Item 1. Financial Statements.
ECA Marcellus Trust I
Statements of Assets, Liabilities, and Trust Corpus
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June 30,
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December 31,
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2021
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2020
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ASSETS:
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Cash
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$
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1,181,489
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$
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1,103,257
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Royalty income receivable
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1,018,242
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583,890
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Royalty interest in gas properties
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352,100,000
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352,100,000
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Accumulated amortization
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(337,337,166
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)
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(336,503,336
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)
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Net royalty interest in gas properties
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14,762,834
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15,596,664
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Total Assets
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$
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16,962,565
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$
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17,283,810
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LIABILITIES AND TRUST CORPUS:
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Liabilities:
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Distributions payable to unitholders
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$
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489,597
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$
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149,871
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Trust corpus; 17,605,000 common units authorized, issued and outstanding
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16,472,968
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17,133,939
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Total Liabilities and Trust Corpus
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$
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16,962,565
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$
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17,283,810
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See notes to the unaudited financial statements.
ECA Marcellus Trust I
Statements of Distributable Income
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Six Months Ended
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Three Months Ended
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June 30,
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June 30,
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2021
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2020
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2021
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2020
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Royalty income
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$
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2,053,381
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$
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780,477
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$
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1,018,242
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$
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306,801
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Net proceeds to Trust
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$
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2,053,381
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$
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780,477
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$
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1,018,242
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$
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306,801
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General and administrative expense
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(836,665
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)
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(798,331
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)
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(438,657
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)
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(285,062
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)
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Interest income
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68
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4,437
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37
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884
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Cash proceeds on sale of net profit interests
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-
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-
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Income available for distribution prior to cash reserves
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$
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1,216,784
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$
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(13,417
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$
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579,622
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$
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22,623
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Cash reserves withheld by Trustee
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(180,000
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)
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16,082
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(90,000
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)
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(21,964
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)
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Interest withheld on cash reserves
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(47
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)
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(2,665
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)
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(26
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)
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(659
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)
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Distributable income available to unitholders
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$
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1,036,737
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$
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-
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$
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489,597
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$
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0
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Distributable income per common unit
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(17,605,000 units authorized and outstanding)
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$
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0.059
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$
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-
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$
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0.028
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$
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-
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See notes to the unaudited financial statements.
ECA Marcellus Trust I
Statements of Trust Corpus
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Three Months Ended
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June 30,
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2021
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2020
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Trust Corpus, Balance at April 1,
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$
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16,808,167
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$
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17,787,028
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Cash reserves withheld, including interest
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90,026
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22,623
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Distributable income
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489,597
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0
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Distributions paid or payable to unitholders
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(488,211
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)
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-
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Amortization of royalty interest in gas properties
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(426,610
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)
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(364,906
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)
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Impairment of royalty interest in gas properties
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-
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-
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Trust Corpus, Balance at June 30,
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$
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16,472,968
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$
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17,444,745
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Six Months Ended
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June 30,
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2021
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2020
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Trust Corpus, Balance at January 1,
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$
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17,133,939
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$
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18,218,080
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Cash reserves withheld, including interest
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180,047
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(13,417
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)
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Distributable income
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1,036,737
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-
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Distributions paid or payable to unitholders
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(1,043,926
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)
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678
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Amortization of royalty interest in gas properties
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(833,830
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(760,596
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Impairment of royalty interest in gas properties
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-
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-
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Trust Corpus, Balance at June 30,
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$
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16,472,968
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$
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17,444,745
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See notes to the unaudited financial statements.
ECA MARCELLUS TRUST I
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. Organization of the Trust
ECA Marcellus Trust I is a Delaware statutory trust
formed in March 2010 by Energy Corporation of America (“Legacy ECA”) to own royalty interests in 14 producing horizontal
natural gas wells producing from the Marcellus Shale formation, all of which are online and are located in Greene County, Pennsylvania
(the “Producing Wells”), and royalty interests in 52 horizontal natural gas development wells subsequently drilled to the
Marcellus Shale formation (the “PUD Wells”) within the “Area of Mutual Interest”, or “AMI”, comprising
approximately 9,300 acres held by Legacy ECA, of which it owned substantially all of the working interests, in Greene County, Pennsylvania.
The effective date of the Trust was April 1, 2010; consequently, the Trust received the proceeds of production attributable to the
PDP Royalty Interest (defined herein) from that date even though the PDP Royalty Interest was not conveyed to the Trust until the closing
of the initial public offering on July 7, 2010. The total number of units the Trust is authorized to issue is 17,605,000 units, all
of which are now common units. The royalty interests were conveyed from Legacy ECA’s working interest in the Producing Wells and
the PUD Wells limited to the Marcellus Shale formation (the “Underlying Properties”). In November 2017, Greylock Energy,
LLC and certain of its wholly owned subsidiaries (“Greylock Energy”), including Greylock Production, LLC (“Greylock
Production”), which serves as operator of the subject wells, and Greylock Midstream, LLC (“Greylock Midstream”), whose
subsidiaries market and gather certain of the gas, acquired substantially of the assets of Legacy ECA, as described in Note 4.
The royalty interest in the Producing Wells (the
“PDP Royalty Interest”) entitles the Trust to receive 90% of the proceeds (exclusive of any production or development costs
but after deducting post-production costs and any applicable taxes) from the sale of production of natural gas attributable to the Sponsor’s
initial interest in the Producing Wells. The royalty interest in the PUD Wells (the “PUD Royalty Interest” and collectively
with the PDP Royalty Interest, the “Royalty Interests”) entitles the Trust to receive 50% of the proceeds (exclusive of any
production or development costs but after deducting post-production costs and any applicable taxes) from the sale of production of natural
gas attributable to the Sponsor’s initial interest in the PUD Wells.
The Trust’s cash receipts in respect of the
Royalty Interests are determined after deducting post-production costs and any applicable taxes associated with the Perpetual Royalty
Interests. The Trust’s cash available for distribution is reduced by Trust administrative expenses. Post-production costs generally
consist of costs incurred to gather, compress, transport, process, treat, dehydrate and market the natural gas produced. Charges (the
“Post-Production Services Fee”) payable to the Sponsor for such post-production costs on the Greene County Gathering System
(“GCGS”) were limited to $0.52 per MMBtu gathered until Legacy ECA fulfilled its drilling obligation in 2011; since then the
Sponsor has been permitted to increase the Post-Production Services Fee to the extent necessary to recover certain capital expenditures
in the GCGS. Additionally, if electric compression is utilized in lieu of gas as fuel in the compression process, the Trust will be charged
for the electric usage as provided for in the Trust conveyance documents.
The trust agreement provides that the Trust will
terminate if gross proceeds to the Trust attributable to the Royalty Interests over any four consecutive quarters are less than $1.5 million.
If this early termination event occurs, the trust agreement will require the Trustee to sell the Royalty Interests, either by private
sale or public auction, subject to Greylock Energy's right of first refusal to purchase the Royalty Interests. After the sale of
all of the Royalty Interests, payment of all Trust liabilities and establishment of reasonable provisions for the payment of additional
anticipated or contingent Trust expenses or liabilities, the Trustee will distribute the net proceeds of the sale to the Trust unitholders.
Gross proceeds to the Trust attributable to the Royalty Interests during the last two quarters of 2020 were $922,571 with additional proceeds
of $2,053,381 for the first two quarters of 2021, for a total of $2,975,952 for the last four consecutive quarters.
The Trust makes quarterly cash distributions of
substantially all of its cash receipts, after deducting Trust administrative expenses, including the costs incurred as a result of being
a publicly traded entity, on or about the 60th day following the completion of each quarter. Unless sooner terminated, the
Trust will begin to liquidate on or about March 31, 2030 (the “Termination Date”) and will soon thereafter wind up its
affairs and terminate. At the termination of the Trust, 50% of each of the PDP Royalty Interest and the PUD Royalty Interest will revert
automatically to Greylock Production. The remaining 50% of each of the PDP Royalty Interest and the PUD Royalty Interest will be sold,
and the net proceeds will be distributed pro rata to the unitholders soon after the termination of the Trust. Greylock Production will
have a right of first refusal to purchase the remaining 50% of the Royalty Interests at the termination of the Trust.
The business and affairs of the Trust are administered
by The Bank of New York Mellon Trust Company, N.A., as Trustee. Although Greylock Production operates all of the Producing Wells and all
of the PUD Wells, Greylock Production has no ability to manage or influence the management of the Trust. Neither the Trust nor the Trustee
has any authority or responsibility for, or any involvement with or influence over, any aspect of the operations on or relating to the
properties to which the Royalty Interests relate.
NOTE 2. Basis of Presentation
The preparation of financial statements requires
the Trust to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period.
Without limiting the foregoing statement, the information furnished is based upon certain estimates of the revenues attributable to the
Trust from natural gas production for the three and six months ended June 30, 2021 and 2020 and is therefore subject to adjustment
in future periods to reflect actual production for the periods presented.
The information furnished reflects all normal and
recurring adjustments which are, in the opinion of the Trustee, necessary for a fair presentation of the results for the interim period
presented. The accompanying unaudited interim financial statements should be read in conjunction with the audited financial statements
and notes thereto included in the Trust’s Annual Report on Form 10-K for the year ended December 31, 2020. The December 31,
2020 condensed balance sheet data was derived from audited financial statements, but does not include all applicable financial statement
disclosures.
NOTE 3. Significant Accounting Policies
The accompanying unaudited financial information
has been prepared by the Trustee in accordance with the instructions to Form 10-Q. The financial statements of the Trust differ from
financial statements prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”)
because certain cash reserves may be established for contingencies, which would not be accrued in financial statements prepared in accordance
with GAAP. Amortization of the investment in overriding royalty interests calculated on a unit-of-production basis is charged directly
to Trust Corpus. This comprehensive basis of accounting other than GAAP corresponds to the accounting permitted for royalty trusts by
the U.S. Securities and Exchange Commission (“SEC”) as specified by Accounting Standard Codification (“ASC”) Topic
932, Extractive Activities—Oil and Gas: Financial Statements of Royalty Trusts. Income determined on the basis of GAAP would include
all expenses incurred for the period presented. However, the Trust serves as a pass-through entity, with expenses for depreciation, depletion,
and amortization, interest and income taxes being based on the status and elections of the Trust unitholders. General and administrative
expenses, production taxes or any other allowable costs are charged to the Trust only when cash has been paid for those expenses. In addition,
the Royalty Interests are not burdened by field and lease operating expenses. Thus, the statement shows distributable income, defined
as income of the Trust available for distribution to the Trust unitholders before application of those additional expenses, if any, for
depreciation, depletion, and amortization, interest and income taxes. The revenues are presented net of existing royalties and overriding
royalties and have been reduced by gathering/post-production expenses.
Cash:
Cash may include highly liquid instruments maturing
in three months or less from the date acquired.
Use of Estimates in the Preparation of Financial
Statements:
The preparation of financial statements requires
the Trust to make estimates and assumptions that affect the reported amounts of assets and liabilities and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from those estimates.
Revenue and Expenses:
The Trust serves as a pass-through entity, with
items of depletion, interest income and expense, and income tax attributes being based upon the status and election of the unitholders.
Thus, the Statements of Distributable Income show Income available for distribution before application of those unitholders’ additional
expenses, if any, for depletion, interest income and expense, and income taxes.
The Trust uses the accrual basis to recognize revenue,
with royalty income recorded as reserves are extracted from the Underlying Properties and sold. Expenses are recognized when paid.
Royalty Interest in Gas Properties:
The Royalty interest in gas properties is assessed
to determine whether the net capitalized cost is impaired, whenever events or changes in circumstances indicate that its carrying amount
may not be recoverable, pursuant to ASC Topic 360, Property, Plant and Equipment. The Trust determines whether an impairment charge is
necessary to its investment in the Royalty interest in gas properties if total capitalized costs, less accumulated amortization, exceed
undiscounted future net revenues attributable to proved gas reserves of the Underlying Properties. Determination as to whether and how
much an asset is impaired involves estimates of fair value, which is determined based on discounted cash flow techniques using assumptions
including projected revenues, future commodity prices, production costs, and market-specific average cost of capital. Estimates of undiscounted
future net revenues attributable to proved gas reserves utilize NYMEX forward pricing curves. If required, the Trust will recognize an
impairment charge to the extent that the net capitalized costs exceed the discounted fair value of the investment in net profits interests
attributable to proved gas reserves of the Underlying Properties. Any such impairment charge would not reduce Distributable Income, although
it would reduce Trust Corpus. No impairment in the Underlying Properties was recognized during 2020 or during the three and six months
ended June 30, 2021. Significant dispositions or abandonment of the Underlying Properties are charged to Royalty Interests and the
Trust Corpus.
Amortization of the Royalty interest in gas properties
is calculated on a units-of-production basis, whereby the Trust’s cost basis in the properties is divided by Trust total proved
reserves to derive an amortization rate per reserve unit. Such amortization does not reduce Distributable Income, rather it is charged
directly to Trust Corpus. Revisions to estimated future units-of-production are treated on a prospective basis beginning on the date significant
revisions are known.
The conveyance of the Royalty Interest to the Trust
was accounted for as a purchase transaction. The $352,100,000 reflected in the Statements of Assets, Liabilities and Trust Corpus as Royalty
interests in gas properties represents 17,605,000 Trust units valued at $20.00 per unit. The carrying value of the Trust’s investment
in the Royalty Interests is not necessarily indicative of the fair value of such Royalty Interests.
NOTE 4. Reaffirmation Agreement
On November 29, 2017, Greylock Energy acquired
substantially all of the gas production and midstream assets of Legacy ECA, including Legacy ECA’s interests in certain natural
gas properties that are subject to royalty interests held by the Trust.
In connection with the transaction, Greylock Production
assumed all of Legacy ECA’s obligations under the Amended and Restated Trust Agreement among the Trust, Legacy ECA and the Trustee
(the “Trust Agreement”), and other instruments to which Legacy ECA and the Trustee were parties, including (1) the Administrative
Services Agreement by and among Legacy ECA, the Trust and the Trustee dated July 7, 2010, and (2) a letter agreement between
Legacy ECA and the Trustee regarding certain loans to be made by Legacy ECA to the Trust as necessary to enable the Trust to pay its liabilities
as they become due (the “Letter Agreement”). In addition, Legacy ECA, Greylock Production, and the Trustee entered into a
Reaffirmation and Amendment of Mortgage, Assignment of Leases, Security Agreement, Fixture Filing and Financing Statement (the “Reaffirmation
Agreement”), pursuant to which, among other things, Greylock Production (1) reaffirmed the liens and the security interest
granted pursuant to the existing mortgage securing the interests in the subject properties, as well as the mortgage and the obligations
of Legacy ECA under the mortgage, and (2) assumed the obligations of Legacy ECA under the Letter Agreement.
NOTE 5. Income Taxes
The Trust is a Delaware statutory trust, which
is taxed as a partnership for federal and state income taxes. Accordingly, no provision for federal or state income taxes has been made.
Uncertain tax positions are accounted for under ASC Topic 740, Income Taxes (“ASC 740”), which prescribes a recognition
threshold and measurement attribute for financial statement disclosure of tax positions taken or expected to be taken on a tax return.
Additionally, ASC 740 provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure,
and transition. The Trust has not identified any uncertain tax positions through the period ended June 30, 2021.
NOTE 6. Related Party Transactions
Trustee Administrative Fee:
Under the terms of the Trust Agreement, the Trustee
charges an annual administrative fee, subject to adjustment each year, that was $150,000 from inception through 2017. The annual fee in
2020 was $158,752 and is expected to be approximately $160,000 in 2021. The Trust deducts these costs, as well as those to be paid to
Greylock Production pursuant to the Administrative Services Agreement referred to below, in the period paid.
Administrative Services Fee:
The Trust and Greylock Production are parties to
an Administrative Services Agreement that obligates the Trust to pay Greylock Production an administrative services fee for accounting,
bookkeeping and informational services to be performed by Greylock Production on behalf of the Trust relating to the Royalty Interests.
The annual fee of $60,000 is payable in equal quarterly installments. Under certain circumstances, Greylock Production and the Trustee
each may terminate the Administrative Services Agreement at any time following delivery of notice no less than 90 days prior to the date
of termination.
Item 2.
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Trustee's Discussion and Analysis of Financial Condition
and Results of Operations.
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References to the “Trust” in this document
refer to ECA Marcellus Trust I. As discussed in “Overview” below, Greylock Energy acquired substantially all of the assets
of Energy Corporation of America in November 2017. References to “Legacy ECA” in this document refer to Energy Corporation
of America and its wholly-owned subsidiaries and, when discussing the conveyance documents, the Private Investors, as such entities existed
prior to the asset acquisition by Greylock Energy. The following review of the Trust’s financial condition and results of operations
should be read in conjunction with the financial statements and notes thereto and the audited financial statements and notes thereto included
in the Trust’s Annual Report on Form 10-K for the year ended December 31, 2020 (the “2020 Form 10-K”).
The Trust’s annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments
to those reports are available on the SEC’s website at www.sec.gov and at http://ect.q4web.com/home/default.aspx. Certain terms
used herein are defined in Appendix A. All information regarding operations has been provided to the Trustee by Greylock Energy.
Note Regarding Forward-Looking Statements
This report contains “forward-looking statements”
about Greylock Energy and the Trust and other matters discussed herein that are subject to risks and uncertainties. All statements other
than statements of historical fact included in this document, including, without limitation, statements under “Trustee’s Discussion
and Analysis of Financial Condition and Results of Operations” and “Risk Factors” regarding the financial position,
business strategy, production and reserve growth, development activities and costs and other plans and objectives for the future operations
of Greylock Energy and all matters relating to the Trust are forward-looking statements. Actual outcomes and results may differ materially
from those projected.
When used in this document, the words “believes,”
“expects,” “anticipates,” “intends” or similar expressions, are intended to identify such forward-looking
statements. Further, all statements regarding future circumstances or events are forward-looking statements. The following important factors,
in addition to those discussed elsewhere in this document, could affect the future results of the energy industry in general, and Greylock
Energy and the Trust in particular, and could cause those results to differ materially from those expressed in such forward-looking statements:
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•
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risks incident to the operation of natural gas wells;
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•
|
future production costs;
|
|
•
|
the effects of existing and future laws and regulatory actions;
|
|
•
|
the effects of changes in commodity prices;
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|
•
|
conditions in the capital markets;
|
|
•
|
the effect, impact, potential duration, or other implications of the Coronavirus Disease 2019 (“COVID-19”) pandemic;
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|
•
|
competition in the energy industry;
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|
•
|
the uncertainty of estimates of natural gas reserves and production; and
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|
•
|
other risks described under the caption “Risk Factors” in Part I, Item 1A of the 2020 Form 10-K
|
This report describes other important factors that
could cause actual results to differ materially from expectations of Greylock Energy and the Trust. All subsequent written and oral forward-looking
statements attributable to Greylock Energy or the Trust or persons acting on behalf of Greylock Energy or the Trust are expressly qualified
in their entirety by such factors. The Trust assumes no obligation, and disclaims any duty, to update these forward-looking statements.
Overview
The Trust is a statutory
trust created under the Delaware Statutory Trust Act. The Bank of New York Mellon Trust Company, N.A. serves as Trustee. The Trust
does not conduct any operations or activities. The Trust’s purpose is, in general, to hold the Royalty Interests (described below),
to distribute to the Trust unitholders cash that the Trust receives in respect of the Royalty Interests after payment of Trust expenses,
and to perform certain administrative functions in respect of the Royalty Interests and the Trust units. The Trustee has no authority
or responsibility for, and no involvement with, any aspect of the oil and gas operations on the properties to which the Royalty Interests
relate. The Trust derives all or substantially all of its income and cash flows from the Royalty Interests. The Trust is treated as a
partnership for federal and state income tax purposes.
In November 2017,
Greylock Energy and certain of its wholly owned subsidiaries, including Greylock Production, LLC, which serves as operator of the subject
wells, and Greylock Midstream, LLC, whose subsidiaries market and gather certain of the gas, acquired substantially all of the gas production
and midstream assets of Legacy ECA, including all of Legacy ECA’s interests in certain natural gas properties that are subject to
royalty interests held by the Trust.
In connection with the
transaction, Greylock Production assumed all of Legacy ECA’s obligations under the Trust Agreement and other instruments to which
Legacy ECA and the Trustee were parties, including (1) the Administrative Services Agreement by and among Legacy ECA, the Trust and
the Trustee dated July 7, 2010, and (2) a letter agreement between Legacy ECA and the Trustee regarding certain loans to be
made by Legacy ECA to the Trust as necessary to enable the Trust to pay its liabilities as they become due (the “Letter Agreement”).
In addition, Legacy ECA, Greylock Production, and the Trustee entered into a Reaffirmation and Amendment of Mortgage, Assignment of Leases,
Security Agreement, Fixture Filing and Financing Statement (the “Reaffirmation Agreement”), pursuant to which, among other
things, Greylock Production (1) reaffirmed the liens and the security interest granted pursuant to the existing mortgage securing
the interests in the subject properties, as well as the mortgage and the obligations of Legacy ECA under the mortgage, and (2) assumed
the obligations of Legacy ECA under the Letter Agreement.
The Royalty Interests were conveyed to the Trust
from the working interest now held by Greylock Production in the Producing Wells and the PUD Wells limited to the Underlying Properties.
The PDP Royalty Interest entitles the Trust to receive 90% of the proceeds (exclusive of any production or development costs but after
deducting post-production costs and any applicable taxes) from the sale of production of natural gas attributable to the Sponsor’s
initial interest in the Producing Wells for a period of 20 years commencing on April 1, 2010 and 45% thereafter. The PUD Royalty
Interest entitles the Trust to receive 50% of the proceeds (exclusive of any production or development costs but after deducting post-production
costs and any applicable taxes) from the sale of production of natural gas attributable to the Sponsor’s initial interest in the
PUD Wells for a period of 20 years commencing on April 1, 2010 and 25% thereafter.
Legacy ECA was obligated
to drill all of the PUD Wells by March 31, 2014. As of November 30, 2011, Legacy ECA had fulfilled its drilling obligation to
the Trust by drilling 40 PUD Wells (52.06 Equivalent PUD Wells), calculated as provided in the Development Agreement. Consequently, no
additional wells will be drilled for the Trust. The Trust was not responsible for any costs related to the drilling of development wells
or any other development or operating costs. As of June 30, 2021, the Trust owns royalty interests in 14 Producing Wells and the
40 development wells (52.06 Equivalent PUD Wells) that are now completed and in production.
The Trust’s
cash receipts in respect of the Royalty Interests are determined after deducting post-production costs and any applicable taxes
associated with the Royalty Interests, and the Trust’s cash available for distribution is reduced by Trust administrative
expenses and any amounts reserved for administrative expenses. Post-production costs generally consist of costs incurred to gather,
compress, transport, process, treat, dehydrate and market the natural gas produced. Charges (the “Post-Production Services
Fee”) payable to Legacy ECA for such post-production costs on the related GCGS were limited to $0.52 per MMBtu gathered until
Legacy ECA fulfilled its drilling obligation in 2011; since then the Sponsor has been permitted to increase the Post-Production
Services Fee to the extent necessary to recover certain capital expenditures in the GCGS.
Greylock Production has an agreement with Columbia
Gas Transmission, LLC (“Columbia”) to provide firm transportation downstream of the GCGS for 50,000 MMBtu per day (the “Transportation Agreement”).
The Transportation Agreement has been in effect since August 1, 2011 and provides for firm transportation at Columbia’s filed
tariff rate, which is currently $0.2508 per MMBtu at one hundred percent load factor. As amended by Greylock Production and Columbia
in September 2020, the Transportation Agreement will terminate on December 31, 2024 with respect to 45,000 MMBtu per day, and
July 31, 2022 with respect to the remaining 5,000 MMBtu per day, unless Greylock Production exercises its right of first refusal
to extend the term.
Greylock Production and Columbia have entered into
an additional agreement, as amended in September 2020, to provide firm transportation downstream of the GCGS for 52,550 MMBtu per
day that will utilize Columbia’s Mountaineer XPress Project (the “MXP Agreement”). This firm transportation arrangement
went into effect on January 18, 2019, and is at a fixed demand rate of $0.50 per MMBtu at one hundred percent load factor plus
applicable Columbia tariff surcharges. Unless otherwise modified or altered, the MXP Agreement, as amended, will terminate on December 31,
2022. The previously existing negotiated reservation rate will remain in place for all months other than September 2020 and December 2021.
Firm transportation utilized as to the Trust’s interests is a chargeable post-production cost, and the Trust bears its proportionate
share of such costs; however, the Trust will not be charged for the costs associated with modifying the firm transportation agreements
with TCO, including the difference between the base negotiated rate and the increased negotiated rate in September 2020 and December 2021
under the MXP Agreement.
On July 31, 2020 Columbia submitted an application
to the Federal Energy Regulatory Commission (“FERC”) to increase certain tariff rates effective February 1, 2021. FERC
issued an Order Accepting and Suspending Filing, Subject to Refund on August 31, 2020. As proposed, this tariff filing would increase
the tariff rate from $0.23/MMbtu to $0.41/MMbtu on the applicable contracts. The tariff filing is currently being protested at FERC. Once
the rate case is settled, TCO would be required to issue a refund on any difference between the $0.41/MMbtu currently being applied and
the final tariff rate.
Generally, the percentage
of production proceeds to be received by the Trust with respect to a well equals the product of (i) the percentage of proceeds to
which the Trust is entitled under the terms of the conveyances (90% for the Producing Wells and 50% for the PUD Wells) multiplied by (ii) Greylock
Production’s net revenue interest in the well. Greylock Production on average owns an 81.53% net revenue interest in the Producing
Wells. Therefore, the Trust is entitled to receive on average 73.37% of the proceeds of production from the Producing Wells. With respect
to the PUD Wells, the conveyance related to the PUD Royalty Interest provides that the proceeds from the PUD Wells will be calculated
on the basis that the underlying PUD Wells are burdened only by interests that in total would not exceed 12.5% of the revenues from such
properties, regardless of whether the royalty interest owners are actually entitled to a greater percentage of revenues from such properties.
As an example, assuming Greylock Production owns a 100% working interest in a PUD Well, the applicable net revenue interest is calculated
by multiplying Greylock Production’s percentage working interest in the 100% working interest well by the unburdened interest percentage
(87.5%), and such well would have a minimum 87.5% net revenue interest. Accordingly, the Trust is entitled to a minimum of 43.75% of the
production proceeds from the well provided in this example. To the extent Greylock Production’s working interest in a PUD Well is
less than 100%, the Trust’s share of proceeds would be proportionately reduced.
The Trust makes quarterly
cash distributions of substantially all of its cash receipts, after deducting Trust administrative expenses and costs and reserves therefor,
on or about the 60th day following the completion of each quarter. Unless sooner terminated, the Trust will begin to liquidate
in March 2030 and will soon thereafter wind up its affairs and terminate.
The amount of Trust revenues and cash distributions
to Trust unitholders depends on, among other things:
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natural gas prices received;
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the volume and Btu rating of natural gas produced and sold;
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post-production costs and any applicable taxes; and
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administrative expenses of the Trust including expenses incurred as a result of being a publicly traded entity and any changes in
amounts reserved for such expenses.
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The global spread of COVID-19 has created significant
volatility, uncertainty, and economic disruption since early 2020. The ongoing COVID-19 pandemic has reached more than 200 countries
and has continued to be a rapidly evolving economic and public health situation. The pandemic has resulted in widespread adverse impacts
on the global economy, and there is considerable uncertainty regarding the extent to which COVID-19 will continue to spread and the extent
and duration of governmental and other measures implemented to try to slow the spread of the virus, such as quarantines, shelter-in-place
orders and business and government shutdowns. State and local authorities have also implemented multi-step policies with the goal of re-opening.
However, certain jurisdictions began re-opening only to return to restrictions in the face of increases in new COVID-19 cases, including
those attributable to the recent spread of the Delta variant.
Natural gas prices are expected to continue to
be volatile as a result of the ongoing COVID-19 pandemic and as changes in natural gas inventories, industry demand and national and economic
performance are reported, and the Trust cannot predict when prices will improve and stabilize. The Trust cannot predict the full impact
that COVID-19 or the significant disruption and volatility currently being experienced in the oil and natural gas markets will have on
Greylock Energy’s business, financial condition and results of operations or on proceeds to the Trust and the Trust’s reserves
and quarterly cash distributions to unitholders due to numerous uncertainties.
The extent to which the COVID-19 pandemic negatively
impacts Greylock Energy’s business will depend on the severity, location and duration of the effects and spread of COVID-19, the
actions undertaken by federal, state and local governments and health officials to contain the virus or treat its effects, and how quickly
and to what extent economic conditions improve and normal business and operating conditions resume. A prolonged period of low natural
gas prices will adversely affect Greylock Energy. If commodity prices for natural gas remain at reduced levels, cash distributions to
unitholders will be substantially lower than historical distributions, and in certain periods in which cash proceeds to the Trust are
insufficient to cover Trust expenses, there may be no distribution to unitholders. For example, there were no distributions to unitholders
for the quarters ended March 31, 2020, June 30, 2020 or September 30, 2020, as Trust expenses exceeded net revenues to
the Trust. Moreover, continued low natural gas prices may ultimately reduce the amount of natural gas that is economic to produce from
the Underlying Properties. As a result, the operator of any of the Underlying Properties could
determine during periods of low natural gas prices to shut in or curtail production from wells on the Underlying Properties. In addition,
the operator of the Underlying Properties could determine during periods of low natural gas prices to plug and abandon marginal wells
that otherwise may have been allowed to continue to produce for a longer period under conditions of higher prices. Specifically, Greylock
Production may abandon any well or property if it reasonably believes that the well or property can no longer produce natural gas in commercially
economic quantities. This could result in termination of the portion of the royalty interest relating to the abandoned well or property,
and Greylock Production would have no obligation to drill a replacement well. In making such decisions, Greylock Production is required
under the applicable conveyance to act as a reasonably prudent operator in the AMI under the same or similar circumstances as it would
act if it were acting with respect to its own properties, disregarding the existence of the Royalty Interests as burdens affecting such
property. The volatility of natural gas prices also reduces the accuracy of estimates of future cash distributions to Trust unitholders.
The effective date of the Trust was April 1,
2010, meaning the Trust has received the proceeds of production attributable to the PDP Royalty Interest from that date even though the
PDP Royalty Interest was not conveyed to the Trust until July 7, 2010. The amount of the quarterly distributions fluctuates from
quarter to quarter, depending on the proceeds received by the Trust, among other factors. There is no minimum required distribution.
Pursuant to Section 1446 of the Internal Revenue
Code of 1986 (the “IRC”), withholding tax on income effectively connected to a United States trade or business allocated to
non-U.S. persons (“ECI”) should be made at the highest marginal rate. Under IRC Section 1441, withholding tax on fixed,
determinable, annual, periodic income from United States sources allocated to non-U.S. persons should be made at a 30% rate unless the
rate is reduced by treaty. Nominees and brokers should withhold at the highest marginal rate on the distribution made to non-U.S. persons.
The Tax Cuts and Jobs Act (the “TCJA”) enacted in December 2017 treats a non-U.S. holder’s gain on the sale of
Trust units as ECI to the extent such holder would have had ECI if the Trust had sold all of its assets at fair market value on the date
of the sale of such Trust units. The TCJA also requires a transferee of units to withhold 10% of the amount realized on the sale of exchange
of units (generally, the purchase price) unless the transferor certifies that it is not a nonresident alien individual or foreign corporation
or another exception is available. Pursuant to final Treasury Regulations issued on October 7, 2020, this new withholding obligation
will become applicable to transfers of units in publicly traded partnerships such as the Trust (which is classified as a partnership for
federal and state income tax purposes) occurring on or after January 1, 2022.
Potential Early Termination of the Trust.
The trust agreement provides that the Trust will terminate if gross proceeds to the Trust attributable to the Royalty Interests over any
four consecutive quarters are less than $1.5 million. If this early termination event occurs, the trust agreement will require the
Trustee to sell the Royalty Interests, either by private sale or public auction, subject to Greylock Energy's right of first refusal
to purchase the Royalty Interests. After the sale of all of the Royalty Interests, payment of all Trust liabilities and establishment
of reasonable provisions for the payment of additional anticipated or contingent Trust expenses or liabilities, the Trustee will distribute
the net proceeds of the sale to the Trust unitholders. Gross proceeds to the Trust attributable to the Royalty Interests during the last
two quarters of 2020 were $922,571 with additional proceeds of $2,053,381 for the first two quarters of 2021, for a total of $2,975,952
for the last four consecutive quarters.
Results of Trust Operations
For the Three Months Ended June 30, 2021 compared to the Three
Months Ended June 30, 2020
Distributable income for the three months ended
June 30, 2021 increased to $0.5 million from $0 for the three months ended June 30, 2020. Compared to the quarter ended June 30,
2020, royalty income increased by $0.7 million while general and administrative expenses increased by $0.1 million.
Royalty income increased to $1.0 million for the
three months ended June 30, 2021 from $0.3 million for the three months ended June 30, 2020, an increase of $0.7 million. This
increase was due to an increase in the average sales price between periods while production remained consistent between periods.
The average price realized for the three months
ended June 30, 2021 increased $1.02 per Mcf to $1.49 per Mcf as compared to $0.47 per Mcf for the three months ended June 30,
2020. The increase in the average sales price realized for natural gas production was due primarily to a higher average sales price and
a decrease in other post-production costs during the period. The average sales price, before post-production costs, increased from $1.48
per Mcf for the three months ended June 30, 2020 to $2.44 per Mcf for the three months ended June 30, 2021. The increase in
price was the result of a decrease in the weighted average monthly closing NYMEX price for the current period to $2.83 per MMBtu
compared to the weighted average monthly closing NYMEX price of $1.71 per MMBtu for the three months ended June 30, 2020. The average
Basis per MMBtu realized for the three months ended June 30, 2021 decreased $0.20 per Mcf to minus $0.47 per Mcf as compared to minus
$0.27 per Mcf for the three months ended June 30, 2020.
Post-production costs consist of a post-production
services fee together with a charge for electricity used in lieu of gas for compression on the gathering system and firm transportation
charges on interstate gas pipelines. Overall, average post-production costs decreased to $0.95 per Mcf in the current period compared
to $1.01 per Mcf for the three-month period ended June 30, 2020 primarily due to a decrease in firm transportation related
to the MXP Agreement that was partially offset by an increase in the Columbia filed tariff rate.
Production increased 5.4% from 649 MMcf for the
three months ended June 30, 2020 to 683 MMcf for the three months ended June 30, 2021.
General and administrative
expenses paid by the Trust for the three months ended June 30, 2021 increased by $0.1 million to approximately $0.4 million compared
to $0.3 million for the three months ended June 30, 2020. This increase was the result of timing in professional service fees. Cash
reserves of $0.1 million were withheld for the three months ended June 30, 2021 as compared to $0 for the three months ended June 30,
2020.
For the Six Months Ended June 30, 2021 compared to the Six
Months Ended June 30, 2020
Distributable income for the six months ended June 30,
2021 increased to $1.0 from $0 million for the six months ended June 30, 2020. Compared to the six months ended June 30, 2020,
royalty income increased by $1.3 million and general and administrative expenses remained flat.
Royalty income increased to $2.1 million for the
six months ended June 30, 2021 from $0.8 million for the six months ended June 30, 2020, an increase of $1.3 million. This increase
was due to an increase in the average sales price between periods partially offset by slightly lower production between periods.
The average price realized for the six months ended
June 30, 2021 increased $0.96 per Mcf to $1.54 per Mcf as compared to $0.58 per Mcf for the six months ended June 30, 2020.
The increase in the average sales price realized for natural gas production was due primarily to a higher average sales price and lower
post-production costs associated with firm transportation during the period. The average sales price, before post-production costs, increased
from $1.59 per Mcf for the six months ended June 30, 2020 to $2.43 per Mcf for the six months ended June 30, 2021. The increase
in price was the result of an increase in the weighted average monthly closing NYMEX price for the current period to $2.75 per MMBtu
compared to the weighted average monthly closing NYMEX price of $1.84 per MMBtu for the six months ended June 30, 2020. This increase
was partially offset by a slight decrease in the average Basis per MMBtu in the current period at minus $0.32 per MMBtu compared to the
prior period Basis of minus $0.24 per MMBtu.
Post-production costs consist of a post-production
services fee together with a charge for electricity used in lieu of gas for compression on the gathering system and firm transportation
charges on interstate gas pipelines. Overall, average post-production costs decreased to $0.90 per Mcf in the current period compared
to $1.01 per Mcf for the six-month period ended June 30, 2020 primarily due to a decrease in firm transportation related
to the MXP Agreement that was partially offset by an increase in the Columbia filed tariff rate.
Production decreased 1.2% from 1,352 MMcf for the
six months ended June 30, 2020 to 1,336 MMcf for the six months ended June 30, 2021. The decreased production was the result
of natural production declines that occur during the life of a well.
General and administrative
expenses paid by the Trust for the six months ended June 30, 2021 and June 30, 2020 remained flat at $0.8 million. Cash reserves
of $0.2 million were withheld for the six months ended June 30, 2021 as compared to $0 for the six months ended June 30, 2020.
Liquidity and Capital Resources
The Trust has no source of liquidity or capital
resources other than net cash flows from the Royalty Interests. Other than Trust administrative expenses, including, if applicable, expense
reimbursements to Greylock Production and any reserves established by the Trustee for future liabilities, the Trust’s only use of
cash is for distributions to Trust unitholders. Administrative expenses include payments to the Trustee and the Delaware Trustee as well
as a quarterly fee of $15,000 to Greylock Production pursuant to the Administrative Services Agreement. Each quarter, the Trustee determines
the amount of funds available for distribution. Available funds are the excess cash, if any, received by the Trust from the Royalty Interests
and other sources (such as interest earned on any amounts reserved by the Trustee) that quarter, over the Trust’s expenses for that
quarter. Available funds are reduced by any cash the Trustee determines to hold as a reserve against future expenses or liabilities. The
Trustee, on behalf of the Trust, may borrow funds required to pay expenses or liabilities if the Trustee determines that the cash on hand
and the cash to be received are insufficient to cover the Trust’s expenses or liabilities. If the Trustee borrows funds, the Trust
unitholders will not receive distributions until the borrowed funds are repaid.
Commencing
with the distribution paid to unitholders in the first quarter of 2019, the Trustee has been gradually building a cash reserve for the
payment of future expenses and liabilities of approximately $1.8 million by withholding cash reserve amounts from each quarterly
distribution equal to the greater of $90,000 or 10% of the amount distributable to unitholders. In May 2021, the Trustee withheld
$90,000 from funds otherwise available for distribution. These withholdings are in addition to the existing cash reserve of $1.0
million, which is determined prior to the payments of quarterly expenses. The Trustee may increase or decrease the targeted amount at
any time, and may increase or decrease the rate at which it is withholding funds to build the cash reserve at any time, without advance
notice to the unitholders. After the approximately $1.8 million has been withheld,
the Trustee will have cash reserves of approximately $2.3 million. Cash held in reserve will be invested as required by the Trust Agreement.
Any cash reserved in excess of the amount necessary to pay or provide for the payment of future known, anticipated or contingent expenses
or liabilities eventually will be distributed to unitholders, together with interest earned on the funds. For the quarter ended June 30,
2021, the Trustee withheld approximately $0.1 million from the funds otherwise available for distribution and withheld a minimal amount
of interest earned on the cash reserve balance. As of June 30, 2021, the Trustee has withheld from the funds otherwise available
for distribution a total amount of $1.2 million plus $5,262 of interest toward the building of the $1.8 million cash reserve.
Payments to the Trust in respect of the Royalty
Interests are based on the complex provisions of the various conveyances held by the Trust, copies of which are filed as exhibits to the
2020 Form 10-K, and reference is hereby made to the text of the conveyances for the actual calculations of amounts due to the Trust.
The Trust does not have any transactions, arrangements
or other relationships with unconsolidated entities or persons that could materially affect the Trust’s liquidity or the availability
of capital resources.
Significant Accounting Policies
The financial statements of the Trust differ from
financial statements prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”)
because, among other differences, certain cash reserves may be established for contingencies, which would not be accrued in financial
statements prepared in accordance with GAAP. Amortization of the investment in overriding royalty interests calculated on a unit-of-production
basis is charged directly to Trust Corpus. This comprehensive basis of accounting other than GAAP corresponds to the accounting permitted
for royalty trusts by the SEC as specified by ASC Topic 932 Extractive Activities—Oil and Gas: Financial Statements of Royalty Trusts.
Income determined on the basis of GAAP would include
all expenses incurred for the period presented. However, the Trust serves as a pass-through entity, with expenses for depreciation, depletion,
and amortization, interest and income taxes being based on the status and elections of the Trust unitholders. General and administrative
expenses, production taxes or any other allowable costs are charged to the Trust only when cash has been paid for those expenses. In addition,
the Royalty Interests are not burdened by field and lease operating expenses. Thus, the statement shows distributable income, defined
as income of the Trust available for distribution to the Trust unitholders before application of those unitholders’ additional expenses,
if any, for depreciation, depletion, and amortization, interest and income taxes. The revenues are reflected net of existing royalties
and overriding royalties and have been reduced by gathering/post-production expenses.
Revenue and Expenses:
The Trust serves as a pass-through entity, with
items of depletion, interest income and expense, and income tax attributes being based upon the status and election of the unitholders.
Thus, the Statements of Distributable Income show income available for distribution before application of those unitholders’ additional
expenses, if any, for depletion, interest income and expense, and income taxes.
The Trust uses the accrual basis to recognize revenue,
with royalty income recorded as reserves are extracted from the Underlying Properties and sold. Expenses are recognized when paid.
Royalty Interest in Gas Properties:
The Royalty interest in gas properties is assessed
to determine whether the net capitalized cost is impaired, whenever events or changes in circumstances indicate that its carrying amount
may not be recoverable, pursuant to ASC Topic 360, Property, Plant and Equipment. The Trust determines whether an impairment charge
is necessary to its investment in the Royalty interest in gas properties if total capitalized costs, less accumulated amortization, exceed
undiscounted future net revenues attributable to proved gas reserves of the Underlying Properties. Determination as to whether and how
much an asset is impaired involves estimates of fair value, which is determined based on discounted cash flow techniques using assumptions
including projected revenues, future commodity prices, production costs, and market-specific average cost of capital. Estimates of undiscounted
future net revenues attributable to proved gas reserves utilize NYMEX forward pricing curves. If required, the Trust will recognize an
impairment charge to the extent that the net capitalized costs exceed the discounted fair value of the investment in net profits interests
attributable to proved gas reserves of the Underlying Properties. Any such impairment charge would not reduce Distributable Income, although
it would reduce Trust Corpus. No impairment in the Underlying Properties was recognized during the quarter ended June 30, 2021. Significant
dispositions or abandonment of the Underlying Properties are charged to Royalty Interests and the Trust Corpus.
Amortization of the Royalty interest in gas properties
is calculated on a units-of-production basis, whereby the Trust’s cost basis in the properties is divided by Trust total proved
reserves to derive an amortization rate per reserve unit. Such amortization does not reduce Distributable Income, rather it is charged
directly to Trust Corpus. Revisions to estimated future units-of-production are treated on a prospective basis beginning on the date significant
revisions are known.
The conveyance of the Royalty Interests to the
Trust was accounted for as a purchase transaction. The $352,100,000 reflected in the Statements of Assets, Liabilities and Trust Corpus
as Royalty interest in gas properties represents 17,605,000 Trust units valued at $20.00 per unit. The carrying value of the Trust’s
investment in the Royalty Interests is not necessarily indicative of the fair value of such Royalty Interests.