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 March 31, 2003
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
Torch Energy Royalty Trust
(Exact Name of Registrant as Specified in Its Charter)
Delaware 74-6411424
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
Rodney Square North
1100 North Market Street, Wilmington, Delaware 19890
(Address of Principal Executive Offices) (Zip Code)
302/651-8584
Registrant's telephone number, including area code
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 [ ]
Indicated by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
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 1993, 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 net present
values of reserves of the Torch Energy Royalty Trust ("Trust") and statements
that include the words "believe", "expects", "anticipates", "intends",
"estimates", "projects", "target", "goal", "plans", "objectives", "should" or
similar expressions or variations 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 cautionary statements set forth in the Trust's Annual
Report on Form 10-K filed with the Securities Exchange Commission, the
volatility of oil and gas prices, future production costs, future oil and gas
production quantities, operating hazards and environmental conditions.
Introduction
The financial statements included herein have been prepared by Torch, pursuant
to an administrative service 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, 2002
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 March
31, 2003 and December 31, 2002, the distributable income and changes in trust
corpus for the three-month periods ended March 31, 2003 and 2002 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.
The Trust has no officers, directors or employees. The Trustee relies solely on
receiving accurate information, reports and other representations from Torch in
the ordinary course of its duties as Trustee. In executing and submitting this
report on behalf of the Trust and with respect to Bruce L. Bisson in executing
the Certifications relating to this report, the Trustee and Bruce L. Bisson have
relied upon the accuracy of such reports, information and representations of
Torch.
2
TORCH ENERGY ROYALTY TRUST
STATEMENTS OF ASSETS, LIABILITIES AND TRUST CORPUS
(In thousands)
ASSETS
March 31, 2003 December 31, 2002
-------------- -----------------
(Unaudited)
Cash $ 2 $ 2
Net profits interests in oil and gas properties
(Net of accumulated amortization of $150,637 and
$149,337 at March 31, 2003 and December 31, 2002,
respectively) 29,963 31,263
------- -------
$29,965 $31,265
======= =======
LIABILITIES AND TRUST CORPUS
Trust expense payable $ 205 $ 221
Trust corpus 29,760 31,044
------- -------
$29,965 $31,265
======= =======
See notes to financial statements.
3
TORCH ENERGY ROYALTY TRUST
STATEMENTS OF DISTRIBUTABLE INCOME
(In thousands, except Units and per Unit amounts)
(Unaudited)
Three Months Ended March 31,
----------------------------
2003 2002
------ ------
Net profits income $2,868 $2,233
Interest income 1 1
------ ------
2,869 2,234
------ ------
General and
administrative expenses 204 176
------ ------
Distributable income $2,665 $2,058
====== ======
Distributable income
per Unit (8,600,000 Units) $ .31 $ .24
====== ======
Distributions per Unit $ .31 $ .24
====== ======
See notes to financial statements.
4
TORCH ENERGY ROYALTY TRUST
STATEMENTS OF CHANGES IN TRUST CORPUS
(In thousands)
(Unaudited)
Three Months Ended March 31,
----------------------------
2003 2002
-------- --------
Trust corpus, beginning of period $31,044 $ 36,511
Amortization of Net Profits Interests (1,300) (1,918)
Distributable income 2,665 2,058
Distributions to Unitholders (2,649) (2,055)
------- --------
Trust corpus, end of period $29,760 $ 34,596
======= ========
See notes to financial statements.
5
TORCH ENERGY ROYALTY TRUST
Notes to Financial Statements
1. Trust Organization and Nature of Operations
The Trust was formed effective October 1, 1993 under the Delaware Business Trust
Act pursuant to a trust agreement ("Trust Agreement") among Trustee, Torch
Royalty Company ("TRC"), Velasco Gas Company, Ltd. ("Velasco"), and Torch as
grantor. TRC and Velasco created net profits interests ("Net Profits
Interests"), which burden certain oil and gas properties ("Underlying
Properties"), 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 owned by TRC in the
Chalkley Field in Louisiana ("Chalkley 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").
Additionally, the Underlying Properties include working interest in the
Robinson's Bend Field in the Black Warrior Basin in Alabama owned by Velasco
until January 8, 2003. On such date, Torch and certain of its subsidiaries and
subsidiaries of Torchmark Corporation, including Velasco, sold all of their
interests in the Robinson's Bend Field to Everlast Energy ("Everlast"). Everlast
assumed operations of the properties and the water disposal and gathering
facilities. The sale included the Robinson's Bend working interests, which are
burdened by the Trust's Net Profits Interests, and the water disposal and
gathering systems. This transaction did not alter the Trust's Net Profits
Interests in the Robinson's Bend Field. Additionally, this transaction did not
alter Torch's obligation to administer the Trust and to handle the distribution
of the Trust's cash distributions.
Sales of coal seam and tight sands gas attributable to the Net Profits Interests
between November 23, 1993 and January 1, 2003 resulted in the unitholders
("Unitholders") receiving quarterly allocations of tax credits under Section 29
of the Internal Revenue Code of 1986 ("Section 29 Credits"). The Section 29
Credits from qualifying coal seam properties were approximately $1.09 and $1.08
for each MMBtu of gas produced and sold during the years ended December 31, 2002
and 2001, respectively. This rate was adjusted annually for inflation. The
Section 29 Credit available for production from qualifying tight sands
properties was approximately $0.52 for each MMBtu of gas produced and sold and
such amount was not adjusted for inflation. In accordance with current Federal
tax laws, there is no tax benefit from the Section 29 Credits pertaining to
sales of coal seam and tight sands gas subsequent to December 31, 2002.
6
TORCH ENERGY ROYALTY TRUST
Notes to Financial Statements
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 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 were not deducted. Commencing with the second quarter 2003 distribution,
pertaining to production during the quarter ended March 31, 2003, operating and
development costs will be 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 December 31, 2002 and 2001
from the Underlying Properties in the Robinson's Bend Field was approximately
46% (422 MMcf) and 42% (387 MMcf), respectively, below the Volume Limitation.
The Net Profits Interests also entitle the Trust to 20% of the Infill Well Net
Proceeds (as defined herein) 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 recovered 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 the aggregate gross revenues have not
exceeded aggregate costs and expenses for these wells.
The Trust's website address is www.torchroyalty.com. The Trust provides access
through this website to its annual report on Form 10-K, quarterly reports on
Form 10-Q and any current reports on Form 8-K, and all amendments to those
reports as soon as reasonably practicable after these reports are filed or
furnished electronically with the Securities and Exchange Commission.
7
TORCH ENERGY ROYALTY TRUST
Notes to Financial Statements
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 periods ended
March 31, 2003 and 2002 are derived from oil and gas production sold during
the three-month periods ended December 31, 2002 and 2001, respectively.
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 by the Trustee.
- An impairment loss is recognized when the net carrying value of the Net
Profits Interests exceeds its fair market value. No impairment loss was
recognized during the first quarter of 2003 and 2002.
- 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.
In August 2001, the Financial Accounting Standards Board issued SFAS Statement
144, Accounting for the Impairment or Disposal of Long-Lived Assets ("SFAS 144")
which addresses the reporting for the impairment or disposal of long-lived
assets. The Trust's adoption of Statement 144 in 2002 had no impact on the
Trust's results of operations or financial position.
3. Federal Income Taxes
Tax counsel has advised the Trustee that, under current tax law, the Trust is
classified as a grantor trust for Federal income tax purposes. 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.
8
TORCH ENERGY ROYALTY TRUST
Notes to Financial Statements
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 were allocated to the
Unitholders of record on such date. Pursuant to current Federal tax laws,
unitholders are not entitled to Section 29 Credits pertaining to sales of
qualifying coal seam and tight sands gas subsequent to December 31, 2002.
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 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.
9
TORCH ENERGY ROYALTY TRUST
Notes to Financial Statements
5. Related Party Transactions
Marketing Arrangements
TRC and Velasco contracted to sell the oil and gas production from the
Underlying 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.
The Purchase Contract also provides that the minimum price paid by TEMI for gas
production is $1.70 per MMBtu ("Minimum Price"), increased annually for
inflation commencing January 1, 2002 (approximately $1.71 per MMBtu for 2002 and
2003). When TEMI pays a purchase price 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 quarters ended March 31, 2003 and 2002. As of
March 31, 2003, TEMI had no accumulated Price Credits.
Additionally, if the Index Price for gas exceeds $2.10 per MMBtu ("Sharing
Price"), adjusted annually for inflation commencing January 1, 2002
(approximately $2.12 per MMBtu for 2002 and 2003), 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 of gas
resulted in distributions received by Unitholders during the three months ended
March 31, 2003 and 2002 being reduced by $1.0 million and $0.2 million,
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 elected not to
discontinue the Minimum Price commitment for 2003.
Gross revenues (before deductions for applicable gathering, treating and
transportation charges) from TEMI included in net profits income for the three
months ended March 31, 2003 and 2002 were $4.0 million and $3.1 million,
respectively.
10
TORCH ENERGY ROYALTY TRUST
Notes to Financial Statements
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 for inflation ($0.289 per MMBtu and $0.286 per MMBtu for 2002 and 2001
production, respectively), plus fuel usage equal to 5% of revenues 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 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 months ended March 31, 2003 and 2002, gathering,
treating and transportation fees deducted by TEMI in calculating the purchase
price for production during the three months ended December 31, 2002 and 2001 in
the Robinson's Bend, Austin Chalk and Cotton Valley Fields, totaled $0.3 million
and $0.2 million, 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 to 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 months ended March 31, 2003
and 2002 were $97,000 per period.
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
11
TORCH ENERGY ROYALTY TRUST
Notes to Financial Statements
charge for services in excess of a combined total of 250 hours annually at its
standard rate. The Trustee receives a transfer agency fee of $5.00 annually per
account (minimum of $15,000 annually), subject to change each December,
beginning December 1994, 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 months ended March 31, 2003 and 2002 were $14,000 per period. The Trustee
is also entitled to reimbursement for out-of-pocket expenses.
12
TORCH ENERGY ROYALTY TRUST
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Three Months Ended March 31, 2003 Compared to Three Months Ended March 31, 2002
Because a modified cash basis of accounting is utilized by the Trust, net
profits income of the Trust for the three months ended March 31, 2003 and 2002
is derived from actual oil and gas produced during the three months ended
December 31, 2002 and 2001, respectively. Oil and gas sales attributable to the
working interests burdened by the Underlying Properties for such periods are as
follows:
Three Months Ended March 31,
--------------------------------------------------
2003 2002
--------------------- ---------------------
Bbls Mcf Bbls Mcf
of Oil of Gas of Oil of Gas
------ ------ ------ ------
Chalkley Field 2,075 458,789 2,524 540,910
Robinson's Bend Field --- 515,801 --- 552,829
Cotton Valley Fields 710 258,307 984 270,753
Austin Chalk Fields 3,509 19,041 3,514 6,700
----- --------- ----- ---------
6,294 1,251,938 7,022 1,371,192
===== ========= ===== =========
For the three months ended March 31, 2003, net profits income was $2.9 million,
up 32% from net profits income of $2.2 million for the same period in 2002. Such
increases are mainly due to increases in the average price paid for oil and gas
production attributable to the Underlying Properties during the current quarter,
partially offset by decreased production.
Gas production attributable to the distributions received by Unitholders during
the three months ended March 31, 2003 was 1,251,938 Mcf, or 9% lower than gas
production of 1,371,192 Mcf for the same period in 2002. Oil production
attributable to distributions received by Unitholders during the quarter ended
March 31, 2003 was 6,294 Bbls as compared to 7,022 Bbls for the same period in
2002. Such decreases in production are mainly due to normal production declines.
The average price used to calculate Net Proceeds for gas and oil during the
three months ended March 31, 2003 was $2.96 per MMBtu for gas and $21.82 per Bbl
for oil as compared to $2.12 per MMBtu for gas and $14.21 per Bbl for oil during
the same period in 2002. When TEMI pays a purchase price for gas based on the
Minimum Price ($1.71 per MMBtu for 2003 and 2002), TEMI receives Price Credits
which it is
13
TORCH ENERGY ROYALTY TRUST
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
quarters ended March 31, 2003 and 2002. As of March 31, 2003, TEMI had no
accumulated Price Credits. Additionally, if the Index Price for gas exceeds the
Sharing Price ($2.12 per MMBtu for 2003 and 2002), 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 three months ended March 31,
2003 and 2002 by $1.0 million and $0.2 million respectively.
General and administrative expenses amounted to $0.2 million for each of the
three-month periods March 31, 2003 and 2002. These expenses primarily relate to
administrative services provided by Torch and the Trustee.
The foregoing resulted in distributable income of $2.7 million, or $.31 per
Unit, for the three months ended March 31, 2003, as compared to $2.1 million, or
$.24 per Unit, for the same period in 2002. Cash distributions of $2.7 million,
or $0.31 per Unit, were made during the quarter ended March 31, 2003 as compared
to $2.1 million, or $0.24 per Unit, for the same period in 2002. The Section 29
Credits relating to these distributions, generated from production during the
three months ended December 31, 2002 and 2001, were approximately $0.07 per Unit
per period.
14
TORCH ENERGY ROYALTY TRUST
Net profits income received by the Trust during the three month periods ended
March 31, 2003 and 2002, derived from production sold during the three months
ended December 31, 2002 and 2001, respectively, was computed as shown in the
following table (in thousands):
Three Months Ended March 31, 2003 Three Months Ended March 31, 2002
-------------------------------------- --------------------------------------------
Chalkley, Chalkley, Cotton
Cotton Valley Valley and
and Austin Robinson's Austin Chalk Robinson's
Chalk Fields Bend Field Total Fields Bend Field Total
------------- ---------- ----- ----------------- ---------- -----
Oil and gas revenues $2,359 $1,317 $3,676 $1,869 $975 $2,844
------ ------ ------ ------ ---- ------
Direct operating expenses:
Lease operating expenses and
Property tax 424 --- 424 313 --- 313
Severance tax 143 88 231 135 40 175
------ ------ ------ ------ ---- ------
567 88 655 448 40 488
------ ------ ------ ------ ---- ------
Net proceeds before capital
Expenditures 1,792 1,229 3,021 1,421 935 2,356
Capital expenditures 2 --- 2 5 --- 5
------ ------ ------ ------ ---- ------
Net proceeds 1,790 1,229 3,019 1,416 935 2,351
Net profits percentage 95% 95% 95% 95% 95% 95%
------ ------ ------ ------ ---- ------
Net profits income $1,700 $1,168 $2,868 $1,345 $888 $2,233
====== ====== ====== ====== ==== ======
Following December 31, 2002, Net Proceeds Attributable to the Robinson's Bend
Field Will Decrease
Prior to December 31, 2002, lease operating expenses were not deducted in
calculating the Net Proceeds payable to the Trust from the Robinson's Bend
Field. Commencing with the second quarter 2003 distribution, pertaining to the
quarter ended March 31, 2003 production, lease operating expenses will be
deducted in calculating Net Proceeds. As a result, Net Proceeds paid to the
Trust attributable to the Robinson's Bend Field will decrease substantially.
Lease operating expenses in the Robinson's Bend Field related to the quarter
ended December 31, 2002 production were $1.4 million. Because lease operating
expenses for the Robinson's Bend Field during this period exceeded Net Proceeds
paid to the Trust from the Robinson's Bend Field, deduction of lease operating
expenses would have reduced the Net Proceeds paid to the Trust attributable to
the Robinson's Bend Field to zero and amounts paid to the Trust during the
quarter ended March 31, 2003 would have been reduced from $2.7 million to $1.5
million, or $0.31 per Unit to $0.17 per Unit. Torch currently estimates that if
average gas prices in 2003 are below $4.80 per MMBtu as settled on the New York
Mercantile Exchange ("NYMEX), lease operating expenses will exceed Net Proceeds.
Approximately $1.1 million of the $1.4
15
TORCH ENERGY ROYALTY TRUST
million of the lease operating expenses during the current quarter 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.
Termination of the Trust
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 $25.0 million. The pre-tax future net cash flows,
discounted at 10%, attributable to estimated net proved reserves of the Net
Profits Interests as of December 31, 2002 was approximately $40.8 million. Such
reserve report was prepared pursuant to Securities and Exchange Commission
guidelines and utilized an unescalated Purchase Contract price (after gathering,
treating and transportation fees) of $3.42 per Mcf. The computation of the $3.42
per Mcf Purchase Contract price was based on a NYMEX year-end gas price of $4.79
per MMBtu. As the December 31, 2002 reserve value was greater than $25.0
million, the Trust did not terminate on March 1, 2003. Based on oil and gas
reserve estimates at December 31, 2002 prepared by independent reserve
engineers, Torch projects that unless the NYMEX price of natural gas on December
31, 2003 exceeds approximately $2.80 per MMBtu, the Trust will terminate March
1, 2004. Torch's natural gas price estimate of $2.80 per MMBtu that projects the
Trust's termination was lowered from previous estimates primarily due to an
increase in Chalkley Field reserves and production rates reflected in the
December 31, 2002 reserve report. Such increase in reserves is mainly a result
of the Chalkley Field's production declining less than forecasted in the
December 31, 2001 reserve report. Future revisions of oil and natural gas
reserve estimates and operating costs can impact the price estimate per MMBtu
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. Such distributions
could be below the market value of the Units.
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.
16
TORCH ENERGY ROYALTY TRUST
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 provided a Minimum Price of
$1.70 per MMBtu until December 31, 2001. Beginning January 1, 2002, TEMI has an
annual option to discontinue the Minimum Price commitment and adjust the Minimum
Price and Sharing Price for inflation. 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. TEMI elected not to discontinue the
Minimum Price Commitment for 2003.
Item 4. Controls and Procedures
(a) Evaluation of Disclosures Controls and Procedures. Based on their evaluation
as of the date within 90 days of the filing date of this quarterly report on
Form 10-Q, the Trustee has concluded that the Trust's disclosure controls and
procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities and
Exchange Act of 1934 (the "Exchange Act")) are effective to ensure that
information required to be disclosed by the Trust in reports that it files or
submits under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in the rules and forms of the Securities and
Exchange Commission.
(b) Change in Internal Controls. There were no significant changes in the
Trust's internal controls or in other factors that could significantly affect
these controls subsequent to the date of their evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
17
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
4. Instruments of defining the rights of security holders,
including indentures.
4.1 Form of Torch Energy Royalty Trust Agreement. *
4.2 Form of Louisiana Trust Agreement. *
4.3 Specimen Trust Unit Certificate. *
4.4 Designation of Ancillary Trustee. *
99.1 Certification of Wilmington Trust Company pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
* Incorporated by reference from Registration Statements on Form S-1 of
Torch Energy Advisors Incorporated (Registration No. 33-68688) dated
November 16, 1993.
(b) Report on Form 8-K:
None filed during the quarter ended March 31, 2003
18
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: May 19, 2003
(The Trust has no employees, directors or executive officers.)
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CERTIFICATIONS
I, Bruce L. Bisson, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Torch Energy Royalty
Trust, for which Wilmington Trust Company acts as Trustee;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, distributable income and changes
in trust corpus of the registrant as of, and for, the period presented in
this quarterly report;
4. I am responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14), or for
causing such procedures to be established and maintained, for the
registrant and I have:
a) designed such disclosure controls and procedures, or caused such
controls and procedures to be designed, to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to me by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report my conclusions about the
effectiveness of the disclosure controls and procedures based on my
evaluation as of the Evaluation Date;
5. I have disclosed, based on my most recent evaluation, to the registrant's
auditors:
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves persons who have a
significant role in the registrant's internal controls; and
6. I have indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of my most
recent evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
In giving the certifications in paragraphs 4, 5 and 6 above, I have relied to
the extent I consider reasonable on information provided to me by Torch Energy
Advisors Incorporated.
Date: May 19, 2003 By: /s/ Bruce L. Bisson
------------ --------------------------
Bruce L. Bisson
Vice President
Wilmington Trust Company
20