UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-Q
(MARK ONE)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2001
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _________
Commission File Number 1-12474
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Torch Energy Royalty Trust
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(Exact name of registrant as specified in its charter)
Delaware 74-6411424
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1100 North Market Street, Wilmington, Delaware 19890
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 302/651-8584
------------
Not Applicable
--------------------------------------------------------------------------------
Former name, former address and former fiscal year,
if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for 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 X No
-------- --------
1
TORCH ENERGY ROYALTY TRUST
PART 1 - FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
This document includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended and Section 21E of the
Securities Exchange Act of 1934. All statements other than statements of
historical facts included in this document, including without limitation,
statements under "Discussion and Analysis of Financial Condition and Results of
Operations" regarding the financial position, reserve quantities and values of
the Torch Energy Royalty Trust ("Trust") are forward-looking statements. Torch
Energy Advisors Incorporated ("Torch") and the Trust can give no assurances that
the assumptions upon which these statements are based will prove to be correct.
Factors which could cause such forward-looking statements not to be correct
include, among others, the other cautionary statements set forth in the Trust's
Annual Report on Form 10-K filed with the Securities and Exchange Commission,
the volatility of oil and gas prices, future production costs, operating hazards
and environmental conditions.
INTRODUCTION
The financial statements included herein have been prepared by Torch, pursuant
to an administrative services agreement between Torch and the Trust, pursuant to
the rules and regulations of the Securities and Exchange Commission. Wilmington
Trust Company serves as the trustee ("Trustee") of the Trust pursuant to the
trust agreement dated October 1, 1993. Certain information and footnote
disclosures normally included in the annual financial statements have been
omitted pursuant to such rules and regulations, although Torch believes that the
disclosures are adequate to make the information presented not misleading. These
financial statements should be read in conjunction with the December 31, 2000
financial statements and notes thereto included in the Trust's latest annual
report on Form 10-K. In the opinion of Torch, all adjustments necessary to
present fairly the assets, liabilities and trust corpus of the Trust as of
September 30, 2001 and December 31, 2000, and the distributable income and
changes in trust corpus for the three-month and nine-month periods ended
September 30, 2001 and 2000 have been included. All such adjustments are of a
normal recurring nature. The distributable income for such interim periods is
not necessarily indicative of the distributable income for the full year.
2
TORCH ENERGY ROYALTY TRUST
STATEMENTS OF ASSETS, LIABILITIES AND TRUST CORPUS
(In thousands)
ASSETS
September 30, 2001 December 31, 2000
------------------ -----------------
(Unaudited)
Cash............................................... $ 3 $ 5
Net profits interests in oil and gas properties
(Net of accumulated amortization of $138,641
and $135,664 at September 30, 2001 and
December 31, 2000, respectively)................... 41,959 44,936
------- -------
$41,962 $44,941
======= =======
LIABILITIES AND TRUST CORPUS
Trust expense payable.............................. $ 171 $ 158
Trust corpus....................................... 41,791 44,783
------- -------
$41,962 $44,941
======= =======
See notes to financial statements.
3
TORCH ENERGY ROYALTY TRUST
STATEMENTS OF DISTRIBUTABLE INCOME
(In thousands, except per Unit amounts)
(Unaudited)
Three Months Ended Sept. 30, Nine Months Ended Sept. 30,
---------------------------- ---------------------------
2001 2000 2001 2000
--------- --------- ---------- ----------
Net profits income...................... $3,755 $3,703 $14,273 $9,612
Interest income......................... 6 6 18 11
------ ------ ------- ------
3,761 3,709 14,291 9,623
------ ------ ------- ------
General and
administrative expenses............... 171 139 503 424
------ ------ ------- ------
Distributable income.................... $3,590 $3,570 $13,788 $9,199
====== ====== ======= ======
Distributable income per Unit
(8,600 Units)........................ $ .42 $ .42 $ 1.60 $ 1.07
====== ====== ======= ======
Distributions per Unit.................. $ .42 $ .42 $ 1.61 $ 1.07
====== ====== ======= ======
See notes to financial statements.
4
TORCH ENERGY ROYALTY TRUST
STATEMENTS OF CHANGES IN TRUST CORPUS
(In thousands)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ----------------------
2001 2000 2001 2000
-------- --------- -------- --------
Trust corpus, beginning of period.......... $42,706 $45,348 $ 44,783 $48,982
Amortization of net profits interests...... (919) (1,860) (2,977) (5,525)
Distributable income....................... 3,590 3,570 13,788 9,199
Distributions to Unitholders............... (3,586) (3,578) (13,803) (9,176)
------- ------- -------- --------
Trust corpus, end of period................ $41,791 $43,480 $ 41,791 $43,480
======= ======= ======== ========
See notes to financial statements.
5
TORCH ENERGY ROYALTY TRUST
NOTES TO FINANCIAL STATEMENTS
1. Trust Organization and Nature of Operations
The Torch Energy Royalty Trust ("Trust") was formed effective October 1, 1993
under the Delaware Business Trust Act pursuant to a trust agreement ("Trust
Agreement") among Wilmington Trust Company, as trustee ("Trustee"), Torch
Royalty Company ("TRC") and Velasco Gas Company, Ltd. ("Velasco"), as owners of
certain oil and gas properties ("Underlying Properties"), and Torch Energy
Advisors Incorporated ("Torch") as grantor. TRC and Velasco created net profits
interests ("Net Profits Interests") and conveyed such interests to Torch. Torch
conveyed the Net Profits Interests to the Trust in exchange for an aggregate of
8,600,000 units of beneficial interest ("Units"). Such Units were sold to the
public through various underwriters beginning November 1993. Pursuant to an
administrative services agreement with the Trust, Torch provides accounting,
bookkeeping, informational and other services related to the Net Profits
Interests.
The Underlying Properties constitute working interests in the Chalkley Field in
Louisiana ("Chalkley Field"), the Robinson's Bend Field in the Black Warrior
Basin in Alabama ("Robinson's Bend Field"), fields that produce from the Cotton
Valley formations in Texas ("Cotton Valley Fields") and fields that produce from
the Austin Chalk formation in Texas ("Austin Chalk Fields"). Sales of coal seam
and tight sands gas attributable to the Net Profits Interests between November
23, 1993 and January 1, 2003 result in the unitholders ("Unitholders") receiving
quarterly allocations of tax credits under Section 29 of the Internal Revenue
Code of 1986 ("Section 29 Credits"). The estimated Section 29 Credit rate for
2001 coal seam production is $1.06 for each MMBtu of gas produced and sold. The
Section 29 Credits available for 2000 and 1999 production from qualifying coal
seam properties were approximately $1.06 and $1.04, respectively, for each MMBtu
of gas produced and sold. This rate is adjusted annually for inflation. The
Section 29 Credit available for production from qualifying tight sands
properties is $0.517 for each MMBtu of gas produced and sold and such amount is
not adjusted for inflation.
The only assets of the Trust, other than cash and temporary investments being
held for the payment of expenses and liabilities and for distribution to
Unitholders, are the Net Profits Interests. The Net Profits Interests (other
than the Net Profits Interest covering the Robinson's Bend Field) entitle the
Trust to receive 95% of the net proceeds ("Net Proceeds") attributable to oil
and gas produced and sold from wells (other than infill wells) on the Underlying
Properties. Net Proceeds are generally defined as gross revenues received from
the sale of production attributable to the Underlying Properties during any
period less property, production, severance and similar taxes, and
6
TORCH ENERGY ROYALTY TRUST
NOTES TO FINANCIAL STATEMENTS
development, operating, and certain other costs. In calculating Net Proceeds
from the Robinson's Bend Field, operating and development costs incurred prior
to January 1, 2003 are not deducted. In addition, the amounts paid to the Trust
from the Robinson's Bend Field during any calendar quarter are subject to a
volume limitation ("Volume Limitation") equal to the gross proceeds from the
sale of 912.5 MMcf of gas, less property, production, severance and related
taxes. Production for the three-month periods ended June 30, 2001 and 2000 from
the Underlying Properties in the Robinson's Bend Field was approximately 42%
(383 MMcf) and 39% (357 MMcf), respectively, below the Volume Limitation.
Production for the nine-month periods ended June 30, 2001 and 2000 from the
Underlying Properties in the Robinson's Bend Field was approximately 42% (1,154
MMcf) and 37% (1,023 MMcf), respectively, below the Volume Limitation.
The Net Profits Interests also entitle the Trust to 20% of the Net Proceeds of
wells drilled on the Underlying Properties since the Trust's establishment into
formations in which the Trust has an interest, other than wells drilled to
replace damaged or destroyed wells ("Infill Wells"). Infill Well Net Proceeds
represent the aggregate gross revenues received from Infill Wells less the
aggregate amount of the following Infill Well costs: i) property, production,
severance and similar taxes; ii) development costs; iii) operating costs; and
iv) interest on the unrecovered portion, if any, of the foregoing costs computed
at a rate of interest announced publicly by Citibank, N.A. in New York as its
base rate. Distributions received by Unitholders have not been impacted by
these wells as gross revenues have not exceeded costs and expenses for the
Infill Wells.
Effective April 1, 2000, Torch sold its interest in eight infill wells and its
approximate 5% interest in the Cotton Valley field. The properties were
conveyed subject to the terms and conditions of the Trust Agreement. The
Trust's Net Profit Interest and Trust Corpus were not impacted by the sale.
2. Basis of Accounting
The financial statements of the Trust are prepared on a modified cash basis and
are not intended to present the financial position and results of operations in
conformity with generally accepted accounting principles ("GAAP"). Preparation
of the Trust's financial statements on such basis includes the following:
- Revenues are recognized in the period in which amounts are received by the
Trust. Therefore, revenues recognized during the three-month and nine-month
periods ended September 30, 2001 and 2000 are derived from oil and gas
production sold during the three-month and nine-month periods ended June 30,
2001 and 2000, respectively.
7
TORCH ENERGY ROYALTY TRUST
NOTES TO FINANCIAL STATEMENTS
- General and administrative expenses are recognized on an accrual basis.
- Amortization of the Net Profits Interests is calculated on a unit-of-
production basis and charged directly to trust corpus.
- Distributions to Unitholders are recorded when declared.
- An impairment loss is recognized when the net carrying value of the Net
Profits Interests exceeds the sum of the estimated undiscounted future cash
flows attributable to the Net Profits Interest plus the estimated future
Section 29 Credits for Federal income tax purposes. No impairment loss was
recognized during the nine-month periods ending September 30, 2001 and 2000.
The financial statements of the Trust differ from financial statements prepared
in accordance with GAAP because net profits income is not accrued in the period
of production and amortization of the Net Profits Interests is not charged
against operating results.
3. Federal Income Taxes
Tax counsel has advised the Trust that, under current tax law, the Trust is
classified as a grantor trust for Federal income tax purposes and not an
association taxable as a corporation. However, the opinion of tax counsel is
not binding on the Internal Revenue Service. As a grantor trust, the Trust is
not subject to Federal income tax.
Because the Trust is treated as a grantor trust for Federal income tax purposes
and a Unitholder is treated as directly owning an interest in the Net Profits
Interests, each Unitholder is taxed directly on such Unitholder's pro rata share
of income attributable to the Net Profits Interests consistent with the
Unitholder's method of accounting and without regard to the taxable year or
accounting method employed by the Trust. Amounts payable with respect to the
Net Profits Interests are paid to the Trust on the quarterly record date
established for quarterly distributions in respect to each calendar quarter
during the term of the Trust, and the income, deductions and income tax credits
relating to Section 29 Credits resulting from such payments are allocated to the
Unitholders of record on such date.
4. Distributions and Income Computations
Distributions are determined for each quarter and are based on the amount of
cash available for distribution to Unitholders. Such amount (the "Quarterly
Distribution Amount") is equal to the excess, if any, of the cash received by
the Trust, on the last day of the second month following the previous calendar
quarter (or the next business
8
TORCH ENERGY ROYALTY TRUST
NOTES TO FINANCIAL STATEMENTS
day thereafter) ending prior to the dissolution of the Trust, from the Net
Profits Interests then held by the Trust plus, with certain exceptions, any
other cash receipts of the Trust during such quarter, subject to adjustments for
changes made during such quarter in any cash reserves established for the
payment of contingent or future obligations of the Trust. Based on the payment
procedures relating to the Net Profits Interests, cash received by the Trust on
the last day of the second month of a particular quarter from the Net Profits
Interests generally represents proceeds from the sale of oil and gas produced
from the Underlying Properties during the preceding calendar quarter. The
Quarterly Distribution Amount for each quarter is payable to Unitholders of
record on the last day of the second month of the calendar quarter unless such
day is not a business day, in which case the record date is the next business
day thereafter. The Quarterly Distribution Amount is distributed within
approximately ten days after the record date to each person who was a Unitholder
of record on the associated record date.
5. Related Party Transactions
Marketing Arrangements
TRC and Velasco, as owners of the Underlying Properties subject to and burdened
by the Net Profits Interests, contracted to sell the oil and gas production from
such properties to Torch Energy Marketing, Inc. ("TEMI"), a subsidiary of Torch,
under a purchase contract ("Purchase Contract"). Under the Purchase Contract,
TEMI is obligated to purchase all net production attributable to the Underlying
Properties for an index price for oil and gas ("Index Price"), less certain
gathering, treating and transportation charges, which are calculated monthly.
The Index Price equals 97% of the average spot market prices of oil and gas
("Average Market Prices") at the four locations where TEMI sells production,
which, prior to September 1, 2000, was adjusted to reflect the terms of a
hedge contract ("Hedge Contract") to which TEMI was a party. Under the Hedge
Contract, TEMI received prices specified in the Hedge Contract ("Specified
Prices") for quantities of oil and gas specified therein ("Specified
Quantities"). While the Index Price calculation reflected the terms of the
Hedge Contract, the Trust's net profits income was not impacted by payments or
receipts made by or received by TEMI in connection with its participation in the
Hedge Contract. In calculating the Index Price for gas (which represents
approximately 98% of the estimated reserves as of January 1, 2001, on a Mcfe
basis), the Specified Prices received weightings of approximately 10% and less
in 2000 and the Average Market Prices received the balance of the weighting.
The Specified Prices for gas was $1.89 per MMBtu in 2000. The Hedge Contract
expired August 31, 2000.
The Purchase Contract also provides that the minimum price paid by TEMI for gas
production is $1.70 per MMBtu ("Minimum Price"). When TEMI pays a purchase
price
9
TORCH ENERGY ROYALTY TRUST
NOTES TO FINANCIAL STATEMENTS
based on the Minimum Price, it receives price credits ("Price Credits")
equal to the difference between the Index Price and the Minimum Price that it is
entitled to deduct in determining the purchase price when the Index Price for
gas exceeds the Minimum Price. No Price Credits were deducted in calculating
the purchase price related to distributions received by Unitholders during the
nine-months ended September 30, 2001 and 2000. As of September 30, 2001, TEMI
had no accumulated Price Credits. In addition, if the Index Price for gas
exceeds $2.10 per MMBtu, TEMI is entitled to deduct 50% of such excess ("Price
Differential") in calculating the purchase price. The deduction of the Price
Differential in calculating the purchase price had the effect of reducing
distributions received by Unitholders during the nine-month periods ended
September 30, 2001 and 2000 by $7,439,000 and $1,406,000, respectively.
Beginning January 1, 2002, TEMI has an annual option to discontinue the Minimum
Price commitment. However, if TEMI discontinues the Minimum Price commitment,
it will no longer be entitled to deduct the Price Differential in calculating
the purchase price and will forfeit all accrued Price Credits. TEMI has
purchased put option contracts granting TEMI the right to sell estimated gas
production in excess of the Specified Quantities at a price intended to limit
TEMI's losses in the event the Index Price falls below the Minimum Price.
Gross revenues (before deductions for applicable gathering, treating and
transportation charges) from TEMI included in net profits income for the three-
month periods ended September 30, 2001 and 2000 were $4,877,000 and $4,726,000,
respectively. Such gross revenues for the nine-month periods ended September
30, 2001 and 2000 were $18,158,000 and $12,551,000, respectively.
Gathering, Treating and Transportation Arrangements
The Purchase Contract entitles TEMI to deduct certain gas gathering, treating
and transportation costs in calculating the purchase price for gas in the
Robinson's Bend, Austin Chalk and Cotton Valley Fields. The amounts that may be
deducted in calculating the purchase price for such gas are set forth in the
Purchase Contract and are not affected by the actual costs incurred by TEMI to
gather, treat and transport gas. In the Robinson's Bend Field, TEMI is entitled
to deduct a gathering, treating and transportation fee of $0.26 per MMBtu
adjusted annually for inflation ($0.286, $0.283 and $0.281, per MMBtu for 2001,
2000 and 1999 production, respectively), plus fuel usage equal to 5% of
revenues, payable to an affiliate of Torch, pursuant to a gas gathering
agreement. Additionally, a fee of $0.05 per MMBtu, representing a gathering fee
payable to a non-affiliate of TEMI, is deducted in calculating the purchase
price for production from 68 of 394 wells in the Robinson's Bend Field. TEMI
also deducts $0.38 per MMBtu plus 17% of revenues in calculating the purchase
price for production from the Austin Chalk Fields, as a fee to gather, treat and
transport gas production. TEMI
10
TORCH ENERGY ROYALTY TRUST
NOTES TO FINANCIAL STATEMENTS
deducts from the purchase price for gas in the Cotton Valley Fields a
transportation fee of $0.045 per MMBtu for production attributable to certain
wells. Such transportation fee is paid to a third party. During the three-month
periods ended September 30, 2001 and 2000, gathering, treating and
transportation fees deducted by TEMI in calculating the purchase price for
production during the three-month periods ended June 30, 2001 and 2000 in the
Robinson's Bend, Austin Chalk and Cotton Valley Fields, totaled $328,000 and
$344,000, respectively. During the nine-month periods ended September 30, 2001
and 2000, such fees, attributable to production during the nine-month periods
ended June 30, 2001 and 2000, totaled $1,161,000 and $977,000, respectively. No
amounts for gathering, treating or transportation are deducted in calculating
the purchase price from the Chalkley Field.
Administrative Services Agreement
Pursuant to the Trust Agreement, Torch and the Trust entered into an
administrative services agreement effective October 1, 1993. The Trust is
obligated, throughout the term of the Trust, to pay Torch each quarter an
administrative services fee for accounting, bookkeeping, informational and other
services relating to the Net Profits Interests. The administrative services fee
is $87,500 per calendar quarter commencing October 1, 1993. The amount of the
administrative services fee is adjusted annually based upon the change in the
Producer's Price Index as published by the Department of Labor, Bureau of Labor
Statistics. Administrative services during the three-month periods ended
September 30, 2001 and 2000 were $96,000 and $95,000, respectively. During the
nine-month periods ended September 30, 2001 and 2000, such fees were $288,000
and $285,000, respectively.
Compensation of the Trustee and Transfer Agent
The Trust Agreement provides that the Trustee be compensated for its
administrative services, out of the Trust assets, in an annual amount of
$41,000, plus an hourly charge for services in excess of a combined total of 250
hours annually at its standard rate. The Trustee also receives a transfer
agency fee of $5.00 annually per account (minimum of $15,000 annually). Such
fees are subject to change each December based upon the change in the Producer's
Price Index as published by the Department of Labor, Bureau of Labor Statistics,
plus $1.00 for each certificate issued. Total administrative and transfer agent
fees during the three-month periods ended September 30, 2001 and 2000 were
$14,000 per period. Such fees during the nine-month periods September 30, 2001
and 2000 were $42,000 per period. The Trustee is also entitled to reimbursement
for out-of-pocket expenses.
11
TORCH ENERGY ROYALTY TRUST
ITEM 2. DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Results of Operations
Because a modified cash basis of accounting is utilized by the Trust, net
profits income of the Trust for the three-month periods ended September 30, 2001
and 2000 is derived from actual oil and gas produced during the three-month
periods ended June 30, 2001 and 2000, respectively. Net profits income for the
nine-month periods ended September 30, 2001 and 2000 is derived from actual oil
and gas produced during the nine-month periods ended June 30, 2001 and 2000,
respectively. Oil and gas sales attributable to the working interests burdened
by the Underlying Properties for such periods are as follows:
Three Months Ended September 30,
---------------------------------------
2001 2000
------------------ -----------------
Bbls Mcf Bbls Mcf
of Oil of Gas of Oil of Gas
------ ------- ------ -------
Chalkley Field 2,750 571,564 4,332 646,985
Robinson's Bend Field --- 557,140 --- 584,919
Cotton Valley Fields 754 249,712 2,394 315,288
Austin Chalk Fields 3,490 15,259 6,103 53,306
------ --------- ------ ---------
6,994 1,393,675 12,829 1,600,498
====== ========= ====== =========
Nine Months Ended September 30,
---------------------------------------
2001 2000
------------------ ------------------
Bbls Mcf Bbls Mcf
of Oil of Gas of Oil of Gas
------ --------- ------- ---------
Chalkley Field 9,853 1,958,674 13,397 1,919,351
Robinson's Bend Field --- 1,666,675 --- 1,805,178
Cotton Valley Fields 2,204 792,261 4,618 896,201
Austin Chalk Fields 11,139 92,658 16,676 155,633
------ --------- ------ ---------
23,196 4,510,268 34,691 4,776,363
====== ========= ====== =========
12
TORCH ENERGY ROYALTY TRUST
THREE-MONTH PERIOD ENDED SEPTEMBER 30, 2001 COMPARED TO THREE-MONTH PERIOD ENDED
SEPTEMBER 30, 2000
For the three-month period ended September 30, 2001, net profits income was
$3,755,000, $52,000 greater than net profits income of $3,703,000 for the same
period in 2000. The slight increase in net profits income during 2001 as
compared to the prior period was primarily a result of higher gas prices in 2001
being offset by lower oil and gas production.
Gas production attributable to the Underlying Properties for the three-month
period ended June 30, 2001 was 1,393,675 Mcf, or 13% lower than gas production
of 1,600,498 Mcf for the same period in 2000. Approximately 54% of this
reduction in production was due to a decline in production from the "#4 well" in
the Chalkley Field which is experiencing unanticipated excess water production.
The operator of the Chalkley unit, ExxonMobil, is utilizing enhanced recovery
methods on the #4 well; however, such methods have not yet improved gas
production for this well. No assurances can be made that production from the #4
well will improve.
Oil production attributable to the Underlying Properties for the three-month
period ended June 30, 2001 was 6,994 Bbls as compared to 12,829 Bbls for the
same period in 2000. Such decrease in oil production is mainly due to normal
production declines.
The average prices paid for production attributable to the Underlying Properties
during the three-month period ended June 30, 2001 was $3.30 per MMBtu for gas
and $21.98 per Bbl for oil as compared to $2.68 per MMBtu for gas and $23.04 per
Bbl for oil during the same period in 2000. When TEMI pays a purchase price for
gas based on the Minimum Price of $1.70 per MMBtu, TEMI receives Price Credits
which it is entitled to deduct in determining the purchase price when the Index
Price for gas exceeds the Minimum Price. No Price Credits were deducted in
calculating the purchase price related to distributions received by Unitholders
during the quarter ended September 30, 2001 and 2000, respectively. As of
September 30, 2001, TEMI had no accumulated Price Credits. Additionally, if the
Index Price for gas exceeds $2.10 per MMBtu, TEMI is entitled to deduct 50% of
such excess in calculating the purchase price. The deduction of the Price
Differential in calculating the purchase price of gas had the effect
13
TORCY ENERGY ROYALTY TRUST
of reducing distributions received by Unitholders by $1,626,000 and $907,000,
respectively, during the three-month periods ended September 30, 2001 and 2000.
General and administrative expenses amounted to $171,000 for the three-month
period ended September 30, 2001 as compared to $139,000 during the three-month
period ended September 30, 2000. These expenses primarily relate to
administrative services provided by Torch and the Trustee.
The foregoing resulted in distributable income of $3,590,000, or $0.42 per Unit,
for the three-month period ended September 30, 2001, as compared to $3,570,000,
or $0.42 per Unit, for the same period in 2000. Cash distributions of
$3,586,000, or $0.42 per Unit, were made during the quarter ended September 30,
2001 as compared to $3,578,000, or $0.42 per Unit, for the same period in 2000.
The Section 29 Credits relating to the distributions received by Unitholders
during the quarter ended September 30, 2001 and 2000, generated from production
during the three-month periods ended June 30, 2001 and 2000, were approximately
$0.07 and $0.08 per Unit, respectively, for each period.
NINE-MONTH PERIOD ENDED SEPTEMBER 30, 2001 COMPARED TO NINE-MONTH PERIOD ENDED
SEPTEMBER 30, 2000
For the nine-month period ended September 30, 2001, net profits income was
14,273,000, up 48% from net profits income of $9,612,000 for the same period in
2000. Such increase is primarily due to higher average prices paid for oil and
gas production attributable to the Underlying Properties slightly offset by
normal declines in oil and gas production.
Gas production attributable to the Underlying Properties for the nine-month
period ended June 30, 2001 was 4,510,268 Mcf, or 6% lower than gas production of
4,776,363 Mcf for the same period in 2000. The Chalkley Field's gas production
during the nine months ended June 30, 2001 was 1,958,674 Mcf as compared to
1,919,351 Mcf during the nine months ended June 30, 2000. As discussed above,
during the quarter ended June 30, 2001, the #4 well's production declined as a
result of excessive water production. The operator of the Chalkley unit,
ExxonMobil, is utilizing enhanced recovery methods on the #4 well; however, such
methods have not yet improved gas production for this well.
Oil production attributable to the Underlying Properties for the nine-month
period ended June 30, 2001 was 23,196 Bbls, as compared to 34,691 Bbls for the
same period in 2000. Such decreases in production are mainly due to normal
production declines.
14
TORCY ENERGY ROYALTY TRUST
The average price paid for production attributable to the Underlying Properties
during the nine-month period ended June 30, 2001 was $3.78 per MMBtu for gas and
$23.95 per Bbl for oil as compared to $2.39 per MMBtu for gas and $21.75 per Bbl
for oil during the same period in 2000. When TEMI pays a purchase price for gas
based on the Minimum Price of $1.70 per MMBtu, TEMI receives Price Credits which
it is entitled to deduct in determining the purchase price when the Index Price
for gas exceeds the Minimum Price. No Price Credits were deducted in
calculating the purchase price related to distributions received by Unitholders
during the nine-months ended September 30, 2001 and 2000. As of September 30,
2001, TEMI had no accumulated Price Credits. Additionally, if the Index Price
for gas exceeds $2.10 per MMBtu, TEMI is entitled to deduct 50% of such excess
in calculating the purchase price. The deduction of the Price Differential in
calculating the purchase price had the effect of reducing distributions received
by Unitholders during the nine-month periods ended September 30, 2001 and 2000
by $7,439,000 and $1,406,000, respectively.
General and administrative expenses amounted to $503,000 for the nine-month
period ended September 30, 2001 as compared to $424,000 during the nine-month
period ended September 30, 2000. These expenses primarily relate to
administrative services provided by Torch and the Trustee.
The foregoing resulted in distributable income of $13,788,000, or $1.60 per
Unit, for the nine-month period ended September 30, 2001 as compared to
$9,199,000, or $1.07 per Unit, for the same period in 2000. During the nine-
month period ended September 30, 2001, the Trust made distributions to
Unitholders of $13,803,000, or $1.61 per Unit, as compared to $9,176,000, or
$1.07 per Unit, for the same period in 2000. The Section 29 Credits relating to
these distributions, generated from production during the nine-month periods
ended June 30, 2001 and 2000, were approximately $0.22 and $0.24, respectively.
15
TORCY ENERGY ROYALTY TRUST
Net profits income (in thousands) received by the Trust during the three-month
and nine-month periods ended September 30, 2001 and 2000, derived from
production sold during the three-month and nine-month periods ended June 30,
2001 and 2000, respectively, was computed as shown in the following tables:
THREE MONTHS ENDED SEPT. 30, 2001 THREE MONTHS ENDED SEPT. 30, 2000
----------------------------------------------- -------------------------------------------
CHALKLEY, CHALKLEY,
COTTON VALLEY COTTON VALLEY
AND AUSTIN ROBINSON'S AND AUSTIN ROBINSON'S
CHALK FIELDS BEND FIELD TOTAL CHALK FIELDS BEND FIELD TOTAL
--------------- ------------- -------- ------------- ---------- ----------
Oil and gas revenues................ $2,965 $1,584 $3,036 $1,346
------ ------ ------ ------
Direct operating expenses:
Lease operating expenses and
property tax...................... 401 --- 340 ---
Severance tax...................... 93 118 94 71
------ ------ ------ ------
494 118 434 71
------ ------ ------ ------
Net proceeds before capital
expenditures....................... 2,471 1,466 2,602 1,275
Capital expenditures................ (15) --- (21) ---
------ ------ ------ ------
Net proceeds........................ 2,486 1,466 2,623 1,275
Net profits percentage.............. 95% 95% 95% 95%
------ ------ ------ ------
Net profits income.................. $2,362 $1,393 $3,755 $2,492 $1,211 $3,703
====== ====== ====== ====== ====== ======
NINE MONTHS ENDED SEPT. 30, 2001 NINE MONTHS ENDED SEPT. 30, 2000
----------------------------------------------- -------------------------------------------
CHALKLEY, CHALKLEY,
COTTON VALLEY COTTON VALLEY
AND AUSTIN ROBINSON'S AND AUSTIN ROBINSON'S
CHALK FIELDS BEND FIELD TOTAL CHALK FIELDS BEND FIELD TOTAL
--------------- ------------- ------------- ------------- ---------- ----------
Oil and gas revenues................ $11,503 $5,494 $7,916 $3,658
------- ------ ------ ------
Direct operating expenses:
Lease operating expenses and
property tax...................... 1,092 --- 1,020 ---
Severance tax...................... 316 429 269 202
------- ------ ------ ------
1,408 5,065 1,289 202
------- ------ ------ ------
Net proceeds before capital
expenditures....................... 10,095 5,065 6,627 3,456
Capital expenditures................ 136 --- (35) ---
------- ------ ------ ------
Net proceeds........................ 9,959 6,662 3,456
Net profits percentage.............. 95% 95% 95% 95%
------- ------ ------ ------
Net profits income.................. $ 9,461 $4,812 $14,273 $6,329 $3,283 $9,612
======= ====== ======= ====== ====== ======
16
TORCY ENERGY ROYALTY TRUST
An impairment loss is recognized when the net carrying value of the Net Profits
Interests exceeds the sum of the estimated undiscounted future cash flows
attributable to the Net Profits Interest plus the estimated future Section 29
Credits. No impairment loss was recognized during the nine-month periods ended
September 30, 2001 and 2000.
RECENT DECLINE IN GAS PRICES
As discussed above, because a modified cash basis of accounting is used by the
Trust, net profits income of the Trust for the three-month and nine-month
periods ended September 30, 2001 is derived from oil and gas produced and sold
during the three- month and nine-month periods ended June 30, 2001,
respectively. Gas prices during the three and nine month periods ended June 30,
2001 were substantially higher than current gas prices and average gas prices
during the three months ended September 30, 2001 (which will be used to
determine net profits income for the three-month period ended December 31,
2001.) Torch currently estimates that average gas prices in the three-month
period ended September 30, 2001 will be approximately 26% less than average gas
prices in the three-month period ended June 30, 2001. Lower gas prices will
reduce the net profits income paid to the Trust for the three months ended
December 31, 2001.
FOLLOWING DECEMBER 31, 2002, NET PROCEEDS ATTRIBUTABLE TO THE ROBINSON'S BEND
FIELD WILL DECREASE
Prior to December 31, 2002, lease operating expenses will not be deducted in
calculating the Net Proceeds payable to the Trust from the Robinson's Bend
Field. After 2002, lease operating expenses will be deducted in calculating Net
Proceeds. As a result, Net Proceeds paid to the Trust will decrease
substantially following 2002.
During the year ended December 31, 2000, lease operating expenses in the
Robinson's Bend Field were $5.8 million. Because lease operating expenses for
the Robinson's Bend Field during 2000 exceeded Net Proceeds paid to the Trust
from the Robinson's Bend Field, deduction of lease operating expenses in 2000
would have reduced the Net Proceeds paid to the Trust attributable to the
Robinson's Bend Field to zero. Torch currently estimates that if gas prices are
below $5.10 per Mcf in 2003, lease operating expenses will be greater than Net
Proceeds and so the Trust would not receive any Net Proceeds attributable to the
Robinson's Bend Field under this pricing scenario. Approximately $4.6 million
of the $5.8 million of the lease operating expenses for 2000 were paid to Torch
and its affiliates pursuant to a water disposal contract and operating
agreements covering the wells in the Robinson's Bend Field.
17
TORCH ENERGY ROYALTY TRUST
THE TRUST MAY TERMINATE AFTER 2002
The Trust will terminate on March 1 of any year after 2002 if it is determined
that the pre-tax future net cash flows, discounted at 10%, attributable to
estimated net proved reserves of the Net Profits Interests on the preceding
December 31 are less than $25 million. Torch currently projects, based on oil
and gas reserve estimates at December 31, 2000 prepared by independent reserve
engineers, that unless the price of natural gas on December 31, 2002 exceeds
$3.00 per Mcf, the Trust will terminate. Future revisions of oil and gas
reserve estimates can impact this price per Mcf estimate that projects the
Trust's termination. Upon termination of the Trust, the Trustee is required to
sell the Net Profits Interests. No assurance can be given that the Trustee will
be able to sell the Net Profits Interests, or as to the price that will be
received for such Net Profits Interests or the amount that will be distributed
to Unitholders following such a sale. During the second quarter of 2001, the
Chalkley #4 well experienced a decline in production primarily due to increased
levels of water production. No assurances can be made that the operator of the
#4 well will be able to take actions which will reverse the reduction in
production experienced in the #4 well. The reduced production from the #4 well
may adversely affect the reserve quantities attributable to the Trust's Net
Profits Interest, thereby increasing the gas price at year end 2002 necessary to
cause the Trust's estimated net cash flows from proved reserves to be more than
$25 million.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Trust is exposed to market risk, including adverse changes in commodity
prices. The Trust's assets constitute Net Profits Interests in the Underlying
Properties. As a result, the Trust's operating results can be significantly
affected by fluctuations in commodity prices caused by changing market forces
and the price received for production from the Underlying Properties.
All production from the Underlying Properties is sold pursuant to a Purchase
Contract between TRC and Velasco, as the owners of the Underlying Properties,
and TEMI. Pursuant to the Purchase Contract, TEMI is obligated to purchase all
net production attributable to the Underlying Properties for an Index Price,
less certain other charges. The Index Price is calculated based on market prices
of oil and gas and therefore is subject to commodity price risk. The Purchase
Contract expires upon termination of the Trust and provides a Minimum Price of
$1.70 per MMBtu paid by TEMI for gas until
18
TORCH ENERGY ROYALTY TRUST
December 31, 2001. When TEMI pays a purchase price based on the Minimum Price it
receives Price Credits equal to the difference between the Index Price and the
Minimum Price that it is entitled to deduct when the Index Price exceeds the
Minimum Price. Additionally, if the Index Price exceeds $2.10 per MMBtu, TEMI is
entitled to deduct 50% of such excess, the Price Differential. Beginning January
1, 2002, TEMI has an annual option to discontinue the Minimum Price commitment.
However, if TEMI discontinues the Minimum Price commitment, it will no longer
be entitled to deduct the Price Differential and will forfeit all accrued
Price Credits.
19
TORCH ENERGY ROYALTY TRUST
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF UNITHOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
None.
20
TORCH ENERGY ROYALTY TRUST
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TORCH ENERGY ROYALTY TRUST
By: Wilmington Trust Company,
Trustee
By: /s/ Bruce L. Bisson
---------------------------------------
Bruce L. Bisson
Vice President
Date: November 12, 2001
(The Trust has no employees, directors or executive officers.)
21