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, 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
--------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1100 North Market Street, Wilmington, Delaware 19890
--------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 302/651-8584
--------------------
Not Applicable
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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____
-----
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 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 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 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, 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 March
31, 2001 and December 31, 2000, the distributable income and changes in trust
corpus for the three-month periods ended March 31, 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
March 31, 2001 December 31, 2000
---------------- --------------------
(Unaudited)
Cash.................................................... $ 9 $ 5
Net profits interests in oil and gas properties
(Net of accumulated amortization of $136,737 and
$135,664 at March 31, 2001 and December 31, 2000,
respectively)........................................... 43,863 44,936
-------------- ---------------
$ 43,872 $ 44,941
============== ===============
LIABILITIES AND TRUST CORPUS
Trust expense payable................................... $ 160 $ 158
Trust corpus............................................ 43,712 44,783
============== ===============
$ 43,872 $ 44,941
============== ===============
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,
-------------------------------------
2001 2000
------------ --------------
Net profits income...................................... $ 4,945 $ 2,819
Interest income......................................... 4 1
------------ --------------
4,949 2,820
------------ --------------
General and
administrative expenses................................ 157 160
------------ --------------
Distributable income.................................... $ 4,792 $ 2,660
============ ==============
Distributable income
per Unit (8,600,000 Units)............................ $ .56 $ .31
============ ==============
Distributions per Unit.................................. $ .56 $ .31
============ ==============
See notes to financial statements.
4
TORCH ENERGY ROYALTY TRUST
STATEMENTS OF CHANGES IN TRUST CORPUS
(In thousands)
(Unaudited)
Three Months Ended March 31,
------------------------------------------
2001 2000
------------------ -------------------
Trust corpus, beginning of period......................... $ 44,783 $ $48,982
Amortization of Net Profits Interests..................... (1,073) (1,793)
Distributable income...................................... 4,792 2,660
Distributions to Unitholders.............................. (4,790) (2,657)
------------------ -------------------
Trust corpus, end of period............................... $ 43,712 $ 47,192
================== ===================
See notes to financial statements.
5
TORCH ENERGY ROYALTY TRUST
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 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 during
the years ended December 31, 2000 and 1999. This rate is adjusted annually for
inflation. The Section 29 Credit available for production from qualifying tight
sands properties is approximately $0.52 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 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
6
TORCH ENERGY ROYALTY TRUST
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, 2000 and 1999 from the Underlying
Properties in the Robinson's Bend Field was approximately 41% (371 MMcf) and 35%
(315 MMcf), respectively, below the Volume Limitation.
The Net Profits Interests also entitle the Trust to 20% of the Net Proceeds
(defined below) 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.
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 periods ended
March 31, 2001 and 2000 are derived from oil and gas production sold during
the three-month periods ended December 31, 2000 and 1999, 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.
7
TORCH 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 Trust's oil and gas reserves plus the estimated
future tax credits under Section 29 of the Internal Revenue Code of 1986
("Section 29 Credit") for Federal income tax purposes. The impairment loss
is equal to the difference between the carrying value of the Net Profits
Interest and the fair value of the Net Profits Interest. No impairment loss
was recognized during the first quarter of 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 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.
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 day thereafter) ending prior to the dissolution of
the Trust, from the Net Profits Interests
8
TORCH ENERGY ROYALTY TRUST
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 an 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 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
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 three months
ended March 31, 2001 and 2000. As of March 31, 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 of gas resulted in distributions received by
Unitholders during the three months ended March 31, 2001 and 2000 being reduced
by $2,349,000 and $263,000 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
months ended March 31, 2001 and 2000 were $6,225,000 and $3,801,000,
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 for inflation ($0.283 per MMBtu and $0.281 per MMBtu for 2000 and 1999
production, respectively), plus fuel usage equal to 5% of revenues, payable to
Bahia Gas Gathering, Ltd. ("Bahia"), 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 deducts from the purchase price for gas
in the
10
TORCH ENERGY ROYALTY TRUST
Cotton Valley Fields a transportation fee of $0.045 per MMBtu for production
production attributable to certain wells. Such transportation fee is paid to a
third party. During the three months ended March 31, 2001 and 2000, gathering,
treating and transportation fees deducted by TEMI in calculating the purchase
price for production during the three months ended December 31, 2000 and 1999 in
the Robinson's Bend, Austin Chalk and Cotton Valley Fields, totaled $392,000 and
$321,000, respectively. No amounts for gathering, treating or transportation are
deducted in calculating the purchase price from the Chalkley Field.
11
TORCH ENERGY ROYALTY TRUST
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, 2001
and 2000 were $96,000 and $95,000, 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 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, 2001 and 2000 were $14,000 per
period. The Trustee is also entitled to reimbursement for out-of-pocket
expenses.
12
TORCH ENERGY ROYALTY TRUST
Item 2. Discussion and Analysis of Financial Condition and Results of
-------------------------------------------------------------
Operations
----------
Three Months Ended March 31, 2001 Compared to Three Months Ended March 31, 2000
-------------------------------------------------------------------------------
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, 2001 and 2000
is derived from actual oil and gas produced during the three months ended
December 31, 2000 and 1999, 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,
-----------------------------------------
2001 2000
------------------ --------------------
Bbls Mcf Bbls Mcf
of Oil of Gas of Oil of Gas
------- --------- --------- ---------
Chalkley Field 3,822 732,273 4,549 580,186
Robinson's Bend Field --- 570,149 --- 629,060
Cotton Valley Fields 565 283,364 991 296,194
Austin Chalk Fields 4,115 41,279 5,199 47,882
------- --------- --------- ---------
8,502 1,627,065 10,739 1,553,322
======= ========= ========= =========
For the three months ended March 31, 2001, net profits income was $4,945,000, up
76% from net profits income of $2,819,000 for the same period in 2000. Such
increase is mainly due to significant increases in the average price paid for
oil and gas production attributable to the Underlying Properties during 2001 as
compared to 2000.
Gas production attributable to the distributions received by Unitholders during
the three months ended March 31, 2001 was 1,627,065 Mcf, or 5% higher than gas
production of 1,553,322 Mcf for the same period in 2000. The increase in gas
production during the current period primarily resulted from a workover
performed on a well in the Chalkley field during the third quarter of 2000. Oil
production attributable to distributions received by Unitholders during the
quarter ended March 31, 2001 was 8,502 Bbls as compared to 10,739 Bbls for the
same period in 2000. Such decrease in production is mainly due to normal
production declines.
The average price used to calculate Net Proceeds for gas during the three months
ended March 31, 2001 was $3.57 per MMBtu for gas and $26.67 per Bbl for oil as
compared to $2.25 per MMBtu for gas and $19.38 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
13
TORCH ENERGY ROYALTY TRUST
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 March 31, 2001
and 2000. As of March 31, 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 three months
ended March 31, 2001 and 2000 by $2,349,000 and $263,000 respectively.
General and administrative expenses amounted to $157,000 for the three months
ended March 31, 2001 as compared to $160,000 during the three months ended March
31, 2000. These expenses primarily relate to administrative services provided by
Torch and the Trustee.
The foregoing resulted in distributable income of $4,792,000, or $.56 per Unit,
for the three months ended March 31, 2001, as compared to $2,660,000, or $.31
per Unit, for the same period in 2000. Cash distributions of $4,790,000, or
$0.56 per Unit, were made during the quarter ended March 31, 2001 as compared to
$2,657,000, or $0.31 per Unit, for the same period in 2000. The Section 29
Credits relating to these distributions, generated from production during the
three months ended December 31, 2000 and 1999, were approximately $0.07 and
$0.08 per Unit for each period, respectively.
14
TORCH ENERGY ROYALTY TRUST
Net profits income (in thousands) received by the Trust during the three month
periods ended March 31, 2001 and 2000, derived from production sold during the
three months ended December 31, 2000 and 1999, respectively, was computed as
shown in the following table:
Three Months Ended March 31, 2001 Three Months Ended March 31, 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................ $ 4,049 $ 1,784 $ 2,290 $ 1,190
------------ --------- ------------ ------------
Direct operating expenses:
Lease operating expenses and
Property tax...................... 373 --- 374 ---
Severance tax...................... 104 127 75 83
------------ --------- ------------ ------------
477 127 449 83
------------ --------- ------------ ------------
Net proceeds before capital
Expenditures....................... 3,572 1,657 1,841 1,107
Capital expenditures................ 24 --- (19) ---
------------ --------- ------------ ------------
Net proceeds........................ 3,548 1,657 1,860 1,107
Net profits percentage.............. 95% 95% 95% 95%
------------ --------- ------------ ------------
Net profits income.................. $ 3,371 $ 1,574 $ 4,945 $ 1,767 $ 1,052 $ 2,819
============ --------- -------- ------------ ------------ --------
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.
15
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 estimates that unless the
price of natural gas on December 31, 2002 exceeds $3.00 per Mcf, the Trust will
terminate. 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.
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. Substantially all of 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 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.
16
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
17
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 10, 2001
(The Trust has no employees, directors or executive officers.)
18