      | (183,993 | ) | (226,818 | ) |
|                                                                          |   |                           |      |                             |   |   |   |   |   |
| Interest Income                                                               |   | 434                            |      | 489                              |   | 212 |   | 245 |   |
|                                                                          |   |                           |      |                             |   |   |   |   |   |
| Cash Proceeds on Sale of Net Profits  Interests                               |   | 80,205                         |      | 10,293                           |   | 80,205 |   | 10,293 |   |
|                                                                          |   |                           |      |                             |   |   |   |   |   |
| Distributable Income                                                          |   | 5,530,469                      |      | 5,416,355                        |   | 3,018,848 |   | 3,053,488 |   |
|                                                                          |   |                           |      |                             |   |   |   |   |   |
| Cash Reserve                                                                  |   | (100,000                       | )         | (115,000                         | )      | (100,000 | ) | (15,000 | ) |
|                                                                          |   |                           |      |                             |   |   |   |   |   |
| Quarterly Distribution Amount                                                 |   | $                              | 5,430,469 |                             | $      | 5,301,355 |   | $ | 2,918,848 |   | $ | 3,038,488 |   |
|                                                                          |   |                           |      |                             |   |   |   |   |   |
| Distributable Income Per Unit (5,900,000  units authorized and outstanding)   |   | $                              | 0.9374    |                             | $      | 0.9180 |   | $ | 0.5117 |   | $ | 0.5175 |   |
|                                                                          |   |                           |      |                             |   |   |   |   |   |
| Quarterly Distribution Per Unit (5,900,000  units authorized and outstanding) |   | $                              | 0.9204    |                             | $      | 0.8985 |   | $ | 0.4947 |   | $ | 0.5150 |   |

 

**The accompanyingnotes are an integral part of these financial statements.**

 

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**EASTERNAMERICAN NATURAL GAS TRUST**

 

**CONDENSEDSTATEMENTS OF ASSETS, LIABILITIES AND TRUST CORPUS**

 
|                                                             |   | **June 30,  2004** |       | **December  31, 2003** |   |
|------------------------------------------------------------------|--------|--------------------|------------|------------------------|--------|
|                                                             |   | **(Unaudited)**    |       |                   |   |
|                                                             |   |               |       |                   |   |
| Assets:                                                          |   |               |       |                   |   |
|                                                             |   |               |       |                   |   |
| Cash                                                             |   | $                  | 215,212    |                   | $      | 115,205 |   |
| Net Proceeds Receivable                                          |   | 3,202,629          |       | 2,678,769              |   |
| Net Profits Interests in Gas Properties                          |   | 93,162,180         |       | 93,162,180             |   |
| Accumulated Amortization                                         |   | (60,408,792        | )          | (58,519,514            | )      |
|                                                             |   |               |       |                   |   |
| Total Assets                                                     |   | $                  | 36,171,229 |                   | $      | 37,436,640 |   |
|                                                             |   |               |       |                   |   |
| Liabilities and Trust Corpus:                                    |   |               |       |                   |   |
|                                                             |   |               |       |                   |   |
| Trust General and Administrative Expenses Payable                |   | $                  | 183,993    |                   | $      | 161,772 |   |
| Distributions Payable                                            |   | 2,918,848          |       | 2,417,202              |   |
| Trust Corpus (5,900,000 Trust Units  authorized and outstanding) |   | 33,068,388         |       | 34,857,666             |   |
|                                                             |   |               |       |                   |   |
| Total Liabilities and Trust Corpus                               |   | $                  | 36,171,229 |                   | $      | 37,436,640 |   |

 

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

 

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** **

**EASTERNAMERICAN NATURAL GAS TRUST**

 

**CONDENSEDSTATEMENTS OF CHANGES IN TRUST CORPUS**

*(Unaudited)*

 
|                                                     |   | **Six Months  Ended  June 30, 2004** |       | **Six Months  Ended  June 30, 2003** |   |
|----------------------------------------------------------|--------|--------------------------------------|------------|--------------------------------------|--------|
|                                                     |   |                                 |       |                                 |   |
| Trust Corpus, Beginning of Period                        |   | $                                    | 34,857,666 |                                 | $      | 38,695,799 |   |
| Distributable Income                                     |   | 5,530,469                            |       | 5,416,355                            |   |
| Distributions Payable to Unitholders                     |   | (5,430,469                           | )          | (5,301,355                           | )      |
| Amortization of Net Profits Interests in  Gas Properties |   | (1,889,278                           | )          | (2,031,059                           | )      |
|                                                     |   |                                 |       |                                 |   |
| Trust Corpus, End of Period                              |   | $                                    | 33,068,388 |                                 | $      | 36,779,740 |   |

 

**Theaccompanying notes are an integral part of these financial statements.**

 

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**EASTERNAMERICAN NATURAL GAS TRUST**

 

**NOTES TO UNAUDITED CONDENSED FINANCIALSTATEMENTS**

 

NOTE 1. Organization of the Trust

 

The Eastern American Natural Gas Trust (the “Trust”) was formed underthe Delaware Business Trust Act pursuant to a Trust Agreement (the “Trust Agreement”)among Eastern American Energy Corporation (“Eastern American”), as grantor,Bank of Montreal Trust Company, as Trustee (“Trustee”), and Wilmington TrustCompany, as Delaware Trustee (the “Delaware Trustee”).  Effective May 8, 2000, The Bank of New Yorkacquired the corporate trust business of the then current Trustee andconsequently is currently serving as Trustee.

 

The Trust was formed to acquire and hold net profits interests (the“Net Profits Interests”) created from the working interests owned by EasternAmerican in 650 producing gas wells and 65 proved development well locations(the “Development Wells”) in West Virginia and Pennsylvania (the “UnderlyingProperties”).

 

On March 15, 1993, 5,900,000 Depositary Unitswere issued in a public offering at an initial public offering price of $20.50per Depositary Unit.  Each DepositaryUnit consists of beneficial ownership of one unit of beneficial interest(“Trust Unit”) in the Trust and a $20 face amount beneficial ownership interestin a $1,000 face amount zero coupon United States Treasury Obligation(“Treasury Obligation”) maturing on May 15, 2013.  The financial statements of the Trust to which these notes relatedo not incorporate information concerning the Treasury Obligations, thebeneficial interest in which 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 Net Profits Interests initially consisted of a royalty interest(“Royalty NPI”) in 322 wells and a term interest (“Term NPI”) in the remainingwells and locations. As of June 30, 2004, the Trust held Net Profits Interestsin 677 wells, consisting of Royalty NPI in 317 wells and Term NPI in theremaining wells. The Term NPI expire by their terms on May 15, 2013, or suchearlier time as 41,683 MMcf of gas has been produced that is attributable toEastern American’s net revenue interest in the properties burdened by the TermNPI. As of December 31, 2003, based on the Independent Petroleum Engineer’sReport, 19,548 MMcf of the maximum 41,683 MMcf has been produced.

 

Between May 15, 2012, and May 15, 2013 (the “Liquidation Date”), theTrustee is required to sell all the Royalty NPI and liquidate the Trust. Underthe Trust Agreement, Eastern American has the right of first refusal topurchase any of the Royalty NPI the Trustee is required to sell after theLiquidation Date. If it exercises this right, Eastern American must pay theappraised Fair Value (as defined in the Trust Agreement) of the Royalty NPI, orthe relevant third party offer price if a third party has offered to purchasethe Royalty NPI. Unitholders of record on the relevant record dates willreceive the net proceeds from selling the Royalty NPI in accordance with theTrust Agreement, and also will receive their respective share of the maturedface amount of the Treasury Obligations held by the Depositary.

 

NOTE 2. Basis of Presentation

 

The information furnished is based uponcertain estimates of production for the periods presented and is thereforesubject to adjustment in future periods to reflect actual production for theperiods presented.  The informationfurnished reflects all adjustments which are, in the opinion of the Trustee,necessary for a fair presentation of the results for the interim periodspresented.  The accompanying financialstatements are unaudited interim financial statements, and should be read inconjunction with the audited financial statements and notes thereto included inthe Trust’s Annual Report on Form 10-K, as amended, for the year endedDecember 31, 2003.

 

NOTE 3. Trust Accounting Policies

 

The Trust serves as a pass-through entity,with items of depletion, interest income and expense, and income tax attributesbeing based upon the status and elections of Unitholders.  Thus, the Statements of Distributable Incomeshow Distributable Income, defined as Trust income available for distributionto Unitholders subject to Trustees Cash Reserves described in Part I, Item 2before application of those Unitholders’ additional expenses, if any, fordepletion, interest expense, and income taxes. The Trust uses the accrual basis to recognize revenue, with RoyaltyIncome recognized as reserves are extracted from properties and sold.  Expenses are also presented on an accrualbasis.  Actual cash receipts will varyfrom the accrual of revenues due to, among other reasons, the paymentprovisions of the gas purchase contract between the Trust and Eastern MarketingCorporation  (a subsidiary of EasternAmerican), which requires payment with respect

 

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to gas production for a calendar quarter tobe made to the Trust on or before the tenth day of the third month followingsuch quarter.

 

The Net Profits Interests are assessedannually to 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.

 

Amortization of the Net Profits Interests inGas Properties is calculated on a units-of-production basis, whereby theTrust’s cost basis in the properties is divided by total Trust proved reservesto derive an amortization rate per reserve unit.  Such amortization does not reduce distributable income, rather itis charged directly to Trust Corpus.

 

The financial statements of the Trust differfrom financial statements prepared in accordance with accounting principlesgenerally accepted in the United States of America due to the following; i)certain cash reserves may be established for contingencies which were notaccrued in the financial statements; ii) amortization of the Net ProfitsInterests in gas properties is charged directly to Trust Corpus; and iii) thesale of the Net Profits Interests is reflected in the Statements of DistributableIncome as cash proceeds to the Trust.

 

NOTE 4. Income Taxes

 

The Trust is a grantor trust and is notrequired to pay federal or state income taxes. Accordingly, no provision for federal or state income taxes has beenmade.  All income is taxed to theUnitholders of the Trust.

 

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

** **

Cautionary Statement

 

 TheTrust, the Trustee and Eastern American, its officers or its agents on behalfof the Trust may, from time to time, make forward-looking statements (otherthan statements of historical fact). When used herein, the words “anticipates,” “expects,” “believes,” “intends”or “projects” and similar expressions are intended to identify forward-lookingstatements.  To the extent that anyforward-looking statements are made, neither the Trust, the Trustee or EasternAmerican is able to predict future changes in gas prices, gas productionlevels, economic activity, legislation and regulation, and certain changes inexpenses of the Trust.  In addition, theTrust’s future results of operations and other forward looking statementscontained in this item and elsewhere in this report involve a number of risksand uncertainties.  As a result ofvariations in such factors, actual results may differ materially from anyforward-looking statements.  Some ofthese factors are described below.  TheTrust, the Trustee and Eastern American disclaim any obligations to updateforward looking statements and all such forward-looking statements in thisdocument are expressly qualified in their entirety by the cautionary statementsin this paragraph and by the statements in the Annual Report on Form 10-K.

 

General

 

The Trust does not conduct any operations oractivities.  The Trust’s purpose is, ingeneral, to hold the Net Profits Interests, to distribute the cash proceeds toUnitholders which the Trust receives in respect of the Net Profits Interests(net of Trust expenses), and to perform certain administrative functions inrespect of the Net Profits Interests and the Depositary Units.  Accordingly, the Trust derives substantiallyall of its income and cash flows from the Net Profits Interests.  The Trust has no source of liquidity or capitalresources other than the cash flows from the Net Profits Interests.

 

The Net Profits Interests were createdpursuant to conveyances (the “Conveyances”) from Eastern American to theTrust.  In connection therewith, EasternAmerican assigned its rights under a gas purchase contract (the “Gas PurchaseContract”) which obligates Eastern Marketing Corporation, a subsidiary ofEastern American, to purchase all of the natural gas produced from theUnderlying Properties that is attributable to the Net Profits Interests.

 

The Conveyances and theGas Purchase Contract entitle the Trust to receive an amount of cash for eachcalendar 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.  “ChargeableCosts” is that volume of gas which equates in value, determined by reference tothe relevant 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 “Operating CostCharge” for 2004 is based on an annual rate of $521,340, and for 2003 was anannual rate of $510,444.  As provided inthe Conveyances, the Operating Cost Charge will fluctuate based on the lesserof (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 earnings ofCrude Petroleum and Gas Production Workers for the last calendar year, as shownby the index of average weekly earnings of Crude Petroleum and Gas ProductionWorkers, as published by the United States Department of Labor, Bureau of LaborStatistics, based on December-to-December comparison.  During 2003, the United States Department of Labor, Bureau ofLabor Statistics converted all of its industry-based statistics to a differentreporting system that was developed in cooperation with the United States’North American Free Trade Agreement Partners, Canada and Mexico, in an effortto standardize and modernize reporting codes. As a result of this conversion, the Crude Petroleum and Gas ProductionWorkers index is no longer available for use in the annual calculation ofoverhead adjustment called for in the various Council of Petroleum AccountantsSocieties, 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, the resultsapproximate the data from the old Crude Petroleum and Natural Gas WorkersIndex.  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 “OverheadAdjustment Index” has been provided as a guidance to the industry as areplacement index for use in calculating the overhead adjustment.  The adjustment for the effective time periodis 2.3%.  Since the Conveyance Documentsdo not specifically provide for a replacement index if the Crude Petroleum andGas Production Workers Index was no longer published, Eastern Americanbelieves, and advised the Trustee, that the “Overhead Adjustment Index” ascalculated by COPAS is a reasonable index to utilize since the industry isgenerally adopting the same as a replacement. Eastern American, with the concurrence of the Trustee, will utilize this“Overhead Adjustment Index” to adjust the “Operating Cost Charge” so long assuch index is published by COPAS.  TheOperating Cost Charge was not increased as Development Wells were completed butis reduced 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 obligated to purchase such gas production at a purchaseprice per Mcf equal to the Index Price. The Index Price for any quarter is determined solely by reference to theVariable Price component.  The VariablePrice for any quarter is equal to the Henry Hub Average Spot Price (as defined)per MMBtu plus $0.30 per MMBtu, multiplied by 110% to effect a fixed adjustmentfor Btu content.  The Henry Hub AverageSpot Price is defined as the price per MMBtu determined for any calendarquarter equal to the price obtained with respect to each of the three months insuch quarter, in the manner specified below, and then taking the average of theprices determined for each of such three months.  The price determined for

 

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any month of such quarter is equal to theaverage of (i) the final settlement price per MMBtu for Henry Hub Gas FuturesContracts (as defined), as reported 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 *TheWall Street Journal*, for such contracts which expire during suchmonth and (iii) the closing settlement price per MMBtu of Henry Hub Gas FuturesContracts determined as of the contract settlement date for such month, asreported in *TheWall Street Journal*, for such contracts which expire in each of thesix months following such month.  AHenry Hub Gas Futures Contract is defined as a gas futures contract for gas tobe delivered to the Henry Hub that is traded on the New York MercantileExchange.

 

Accordingly, the Index Price payable to theTrust for production may be higher or lower based on the fluctuations innatural gas futures prices during the relevant calculation period.  The price payable to the Trust will have adirect impact, positively or negatively, on the quarterly distributions payableby the Trust to its unit holders.

 

Eastern American had adisagreement with the Trust over Eastern American’s obligation to drill certainDevelopment 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 theTrust, on an annual basis commencing on April 1, 1997, and over the remaininglife of the Trust, a volume of gas which is equal to the projected volumes ofthe wells as if they had been drilled. These volumes have been estimated by Ryder Scott Company, independentpetroleum engineers.  During the quarterended June 30, 2004, an additional volume of 4,457 Mcf was delivered to theTrust, as compared to 4,822 Mcf for the quarter ended June 30, 2003.  These additional volumes fulfill EasternAmerican’s obligation to provide volumes for Development Wells that had beenclosely offset by third parties.

 

Eastern Americanhas fulfilled its obligation with respect to the drilling of the DevelopmentWells. Since the inception of the Trust, Eastern has drilled a total of 59Development Wells, which are online and producing.  (See the Trust’s Form 10-K, as amended, for the fiscal year endedDecember 31, 2003 for a more complete description of the Development Wells.)

 

During the quarter ended March 31, 2003, aCoal Lessee contacted Eastern American and inquired as to whether it would sellthe U.S. Steel Well # 26, which is a well in which the Trust owns a Net ProfitsInterests.  The Coal Lessee stated thatthe well would materially interfere with the Coal Lessee’s proposed miningoperations.  Eastern American reviewedthe Trust Agreement and production from this well to determine if it couldcause the Trust to sell its Net Profits Interest in the well.  Upon review, it was discovered that the NetProfits Interests associated with the U.S. Steel #26 well accounted for lessthan 0.25% of the total production from the Underlying Properties for the priortwelve (12) month period.  EasternAmerican advised the Coal Lessee that it could sell this well.  Eastern American received $11,437 for thesale of the U.S Steel Well #26.  Theeffective date of the sale was March 1, 2003.  However, the transaction did not close until April 17, 2003.  Therefore, the Trust’s share of the proceedsof $10,293 was included in the Distributable Income of the Trust during thequarter ended June 30, 2003.

 

During the quarter ended June 30, 2004, anoil and gas company contacted Eastern American and

 

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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 lifeof the Trust, additional wells may be disposed of for similar reasons.

 

**CriticalAccounting Policies**

 

The following is a summary of the criticalaccounting policies followed by the Trust.

 

*Basis of Accounting:*

 

The financial statements of the Trust differfrom financial statements prepared in accordance with accounting principlesgenerally accepted in the United States of America due to the following; i)certain cash reserves may be established for contingencies which were notaccrued in the financial statements; ii) amortization of the Net ProfitsInterests in gas properties is charged directly to Trust Corpus; and iii) thesale of the Net Profits Interests is reflected in the Statements ofDistributable Income as cash proceeds to the Trust.

 

*Net Profits Interests in Gas Properties:*

 

The Net Profits Interests in gas propertiesare periodically assessed to determine whether their net capitalized cost isimpaired.  The Trust will determine if awritedown is necessary to its investment in the Net Profits Interests in gasproperties to the extent that total capitalized costs, less accumulatedamortization, exceed undiscounted future net revenues attributable to provedgas reserves of the Underlying Properties. The Trust will then provide a writedown to the extent that the netcapitalized costs exceed the discounted future net revenues attributable toproved gas reserves of the Underlying Properties.  Any such writedown would not reduce distributable income,although it would reduce Trust Corpus.

 

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Amortization of the Net Profits Interests ingas properties is calculated on a units-of-production basis, whereby theTrust’s cost basis in the properties is divided by total Trust proved reservesto derive an amortization rate per reserve unit.  Such amortization does not reduce distributable income, rather itis charged directly to Trust Corpus. Revisions to estimated future units-of-production are treated on aprospective basis beginning 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.

** **

**Liquidityand Capital Resources**

 

 TheTrust has no source of liquidity or capital resources other than thedistributions received from the Net Profits Interests.

 

 In accordance with the provisions of the Conveyances, generally allrevenues received by the Trust, net of Trust administrative expenses and theamount of established reserves, are distributed currently to the Unitholders.

 

The Trust did not haveany contractual obligations as of June 30, 2004.  At June 30, 2004, the Trust had accounts payable of $183,993 anddistributions payable of $3,018,848.

 

Comparison of Results ofOperations for Three Months Ended June 30, 2004 and Three Months Ended June 30,2003

 

The Trust’s distributableincome was $3,018,848 for the three months ended June 30, 2004 as compared to$3,053,488 for the three months ended June 30, 2003.  This decrease was due to a decrease in Royalty Income for thethree months ended June 30, 2004 ($3,491,809) as compared to the three monthsended June 30, 2003 ($3,645,266).  Thedecrease in Royalty Income was due to a decrease in production of gasattributable to the Net Profits Interests for the three months ended June 30,2004 (515 Mmcf) as compared to the three months ended June 30, 2003 (557Mmcf).  This decrease in production wasoffset by an increase in the price payable to the Trust under the Gas PurchaseContract as discussed below ($6.774 per Mcf for the three months ended June 30,2004; $6.544 per Mcf for the three months ended June 30, 2003).  The decline in production is primarilyattributable to natural production declines. Taxes on production and property were $239,050 for the three monthsended June 30, 2004 as compared to $247,887 for the three months ended June 30,2003. The decrease in taxes is due directly to the decrease in Royalty Incomeas discussed above.  Trust general andadministrative expenses were $183,993 for the three months ended June 30, 2004as compared to $226,818 for the three months ended June 30, 2003.  This decrease in general and administrativeexpense was due primarily to a reduction in legal fees of $51,255.  During the three months ended June 30, 2004,the Trustee added $100,000 to the reserve as compared to $15,000 for the threemonths ended June 30, 2003.  Thisreserve was previously established during the quarter

 

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ended March 31,2003 to facilitate the payment of vendor invoices on a timely basis.  The distributable income includes CashProceeds on Sale of Net Profits Interests of $80,205 for the three months endedJune 30, 2004, while $10,293 was recognized in the corresponding three monthsof the prior year.

 

The price payable to the Trust for gasproduction attributable to the Net Profits Interests was $6.774 per Mcf for thethree months ended June 30, 2004 and $6.544 per Mcf for the three months endedJune 30, 2003.  The price per Mcf washigher for the three months ended June 30, 2004 than for the correspondingthree month period ended June 30, 2003 due to an increase in the average spotmarket price for gas delivered at the Henry Hub near Henry, Louisiana ($5.858per Dth for the three months ended June 30, 2004; $5.649 per Dth for the threemonths ended June 30, 2003).

 

Comparison of Results ofOperations for Six Months Ended June 30, 2004 and Six Months Ended June 30,2003

 

The Trust’s distributableincome was $5,530,469 for the six months ended June 30, 2004 as compared to$5,416,355 for the six months ended June 30, 2003.  This increase was due mainly to a decrease in general andadministrative expenses for the six months ended June 30, 2004 ($409,735) ascompared to the six months ended June 30, 2003 ($530,576).  The decrease in general and administrativeexpenses was due primarily to a decrease in legal fees of $104,685.  The Trust’s Royalty Income was $6,571,889for the six months ended June 30, 2004 as compared to $6,644,071 for the sixmonths ended June 30, 2003.  Thedecrease in Royalty Income was due to a decrease in production of gas attributableto the Net Profits Interests for the six months ended June 30, 2004 (1,023Mmcf) as compared to the six months ended June 30, 2003 (1,083 Mmcf).  This decrease was offset by an increase inthe average price payable to the Trust under the Gas Purchase Contract asdiscussed below ($6.414 per Mcf for the six months ended June 30, 2004; $6.119per Mcf for the six months ended June 30, 2003).  The decline in production is primarily attributable to naturalproduction declines and the sale of wells. Taxes on production and property were $451,654 for the six months endedJune 30, 2004 as compared to $452,700 for the six months ended June 30,2003.  The decrease in taxes is duedirectly to the decrease in Royalty Income as discussed above.  During the six months ended June 30, 2003,the Trustee established and added to a reserve the amount of $115,000 tofacilitate the payment of vendor invoices on a timely basis.  During the six months ended June 30, 2004,the Trustee added $100,000 to the reserve as compared to $115,000 for the sixmonths ended June 30, 2003.  Thisreserve was established in the quarter ended March 31, 2003 to facilitate thepayment of vendor invoices on a timely basis. The distributable income includes Cash Proceeds on Sale of Net ProfitsInterests of $80,205 for the six months ended June 30, 2004, while $10,293 wasrecognized in the corresponding six months of the prior year.  Amortization of Net Profits Interests in GasProperties was $1,889,278 for the six months ended June 30, 2004 as compared to$2,031,059 for the six months ended June 30, 2003.  This decrease was primarily due to the decrease in productionvolumes.

 

The average price payable to the Trust forgas production attributable to the Net Profits Interests was $6.414 per Mcf forthe six months ended June 30, 2004 and $6.119 per Mcf for the six months endedJune 30, 2003.  The price per Mcf washigher for the six months ended June 30, 2004 than for

 

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the corresponding six month period ended June30, 2003 due to an increase in the average spot market price for gas deliveredat the Henry Hub near Henry, Louisiana ($5.531 per Dth for the six months endedJune 30, 2004; $5.263 per Dth for the six months ended June 30, 2003).

** **

**Off-BalanceSheet Arrangements**

 

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 engagein any operations, and does not utilize market risk sensitive instruments,either for trading purposes or for other than trading purposes.  As described elsewhere herein, theDepositary Units consist of beneficial ownership of one unit of beneficialinterest in the Trust and a $20 face amount beneficial ownership interest in a$1,000 face amount zero coupon Treasury Obligation maturing on May 15,2013.  High and low price informationfor the Treasury Obligations is included under Part II Item 5.  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 and Procedures. *The Trustee maintainsdisclosure controls and procedures designed to ensure that information requiredto be disclosed by the Trust in the reports that it files or submits under theSecurities Exchange Act of 1934, as amended, is recorded, processed, summarizedand reported within the time periods specified in the SEC’s rules andregulations.  Disclosure controls andprocedures include controls and procedures designed to provide reasonableassurance that information required to be disclosed by the Trust is accumulatedand communicated by several parties, including without limitation, the workinginterest owner, Eastern American Energy Corporation (“Eastern American”), andthe 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 June 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 certain potential weaknesses that maylimit the effectiveness of disclosure controls and procedures established bythe Trustee or its employees and their ability to verify the accuracy ofcertain financial

 

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information.  The contractuallimitations creating potential weaknesses in disclosure controls and proceduresmay 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 its disclosurecontrols and procedures, the Trustee does not manage this information, andrelies entirely on Eastern American to provide accurate and timely informationwhen 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 andquarterly reviews 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 ordirect verification of this financial or other information. While the Trusteehas no reason to believe its reliance upon experts is unreasonable, this relianceon experts 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.

### ** **

### **PART II – OTHERINFORMATION**

 

ITEM 1.        Legal Proceedings.

 

None.

 

ITEM 2.        Changes inSecurities, Use of Proceeds and Purchases of Equity Securities.

 

None.

 

ITEM 3.        Defaults UponSenior Securities.

 

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None.

 

ITEM 4.        Submission ofMatters to a Vote of Security Holders.

 

None.

 

ITEM 5.        Other Information.

 

For the calendar quarterended June 30, 2004, the high and low closing prices of the TreasuryObligations (which have $1,000 face principal amount), as quoted in theover-the-counter market for United States Treasury obligations were $691.60 and$635.10 respectively.  On June 30, 2004the closing price of the Treasury Obligations, as quoted on such market, was$658.30.

 

**TheTrust provides Unitholders with the option to separate the related TreasuryObligation from the Trust Units.  Uponexercising this option, the Trustee transfers such Trust Units from the name ofthe Depositary to the name of the withdrawing Unitholder.  As of June 30, 2004, this option wasexercised on 119,900 Trust Units.  (Seethe Trust’s 10-K for the fiscal year ended December 31, 2003 for a more completedescription of the Withdrawal 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. In accordance with the TrustAgreement and the Depositary Agreement, such resignations will not take effectuntil Trust Unitholders have approved a successor Trustee and Depositary.  Recommendations for a successor Trustee andDepositary will be made to the Trust Unitholders and voted upon at a meeting ofthe Trust Unitholders that will be scheduled in accordance with the Trust Agreementand the Depositary Agreement.

 

On May 14, 2004, the Trust filed an amendedannual report on Form 10-K for the year ended December 31, 2003.  The amended annual report corrected the gasvolume estimates of net proved reserves attributable to the Trust’s royalty andterm net profits interests that were previously provided to the Trust andreported in the Trust’s annual report. The Trust was informed by the independent petroleum consultant whoprovided the Trust with the gas reserve information reported in the Trust’s2003 annual report that the information was incorrect.  The filing of the amended annual reportfollowed the Trust’s receipt of corrected estimates from the independent petroleumconsultant upon completion of that consultant’s review.

 

ITEM 6.        Exhibits andReports on Form 8-K.

(a)         Exhibits

 

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| **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                                                                                                                       |

 

(b)         Reportson Form 8-K

 

On April 30, 2004, theTrust filed a report on Form 8-K-Item 12 with respect to a press release issuedon April 29, 2004 announcing that the gas volume estimates of net provedreserves attributable to the Trust’s royalty and term net profits previouslyprovided to the Trust and reported in the Trust’s annual report on Form 10-Kfor the year ended December 31, 2003 were incorrect.

 

On May 17, 2004, the Trust filed a report onForm 8-K-Item 12 with respect to a press release dated May 14, 2003 announcingthat the filing of the Trust’s amended annual report for the year endedDecember 31, 2003 on Form 10-K/A and its quarterly report for the quarter endedMarch 31, 2004 on Form 10-Q.

 

On May 21, 2004, the Trust filed a report onForm 8-K-Item 12 with respect to a press release announcing the estimateddistributable income for the quarter ended March 31, 2004 and the estimatedcash distribution to be distributed on or before June 15, 2004 to holders of recordas of the close of

 

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business on May 28, 2004.

 

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*   Incorporated by reference to the indicated exhibits to filingspreviously made by the registrant with the Securities and ExchangeCommission.  All references are to theregistrant’s Registration Statement on Form S-1, Registration No. 33-56336,except for Exhibit 3.1, which is incorporated by reference to the Registrant’sAnnual report on Form 10-K for the year ended December 31, 1994.

### ** **

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### **SIGNATURES**

 

Pursuant to the requirements of theSecurities Exchange Act of 1934, the Registrant has duly caused this report tobe signed on its behalf by the undersigned, 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: August 6, 2004 |                                                              |
|                      |                                                                   |  |  |

 

The Registrant, Eastern American Natural GasTrust, has no principal executive officer, principal financial officer, boardof directors or persons performing similar functions.  Accordingly no additional signatures are available and none havebeen provided.

 

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