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, 2002
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
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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
---------------------------------------------- ----------------
(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
-------- --------
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 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, as required
by 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, 2001
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, 2002 and December 31, 2001, and the distributable income and
changes in trust corpus for the three-month and nine-month periods ended
September 30, 2002 and 2001 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, December 31,
2002 2001
------------- ------------
(Unaudited)
Cash .............................................................. $ 2 $ 2
Net profits interests in oil and gas properties
(Net of accumulated amortization of $149,408
and $143,906 at September 30, 2002 and
December 31, 2001, respectively) .................................. 31,192 36,694
------- -------
31,194 $36,696
======= =======
LIABILITIES AND TRUST CORPUS
Trust expense payable ............................................. $ 174 $ 185
Trust corpus ...................................................... 31,020 36,511
------- -------
$31,194 $36,696
======= =======
See notes to financial statements.
3
TORCH ENERGY ROYALTY TRUST
STATEMENTS OF DISTRIBUTABLE INCOME
(In thousands, except per Unit amounts)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- --------------------
2002 2001 2002 2001
-------- ------- ------- ---------
Net profits income $ 2,586 $ 3,755 $ 6,802 $ 14,273
Interest income 1 6 3 18
-------- ------ ------- --------
2,587 3,761 6,805 14,291
-------- ------- ------- --------
General and administrative expenses 175 171 525 503
-------- ------- ------- --------
Distributable income $ 2,412 $ 3,590 $ 6,280 $ 13,788
======== ======= ======= ========
Distributable income per Unit (8,600 Units) $ .28 $ .42 $ .73 $ 1.60
======== ======= ======= ========
Distributions per Unit $ .28 $ .42 $ .73 $ 1.61
======== ======= ======= ========
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,
------------------------------- ---------------------------------
2002 2001 2002 2001
------------- -------------- -------------- --------------
Trust corpus, beginning of period $ 32,806 $ 42,706 $ 36,511 $ 44,783
Amortization of net profits interests (1,790) (919) (5,502) (2,977)
Distributable income 2,412 3,590 6,280 13,788
Distributions to Unitholders (2,408) (3,586) (6,269) (13,803)
------------ ------------ ------------- -------------
Trust corpus, end of period $ 31,020 $ 41,791 $ 31,020 $ 41,791
============ ============ ============= =============
See notes to financial statement
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 the Trustee, Torch
Royalty Company ("TRC") and Velasco Gas Company, Ltd. ("Velasco"), as owners of
certain oil and gas properties ("Underlying Properties"), and 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
2002 coal seam production is $1.08 for each MMBtu of gas produced and sold. The
Section 29 Credits available for 2001 and 2000 production from qualifying coal
seam properties were approximately $1.08 and $1.06, 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 development,
operating, and certain other costs. In calculating Net Proceeds from the
6
TORCH ENERGY ROYALTY TRUST
Notes to Financial Statements
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, 2002 and 2001 from
the Underlying Properties in the Robinson's Bend Field was approximately 47%
(426 MMcf) and 42% (383 MMcf), respectively, below the Volume Limitation.
Production for the nine-month periods ended June 30, 2002 and 2001 from the
Underlying Properties in the Robinson's Bend Field was approximately 45% (1,231
MMcf) and 42% (1,154 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 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 aggregate gross revenues have not exceeded aggregate
costs and expenses for the Infill Wells.
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, 2002 and 2001 are derived from
oil and gas production sold during the three-month and nine-month
periods ended June 30, 2002 and 2001, respectively. General and
administrative expenses are recognized on an accrual basis.
7
TORCH ENERGY ROYALTY TRUST
Notes to Financial Statements
- 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 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, 2002 and 2001.
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
8
TORCH ENERGY ROYALTY TRUST
Notes to Financial Statements
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.
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. The
Purchase Contract provides that the minimum paid by TEMI for gas production is
$1.70 per MMBtu ("Minimum Price"). 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 determining the purchase
price attributable to distributions received by Unitholders during the nine
months ended September 30, 2002 and 2001. As of September 30, 2002, TEMI had no
accumulated Price Credits. In addition, if the Index Price for gas exceeds $2.10
per MMBtu ("Sharing Price"), 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 had the effect of
reducing
9
TORCH ENERGY ROYALTY TRUST
Notes to Financial Statements
distributions received by Unitholders during the nine-month periods ended
September 30, 2002 and 2001 by $1.0 million and $7.4 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 to
continue the Minimum Price commitment in 2002, and in accordance with the
Purchase Contract, the Minimum Price and Sharing Price commencing January 1,
2002, adjusted for inflation, is $1.71 per MMBtu and $2.12 per MMBtu,
respectively. 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, 2002 and 2001 were $3.6 million and $4.9
million respectively. Such gross revenues for the nine-month periods ended
September 30, 2002 and 2001 were $9.6 million and $18.2 million, 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 ($0.289 and $0.286, respectively, per MMBtu for
2002 and 2001 production), 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 Torch, 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
Notes to Financial Statements
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, 2002 and 2001, gathering,
treating and transportation fees charged to the Trust by TEMI, attributable to
production during the three-month periods ended June 30, 2002 and 2001 in the
Robinson's Bend, Austin Chalk and Cotton Valley Fields, totaled $0.3 million for
each period. During the nine-month periods ended September 30, 2002 and 2001,
such fees, attributable to production during the nine-month periods ended June
30, 2002 and 2001, totaled $0.7 million and $1.2 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 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 and 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 fees during the three-month periods
ended September 30, 2002 and 2001 were $97,000 and $96,000, respectively. During
the nine-month periods ended September 30, 2002 and 2001, such fees were
$292,000 and $288,000, 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, 2002 and 2001 were $14,000
per period. Such fees during the nine-month periods September 30, 2002 and 2001
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, 2002
and 2001 is derived from oil and gas produced during the three-month periods
ended June 30, 2002 and 2001, respectively. Net profits income for the
nine-month periods ended September 30, 2002 and 2001 is derived from oil and gas
produced during the nine-month periods ended June 30, 2002 and 2001. 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,
---------------------------------------------
2002 2001
--------------------- ---------------------
Bbls Mcf Bbls Mcf
of Oil of Gas of Oil of Gas
------- ----------- ------- ----------
Chalkley Field ................. 2,282 499,271 2,750 571,564
Robinson's Bend Field .......... --- 511,732 --- 557,140
Cotton Valley Fields ........... 887 264,747 754 249,712
Austin Chalk Fields ............ 2,877 6,900 3,490 15,259
------- ----------- ------- ----------
6,046 1,282,650 6,994 1,393,675
======= =========== ======= ==========
Nine Months Ended September 30,
---------------------------------------------
2002 2001
--------------------- ---------------------
Bbls Mcf Bbls Mcf
of Oil of Gas of Oil of Gas
------- ----------- ------- ----------
Chalkley Field ................. 7,166 1,554,298 9,853 1,958,674
Robinson's Bend Field .......... --- 1,586,301 --- 1,666,675
Cotton Valley Fields ........... 2,559 780,940 2,204 792,261
Austin Chalk Fields ............ 8,917 20,548 11,139 92,658
------- ----------- -------- ----------
18,642 3,942,087 23,196 4,510,268
======= =========== ======== ==========
12
TORCH ENERGY ROYALTY TRUST
Three-Month Period Ended September 30, 2002 Compared to Three-Month Period Ended
September 30, 2001
For the three-month period ended September 30, 2002, net profits income was $2.6
million, down 32% from net profits income of $3.8 million for the same period in
2001. Such decrease is primarily due to lower average prices received for oil
and gas production attributable to the Underlying Properties, combined with
normal declines in oil and gas production.
Gas production attributable to the Underlying Properties for the three-month
period ended June 30, 2002 was 1,282,650 Mcf, or 8% lower than gas production of
1,393,675 Mcf for the same period in 2001. Oil production attributable to the
Underlying Properties for the three-month period ended June 30, 2002 was 6,046
Bbls as compared to 6,994 Bbls for the same period in 2001. Such decreases in
production are mainly due to normal production declines.
The average price used to calculate Net Proceeds for gas, before gathering,
treating and transportation deductions, during the three-month period ended
September 30, 2002 was $2.67 per MMBtu for gas and $20.11 per Bbl for oil as
compared to $3.30 per MMBtu for gas and $21.98 per Bbl for oil during the same
period in 2001. When TEMI pays a purchase price for gas based on the Minimum
Price ($1.71 and $1.70 per MMBtu for 2002 and 2001, respectively), 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 attributable to distributions
received by Unitholders during the quarters ended September 30, 2002 and 2001.
As of June 30, 2002, TEMI had no accumulated Price Credits. Additionally, if the
Index Price for gas exceeds the Sharing Price ($2.12 and $2.10 per MMBtu for
2002 and 2001, respectively), 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 resulted in distributions received by
Unitholders during the three months ended September 30, 2002 and 2001 being
reduced by $0.7 million and $1.6 million, respectively.
General and administrative expenses amounted to $175,000 for the three-month
period ended September 30, 2002 as compared to 171,000 during the same period in
2001. These expenses primarily relate to administrative services provided by
Torch and the Trustee.
13
TORCH ENERGY ROYALTY TRUST
The foregoing resulted in distributable income of $2.4 million, or $0.28 per
Unit, for the three-month period ended September 30, 2002, as compared to $3.6
million, or $0.42 per Unit, for the same period in 2001. Cash distributions of
$2.4 million, or $0.28 per Unit, were made to Unitholders during the quarter
ended September 30, 2002 as compared to $3.6 million, or $0.42 per Unit, for the
same period in 2001. The Section 29 Credits relating to the distributions
received by Unitholders during the quarter ended September 30, 2002 and 2001,
generated from production during the three-month periods ended June 30, 2002 and
2001, were approximately $0.07 per Unit for each period.
Nine-Month Period Ended September 30, 2002 Compared to Nine-Month Period Ended
September 30, 2001
For the nine-month period ended September 30, 2002, net profits income was $6.8
million, down 52% from net profits income of $14.3 million for the same period
in 2001. Such decrease is primarily due to lower average prices received for oil
and gas production attributable to the Underlying Properties, combined with
normal declines in oil and gas production.
Gas production attributable to the Underlying Properties for the nine-month
period ended June 30, 2002 was 3,942,087 Mcf, or 13% lower than gas production
of 4,510,268 Mcf for the same period in 2001. Oil production attributable to the
Underlying Properties for the nine-month period ended June 30, 2002 was 18,642
Bbls, as compared to 23,196 Bbls for the same period in 2001. Such decreases in
production are mainly due to normal production declines.
The average price paid for production attributable to the Underlying Properties
during the nine-month period ended June 30, 2002 was $2.31 per MMBtu for gas and
$16.49 per Bbl for oil as compared to $3.78 per MMBtu for gas and $23.95 per Bbl
for oil during the same period in 2001. When TEMI pays a purchase price for gas
based on the Minimum Price ($1.71 and $1.70 per MMBtu for 2002 and 2001,
respectively), 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, 2002 and 2001. As of September 30, 2002, TEMI had no accumulated Price
Credits. Additionally, if the Index Price for gas exceeds the Sharing Price
($2.12 and $2.10 per MMBtu for 2002 and 2001, respectively), TEMI is entitled to
deduct 50% of such excess from 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, 2002 and 2001 by $1.0 million and $7.4 million, respectively.
General and administrative expenses amounted to $525,000 for the nine-month
period
14
TORCH ENERGY ROYALTY TRUST
ended September 30, 2002 as compared to $503,000 for the same period in 2001.
These expenses primarily relate to administrative services provided by Torch and
the Trustee.
The foregoing resulted in distributable income of $6.3 million, or $0.73 per
Unit, for the nine-month period ended September 30, 2002 as compared to $13.8
million, or $1.60 per Unit, for the same period in 2001. Cash distributions of
$6.3 million, or $0.73 per Unit, were made to Unitholders during the nine-month
period ended September 30, 2002, as compared to $13.8 million, or $1.61 per
Unit, for the same period in 2001. The Section 29 Credits relating to these
distributions, generated from production during the nine-month periods ended
June 30, 2002 and 2001, were approximately $0.21 and $0.22 per Unit,
respectively.
Net profits income (in thousands) received by the Trust during the three-month
and nine-month periods ended September 30, 2002 and 2001, derived from
production sold during the three-month and nine-month periods ended June 30,
2002 and 2001, respectively, was computed as shown in the following tables:
Three Months Ended Three Months Ended
September 30, 2002 September 30, 2001
-------------------------------------- ---------------------------------------------
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 $ 2,216 $ 1,157 $ 2,965 $ 1,584
----------- --------- ----------- ---------
Direct operating expenses:
Lease operating expenses and
property tax 366 --- 401 ---
Severance tax 213 65 93 118
----------- --------- ----------- ---------
579 65 494 118
----------- --------- ----------- ---------
Net proceeds before capital
expenditures 1,637 1,092 2,471 1,466
Capital expenditures 6 --- (15) ---
----------- --------- ----------- ---------
Net proceeds 1,631 1,092 2,486 1,466
Net profits percentage 95% 95% 95% 95%
----------- --------- ----------- ---------
Net profits income $ 1,549 $ 1,037 $ 2,586 $ 2,362 $ 1,393 $ 3,755
=========== ========= ========= =========== ========= ========
15
TORCH ENERGY ROYALTY TRUST
Nine Months Ended Nine Months Ended
September 30, 2002 September 30, 2001
-------------------------------------------------------------------------------------
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 $ 5,839 $ 3,056 $ 11,503 $ 5,494
----------- --------- ----------- ---------
Direct operating expenses:
Lease operating expenses and
property tax 1,086 --- 1,092 ---
Severance tax 497 149 316 429
----------- --------- ----------- ---------
1,583 149 1,408 429
----------- --------- ----------- ---------
Net proceeds before capital
expenditures 4,256 2,907 10,095 5,065
Capital expenditures 3 --- 136 ---
----------- --------- ----------- ---------
Net proceeds 4,253 2,907 9,959 5,065
Net profits percentage 95% 95% 95% 95%
----------- --------- ----------- ---------
Net profits income $ 4,040 $ 2,762 $ 6,802 $ 9,461 $ 4,812 $ 14,273
=========== ========= ======== =========== ========= ========
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.
Lease operating expenses in the Robinson's Bend Field during the nine months
ended June 30, 2002 were $4.3 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, the 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 would have been reduced from
$6.3 million to $3.5 million, or $0.73 per Unit to $0.41 per Unit. 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 $3.5 million of the $4.3 million of the lease
operating expenses during the nine months ended June 30, 2002 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.
16
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 $25.0 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. The
information contained in this item updates, and should be read in conjunction
with Part II, Item 7 of the Trust's Annual Report on Form 10-K for the year
ended December 31, 2001.
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. TEMI elected to continue the Minimum Price Commitment in 2002, and in
accordance with the Purchase Contract, the Minimum Price and Sharing Price
commencing January 1, 2002, adjusted for inflation, is $1.71 per MMBtu and $2.12
per MMBtu, respectively.
Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures. Based on their
evaluation as of a date within 90 days of the filing date of this Quarterly
Report on Form 10-Q, the principal executive officer and principal financial
officer of Torch, the grantor of the Trust, have concluded that the Company's
disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c)
under the Securities Exchange Act of 1934 (the "Exchange Act")) are effective to
ensure that information required to be disclosed by the Company 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) Changes in Internal Controls. There were no significant changes in the
internal controls of Torch, the grantor of the Trust, 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 Chief Executive Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
99.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
(b) Report on Form 8-K:
The Trust filed a current report on Form 8-K on August 14, 2002 disclosing the
certifications of the Torch Energy Royalty Trust Quarterly Report on Form 10-Q
for the quarterly period ended June 30, 2002.
* Incorporated by reference from Registration Statements on Form S-1 of Torch
Energy Advisors Incorporated (Registration No. 33-68688) dated November 16,
1993.
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: November 14, 2002
(The Trust has no employees, directors or executive officers.)
19
CERTIFICATIONS
I, J.P. Bryan, being the chief executive officer of Torch Energy Advisors
Incorporated ("Torch"), the grantor of the Torch Energy Royalty Trust ("Trust"),
certify that:
1. I have reviewed this quarterly report on Form 10-Q of the Trust;
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 periods presented in this quarterly
report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us 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 our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our 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
20
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 management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and 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 our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
By /s/ J.P. BRYAN
------------------------------------------
J.P. Bryan
Chief Executive Officer
I, Michael Smith, being the chief financial officer of Torch Energy
Advisors Incorporated ("Torch"), the grantor of the Torch Energy Royalty Trust
("Trust"), certify that:
1. I have reviewed this quarterly report on Form 10-Q of the Trust;
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 periods presented in this quarterly
report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
21
(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 our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our 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 management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and 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 our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
By /s/ MICHAEL SMITH
------------------------------------------
Michael Smith
Chief Financial Officer
22
Exhibit Index
Exhibit Number Title of Document
-------------- -----------------
99.1 Certification of Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
99.2 Certification of Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002