**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 June 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**

 

**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 MidwestTrust Company**

**2 North LasalleStreet**

**Chicago, Illinois60602**

(Address of principal executive offices)

(Zip Code)

 

**(312) 827-8553**

(Registrant’s telephone number, including area code)

 

Indicate by check mark whetherthe registrant (1) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (orfor such shorter period that the registrant was required to file such reports)and (2) has been subject to such filing requirements for the past 90 days.

Yes   ý           No   o

 

Indicate by check mark whetherthe registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).

Yes   ý           No   o

 

As of August 13, 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)*

 
|                                                                        |   | **Six Months  Ended  June 30** |      | **Three  Months Ended  June 30** |   |
|-----------------------------------------------------------------------------|--------|--------------------------------|-----------|----------------------------------|--------|
|                                                                        |   | **2003**                       |      | **2002**                         |   | **2003** |   | **2002** |   |
|                                                                        |   |                           |      |                             |   |   |   |   |   |
| Royalty Income                                                              |   | $                              | 6,644,071 |                             | $      | 3,963,220 |   | $ | 3,645,266 |   | $ | 2,191,952 |   |
|                                                                        |   |                           |      |                             |   |   |   |   |   |
| Operating Expenses:                                                         |   |                           |      |                             |   |   |   |   |   |
| Taxes on production and property                                            |   | 452,700                        |      | 271,167                          |   | 247,887 |   | 150,032 |   |
| Operating cost charges                                                      |   | 255,222                        |      | 251,274                          |   | 127,611 |   | 125,637 |   |
|                                                                        |   |                           |      |                             |   |   |   |   |   |
| Total Operating Expenses                                                    |   | 707,922                        |      | 522,441                          |   | 375,498 |   | 275,669 |   |
|                                                                        |   |                           |      |                             |   |   |   |   |   |
| Net Proceeds to the Trust                                                   |   | 5,936,149                      |      | 3,440,779                        |   | 3,269,768 |   | 1,916,283 |   |
|                                                                        |   |                           |      |                             |   |   |   |   |   |
| General and Administrative Expenses                                         |   | (530,576                       | )         | (320,465                         | )      | (226,818 | ) | (155,015 | ) |
|                                                                        |   |                           |      |                             |   |   |   |   |   |
| Interest Income                                                             |   | 489                            |      | 1,017                            |   | 245 |   | 316 |   |
|                                                                        |   |                           |      |                             |   |   |   |   |   |
| Cash Proceeds on Sale of Net Profits  Interests                             |   | 10,293                         |      | 492,043                          |   | 10,293 |   | 188,605 |   |
|                                                                        |   |                           |      |                             |   |   |   |   |   |
| Distributable Income                                                        |   | 5,416,355                      |      | 3,613,374                        |   | 3,053,488 |   | 1,950,189 |   |
|                                                                        |   |                           |      |                             |   |   |   |   |   |
| Cash Reserve                                                                |   | (115,000                       | )         | 0                                |   | (15,000 | ) | 0 |   |
|                                                                        |   |                           |      |                             |   |   |   |   |   |
| Distribution Amount                                                         |   | $                              | 5,301,355 |                             | $      | 3,613,374 |   | $ | 3,038,488 |   | $ | 1,950,189 |   |
|                                                                        |   |                           |      |                             |   |   |   |   |   |
| Distributable Income Per Unit (5,900,000  units authorized and outstanding) |   | $                              | 0.9180    |                             | $      | 0.6124 |   | $ | 0.5175 |   | $ | 0.3305 |   |
|                                                                        |   |                           |      |                             |   |   |   |   |   |
| Distribution Per Unit (5,900,000 units  authorized and outstanding)         |   | $                              | 0.8985    |                             | $      | 0.6124 |   | $ | 0.5150 |   | $ | 0.3305 |   |

 

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

 

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**EASTERN AMERICAN NATURAL GAS TRUST**

** **

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

 
|                                                             |   | **June 30,  2003** |       | **December  31, 2002** |   |
|------------------------------------------------------------------|--------|--------------------|------------|------------------------|--------|
|                                                             |   | **(Unaudited)**    |       |                   |   |
|                                                             |   |               |       |                   |   |
| Assets:                                                          |   |               |       |                   |   |
|                                                             |   |               |       |                   |   |
| Cash                                                             |   | $                  | 84,529     |                   | $      | 406 |   |
| Net Proceeds Receivable                                          |   | 3,280,061          |       | 2,310,449              |   |
| Net Profits Interests in Gas Properties                          |   | 93,162,180         |       | 93,162,180             |   |
| Accumulated Amortization                                         |   | (56,497,440        | )          | (54,466,381            | )      |
|                                                             |   |               |       |                   |   |
| Total Assets                                                     |   | $                  | 40,029,330 |                   | $      | 41,006,654 |   |
|                                                             |   |               |       |                   |   |
| Liabilities and Trust Corpus:                                    |   |               |       |                   |   |
|                                                             |   |               |       |                   |   |
| Trust General and Administrative Expenses  Payable               |   | $                  | 211,102    |                   | $      | 145,098 |   |
| Distributions Payable                                            |   | 3,038,488          |       | 2,165,757              |   |
| Trust Corpus (5,900,000 Trust Units  authorized and outstanding) |   | 36,779,740         |       | 38,695,799             |   |
|                                                             |   |               |       |                   |   |
| Total Liabilities and Trust Corpus                               |   | $                  | 40,029,330 |                   | $      | 41,006,654 |   |

** **

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

 

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**EASTERN AMERICAN NATURAL GAS TRUST**

** **

**STATEMENT OF CHANGES IN TRUST CORPUS**

*(Unaudited)*

 
|                                                     |   | **Six Months  Ended  June 30, 2003** |       | **Six Months  Ended  June 30, 2002** |   |
|----------------------------------------------------------|--------|--------------------------------------|------------|--------------------------------------|--------|
|                                                     |   |                                 |       |                                 |   |
| Trust Corpus, Beginning of Period                        |   | $                                    | 38,695,799 |                                 | $      | 43,169,981 |   |
| Distributable Income                                     |   | 5,416,355                            |       | 3,613,373                            |   |
| Distributions Payable to Unitholders                     |   | (5,301,355                           | )          | (3,613,373                           | )      |
| Amortization of Net Profits Interests in  Gas Properties |   | (2,031,059                           | )          | (2,208,733                           | )      |
|                                                     |   |                                 |       |                                 |   |
| Trust Corpus, End of Period                              |   | $                                    | 36,779,740 |                                 | $      | 40,961,248 |   |

 

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

 

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**EASTERN AMERICANNATURAL GAS TRUST**

 

**NOTES TO UNAUDITEDFINANCIAL STATEMENTS**

 

NOTE 1. Organization of theTrust

 

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 NetProfits Interests are passive in nature, and neither the Trustee nor theDelaware Trustee has management control or authority over, nor anyresponsibility relating to, the operation of the properties subject to the NetProfits Interests.  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 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 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 June 30, 2003, the Trust held Net Profits Interests in 677wells, 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 time as41,683 MMcf of gas has been produced that is attributable to Eastern American’snet revenue interest in the properties burdened by the Term NPI. As of December31, 2002, based on the Independent Petroleum Engineer’s Report, 18,319 MMcf ofthe maximum 41,683 MMcf has been produced.

 

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

 

NOTE 2.  Basis of Presentation

 

Theinformation furnished is based upon certain estimates of production for theperiods presented and is therefore subject to adjustment in future periods toreflect actual production for the periods presented.  The information furnished reflects all adjustments which are, inthe opinion of the Trustee, necessary for a fair presentation of the resultsfor the interim periods presented.  Theaccompanying financial statements are unaudited interim financial statements,and should be read in conjunction with the audited financial statements andnotes thereto included in the Trust’s Annual Report on Form 10-K for the yearended December 31, 2002.

 

NOTE 3.  Trust Accounting Policies

 

The Trustserves as a pass-through entity, with items of depletion, interest income andexpense, 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

 

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payment with respect to gasproduction for a calendar quarter to be made to the Trust on or before thetenth day of the third month following such quarter.

 

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 UnderlyingProperties.  The Trust will then providea writedown to the extent that the net capitalized costs exceed the discountedfuture net revenues attributable to proved gas reserves of the UnderlyingProperties.   Any such writedown wouldnot reduce distributable income, although it would reduce Trust Corpus.

 

Amortizationof the 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. Income Taxes

 

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

 

Cautionary Statement

 

The Trusteeand Eastern American, its officers or its agents on behalf of the Trust may,from time to time, make forward-looking statements (other than statements ofhistorical fact).  When used herein, thewords “anticipates,” “expects,” “believes,” “intends” or “projects” and similarexpressions are intended to identify forward-looking statements.  To the extent that any forward-lookingstatements are made, the Trust is unable to predict future changes in gasprices, gas production levels, economic activity, legislation and regulation,and certain changes in expenses of the Trust. In addition, the Trust’s future results of operations and other forwardlooking statements contained in this item and elsewhere in this report involvea number of risks and uncertainties.  Asa result of variations in such factors, actual results may differ materially fromany forward-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 doesnot conduct 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 NetProfits Interests were created pursuant to conveyances (the “Conveyances”) fromEastern American to the Trust.  Inconnection therewith, Eastern American assigned its rights under a gas purchasecontract (the “Gas Purchase Contract”) which obligates Eastern Marketing Corporation,a subsidiary of Eastern American, to purchase all of the natural gas producedfrom the Underlying Properties that is attributable to the Net ProfitsInterests.

 

TheConveyances and the Gas Purchase Contract entitle the Trust to receive anamount of cash for each calendar quarter equal to the Net Proceeds for suchquarter.  “Net Proceeds” for anycalendar quarter generally means an amount of cash equal to (a) 90% of a volumeof gas equal to (i) the volume of gas produced during such quarter attributableto the Underlying Properties less (ii) a volume of gas equal to “ChargeableCosts” for such quarter, multiplied by (b) the applicable price for suchquarter under the Gas Purchase Contract. “Chargeable Costs” is that volume of gas which equates in value,determined by reference to the relevant sales price under the Gas PurchaseContract or the Conveyances, as applicable, to the sum of the “Operating CostCharge”, “Capital Costs” and “Taxes”.

 

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The “OperatingCost Charge” for 2003 is based on an annual rate of $510,444, and for 2002 wasan annual 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.  The Operating Cost Charge for 2003 has been adjusted to reflectthis change.  As provided in theConveyances, the Operating Cost Charge will fluctuate based on the lesser of(A) five percent (5%) or (B) a percentage, not less than zero percent (0%),equal to the percentage increase, if any, in the average weekly 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.  The Crude Petroleum and Gas Production Workers Index for 2003decreased by 3.1%.  The Operating CostCharge was not increased as Development Wells were completed but will bereduced 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 tothe Gas 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 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 the Trust for production may be higher or lowerbased on the fluctuations in natural gas futures prices during the relevantcalculation period.  The price payableto the Trust will have a direct impact, positively or negatively, on thequarterly distributions payable by the Trust to its unit holders.

 

EasternAmerican had a disagreement with the Trust over Eastern American’s obligationto drill certain Development Wells that were closely offset by thirdparties.  The Trust agreed that in lieuof drilling these closely offset Development Wells that Eastern American couldprovide the Trust, on an

 

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annual basis commencing onApril 1, 1997, and over the remaining life of the Trust, a volume of gas whichis equal to the projected volumes of the wells as if they had been drilled.  These volumes have been estimated by RyderScott Company, independent petroleum engineers.  During the quarter ended June 30, 2003, an additional volume of4,822 Mcf was delivered to the Trust, as compared to 5,260 Mcf for the quarterended June 30, 2002.  These additionalvolumes fulfill Eastern American’s obligation to provide volumes forDevelopment Wells that had been closely offset by third parties.

 

EasternAmerican has fulfilled its obligation with respect to the drilling of theDevelopment Wells. Since the inception of the Trust, Eastern has drilled atotal of 59 Development Wells, which are online and producing.  (See the Trust’s Form 10-K for the fiscalyear ended December 31, 2002 for a more complete description of the DevelopmentWells.)

 

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 wellsowned the 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 Profits Interestin the well.  Upon Review, it was discoveredthat the Net Profits Interests associated with the U.S. Steel #26 wellaccounted for less than .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.

 

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

 

Comparison ofResults of Operations for Three Months Ended June 30, 2003 and Three MonthsEnded June 30, 2002

 

The Trust’sdistributable income was $3,053,488 for the three months ended June 30, 2003 ascompared to $1,950,189 for the three months ended June 30, 2002.  This increase was due to an increase inRoyalty Income for the three months ended June 30, 2003 ($3,645,266) ascompared to the three months ended June 30, 2002 ($2,191,952).  The increase in Royalty Income was due to anincrease in the price payable to the Trust under the Gas Purchase Contract asdiscussed below ($6.544 per Mcf for the three months ended June 30, 2003;$3.776 per Mcf for the three months ended June 30, 2002).  This increase was offset by a decrease inproduction of gas attributable to the Net Profits Interests for the threemonths ended June 30, 2003 (557 Mmcf) as compared to the three months endedJune 30, 2002 (582 Mmcf).  The declinein production is primarily attributable to natural production declines and thesale of wells.  Taxes on production andproperty were $247,887 for the three months ended June 30, 2003 as compared to$150,032 for the three months ended June 30, 2002.  The increase in taxes is due directly to the increase in RoyaltyIncome as discussed above. Trust general and administrative expenses were$226,818 for the three months ended June 30, 2003 as compared to $155,015 forthe three months ended June 30, 2002. The increase in general and administrative expenses was due primarily toan increase in legal fees of $86,000 (attributable primarily to determining thelegal obligations of the Trust under the Sarbanes-Oxley Act of 2002 withrespect to the public reports filed on behalf of the Trust), which was offsetby a decrease of $19,000 in tax services due to the timing of payments.  During the three months ended June 30, 2003,the Trustee added $15,000 to the reserve which was previously establishedduring the quarter ended March 31, 2003 to facilitate the payment of vendorinvoices on a timely basis.  No suchreserve existed in the prior three months ending June 30, 2002.  The distributable income includes CashProceeds on Sale of Net Profits Interests of $10,293 for the three months endedJune 30, 2003, as compared to $188,605 for the three months ended June 30,2002.

 

The pricepayable to the Trust for gas production attributable to the Net ProfitsInterests was $6.544 per Mcf for the three months ended June 30, 2003 and$3.776 per Mcf for the three months ended June 30, 2002.  The price per Mcf was higher for the threemonths ended June 30, 2003 than for the corresponding three month period endedJune 30, 2002 due to a increase in the average spot market price for gasdelivered at the Henry Hub near Henry, Louisiana ($5.649 per Dth for the threemonths ended June 30, 2003; $3.133 per Dth for the three months ended June 30,2002).

 

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Comparison ofResults of Operations for Six Months Ended June 30, 2003 and Six Months EndedJune 30, 2002

 

The Trust’sdistributable income was $5,416,335 for the six months ended June 30, 2003 ascompared to $3,613,374 for the six months ended June 30, 2002.  This increase was due to an increase inRoyalty Income for the six months ended June 30, 2003 ($6,644,071) as compared tothe six months ended June 30, 2002 ($3,963,220).  The increase in Royalty Income was due to an increase in theaverage price payable to the Trust under the Gas Purchase Contract as discussedbelow ($6.119 per Mcf for the six months ended June 30, 2003; $3.409 per Mcffor the six months ended June 30, 2002). This increase was offset by a decrease in production of gas attributableto the Net Profits Interests for the six months ended June 30, 2003 (1,083Mmcf) as compared to the six months ended June 30, 2002 (1,164 Mmcf).  The decline in production is primarilyattributable to natural production declines and the sale of wells.  Taxes on production and property were$452,700 for the six months ended June 30, 2003 as compared to $271,167 for thesix months ended June 30, 2002.  Theincrease in taxes is due directly to the increase in Royalty Income asdiscussed above. Trust general and administrative expenses were $530,576 forthe six months ended June 30, 2003 as compared to $320,465 for the six monthsended June 30, 2002.  The increase ingeneral and administrative fees was due primarily to an increase in legal feesof $168,998 (attributable primarily to determining the legal obligations of theTrust under the Sarbanes-Oxley Act of 2002 with respect to the public reportsfiled on behalf of the Trust) and increased fees for tax services performed of$22,610.  During the six months endedJune 30, 2003, the Trustee established and added to a reserve the amount of$115,000 to facilitate the payment of vendor invoices on a timely basis. Nosuch reserve existed in the prior six months ended June 30, 2002.  The distributable income includes CashProceeds on Sale of Net Profits Interests of $10,293 for the period ended June30, 2003, while $492,043 was recognized in the corresponding prior sixmonths.  Amortization of Nets ProfitsInterests in Gas Properties was $2,031,059 for the six months ended June 30,2003 as compared to $2,208,733 for the six months ended June 30, 2002.  This decrease was due to the decrease in productionvolumes.

 

The averageprice payable to the Trust for gas production attributable to the Net ProfitsInterests was $6.119 per Mcf for the six months ended June 30, 2003 and $3.409per Mcf for the six months ended June 30, 2002.  The price per Mcf was higher for the six months ended June 30,2003 than for the corresponding six month period ended June 30, 2002 due to aincrease in the average spot market price for gas delivered at the Henry Hubnear Henry, Louisiana ($5.263 per Dth for the six months ended June 30, 2003;$2.799 per Dth for the six months ended June 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

 

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Obligations is included underItem 5.  As described elsewhere herein,gas production attributable to the Net Profits Interest is sold to a whollyowned subsidiary of Eastern American pursuant to the Gas Purchase Contractdescribed herein.

 

ITEM 4.  Controls and Procedures

 

*Evaluation of Disclosure Controls andProcedures. *TheTrustee maintains disclosure controls and procedures designed to ensure thatinformation required to be disclosed by the Trust in the reports that it filesor submits under the Exchange Act of 1934, as amended, is recorded, processed,summarized and reported within the time periods specified in the SEC’s rulesand regulations.  Disclosure controlsand procedures 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 of June 30,2003, the Trustee carried out an evaluation of the Trustee’s disclosurecontrols and procedures.  RobertGriffin, as Agent of the Trustee, has concluded that the controls and proceduresare effective at the reasonable assurance level, while noting certainlimitations on disclosure controls and procedures as set forth below.

 

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, and reliesentirely on Eastern American to provide accurate and timely information whenrequested 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

 

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provided byEastern American.  Other thancontracting independent auditors and reviewing the financial and otherinformation provided to the Trust by Eastern American on a quarterly basis, theTrustee makes no independent or direct verification of this financial or otherinformation. While the Trustee has no reason to believe its reliance upon expertsis unreasonable, this reliance on experts and restricted access to informationmay 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.

 

*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 ofSecurity Holders.

 

None.

 

ITEM 5.      Other Information.

 

For thecalendar quarter ended June 30, 2003, the high and low closing prices of theTreasury Obligations (which have $1,000 face principal amount), as quoted inthe over-the-counter market for United States Treasury obligations were $711.50and $641.50 respectively.  On June 30,2003 the closing price of the Treasury Obligations, as quoted on such market,was **$**684.80.

 

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

 

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theDepositary to the name of the withdrawing Unitholder.  As of June 30, 2003, this option was exercised on 77,900 TrustUnits.  (See the Trust’s 10-K for thefiscal year ended December 31, 2002 for a more complete description of theWithdrawal of Trust Units and Restriction on Transfer.)

 

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 theDepositary Agreement, such resignations will not take effect until TrustUnitholders 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 TrustAgreement and the Depositary Agreement.

 

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                                                                                                          |

 

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| 32.    |   | Section 1350  Certification                                                                                                                                                                     |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                            |
|   |   | (b)      Reports  on Form 8-K                                                                                                                                          |
|   |   |                                                                                                                                                                                            |
|   |   | On April 18, 2003, the Trust filed a report on Form 8-K giving notice  of The Bank of New York’s intention to resign as Trustee and Depositary of  the Eastern American Natural Gas Trust. |

 

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*      Incorporated by reference to the indicatedexhibits to filings previously made by the registrant with the Securities andExchange Commission.  All references areto the registrant’s Registration Statement on Form S-1, Registration No.33-56336, except for Exhibit 3.1, which is incorporated by reference to theRegistrant’s Annual report on Form 10-K for the year ended December 31, 1994.

 

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**SIGNATURES**

 

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

 
|   | EASTERN  AMERICAN NATURAL GAS TRUST     |
|--------|-----------------------------------------|
|   |                                    |
|   | By:  The Bank of New York, Trustee |
|   |                                    |
|   | /s/ Robert L. Griffin                   |   |
|   | Name:                                   | Robert L.  Griffin |
|   | Title:                                  | Vice  President |
|   |                                    | The Bank of  New York |
|        |                                         |  |  |

 

Date: August 14, 2003

 

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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