** **

**UNITED STATES**

**SECURITIES 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 March 31, 2002**       |
|                                               |                                                    |
|                                               | **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 ofregistrant as specified in its charter)

 

 

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

 

**Bank ofNew York**

**Care of BNY Midwest Trust Company**

**2 North Lasalle Street**

**Chicago, Illinois 60602**

(Address ofprincipal executive offices)

(Zip Code)

 

**(312) 827-8553**

(Registrant’stelephone number, including area code)

 

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports) and (2) has been subjectto such filing requirements for the past 90 days.

 

Yes   ý              No   o

 

# **As of May 9, 2002, 5,900,000 Units of BeneficialInterest in Eastern American Natural Gas Trust were outstanding.**

# ** **

 

 

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# ** **

# **PART I — FINANCIALINFORMATION**

## ** **

## **ITEM 1.   Financial Statements**

 

**EASTERN AMERICAN NATURAL GAS TRUST**

 

**STATEMENTS OF DISTRIBUTABLE INCOME**

*(Unaudited)*

 
|                                                                        |   | **Three  Months Ended** |      |
|-----------------------------------------------------------------------------|--------|-------------------------|-----------|
|                                                                        |   | **March 31**            |      |
|                                                                        |   | **2002**                |      | **2001** |   |
|                                                                        |   |                    |      |   |   |
| Royalty Income                                                              |   | $                       | 1,771,268 |   | $ | 4,307,387 |   |
|                                                                        |   |                    |      |   |   |
| Operating  Expenses:                                                        |   |                    |      |   |   |
| Taxes on  production and property                                           |   | 121,135                 |      | 291,733 |   |
| Operating cost  charges                                                     |   | 125,637                 |      | 128,277 |   |
|                                                                        |   |                    |      |   |   |
| Total Operating  Expenses                                                   |   | 246,772                 |      | 420,010 |   |
|                                                                        |   |                    |      |   |   |
| Net Proceeds to  the Trust                                                  |   | 1,524,496               |      | 3,887,377 |   |
|                                                                        |   |                    |      |   |   |
| General and  Administrative Expenses                                        |   | (165,450                | )         | (162,937 | ) |
|                                                                        |   |                    |      |   |   |
| Interest Income                                                             |   | 701                     |      | 1,507 |   |
|                                                                        |   |                    |      |   |   |
| Cash Proceeds on  Sale of Net Profits Interests                             |   | 303,438                 |      | 0 |   |
|                                                                        |   |                    |      |   |   |
| Distributable  Income                                                       |   | $                       | 1,663,185 |   | $ | 3,725,947 |   |
|                                                                        |   |                    |      |   |   |
| Distributable  Income Per Unit (5,900,000 units authorized and outstanding) |   | $                       | 0.2819    |   | $ | 0.6315 |   |

 

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

 

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**EASTERN AMERICAN NATURAL GAS TRUST**

 

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

 
|                                                             |   | **March 31,  2002** |       | **December  31, 2001** |   |
|------------------------------------------------------------------|--------|---------------------|------------|------------------------|--------|
|                                                             |   | **(Unaudited)**     |       |                   |   |
|                                                             |   |                |       |                   |   |
| Assets:                                                          |   |                |       |                   |   |
|                                                             |   |                |       |                   |   |
| Cash                                                             |   | $                   | 701        |                   | $      | 1,201 |   |
| Net Proceeds  Receivable                                         |   | 1,827,934           |       | 1,957,988              |   |
| Net Profits  Interests in Gas Properties                         |   | 93,162,180          |       | 93,162,180             |   |
| Accumulated  Amortization                                        |   | (51,095,606         | )          | (49,992,199            | )      |
|                                                             |   |                |       |                   |   |
| Total Assets                                                     |   | $                   | 43,895,209 |                   | $      | 45,129,170 |   |
|                                                             |   |                |       |                   |   |
| Liabilities and  Trust Corpus:                                   |   |                |       |                   |   |
|                                                             |   |                |       |                   |   |
| Trust General  and Administrative Expenses Payable               |   | $                   | 165,450    |                   | $      | 172,034 |   |
| Distributions  Payable                                           |   | 1,663,185           |       | 1,787,155              |   |
| Trust Corpus  (5,900,000 Trust Units authorized and outstanding) |   | 42,066,574          |       | 43,169,981             |   |
|                                                             |   |                |       |                   |   |
| Total  Liabilities and Trust Corpus                              |   | $                   | 43,895,209 |                   | $      | 45,129,170 |   |

 

 

 

 

 

**The accompanying notes are anintegral part of these financial statements.**

 

 

 

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**EASTERN AMERICAN NATURAL GAS TRUST**

 

**STATEMENTS OF CHANGES IN TRUST CORPUS**

*(Unaudited)*

 

 

 

 
|                                                     |   | **Three  Months**   |       | **Three  Months**   |   |
|----------------------------------------------------------|--------|---------------------|------------|---------------------|--------|
|                                                     |   | **Ended**           |       | **Ended**           |   |
|                                                     |   | **March 31,  2002** |       | **March 31,  2001** |   |
|                                                     |   |                |       |                |   |
| Trust Corpus,  Beginning of Period                       |   | $                   | 43,169,981 |                | $      | 47,650,950 |   |
| Distributable  Income                                    |   | 1,663,185           |       | 3,725,947           |   |
| Distributions  Payable to Unitholders                    |   | (1,663,185          | )          | (3,725,947          | )      |
| Amortization of  Net Profits Interests in Gas Properties |   | (1,103,407          | )          | (1,133,723          | )      |
|                                                     |   |                |       |                |   |
| Trust Corpus,  End of Period                             |   | $                   | 42,066,574 |                | $      | 46,517,227 |   |

 

 

 

 

**The accompanying notes are anintegral part of these financial statements.**

** **

 

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**EASTERN AMERICAN NATURAL GAS TRUST**

 

**NOTESTO UNAUDITED FINANCIAL STATEMENTS**

 

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”). The Trust was formed to acquire and hold net profits interests (the “NetProfits Interests”) created from the working interests owned by EasternAmerican in 650 producing gas wells and 65 proved development well locations inWest Virginia and Pennsylvania (the “Underlying Properties”).  The Net Profits Interests consisted of aroyalty interest in 322 wells and a term interest in the remaining wells andlocations.  Prior to or on May 15, 2013,the Trustee is required to sell the royalty interests and liquidate the Trust.

 

On March 15, 1993, 5,900,000 Depositary Units wereissued in a public offering at an initial public offering price of $20.50 perDepositary Unit.  Each Depositary Unitconsists of beneficial ownership of one unit of beneficial interest (“TrustUnit”) in the Trust and a $20 face amount beneficial ownership interest in a$1,000 face amount zero coupon United States Treasury Obligation (“TreasuryObligation”) maturing on May 15, 2013.

 

        Effective May 8, 2000, The Bank of New York acquired thecorporate trust business of the Bank of Montreal Trust Company / HarrisTrust.  Consequently, the Bank of NewYork serves as Trustee.

 

The Net ProfitsInterests are passive in nature, and neither the Trustee nor the DelawareTrustee has management control or authority over, nor any responsibilityrelating to, the operation of the properties subject to the Net ProfitsInterests.  The Trust Agreementprovides, among other things, that the Trust shall not engage in any businessor 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 which is contingent, uncertain in amount or thatis not currently due and payable; the Trustee is authorized to borrow fundsrequired to pay liabilities of the Trust, provided that such borrowings arerepaid in full prior to further distributions to Unitholders; and the Trusteewill make quarterly cash distributions to Unitholders from funds of the Trust.

 

NOTE 2.  Basis of Presentation

 

        The information furnished is based upon certain estimates ofproduction for the periods presented and is therefore subject to adjustment infuture periods to reflect 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

 

 

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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 for the year ended December 31, 2001.

 

NOTE 3.  Trust Accounting Policies

 

The Trust servesas a pass-through entity, with items of depletion, interest income and expense,and income tax attributes being based upon the status and elections ofUnitholders.  Thus, the Statements ofDistributable Income show Distributable Income, defined as Trust incomeavailable for distribution to Unitholders before application of thoseUnitholders’ additional expenses, if any, for depletion, interest expense, andincome taxes.  The Trust uses theaccrual basis to recognize revenue, with Royalty Income recognized as reservesare extracted 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 to gas production for a calendar quarter to bemade to the Trust on or before the tenth day of the third month following suchquarter.

 

Net ProfitsInterests in Gas Properties are periodically assessed 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 ofthe Net Profits Interests in Gas Properties is calculated on aunits-of-production basis, whereby the Trust’s cost basis in the properties isdivided by total Trust proved reserves to derive an amortization rate perreserve unit.  Such amortization doesnot reduce distributable income, rather it is charged directly to Trust Corpus.

 

NOTE 4. IncomeTaxes

 

The Trust is agrantor trust and is not required to pay federal or state income taxes.  Accordingly, no provision for federal orstate income taxes has been made.  Allincome is taxed to the Unitholders of the Trust.

 

 

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ITEM 2.  Management’s Discussion and Analysis ofFinancial Condition and Results of Operations

 

CautionaryStatement

 

        The Trustee and Eastern American, itsofficers or its agents on behalf of the Trust may, from time to time, makeforward-looking statements (other than statements of historical fact).  When used herein, the words “anticipates,”“expects,” “believes,” “intends” or “projects” and similar expressions areintended to identify forward-looking statements.  To the extent that any forward-looking statements are made, theTrust is unable to predict future changes in gas prices, gas production levels,economic activity, legislation and regulation, and certain changes in expensesof the Trust.  In addition, the Trust’sfuture results of operations and other forward looking statements contained inthis item and elsewhere in this report involve a number of risks anduncertainties.  As a result ofvariations in such factors, actual results may differ materially from anyforward-looking statements.  Some ofthese factors are described below.  TheTrustee and Eastern American, disclaims any obligations to update forwardlooking statements 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 notconduct any operations or activities. The Trust’s purpose is, in general, to hold the Net Profits Interests,to distribute the cash proceeds to Unitholders which the Trust receives inrespect of the Net Profits Interests (net of Trust expenses), and to performcertain administrative functions in respect of the Net Profits Interests andthe Depositary Units.  Accordingly, theTrust derives substantially all of its income and cash flows from the NetProfits Interests.  The Trust has nosource of liquidity or capital resources other than the cash flows from the NetProfits Interests.

 

The Net ProfitsInterests were created pursuant to conveyances (the “Conveyances”) from EasternAmerican to the Trust.  In connectiontherewith, Eastern American assigned its rights under a gas purchase contract(the “Gas Purchase Contract”) which obligates Eastern Marketing Corporation, asubsidiary of Eastern American, to purchase all of the natural gas producedfrom the Underlying Properties which is attributable to the Net ProfitsInterests.

 

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”. The “Operating Cost Charge” for 2002 is based on an annual rate of$503,354, and for 2001 was an annual rate of $513,106. In subsequent years, theOperating Cost Charge will fluctuate based on the index of average weeklyearnings of Crude Petroleum and Gas Production Workers (published by the 

 

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United StatesDepartment of Labor, Bureau of Labor Statistics), but not more than 5% peryear.  The Operating Cost Charge was notincreased as Development Wells were completed but will be reduced for each wellthat is sold (free of the Net Profits Interests) or plugged and abandoned.  “Capital Costs” means Eastern American’sworking interest share of capital costs for operations on the UnderlyingProperties, but only for items having a useful life of at least three years,and not including any capital costs incurred in drilling the DevelopmentWells.  “Taxes” means ad valorem taxes,production and severance taxes, and other taxes imposed on the Trust’s interestin the Underlying Properties, or production therefrom.

 

Pursuant to theGas Purchase Contract, Eastern Marketing is obligated to purchase such gasproduction at a purchase price per Mcf equal to the Index Price.  The Index Price for any quarter isdetermined 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 definedas the 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.  Theprice determined for any month of such quarter is equal to the average of (i)the final settlement price per MMBtu for Henry Hub Gas Futures Contracts (asdefined), 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 Contracts is defined as a gas futures contract for gas tobe delivered to the Henry Hub which is traded on the New York MercantileExchange.

 

Accordingly, theIndex Price payable to the Trust for production may be higher or lower based onthe fluctuations in natural gas futures prices during the relevant calculationperiod.  The price payable to the Trustwill have a direct impact, positively or negatively, on the quarterlydistributions 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 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 March 31, 2002, an additional volume of 5,833 Mcf was delivered to theTrust, as compared to 6,625 Mcf for the quarter ended March 31, 2001.  These additional volumes fulfill EasternAmerican’s obligation to provide volumes for Development Wells that had beenclosely offset by third parties.

 

     Eastern American has fulfilled itsobligation with respect to the drilling of the Development Wells. Since theinception of the Trust, Eastern has drilled a total of 59 Development Wells,which are online 

 

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and producing.  (See the Trust’s Form 10-K for the fiscalyear ended December 31, 2001 for a more complete description of the DevelopmentWells.)

 

    During the quarter ended March 31, 2002, aCoal Lessee contacted Eastern American and inquired as to whether it would sellthe Western Pocahontas # 7 Well which is a well in which the Trust owns a NetProfits Interest.

 

    The Coal Lessee stated that the well wouldmaterially interfere with the Coal Lessee’s proposed mining operations.

 

    Eastern American reviewed the TrustAgreement and production from this well to determine if it could cause theTrust to sell its Net Profits Interest in the Well.  Upon review it was discovered that the Net Profits Interestassociated with this well accounts for more than .25% of the total productionfrom the Underlying Properties for the prior twelve (12) month period.  Eastern American advised the Coal Lesseethat it could not sell this well.

 

    Subsequent thereto the Coal Lesseeinsisted that the well needed to be plugged in order for them to proceed withtheir proposed mining operations.  TheCoal Lessee took the position that the coal estate was the dominate estate and,that under the applicable oil and gas lease and case law, that the Coal Lesseecould cause the Trust and Eastern American to plug and abandon the well so longas the Coal Lessee fairly compensated the Trust and Eastern American.  Eastern American and the Trust did notnecessarily agree with the Coal Lessee position, however the Coal Lesseethreatened to institute a Declaratory Judgment Action to determine the respectiveinterest of the parties.

 

    As a result, and in an effort to avoidlitigation, the Trust and Eastern American entered into a Settlement Agreementand Release of All Claims with the Coal Lessee pursuant to which Eastern agreedto sell the subject well for the amount of $426,187.  The Trust’s share of the proceeds of $303,438 was distributed tothe Trust during the quarter ended March 31, 2002.

 

     The Coal Lessee has subsequently notifiedEastern American that it plans to purchase two additional wells, the WesternPocahontas # 8 and #10, in which the Trust owns a net profits interest.  It is expected that the proceeds from thesales of these wells will be agreed upon and received during the quarter endedJune 30, 2002, and the Trust’s share of the proceeds will be included inDistributable Income for that quarter.

 

 

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Comparison of Results ofOperations for Three Months Ended March 31, 2002 and Three Months Ended March31, 2001

 

    The Trust’s distributable income was$1,663,185 for the three months ended March 31, 2002 as compared to $3,725,947for the three months ended March 31, 2001. This decrease was due to a decrease in the price payable to the Trustunder the Gas Purchase Contract as discussed below ($3.041 per Mcf for thethree months ended March 31, 2002; $6.816 per Mcf for the three months endedMarch 31, 2001).  This decrease was alsodue to a decrease in production of gas attributable to the Net ProfitsInterests for the three months ended March 31, 2002 (581 Mmcf) as compared tothe three months ended March 31, 2001 (630 Mmcf).  The decline in production is primarily attributable to naturalproduction declines and the required plugging and abandonment of WesternPocahontas #7 in the current period. Taxes on production and property were$121,135 for the three months ended March 31, 2002 as compared to $291,733 forthe three months ended March 31, 2001. This decrease was due to the decrease in Royalty Income for the threemonths ended March 31, 2002 ($1,771,268) as compared to the three months endedMarch 31, 2001 ($4,307,387).  Thedistributable income includes Cash Proceeds on Sale of Net Profits Interest of$303,438 for the quarter ended March 31, 2002, while no such sales wererecognized in the corresponding prior quarter.

 

    The price payable to the Trust for gasproduction attributable to the Net Profits Interests was $3.041 per Mcf for thethree months ended March 31, 2002 and $6.816 per Mcf for the three months endedMarch 31, 2001.  The price per Mcf waslower for the three months ended March 31, 2002 than for the correspondingthree month period ended March 31, 2001 due to a decrease in the average spotmarket price for gas delivered at the Henry Hub near Henry, Louisiana ($2.465per Dth for the three months ended March 31, 2002; $5.896 per Dth for the threemonths ended March 31, 2001).

 

 

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### **PART II — OTHER INFORMATION**

 

 

ITEM 1.     Legal Proceedings.

 

None.

 

ITEM 2.    Changes in Securities.

 

None.

 

ITEM 3.     Defaults Upon Senior Securities.

 

None.

 

ITEM 4.    Submission of Matters to a Vote ofSecurity Holders.

 

None.

 

ITEM 5.   Other Information.

 

      For the calendar quarter ended March 31,2002, the high and low closing prices of the Treasury Obligations (which have$1,000 face principal amount), as quoted in the over-the-counter market forUnited States Treasury obligations, were $548.40 and $516.20 respectively.  On March 31, 2002 the closing price of theTreasury Obligations, as quoted on such market, was $518.00.

 

**     The Trust provides Unitholders with the option to separate therelated Treasury Obligation from the Trust Units.  Upon exercising this option, the Trustee transfers such TrustUnits from the name of the Depositary to the name of the withdrawingUnitholder.  As of March 31, 2002, thisoption was exercised on 7,900 Trust Units. (See the Trust’s 10-K for the fiscal year ended December 31, 2001 for amore complete description of the Withdrawal of Trust Units and Restriction onTransfer.)**

 

 ITEM 6.  Exhibits and Reports on Form 8-K.

 

           (a)       Exhibits

 

None

 

           (b)       Reports on Form 8-K

 

No reports on Form 8-Kwere filed during the fiscal quarter ended

March 31, 2002.

 

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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:  Bank of  New York, Trustee |
| /s/Robert Foltz                      |
|                                 |
| Name:                                | Robert Foltz |
| Title:                               | Agent |

 

 

Date: May 14, 2002

 

     TheRegistrant, Eastern American Natural Gas Trust, has no principal executiveofficer, principal financial officer, board of directors or persons performingsimilar functions.  Accordingly noadditional signatures are available and none have been provided.

 

 

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