**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, 2003**                                                                                                                                                         |
|                                                                                                                                                                                                          |
| **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**                                                                                                                                                                            |
|                                                                                                                                                                                                               |        |                                                                                                |  |

 

**EASTERNAMERICAN NATURAL GAS TRUST**

(Exact name of registrant as specified in itscharter)

 

| **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) 827-8553**                                                                                           |
| (Registrant’s telephone number, including area code)                                                    |

 

Indicate bycheck mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports) and (2) has been subject to such filingrequirements for the past 90 days.

Yes   ý           No   o

 

Indicate bycheck mark whether the registrant is an accelerated filer (as defined in Rule12b-2 of the Act).

Yes   ý           No   o

 

As of November 12, 2003,5,900,000 Units of Beneficial Interest in Eastern American Natural Gas Trustwere outstanding.

 

 

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**PART I – FINANCIAL INFORMATION**

**ITEM1.   Financial Statements**

 

**EASTERN AMERICAN NATURAL GAS TRUST**

**STATEMENTS OF DISTRIBUTABLE INCOME**

*(Unaudited)*

 
|                                                                        |   | **Nine  Months Ended  September 30** |       | **Three  Months Ended  September 30** |   |
|-----------------------------------------------------------------------------|--------|--------------------------------------|------------|---------------------------------------|--------|
|                                                                        |   | **2003**                             |       | **2002**                              |   | **2003** |   | **2002** |   |
|                                                                        |   |                                 |       |                                  |   |   |   |   |   |
| Royalty Income                                                              |   | $                                    | 10,165,525 |                                  | $      | 6,412,497 |   | $ | 3,521,454 |   | $ | 2,449,277 |   |
|                                                                        |   |                                 |       |                                  |   |   |   |   |   |
| Operating Expenses                                                          |   |                                 |       |                                  |   |   |   |   |   |
| Taxes on production and property                                            |   | 692,070                              |       | 436,647                               |   | 239,370 |   | 165,480 |   |
| Operating cost charges                                                      |   | 382,627                              |       | 376,506                               |   | 127,405 |   | 125,232 |   |
|                                                                        |   |                                 |       |                                  |   |   |   |   |   |
| Total Operating Expenses                                                    |   | 1,074,697                            |       | 813,153                               |   | 366,775 |   | 290,712 |   |
|                                                                        |   |                                 |       |                                  |   |   |   |   |   |
| Net Proceeds to the Trust                                                   |   | 9,090,828                            |       | 5,599,344                             |   | 3,154,679 |   | 2,158,565 |   |
|                                                                        |   |                                 |       |                                  |   |   |   |   |   |
| General and Administrative Expenses                                         |   | (671,255                             | )          | (449,823                              | )      | (140,679 | ) | (129,358 | ) |
|                                                                        |   |                                 |       |                                  |   |   |   |   |   |
| Interest Income                                                             |   | 748                                  |       | 1,404                                 |   | 259 |   | 387 |   |
|                                                                        |   |                                 |       |                                  |   |   |   |   |   |
| Cash Proceeds on Sale of Net Profits  Interests                             |   | 10,293                               |       | 492,043                               |   | 0 |   | 0 |   |
|                                                                        |   |                                 |       |                                  |   |   |   |   |   |
| Distributable Income                                                        |   | 8,430,614                            |       | 5,642,968                             |   | 3,014,259 |   | 2,029,594 |   |
|                                                                        |   |                                 |       |                                  |   |   |   |   |   |
| Cash Reserve                                                                |   | (115,000                             | )          | 0                                     |   | 0 |   | 0 |   |
|                                                                        |   |                                 |       |                                  |   |   |   |   |   |
| Distribution Amount                                                         |   | $                                    | 8,315,614  |                                  | $      | 5,642,968 |   | $ | 3,014,259 |   | $ | 2,029,594 |   |
|                                                                        |   |                                 |       |                                  |   |   |   |   |   |
| Distributable Income Per Unit (5,900,000  units authorized and outstanding) |   | $                                    | 1.4289     |                                  | $      | 0.9564 |   | $ | 0.5109 |   | $ | 0.3440 |   |
|                                                                        |   |                                 |       |                                  |   |   |   |   |   |
| Distribution Amount Per Unit (5,900,000  units authorized and outstanding)  |   | $                                    | 1.4094     |                                  | $      | 0.9564 |   | $ | 0.5109 |   | $ | 0.3440 |   |

 

**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**

 
|                                                             |   | **September  30, 2003** |       | **December  31, 2002** |   |
|------------------------------------------------------------------|--------|-------------------------|------------|------------------------|--------|
|                                                             |   | **(Unaudited)**         |       |                   |   |
|                                                             |   |                    |       |                   |   |
| Assets:                                                          |   |                    |       |                   |   |
|                                                             |   |                    |       |                   |   |
| Cash                                                             |   | $                       | 50,927     |                   | $      | 406 |   |
| Net Proceeds Receivable                                          |   | 3,154,679               |       | 2,310,449              |   |
| Net Profits Interests in Gas Properties                          |   | 93,162,180              |       | 93,162,180             |   |
| Accumulated Amortization                                         |   | (57,532,379             | )          | (54,466,381            | )      |
|                                                             |   |                    |       |                   |   |
| Total Assets                                                     |   | $                       | 38,835,407 |                   | $      | 41,006,654 |   |
|                                                             |   |                    |       |                   |   |
| Liabilities and Trust Corpus:                                    |   |                    |       |                   |   |
|                                                             |   |                    |       |                   |   |
| Trust General and Administrative Expenses  Payable               |   | $                       | 76,347     |                   | $      | 145,098 |   |
| Distributions Payable                                            |   | 3,014,259               |       | 2,165,757              |   |
| Trust Corpus (5,900,000 Trust Units  authorized and outstanding) |   | 35,744,801              |       | 38,695,799             |   |
|                                                             |   |                    |       |                   |   |
| Total Liabilities and Trust Corpus                               |   | $                       | 38,835,407 |                   | $      | 41,006,654 |   |

 

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

 

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**EASTERN AMERICAN NATURAL GAS TRUST**

** **

**STATEMENT OF CHANGES IN TRUST CORPUS**

*(Unaudited)*

 
|                                                     |   | **Nine  Months  Ended  September 30, 2003** |       | **Nine  Months  Ended  September 30, 2002** |   |
|----------------------------------------------------------|--------|---------------------------------------------|------------|---------------------------------------------|--------|
|                                                     |   |                                        |       |                                        |   |
| Trust Corpus, Beginning of Period                        |   | $                                           | 38,695,799 |                                        | $      | 43,169,981 |   |
| Distributable Income                                     |   | 8,430,614                                   |       | 5,642,968                                   |   |
| Distributions Payable to Unitholders                     |   | (8,315,614                                  | )          | (5,642,968                                  | )      |
| Amortization of Net Profits Interests in  Gas Properties |   | (3,065,998                                  | )          | (3,363,418                                  | )      |
|                                                     |   |                                        |       |                                        |   |
| Trust Corpus, End of Period                              |   | $                                           | 35,744,801 |                                        | $      | 39,806,563 |   |

 

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

 

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**EASTERN AMERICANNATURAL 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”). 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 public offering at an initialpublic offering price of $20.50 per Depositary Unit.  Each Depositary Unit consists of beneficial ownership of one unitof beneficial interest (“Trust Unit”) in the Trust and a $20 face amountbeneficial ownership interest in a $1,000 face amount zero coupon United StatesTreasury Obligation (“Treasury Obligation”) maturing on May 15, 2013.  The financial statements of the Trust towhich these notes relate do not incorporate information concerning the TreasuryObligations, the beneficial interest in which is held for the Unitholders bythe Depositary.

 

The Net Profits Interests are passive innature, and neither the Trustee nor the Delaware Trustee has management controlor authority over, nor any responsibility relating to, the operation of theproperties subject to the Net Profits Interests.  The Trust Agreement provides, among other things, that the Trustshall not engage in any business or commercial activity or acquire any assetother than the Net Profits Interests initially conveyed to the Trust; theTrustee may establish a reserve for payment of any liability that iscontingent, uncertain in amount or is not currently due and payable; theTrustee is authorized to borrow funds required to pay liabilities of the Trust,provided that such borrowings are repaid in full prior to further distributionsto Unitholders; and the Trustee will make quarterly cash distributions toUnitholders from funds of the Trust.

 

After theTrust was formed, 59 of the 65 Development Wells were drilled and completed.The remaining six Development Wells were not drilled. Clear title to two of theDevelopment Wells could not be established, and they were excluded from theTrust in accordance with the conveyance transferring them to the Trust. EasternAmerican asserted the remaining four undrilled Development Wells, if drilled,would be too close to then existing wells on the property or an adjoiningproperty, and thereafter settled its dispute with the Trust about drillingthose four Development Wells by agreeing instead to pay the Trust annually forthe annual volume of gas projected to be produced from those Development Wellsas 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, 2003, the Trust held Net Profits Interests in677 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 EasternAmerican’s net revenue interest in the properties burdened by the Term NPI. Asof December 31, 2002, based on the Independent Petroleum Engineer’s Report,18,319 MMcf of the 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

 

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 for the year ended December 31, 2002.

 

NOTE 3.  Trust AccountingPolicies

 

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 payment provisionsof the gas purchase contract between the Trust and Eastern Marketing Corporation  (a subsidiary of Eastern American), whichrequires

 

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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.

 

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.

 

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 Discussion and Analysis ofFinancial Condition and Results of Operations

 

Cautionary Statement

 

The Trust, the Trustee and Eastern American,its officers 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,neither the Trust, the Trustee or Eastern American is able to predict futurechanges in gas prices, gas production levels, economic activity, legislationand regulation, and certain changes in expenses of the Trust.  In addition, the Trust’s future results ofoperations and other forward looking statements contained in this item andelsewhere in this report involve a number of risks and uncertainties.  As a result of variations in such factors,actual results may differ materially from any forward-looking statements.  Some of these factors are described below.  The Trust, the Trustee and Eastern Americandisclaim any obligations to update forward looking statements and all suchforward-looking statements in this document are expressly qualified in theirentirety by the cautionary statements in this paragraph and by the statementsin 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 (netof Trust expenses), and to perform certain administrative functions in respectof 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 orcapital resources 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 the Gas Purchase Contractentitle the Trust to receive an amount of cash for each calendar quarter equalto the Net Proceeds for such quarter. “Net Proceeds” for any calendar quarter generally means an amount ofcash equal to (a) 90% of a volume of gas equal to (i) the volume of gasproduced during such quarter attributable to the Underlying Properties less(ii) a volume of gas equal to “Chargeable Costs” for such quarter, multipliedby (b) the applicable price for such quarter under the Gas PurchaseContract.  “Chargeable Costs” is thatvolume of gas which equates in value, determined by reference to the relevantsales price under the Gas Purchase Contract or the Conveyances, as applicable,to the sum of the “Operating Cost Charge”, “Capital Costs” and “Taxes”.

 

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The “Operating CostCharge” for 2003 is based on an annual rate of $510,444, and for 2002 was anannual rate of $503,354. The increase in the 2003 “Operating Cost Charge”reflects a prospective adjustment made based upon changes in the CrudePetroleum and Gas Production Workers Index for 2002.  As provided in the Conveyances, the Operating Cost Charge willfluctuate based on the lesser of (A) five percent (5%) or (B) a percentage, notless than zero percent (0%), equal to the percentage increase, if any, in theaverage weekly earnings of Crude Petroleum and Gas Production Workers for thelast calendar year, as shown by the index of average weekly earnings of CrudePetroleum and Gas Production Workers, as published by the United StatesDepartment of Labor, Bureau of Labor Statistics, based on December-to-Decembercomparison.  The Crude Petroleum and GasProduction Workers Index for 2003 decreased by 3.1%.  The Operating Cost Charge was not increased as Development Wellswere completed but is reduced for each well that is sold (free of the NetProfits Interests) or plugged and abandoned. “Capital Costs” means Eastern American’s working interest share ofcapital costs for operations on the Underlying Properties, but only for itemshaving a useful life of at least three years, and not including any capitalcosts incurred in drilling the Development Wells.  “Taxes” means ad valorem taxes, production and severance taxes,and other taxes imposed on the Trust’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 any month of such quarter is equal tothe average of (i) the final settlement price per MMBtu for Henry Hub GasFutures Contracts (as defined), as reported in *The Wall Street Journal*, forsuch contracts 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,as reported in *The Wall Street Journal*, for such contracts which expireduring such month and (iii) the closing settlement price per MMBtu of Henry HubGas Futures Contracts determined as of the contract settlement date for suchmonth, as reported in *The Wall Street Journal*, for suchcontracts which expire in each of the six months following such month.  A Henry Hub Gas Futures Contract is definedas a gas futures contract for gas to be delivered to the Henry Hub that istraded on the New York Mercantile Exchange.

 

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

 

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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 ended September30, 2003, an additional volume of 4,822 Mcf was delivered to the Trust, ascompared to 5,260 Mcf for the quarter ended September 30, 2002.  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 for the fiscal year ended December 31,2002 for a more complete description of the Development Wells.)

 

During 2002,Eastern American was asked to sell 3 wells in which the Trust owned a NetProfits Interest (the Western Pocahontas #7, #8 and #10 wells).  The party seeking to purchase the wells ownedthe right to mine for coal on such properties (the “Coal Lessee”).  The Coal Lessee stated that the wells wouldmaterially interfere with the Coal Lessee’s proposed mining operations.

 

EasternAmerican reviewed the Trust Agreement and production from these wells, anddetermined that the Net Profits Interest associated with the Western Pocahontas# 7 well accounted for more than 0.25% of the total production from theUnderlying Properties for the prior twelve (12) month period.  Eastern American advised the Coal Lesseethat it could not sell this well.

 

Subsequently,the Coal Lessee asserted that the coal estate in the relevant UnderlyingProperties was the dominate estate and that under the relevant oil and gasleases and applicable case law, the Coal Lessee could cause the Trust andEastern American to plug and abandon the well. Eastern American and the Trust did not necessarily agree with the CoalLessee position, however, and in an effort to avoid litigation, the Trust andEastern American entered into a Settlement Agreement and Release of All Claimswith the Coal Lessee pursuant to which Eastern agreed to sell the WesternPocahontas # 7 well for the amount of $426,187.  The Trust’s share of the proceeds of $303,438 was included inDistributable Income to the Trust during the quarter ended March 31, 2002.  The Coal Lessee purchased the two additionalwells, the Western Pocahontas # 8 and #10 for the amount of $209,561.  The Trust’s share of the proceeds of$188,605 was also included in the Distributable Income of the Trust during thequarter ended June 30, 2002.

 

During thequarter ended March 31, 2003, a Coal Lessee contacted Eastern American andinquired as to whether it would sell the U.S. Steel Well # 26, which is a wellin which the Trust owns a Net Profits Interests.  The Coal Lessee stated that the well would materially interferewith the Coal Lessee’s proposed mining operations.  Eastern American reviewed the Trust Agreement and production fromthis well to determine if it could cause the Trust to sell its Net ProfitsInterest in the well.  Upon review, itwas discovered that the Net Profits Interests associated with the U.S. Steel#26 well accounted for less than 0.25% of the total production from the UnderlyingProperties for the prior twelve (12) month period.  Eastern American advised the Coal Lessee that it could sell thiswell.  Eastern American received $11,437for the sale of the U.S Steel Well #26. The effective date of the sale was March 1, 2003.  However, the transaction did not close untilApril 17, 2003.

 

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Therefore, the Trust’s share ofthe proceeds of $10,293 was included in the Distributable Income of the Trustduring the quarter ending June 30, 2003 as well as the nine months ended September30, 2003.

 

Over theremaining life of the Trust, additional wells may need to be disposed of forsimilar reasons.

 

Comparison ofResults of Operations for Three Months Ended September 30, 2003 and ThreeMonths Ended September 30, 2002

 

The Trust’sdistributable income was $3,014,259 for the three months ended September 30,2003 as compared to $2,029,594 for the three months ended September 30,2002.  This increase was due to anincrease in Royalty Income for the three months ended September 30, 2003($3,521,454) as compared to the three months ended September 30, 2002($2,449,277).  The increase in RoyaltyIncome was due to an increase in the price payable to the Trust under the GasPurchase Contract as discussed below ($6.381 per Mcf for the three months endedSeptember 30, 2003; $4.028 per Mcf for the three months ended September 30,2002).  This increase was offset by adecrease in production of gas attributable to the Net Profits Interests for thethree months ended September 30, 2003 (552 Mmcf) as compared to the threemonths ended September 30, 2002 (608 Mmcf). The decline in production is primarily attributable to naturalproduction declines and the sale of a well. Taxes on production and property were $239,370 for the three monthsended September 30, 2003 as compared to $165,480 for the three months endedSeptember 30, 2002.  The increase intaxes is due directly to the increase in Royalty Income as discussed above.

 

The pricepayable to the Trust for gas production attributable to the Net ProfitsInterests was $6.381 per Mcf for the three months ended September 30, 2003 and$4.028 per Mcf for the three months ended September 30, 2002.  The price per Mcf was higher for the threemonths ended September 30, 2003 than for the corresponding three month periodended September 30, 2002 due to an increase in the average spot market pricefor gas delivered at the Henry Hub near Henry, Louisiana ($5.501 per Dth forthe three months ended September 30, 2003; $3.362 per Dth for the three monthsended September 30, 2002).

 

Comparison of Results ofOperations for Nine Months Ended September 30, 2003 and Nine Months EndedSeptember 30, 2002

 

The Trust’sdistributable income was $8,430,614 for the nine months ended September 30,2003 as compared to $5,642,968 for the nine months ended September 30,2002.  This increase was due to anincrease in Royalty Income for the nine months ended September 30, 2003($10,165,525) as compared to the nine months ended September 30, 2002($6,412,497).  The increase in Royalty Incomewas due to an increase in the average price payable to the Trust under the GasPurchase Contract as discussed below ($6.207 per Mcf for the nine months endedSeptember 30, 2003; $3.615 per Mcf for the nine months ended September 30,2002).  This increase was offset by adecrease in production of gas attributable to the Net Profits Interests for thenine months ended September 30, 2003 (1,635 Mmcf) as compared to the ninemonths ended September 30, 2002 (1,772 Mmcf). The

 

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decline in production isprimarily attributable to natural production declines and the sale ofwells.  Taxes on production and propertywere $692,070 for the nine months ended September 30, 2003 as compared to $436,647for the nine months ended September 30, 2002. The increase in taxes is due directly to the increase in Royalty Incomeas discussed above. Trust general and administrative expenses were $671,255 forthe nine months ended September 30, 2003 as compared to $449,823 for the ninemonths ended September 30, 2002.  Theincrease in general and administrative fees was due primarily to an increase inlegal fees of $197,114 (attributable primarily to determining the legalobligations of the Trust under the Sarbanes-Oxley Act of 2002 with respect tothe public reports filed on behalf of the Trust) and increased fees for tax andaudit services received of $15,242.  Thedistributable income includes Cash Proceeds on Sale of Net Profits Interests of$10,293 for the period ended September 30, 2003, while $492,043 was recognizedin the corresponding prior nine months.

 

During thenine months ended September 30, 2003, the Trustee established a cash reserve inthe amount of $115,000 to facilitate the payment of vendor invoices on a timelybasis. No such reserve existed in the prior nine months ended September 30,2002.  Establishing this reserve,reduced distributions payable by $115,000 or $0.0195 per unit for the ninemonths ended September 30, 2003. Amortization of Nets Profits Interests in GasProperties was $3,065,998 for the nine months ended September 30, 2003 ascompared to $3,363,418 for the nine months ended September 30, 2002.  This decrease was primarily due to thedecrease in production volumes.

 

The averageprice payable to the Trust for gas production attributable to the Net ProfitsInterests was $6.207 per Mcf for the nine months ended September 30, 2003 and$3.615 per Mcf for the nine months ended September 30, 2002.  The price per Mcf was higher for the ninemonths ended September 30, 2003 than for the corresponding nine month periodended September 30, 2002 due to an increase in the average spot market pricefor gas delivered at the Henry Hub near Henry, Louisiana ($5.342 per Dth forthe nine months ended September 30, 2003; $2.987 per Dth for the nine monthsended September 30, 2002).

 

ITEM 3.  Quantitative and Qualitative Disclosuresabout Market Risk

 

The Trust doesnot engage in any operations, and does not utilize market risk sensitiveinstruments, either for trading purposes or for other than tradingpurposes.  As described elsewhereherein, the Depositary Units consist of beneficial ownership of one unit ofbeneficial interest in the Trust and a $20 face amount beneficial ownershipinterest in a $1,000 face amount zero coupon Treasury Obligation maturing onMay 15, 2013.  High and low priceinformation for 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 andProcedures. *TheTrustee maintains disclosure controls and procedures designed to ensure thatinformation required to be disclosed by the Trust in the reports

 

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that it files or submits underthe Exchange Act of 1934, as amended, is recorded, processed, summarized andreported 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 the working interest owner, Eastern American EnergyCorporation (“Eastern American”), 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 ofSeptember 30, 2003, the Trustee carried out an evaluation of the Trustee’sdisclosure controls and procedures. Mauro Palladino, 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 thecontractual arrangements of (i) the Trust Agreement, and (ii) the rights of theTrustee under the Conveyances regarding information furnished by EasternAmerican, there are certain potential weaknesses that may limit theeffectiveness of disclosure controls and procedures established by the Trusteeor its employees and their ability to verify the accuracy of certain financialinformation.  The contractuallimitations creating potential weaknesses in disclosure controls and proceduresmay be deemed to include:

 

•                  Eastern Americanand its consolidated subsidiaries manage (i) historical operating data,including production volumes, marketing of products, operating and capitalexpenditures, environmental and other liabilities, the effects of regulatorychanges and the number of producing wells and acreage, (ii) plans for futureoperating and capital expenditures and (iii) geological data relating toreserves.  While the Trustee requestsmaterial 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.

 

•                  Under the termsof the Trust Agreement, the Trustee is entitled to, and in fact does rely, uponcertain experts in good faith, including (i) the independent reserve engineerwith respect to the annual reserve report, which includes projected production,operating expenses and capital expenses, and (ii) the independent auditors theTrustee has contracted with respect to the annual audit and quarterly reviewsof financial data provided by Eastern American.  Other than contracting independent auditors and reviewing thefinancial and other information provided to the Trust by Eastern American on aquarterly basis, the Trustee makes no independent or direct verification ofthis financial or other information. While the Trustee has no reason to believeits reliance upon experts is unreasonable, this reliance on experts andrestricted access to information may be viewed as a weakness.

 

The Trusteedoes not intend to expand its responsibilities beyond those permitted orrequired by the Trust Agreement and those required under applicable law.

 

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*Changes in Internal Controls. *To the knowledge ofthe Trustee, there have been no significant changes in the Trust’s internalcontrols that could significantly affect the Trust’s internal controls subsequentto the date the Trustee completed its evaluation.  The Trustee notes for purposes of clarification that it has noauthority over, and makes no statement concerning, the internal controls ofEastern American.

 

**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 of Security Holders. |
|    |                                                  |
|    |                                                  | None. |
|    |                                                  |
| ITEM 5. | Other  Information.                                   |

 

For thecalendar quarter ended September 30, 2003, the high and low closing prices ofthe Treasury Obligations (which have $1,000 face principal amount), as quotedin the over-the-counter market for United States Treasury obligations were$684.00 and $620.30 respectively.  OnSeptember 30, 2003 the closing price of the Treasury Obligations, as quoted onsuch market, was $663.90.

 

The Trust provides Unitholders with the option to separate the relatedTreasury Obligation from the Trust Units. Upon exercising this option, the Trustee transfers such Trust Units fromthe name of the Depositary to the name of the withdrawing Unitholder.  As of September 30, 2003, this option wasexercised on 77,900 Trust Units.  (Seethe Trust’s 10-K for the fiscal year ended December 31, 2002 for a morecomplete description of the Withdrawal of Trust Units and Restriction onTransfer.)

 

The Bank ofNew York has given notice of its intention to resign as Trustee and Depositaryfor the Eastern American Natural Gas Trust in accordance with (1) the SecondAmended and Restated Trust Agreement of Eastern American Natural Gas Trustpursuant to which the Eastern American Natural Gas Trust was formed (the “TrustAgreement”) and (2) the Depositary Agreement (the “Depositary Agreement”) underwhich Trust Units and Treasury Obligations (as defined in the Trust Agreement)are held for Trust Unitholders. In accordance with the Trust Agreement and the

 

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Depositary Agreement, suchresignations will not take effect until Trust Unitholders have approved asuccessor Trustee and Depositary. Recommendations for a successor Trustee and Depositary will be made tothe Trust Unitholders and voted upon at a meeting of the Trust Unitholders thatwill be scheduled in accordance with the Trust Agreement and the DepositaryAgreement.

 

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

(a)                                 Exhibits

 
| **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)      Reports on Form 8-K |
|                |   |                                                                                                                                             |
|                |   |                                                                                                                                             | No reports  on Form 8-K were filed during the fiscal quarter ended  September 30, 2003. |
|                     |        |                                                                                                                                                  |  |  |

 

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*   Incorporated by referenceto the 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 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/   Mauro Palladino               |   |
|   | Name:  Mauro  Palladino        |
|   | Title:     Vice President |
|   | The Bank of New York                     |

 

Date: November12, 2003

 

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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