e10vk
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2008
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number 1-12474
TORCH ENERGY ROYALTY TRUST
(Exact Name of Registrant as Specified in its Charter)
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| Delaware
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74-6411424 |
| (State or Other Jurisdiction of
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(I.R.S. Employer Identification No.) |
| Incorporation or Organization) |
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Rodney Square North
1100 North Market Street
Wilmington, Delaware 19890
(Address of Principal Executive Offices; Zip Code)
(Registrant’s Telephone number, Including Area Code)
(302) 636-6016
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
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Name of Each Exchange on |
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Which Registered |
| Units of Beneficial Interest
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New York Stock Exchange |
SECURITIES REGISTERED PURSUANT TO SECTION 12 (G) OF THE ACT: None
Indicate by check mark if the registrant is a well-known seasoned issuer; as defined in Rule 405
of the Securities Act. Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act. Yes o No þ
Indicated by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(b) 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 o No þ
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).
Yes o No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this form 10-K. þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of “accelerated filer and large
accelerated filer” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer o |
Accelerated filer o |
Non-accelerated filer o
(Do not check if a smaller reporting company) |
Smaller reporting company þ |
Indicated by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act). Yes o No þ
The aggregate market value of the voting and non-voting common equity held by non-affiliates
computed by reference to the price at which the common equity was last sold, or the average bid and
asked price of such common equity, as of the last business day of the registrant’s most recently
completed second fiscal quarter was $19.5 million.
At March 31, 2009, there were 8,600,000 Units of Beneficial Interest of the Trust outstanding.
Torch Energy Royalty Trust
Annual Report on Form 10-K
For the fiscal year ended December 31, 2008
TABLE OF CONTENTS
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Torch Energy Royalty Trust
PART I
Item 1. Business
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 “Management’s Discussion and Analysis of Financial Condition and
Results of Operations” regarding the financial position, estimated 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. Important factors
that could cause actual results to differ materially from Torch’s expectations (“Cautionary
Statements”) are disclosed under “Risk Factors” elsewhere in this document. All subsequent written
and oral forward-looking statements attributable to the Trust or persons acting on its behalf are
expressly qualified by the Cautionary Statements.
General
The Trust was formed effective October 1, 1993, pursuant to a trust agreement (“Trust
Agreement”) among Wilmington Trust Company, not in its individual capacity but solely as trustee of
the Trust (“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. The Trust was formed under the Delaware
statutory trust act (formerly known as the Delaware business trust act). TRC and Velasco created
net profits interests (“Net Profits Interests”) which burden certain oil and gas properties
(“Underlying Properties”) and 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 in November 1993. The current working interest owners of the
Underlying Properties are Torch Royalty Company, Torch E&P Company, Samson Lone Star Limited
Partnership and Constellation Energy Partners LLC (“Working Interest Owners”).
The sole purpose of the Trust is to hold the Net Profits Interests, to receive payments from
the Working Interest Owners, and to make payments to Unitholders. The Trust does not conduct any
business activity and has no officers, directors or employees. The Trust and Trustee rely on third
party service providers to perform administrative services for the Trust. Torch provided
accounting, bookkeeping, informational and other services to the Trust related to the Net Profits
Interests pursuant to the Administrative Services Agreement effective October 1, 1993 and an oral
arrangement after termination of the Administrative Services Agreement on January 29, 2008 through
April 1, 2008. From November 7, 2008 through December 23, 2008, Torch provided certain accounting
services in connection with the Trust’s preparation of its Form 10-K for the year ended December
31, 2007 pursuant to an agreement between the Trust and Torch dated November 7, 2008. To
facilitate the winding down of the Trust, Torch currently provides certain accounting and other
services for the Trust pursuant to an agreement with the Trust entered into on March 26, 2009. The
initial term of such agreement expires March 31, 2010 or as sooner terminated by written notice
from either party within 5 business days notice.
The Trust has no officers, directors or employees. The Trust and Trustee rely solely on receiving
accurate information, reports and other representations from Torch and other service providers to
the Trust. 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.
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Torch Energy Royalty Trust
In connection with the formation of the Trust, 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”) which expired upon termination of the Trust
on January 29, 2008 (“Termination Date”). See Marketing Arrangements in this section for
oil and gas pricing information pertaining to the Underlying Properties. The Working Interest
Owners receive payments reflecting the proceeds of oil and gas sold and aggregate these payments,
deduct applicable costs and make payments to the Trustee each quarter for the amounts due to the
Trust. Prior to the termination of the Trust, Unitholders received quarterly cash distributions
relating to oil and gas produced and sold from the Underlying Properties. Following the
termination of the Trust, the Trustee established a non-interest bearing segregated cash reserve
account (“Cash Reserve”) for payment by the Trust of certain actual, contingent and uncertain
liabilities of the Trust. See footnote 4 of the Trust’s audited financial statements for
additional information concerning the Cash Reserve. Because no additional properties will be
contributed to the Trust, the assets of the Trust deplete over time and a portion of each cash
distribution made by the Trust is analogous to a return of capital.
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”).
The Underlying Properties represent interests in all productive formations from 100 feet below the
deepest productive formation in each field to the surface when the Trust was formed. The Trust
therefore has no interest in deeper productive formations.
Separate conveyances (“Conveyances”) were used to transfer the Net Profits Interests in each state.
Net proceeds (“Net Proceeds”), 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 (excluding
operating and development costs from the Robinson’s Bend Field prior to January 1, 2003), are
calculated separately for each Conveyance. If, during any period, costs and expenses deducted in
calculating Net Proceeds exceed gross proceeds under a Conveyance, neither the Trust nor
Unitholders are liable to pay such excess directly, but the Trust will receive no payments for
distribution to Unitholders with respect to such Conveyance until future gross proceeds exceed
future costs and expenses plus the cumulative excess of such costs and expenses not previously
recouped by TRC and Velasco plus interest thereon. The complete definitions of Net Proceeds are
set forth in the Conveyances.
The Trust received the affirmative vote of the Unitholders of more than 66 2/3% of the outstanding
Units to terminate the Trust at the meeting of Unitholders held on January 29, 2008. Upon
termination of the Trust, among other things, the Trustee is required to sell the Net Profits
Interests. Specifically, pursuant to Section 9.03(e) of the Trust Agreement if the property of the
Trust Estate (as defined in the Trust Agreement) has not been sold prior to the end of one calendar
year following the termination date, the Trustee, thereafter, must cause such assets to be sold at
public auction. As the Trust was terminated by a vote of the Unitholders on January 29, 2008 (the
“Termination Date”), the Trustee anticipates it will continue to consult with the Trust’s and
Trustee’s financial and legal advisors in preparing the sales process and obtaining the necessary
information required for disclosure regarding the Units to carry out the sale requirement under
Section 9.03(e). No assurances can be given that the Trustee will be able to sell the Net Profits
Interests, or the price that will be distributed to Unitholders following such a sale. Such
distributions could be below the market value of the Units. The Trust can give no assurances of
the effect of the results of the affirmative vote to
terminate the Trust by the Unitholders on the continued listing of the Units on the New York Stock
Exchange (NYSE) or any other national quotation system.
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Torch Energy Royalty Trust
As previously disclosed by the Trust in certain of its filings with the Securities and Exchange
Commission (“SEC”), the Trust and certain working interest owners (TRC, Torch E&P Company and
Constellation Energy Partners LLC) of the Underlying Properties were involved in an arbitration
proceeding relating to the proper calculation of the quarterly Net Profits Interests payments owed
to the Trust following the termination of the Trust. The working interest owners contended that
the pricing mechanism contained in the terminated Purchase Contract (including the sharing price
and minimum price mechanism) should continue to be utilized to calculate the quarterly Net Profits
Interests payments. In the arbitration proceeding, the Trustee, not in its individual capacity but
solely as Trustee of the Trust, contended that the sharing price mechanism of the Purchase Contract
(which determined the calculation of the Net Profits Interests prior to the termination of the Oil
and Gas Purchase Contract) did not survive the termination of the Purchase Contract or the
termination of the Trust. On April 11, 2008, Trust Venture Company, LLC, which owns the majority of
Units in the Trust, submitted an unopposed request to intervene in the arbitration and became a
party to the arbitration. Trust Venture Company, LLC agreed with the Trustee, and took the
position in the arbitration, that the sharing price mechanism of the Purchase Contract did not
survive the termination of the Purchase Contract or the termination of the Trust.
The hearing on the merits in the arbitration commenced on June 16, 2008 and was completed on June
20, 2008. On July 18, 2008, JAMS, through a panel of three arbitrators (“Arbitrators”), released an
award notice to all parties (the “Award Notice”). In the Award Notice, the Arbitrators found that
the Conveyances are not ambiguous and the pricing mechanism of the Purchase Contract is
incorporated by reference into the Conveyances notwithstanding termination of the Purchase
Contract. The Arbitrators therefore concluded that the pricing mechanism (including the sharing
price and minimum price mechanism) continues to burden the Net Profits Interests and will do so for
the life of the Conveyances. The Arbitrators also denied each party’s request for fees and costs;
each party was required to bear its own fees and costs related to the arbitration. The Trust and
Trustee incurred expenses as a result of the arbitration and expect to continue to incur expenses,
including but not limited to legal fees, as a result of the winding down of the Trust. See
also Item 3. Legal Proceedings for subsequent event information concerning the arbitration
and Award Notice.
As previously disclosed by Trust in its Current Report on Form 8-K filed with the Securities and
Exchange Commission (the “SEC”) on May 7, 2009, the Trust received a letter from the NYSE
Regulation, Inc. (the “NYSE”) on May 1, 2009 informing the Trust that, as a result of its failure
to timely file its Annual Report on Form 10-K for the fiscal year ended December 31, 2008 (the
“2008 Annual Report”) with the SEC, the Trust was subject to certain procedures as specified in
Section 802.01E, “SEC Annual Report Timely Filing Criteria,” of the NYSE’s Listed Company Manual
(“Section 802.01E”) and further, regardless of the procedures specified in Section 802.01E, the
NYSE could commence delisting procedures at any time during any period that is available to
complete the filing of the 2008 Annual Report, if circumstances warrant.
As the Trust had been unable to obtain complete and accurate information regarding reserve
information and the financial statements of the Trust required to be included in the 2008 Annual
Report, the Trust remained unable to timely file its 2008 Annual Report. Therefore, the Trust
requested an extension for continued listing and trading on the NYSE notwithstanding its failure to
file its 2008 Annual Report. On October 15, 2009, the Trust issued a press release (the “Press
Release”) disclosing the receipt of notice from the NYSE, received on October 9, 2009, of the
NYSE’s grant of such an extension, providing the Trust until December 31, 2009 to complete and file
its 2008 Annual Report with the SEC. However, the NYSE stated in its extension grant that such
extension is subject to reassessment on an ongoing basis and the NYSE would closely monitor the
Trust’s progress in completing and filing the 2008 Annual Report. Failure of the Trust to make
progress in its efforts to complete and file its SEC reports or failing to meet the minimum listing
criteria could result in a suspension of the Trust’s listing and trading privileges.
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Torch Energy Royalty Trust
Marketing Arrangements and Price Sharing
In connection with the formation of the Trust, TRC, Velasco and TEMI entered into the Purchase
Contract which expired upon termination of the Trust. Pursuant to the Purchase Contract, TEMI was
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 were 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 sold production.
The Purchase Contract also provided that TEMI pay a minimum price (“Minimum Price”) for gas
production. The Minimum Price was adjusted annually for inflation and was $1.87, $1.83 and $1.80
per MMBtu for 2008, 2007 and 2006, respectively. When TEMI paid a purchase price based on the
Minimum Price it received price credits (“Price Credits”), equal to the difference between the
Index Price and the Minimum Price, that it was entitled to deduct in determining the purchase price
when the Index Price for gas exceeded the Minimum Price. In addition, if the Index Price for gas
exceeded the sharing price, which was adjusted annually for inflation (“Sharing Price”), TEMI was
entitled to deduct 50% of such excess (“Price Differential”) in determining the purchase price.
The Sharing Price was $2.30, $2.26 and $2.22 per MMBtu in 2008, 2007 and 2006, respectively. TEMI
had an annual option to discontinue the Minimum Price commitment. However, if TEMI discontinued the
Minimum Price commitment, it would no longer be entitled to deduct the Price Differential in
calculating the purchase price and would have forfeited all accrued Price Credits. TEMI had no
outstanding Price Credits on the Termination Date and had not exercised its option to discontinue
the Minimum Price Commitment prior to the Purchase Contract’s expiration date.
After the Trust’s termination, the Working Interest Owners utilized the same pricing mechanisms
(including the Sharing Price and Minimum Price commitment mechanisms) as the expired Purchase
Contract in calculating Net Proceeds due to the Trust. The Working Interest Owners also have the
same annual option to discontinue the Minimum Price commitment. As of December 31, 2008, the
Working Interest Owners had no outstanding Price Credits and had not exercised its right to
discontinue the Minimum Price commitment.
Gas production is purchased at the wellhead. Therefore, Net Proceeds do not include any amounts
received in connection with extracting natural gas liquids from such production at gas processing
or treating facilities.
Gathering, Treating and Transportation Arrangements
The Purchase Contract, which expired upon the Trust’s termination, entitled TEMI to deduct certain
gas gathering, treating and transportation fees in calculating the purchase price for gas in the
Robinson’s Bend, Austin Chalk and Cotton Valley Fields. The amounts that were deducted in
calculating the purchase price for such gas were set forth in the Purchase Contract and were not
affected by the actual costs incurred by TEMI to gather, treat and transport gas. For the
Robinson’s Bend Field, TEMI was entitled to deduct a gathering, treating and transportation fee of
$0.260 per MMBtu adjusted for inflation ($0.314, $0.308 and $0.303 per MMBtu for 2008, 2007, and
2006, respectively), plus fuel usage equal to 5% of revenues. Additionally, a gathering fee of
$0.05 per MMBtu was deducted in calculating the purchase price for production from 73 of the 426
wells in the Robinson’s Bend Field. TEMI deducted $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 deducted from the purchase price for gas for production
attributable to certain wells in the Cotton Valley Fields a transportation fee of $0.045 per MMBtu.
Upon the Trust’s termination, the Working Interest Owners deducted the same gas gathering,
treating and transportation fees that had previously been deducted by TEMI pursuant to the Purchase
Contract in calculating Net Proceeds due to the Trust.
During the years ended December 31, 2008, 2007 and 2006, gathering, treating and transportation
fees deducted from the Net Proceeds calculations pertaining to production during the twelve months
ended September 30, 2008, 2007 and 2006 in the Robinson’s Bend, Austin Chalk and Cotton Valley
Fields, totaled
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Torch Energy Royalty Trust
$1.4 million, $1.5 million and $1.7 million for 2008, 2007 and 2006, respectively. No amounts for
gathering, treating or transportation are deducted in calculating the purchase price from the
Chalkley Field.
On February 5, 2008, the Trust and Trustee confirmed the existence of the Second Amendment to the
Water Gathering and Disposal Agreement dated November 30, 2004 entered into by Robinson’s Bend
Operating Company, LLC, a Delaware company, successor in interest to Torch Energy Associates, Ltd.,
a Texas limited partnership (“Producer”), and Everlast Energy LLC, a Delaware company, successor in
interest to Velasco Gas Company Ltd., a Texas limited partnership, (“Gatherer”) (the “Second
Amendment”). The Second Amendment provides that Section 3.1 of the Water Gathering and Disposal
Agreement entered into as of August 9, 1990, by and between Producer’s and Gatherer’s respective
predecessors in interest, as amended by the First Amendment to Water Gathering and Disposal
Agreement entered into as of October 1, 1993, by and between such parties was amended such that the
Producer shall pay Gatherer a fee of $0.53 per barrel for gathering, separation and disposal of
water until Trust terminates, at which point Producer shall pay Gatherer a fee of $1.00 per barrel
for gathering, separation and disposal of water.
Neither the Trust nor the Trustee is a party to the Agreement or the Second Amendment and the Trust
did not approve or ratify the Second Amendment. No assurance can be given of the effect of the
Second Amendment on the Trust, its assets or the production costs chargeable to the Trust based on
the Agreement. Pursuant to the Alabama net overriding royalty conveyance for the Trust, certain
production costs including “second category costs” as defined in the conveyance are chargeable to
the Trust, provided that the costs and expenses paid by a working interest owner to an affiliate of
the working interest owner and chargeable to the Trust for performing such operations or services
shall not exceed competitive contract charges prevailing in the area for such operations or
services. The Trust believes that the costs associated with the Agreement are considered “second
category costs” and are likely subject to the competitive limitation noted above. See
also Item 3. Legal Proceedings for subsequent event information concerning these matters.
Net Profits Interests
The Net Profits Interests entitle the Trust to receive 95% of the Net Proceeds attributable to oil
and gas produced and sold from wells (other than infill wells) on the Underlying Properties. In
calculating Net Proceeds from the Robinson’s Bend Field, operating and development costs incurred
prior to January 1, 2003 were 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. The Robinson’s Bend Field production attributable to the
Trust did not meet the Volume Limitation during the years ended December 31, 2008, 2007 and 2006
and is not expected to do so in the future.
The Net Profits Interests also entitle the Trust to 20% of the Net Proceeds of wells drilled on the
Underlying Properties since the Trust’s establishment into formations in which the Trust has an
interest, other than wells drilled to replace damaged or destroyed wells (“Infill Wells”). Infill
Wells Net Proceeds (“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.
Availability of Reports
The Trust’s principal offices are located at Rodney Square North, 1100 North Market Street,
Wilmington, Delaware 19890. The telephone number is (302) 636-6016. The Trust files quarterly and
annual reports and other information with the Securities and Exchange Commission (“SEC”). You may
read and copy any document that we file at the SEC’s Public Reference Room at 100 F Street, N.E.,
Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the public
reference rooms. Our SEC filings are also available to the public from the SEC’s website at
http://www.sec.gov and on our website, http://www.torchroyalty.com, which features all of our
current SEC
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Torch Energy Royalty Trust
filings free of charge as soon as reasonably practicable after they are filed with the SEC.
Our SEC filings are also available at the office of the NYSE. For further information on obtaining
copies of our public filings from the NYSE, visit the NYSE website at http://www.nyse.com.
Information contained on the Trust’s website or any other website referenced herein is not
incorporated by reference into this report and does not constitute a part of this report.
Item 1A. Risk Factors
You should carefully consider the following risk factors in addition to the other information
included in this report. The risks set forth below are in addition to risks that apply to most
businesses. The Trustee is in the process of winding down and liquidating the Trust after
the affirmative vote of the requisite number of Unitholders. See Trust Termination below
in this item. The other Risk Factors set forth below should be considered in light of the wind up
and liquidation of the Trust. If any of these risks or uncertainties actually occur, the Trust’s
financial condition and results of operations and the future and current value of the Net Profits
Interests could be materially adversely affected. Additional risks not presently known to the
Trust or which the Trust considers immaterial based on information currently available to it may
also materially adversely affect the Trust. Because of these factors, past financial performance
should not be considered an indication of future performance.
Trust Termination
The Trust received the affirmative vote of the Unitholders of more than 66 2/3% of the outstanding
Units to terminate the Trust at the meeting of Unitholders held on January 29, 2008. Upon
termination of the Trust, among other things, the Trustee is required to sell the Net Profits
Interests. No assurances can be given that the Trustee will be able to sell the Net Profits
Interests, or that the ultimate proceeds that will be distributed to Unitholders following such a
sale will be equivalent to the market value of such interests. Such distributions could be below
the market value of the Units. The Trust and Trustee cannot anticipate the results that such
termination of the Trust will have on its ability to sell the Net Profits Interests.
Specifically, pursuant to Section 9.03(e) of the Trust Agreement if the property of the Trust
Estate (as defined in the Trust Agreement) has not been sold prior to the end of one calendar year
following the termination date (prior to January 29, 2009), the Trustee must then cause such assets
to be sold at public auction. As the Trust was terminated by a vote of the Unitholders on January
29, 2008, the Trustee anticipates it will continue to consult with the Trust’s and Trustee’s
financial and legal advisors in preparing the sales process and obtaining the necessary information
required for disclosure regarding the Units to carry out the sale requirement under Section
9.03(e). There can be no assurance at this time of the specific timetable in which the Trust and
Trustee would be able to obtain all the information advisable and necessary concerning the Net
Profits Interests in order to prepare and finalize the sales process.
The Trust’s continuing failure to timely file certain periodic reports with the SEC during the wind
up and liquidation of the Trust may pose significant risks to the Trust’s business, which could
materially and adversely affect the Trust financial condition and results of operation and the
current and/or future value of the Net Profits Interests.
The public trading price for the Units tends to be tied to the recent and expected levels of cash
distribution on the Units. The amounts available for distribution by the Trust vary in response to
numerous factors outside
the control of the Trust, including prevailing prices for natural gas produced from the Trust’s Net
Profits Interests. The market price is not necessarily indicative of the value that the Trust would
realize if it sold those Net Profits Interests to a third party buyer. In addition, such market
price is not necessarily reflective of the fact that since the assets of the Trust are depleting
assets, a portion of each cash distribution paid on the units should be considered by investors as
a return of capital, with the remainder being considered as a return on investment. There is no
guarantee that distributions made to a Unitholder over the life of these depleting assets will
equal or exceed the purchase price paid by the Unitholder.
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Torch Energy Royalty Trust
The Trust can give no assurances of the effect of the results of the affirmative vote to terminate
the Trust by the Unitholders on the continued listing of the Units on the New York Stock Exchange
(NYSE) or any other national quotation system. Failure of the Trust to make progress in its
efforts to complete and file its SEC reports or failing to meet the minimum listing criteria of the
NYSE could result in a suspension of the Trust’s listing and trading privileges. If the NYSE does
not grant the Trust extensions to file its periodic reports with the NYSE, it has the right to
begin proceedings to delist the units. A delisting of the Trust’s units may have a material adverse
effect on the Trust, among other things reducing the liquidity and market price of the units.
If gas and oil prices decline significantly, the Trust’s cash flow from operations will likely
decline and the Trust may have to lower the cash distributions or may not be able to pay
distributions at all during the wind up and liquidation of the Trust.
The Trust’s cash distributions, operating results and the value of the Net Profits Interest are
substantially dependent on prices of gas and, to a lesser extent, oil. Prices for oil and gas are
volatile and are subject to large fluctuations in response to relatively minor changes in the
supply of and demand for oil and gas, market uncertainty and a variety of additional factors beyond
the control of the Trust and/or Torch. These factors include:
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The domestic and foreign supply of and demand for oil and gas; |
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The price and quantity of foreign imports of oil and gas; |
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The level of consumer product demand; |
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Weather conditions, including but not limited to, hurricanes in the Gulf of
Mexico, can adversely impact cash distributions received by the Trust. If the wells
drilled on the Underlying Properties and related infrastructure were to be damaged by
adverse weather conditions, cash flows distributed to Unitholders could be delayed
during the period in which damage to such assets were repaired. Additionally, costs
associated with such repairs not covered by insurance would reduce cash distributions
received by the Trust; |
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Overall domestic and global economic conditions; |
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Political and economic conditions and events in foreign oil and gas producing
countries, including embargoes, continued hostilities in the Middle East and other
sustained military campaigns, conditions in South America and Russia, and acts of
terrorism or sabotage; |
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The ability of members of the Organization of Petroleum Exporting Countries to
agree to and maintain oil price and production controls; |
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Technological advances affecting energy consumption; |
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Domestic and foreign governmental regulations and taxation; |
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The impact of energy conservation efforts; |
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The capacity of natural gas pipelines and other transportation facilities to
the Trust’s production; and |
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The price and availability of alternative fuels. |
Any substantial and extended decline in the price of gas and oil would have an adverse effect on
the Trust’s revenues, cash distributions and current and/or future value of the Net Profits
Interests.
Trust expenses may have an adverse impact on the distributions to Unitholders during the wind up
and liquidation of the Trust.
Trust expenses, Sarbanes-Oxley compliance and legal fees during the wind down and liquidation of
the Trust may have an adverse effect on the ability of the Trust to pay quarterly distributions to
the Unitholders. The Trustee has set up a cash reserve account pursuant to the Trust Agreement in
order to provide the funds necessary for an orderly wind up and liquidation of the Trust.
7
Torch Energy Royalty Trust
The estimated reserve quantities in this report are based on many assumptions that may prove to be
inaccurate. Any material inaccuracies in these reserve estimates or underlying assumptions will
materially affect the quantities and present value of the Trust’s reserves.
Estimates of economically recoverable gas and oil reserves and of future net cash flows are based
upon a number of variable factors and assumptions, all of which are to some degree speculative and
may vary considerably from actual results. Prices for oil and gas are volatile and are subject to
large fluctuations in response to relatively minor changes in the supply of and demand for oil and
gas, market uncertainty and a variety of additional factors beyond the control of the Trust and/or
Torch. Therefore, actual production, revenues, taxes and development and operation expenditures
may not occur as estimated. As disclosed by the Trust in its Annual Report on Form 10-K for the
period ended December 31, 2007 and in this Annual Report, on December 30, 2008, Trust Venture
Company, LLC filed and subsequently served a derivative lawsuit against Constellation Energy
Partners LLC in Alabama state court alleging counts, in accordance with, inter alia, Section 3816
of the Delaware Statutory Trust Act, codified at 12 Del. C. 3816(a), to (i) recover any overcharges
to the Trust by Constellation Energy Partners LLC related to administrative costs, water
gathering, treating and disposal costs and severance taxes and (ii) require Constellation Energy
Partners LLC to provide an accounting of its revenues and expenses as required under the Net
Overriding Royalty Conveyance filed of record in Tuscaloosa County, Alabama. There can be no
assurance as to the outcome or result of this derivative lawsuit or the effect of the derivative
lawsuit may have on the calculation of the reserve reports and the estimated reserve quantities.
Future results of the Trust will depend upon the ability of the owners of the Underlying Properties
to develop, produce and sell their oil and natural gas reserves and the corresponding proceeds from
such sales which may vary widely. The reserve data included herein are estimates only and are
subject to many uncertainties. Actual quantities of oil and natural gas may differ considerably
from the amounts set forth herein. In addition, different reserve engineers may make different
estimates of reserve quantities and cash flows based upon the same available data. The present
value, discounted at 10%, of future net cash flows from proved reserves attributable to the Net
Profits Interests does not represent the fair market value of the proved reserves, or the price at
which the Net Profits Interests could be sold. A determination of fair market value would involve
consideration of many factors in addition to the present value, discounted at 10%. 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 years ended December 31, 2008, 2007 and 2006.
As more Infill Wells are drilled, they could cause a reduction in amounts payable to the Trust or a
purchaser of the Net Profits Interests.
The Net Profits Interests include a 20 percent net profit interest in Infill Wells. Infill Wells
may recover a portion of the reserves that would otherwise be produced from wells burdened by the
Trust’s Net Profits Interests. Since the Trust is entitled to receive 95 percent of the Net
Proceeds from production burdened by its Net Profits Interests but only 20 percent of the net
profits from Infill Wells, the drilling of Infill Wells may reduce payments to the Trust, and
ultimately distributions to Trust Unitholders.
The Trust’s business is subject to operational risks that may not be fully insured, which, if they
were to occur, could adversely affect the Trust’s financial condition or results of operations and,
as a result, the Trust’s ability to pay distributions to Unitholders.
Cash payments to the Trust are derived from the production and sale of gas and oil, which
operations are subject to risk inherent in such activities, such as blowouts, cratering,
explosions, damage to equipment caused by weather conditions, facility or equipment malfunctions,
uncontrollable flows of oil, gas or well fluids, fires, pollution and other environmental risks.
These risks could result in substantial losses which are
deducted in calculating the Net Proceeds paid to the Trust due to injury and loss of life, severe
damage to and destruction of property and equipment, pollution and other environmental damage and
suspension of
8
Torch Energy Royalty Trust
operations. The Trust may elect not to obtain insurance if it believes that the cost
of available insurance is excessive relative to the perceived risks presented. Losses could
therefore occur for uninsurable or uninsured risks or in amounts in excess of existing insurance
coverage. The occurrence of an event that is not fully covered by insurance could have a material
adverse impact on the Trust’s business activities, financial condition, results of operations and
ability to pay distributions to Unitholders. The failure of an operator of the Underlying
Properties to conduct its operations or discharge its obligations in a proper manner could have an
adverse effect on the Net Proceeds payable to the Trust.
The Trust may be unable to compete effectively with larger companies, which may adversely affect
the Trust’s ability to generate sufficient revenue and its ability to pay distributions to
Unitholders prior to the windup and liquidation of the Trust.
The Trust’s distributions are dependent on gas production and prices and, to a lesser extent, oil
production and prices from the Underlying Properties. The gas industry is highly competitive in
all of its phases. In marketing production from the Underlying Properties, major gas companies,
independent gas concerns, and individual producers and operators may provide competition. Many of
these competitors have greater financial and other resources than the companies marketing the
production of the Trust. Competition may also be presented by alternative fuel sources, including
heating oil and other fossil fuels. In addition, the Trust and Trustee do not independently
monitor the Working Interest Owners financial viability on an ongoing basis which may have an
effect on the Trust and its ability to pay distributions to the Unitholders.
The Trust’s operations are subject to regulations which may limit the Trust’s production of natural
gas or the price that the Trust receives for natural gas.
The production, transportation and sale of natural gas from the Underlying Properties are subject
to Federal and state governmental regulation, including regulation of tariffs charged by pipelines,
taxes, the prevention of waste, the conservation of gas, pollution controls and various other
matters. The United States has governmental power to impose pollution control measures.
If it is determined that the Trust is subject to the Texas margin tax, the Trustee may have to
withhold a disproportionate amount from future distributions to pay the tax liability.
The Trustee does not intend to pay any amounts for the new Texas margin tax for tax years 2007 and
2008, based on the assumption that the Trust is exempt from tax as a passive entity; however, there
is currently no clear statutory authority that the Trust meets requirements for the margin tax
exemption as a passive entity. If it is subsequently determined that the Trust is not exempt from
the margin tax, the Trust would be required to deduct and withhold from future distributions the
amounts necessary to pay the margin tax for the years ended December 31, 2007 and 2008, including
the tax liability accruing on income distributed after December 2006 attributable to 2007 and 2008
Trust revenues from which no tax was withheld. For more information about the Texas margin tax,
see Note 3 to the Trust’s financial statements.
Federal Regulation
The Underlying Properties are subject to the jurisdiction of FERC with respect to various aspects
of gas operations including the marketing and production of gas. The Natural Gas Act and the
Natural Gas Policy Act (collectively, the “Acts”) mandate Federal regulation of interstate
transportation of gas. The Natural Gas Wellhead Decontrol Act of 1989 terminated wellhead price
controls on all domestic gas on January 1, 1993. Numerous questions have been raised concerning
the interpretation and implementation of several significant provisions of the Acts and of the
regulations and policies promulgated by FERC thereunder. A number of lawsuits and administrative
proceedings have been instituted which challenge the validity of regulations
implementing the Acts. In addition, FERC currently has under consideration various policies and
proposals
that may affect the marketing of gas under new and existing contracts. Accordingly,
Torch is unable to predict the impact of any such government regulation.
9
Torch Energy Royalty Trust
In the past, Congress has been very active in the area of gas regulation. Legislation enacted in
repeals incremental pricing requirements and gas use restraints previously applicable. At the
present time, it is impossible to predict what proposals, if any, might actually be enacted by
Congress or the various state legislatures and what effect, if any, such proposals might have on
the Underlying Properties and the Trust.
State Regulation
Many state jurisdictions have at times imposed limitations on the production of gas by restricting
the rate of flow for gas wells below their actual capacity to produce and by imposing acreage
limitations for the drilling of a well. States may also impose additional regulations of these
matters. Most states regulate the production of gas, including requirements for obtaining drilling
permits, the method of developing new fields, provisions for the unitization or pooling of gas
properties, the spacing, operation, plugging and abandonment of wells and the prevention of waste
of gas resources. The rate of production may be regulated and the maximum daily production
allowable from gas wells may be established on a market demand or conservation basis or both.
Because the Trust handles oil and gas petroleum products, the Trust may incur significant costs and
liabilities in the future resulting from a failure to comply with new or existing environmental
regulations or an accidental release of hazardous substances in the environment.
Activities on the Underlying Properties are subject to existing Federal, state and local laws,
rules and regulations relating to the protection of public health and welfare, safety and the
environment, including, without limitation, laws regulating the release of materials into the
environment and laws protecting areas of particular environmental concern. It is anticipated that,
absent the occurrence of an unanticipated event, compliance with these laws will not have a
material adverse effect upon the Trust or Unitholders. Torch has informed the Trust that it cannot
predict what effect future regulation or legislation, enforcement policies thereunder, and claims
for damages to property, employees, other persons and the environment resulting from operations on
the Underlying Properties could have on the Trust or Unitholders. However, pursuant to the terms
of the Conveyances, any costs or expenses incurred by TRC or Velasco in connection with
environmental liabilities, to the extent arising out of or relating to activities occurring on, or
in connection with, or conditions existing on or under, the Underlying Properties before October 1,
1993, will be borne by TRC or Velasco and not the Trust and will not be deducted in calculating Net
Proceeds and will, therefore, not reduce amounts payable to the Trust.
Net Proceeds Attributable to the Robinson’s Bend Field have declined significantly.
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. In accordance with the provisions of
the Net Profits Interest conveyance covering the Robinson’s Bend Field, commencing with the second
quarter 2003 distribution (pertaining to the quarter ended March 31, 2003 production) lease
operating expenses and capital expenditures have been deducted in calculating Net Proceeds. These
expenses and expenditures are being reviewed by the Trust, including the Second Amendment of the
Water Gathering and Disposal. The Trust receives no payments for distributions to Unitholders with
respect to the Robinson’s Bend Field when proceeds do not exceed the sum of costs and expenses and
the cumulative excess of such costs and expenses including interest (“Robinson’s Bend Field
Cumulative Deficit”). The Trust received approximately $0.6 million in 2006 (pertaining to
production during the twelve month period ended September 30, 2006) for payments for distributions
to Unitholders with respect to the Robinson’s Bend Field. The Trust received no
payments for distributions to Unitholders with respect to the Robinson’s Bend Field during the
years ended December 31, 2007 and 2008.
10
Torch Energy Royalty Trust
The Robinson’s Bend Field Cumulative Deficit at December 31, 2008 (pertaining to production as of
September 30, 2008) was approximately $42,000. Neither the Trust nor Unitholders are liable to pay
such deficit. However, the Trust will receive no payments with respect to the Robinson’s Bend
Field until future proceeds exceed the Robinson’s Bend Cumulative Deficit.
The market price for the Trust’s Units may not reflect the value of the Net Profits Interests held
by the Trust.
The public trading price for the Trust Units tends to be tied to the recent and expected levels of
cash distributions on the Trust Units. The amounts available for distribution by the Trust vary in
response to numerous factors outside the control of the Trust, including prevailing prices for oil
and natural gas produced from the Underlying Properties. The market price of the Trust Units is
not necessarily indicative of the value that the Trust would realize if the Net Profits Interests
were sold to a third party buyer. In addition, such market price is not necessarily reflective of
the fact that, since the assets of the Trust are depleting assets, a portion of each cash
distribution paid on the Trust Units should be considered by investors as a return of capital, with
the remainder being considered as a return on investment. There is no guarantee that distributions
made to a Unitholder over the life of these depleting assets will equal or exceed the purchase
price paid by the Unitholder.
Financial information of the Trust is not prepared in accordance with GAAP.
The financial statements of the Trust are prepared on a modified cash basis of accounting, which is
a comprehensive basis of accounting other than accounting principles generally accepted in the
U.S., or GAAP. Although this basis of accounting is permitted for royalty trusts by the Securities
and Exchange Commission, the financial statements of the Trust differ from GAAP financial
statements because net profits income is not accrued in the month of production, expenses are not
recognized when incurred and cash reserves may be established for certain contingencies that would
not be recorded in GAAP financial statements.
The Trust is dependent on certain service providers to provide various services to the Trust.
The Trust and Trustee rely on third party service providers to perform administrative services,
Sarbanes-Oxley compliance services and other services for the Trust. Torch provided accounting,
bookkeeping, informational and other services to the Trust related to the Net Profits Interests
pursuant to the Administrative Services Agreement effective October 1, 1993 and an oral arrangement
after termination of the Administrative Services Agreement on January 29, 2008 through April 1,
2008.
On November 7, 2008, the Trust and Torch entered an agreement whereby Torch provided certain
accounting services in connection with the preparation of the Trust’s Form 10-K for the year ended
December 31, 2007. Such service agreement expired December 23, 2008.
To facilitate the winding down of the Trust, Torch currently provides certain accounting and other
services for the Trust pursuant to an agreement with the Trust entered into on March 26, 2009. The
initial term of such agreement expires March 31, 2010 or as sooner terminated by written notice
from either party within 5 business days notice. The inability of the Trust to hire qualified
services providers to assist in the wind up and liquidation of the Trust may have a material
adverse effect on the operations of the Trust.
11
Torch Energy Royalty Trust
Unitholders have limited voting rights.
Voting rights as a Unitholder are more limited than those of stockholders of most public
corporations. For example, there is no requirement for annual meetings of Unitholders or an annual
or other periodic re-election of the Trustee. Unlike corporations which are generally governed by
boards of directors elected by their equity holders, the Trust is administered by a corporate
trustee in accordance with the Trust Agreement and other organizational documents. The Trustee has
extremely limited discretion in its administration of the Trust as set forth in the Trust’s Trust
Agreement.
Item 1B. Unresolved Staff Comments
The Trust does not currently have any unresolved Securities and Exchange Commission staff comments.
Item 2. Properties
Description of the Underlying Properties
Chalkley Field. The Underlying Properties in the Chalkley Field, located in Cameron Parish,
Louisiana, include an average 16.2% working interest (12.1% net revenue interest) in five unitized
wells (excluding Infill Wells) producing from the Miogyp “B” reservoir. As of December 31, 2008,
one Infill Well has been drilled on the Underlying Properties in the Chalkley Field. The average
working interest and net revenue interest (net to the Trust’s 20% interest) is approximately 3.2%
and 2.4%. These wells produce from a depth in excess of 14,000 feet. A subsidiary of ExxonMobil
Corporation operates the wells.
Robinson’s Bend Field. The Underlying Properties include an average 39.9% working interest (30.3%
net revenue interest) in 392 wells (excluding Infill Wells) in the Robinson’s Bend Field in the
Black Warrior Basin of Alabama. As of December 31, 2008, 34 Infill Wells have been drilled on the
Underlying Properties in the Robinson’s Bend Field. The average working interest and net revenue
interest of the Robinson’s Bend Infill Wells (net to the Trust’s 20% interest) is approximately
6.3% and 4.8%, respectively. All of the wells in the Robinson’s Bend Field are operated by a third
party, Robinson’s Bend Operating II, LLC.
Cotton Valley Fields. The Underlying Properties include an average 52.2% working interest
(40.2% net revenue interest) in 41 wells (excluding Infill Wells) in four fields that produce from
the Upper and Lower Cotton Valley formations in Texas. As of December 31, 2008, 32 Infill Wells
have been drilled on the Underlying Properties in the Cotton Valley Fields. The average working
interest and net revenue interest of the Cotton Valley Fields Infill Wells (net to the Trust’s 20%
interest) is approximately 13.8% and 11.1%, respectively. A subsidiary of Torch operates 40 of
these wells. The remaining wells are operated by Samson Lone Star Limited Partnership (“Samson”).
Austin Chalk Fields. The Underlying Properties include an average of 17.9% working interest
(14.1% net revenue interest) in 75 wells in the Austin Chalk Fields of Central Texas. Production
from these fields is derived primarily from the highly fractured Austin Chalk formation using
horizontal drilling techniques. A subsidiary of Torch operates two wells in the Austin Chalk
Fields. The remaining wells in the Austin Chalk Fields are operated by third parties.
Oil and Gas Reserves
The pre-tax future net cash flows, discounted at 10%, attributable to the net proved reserves of
the Net Profits Interests was approximately $20.4 million as of December 31, 2008. Future cash
flows attributable to the Robinson’s Bend Field’s Net Profits Interest were estimated to have no
value to the Trust as of December 31, 2008. See Note 7 of the audited financial statements for
additional information concerning the net proved reserves of the Net Profits Interests.
12
Torch Energy Royalty Trust
As disclosed by the Trust in its Annual Report on Form 10-K for the year ended December 31, 2007
and in this Annual Report, on December 30, 2008, Trust Venture Company, LLC filed and subsequently
served a derivative lawsuit against Constellation Energy Partners LLC in Alabama state court
alleging counts, in accordance with, inter alia, Section 3816 of the Delaware Statutory Trust Act,
codified at 12 Del. C. 3816(a), to (i) recover any overcharges to the Trust by Constellation Energy
Partners LLC related to administrative costs, water gathering, treating and disposal costs and
severance taxes and (ii) require Constellation Energy Partners LLC to provide an accounting of its
revenues and expenses as required under the Net Overriding Royalty Conveyance filed of record in
Tuscaloosa County, Alabama. There can be no assurance as to the outcome or result of this
derivative lawsuit or the effect of the derivative lawsuit may have on the calculation of the
reserve reports and the estimated reserve quantities.
Well Count and Acreage Summary
The following table shows, as of December 31, 2008, the gross and net interest in oil and gas wells
for the Underlying Properties:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Gas Wells |
|
Oil Wells |
| |
|
Gross |
|
Net |
|
Gross |
|
Net |
Chalkley Field |
|
|
6 |
|
|
|
.8 |
|
|
|
— |
|
|
|
— |
|
Robinson’s Bend Field |
|
|
426 |
|
|
|
170.4 |
|
|
|
— |
|
|
|
— |
|
Cotton Valley Fields |
|
|
73 |
|
|
|
25.4 |
|
|
|
— |
|
|
|
— |
|
Austin Chalk Fields |
|
|
33 |
|
|
|
5.7 |
|
|
|
42 |
|
|
|
7.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
538 |
|
|
|
202.3 |
|
|
|
42 |
|
|
|
7.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table shows the gross and net acreage for the Underlying Properties as of December
31, 2008. A gross acre in the following table refers to the number of acres in which a working
interest is owned directly by the Trust. The number of net acres is the sum of the fractional
ownership of working interests owned directly by the Trust in the gross acres expressed as a whole
number and percentages thereof. A net acre is deemed to exist when the sum of fractional ownership
of working interests in gross acres equals one.
| |
|
|
|
|
|
|
|
|
| |
|
Acreage |
| |
|
Gross |
|
Net |
Chalkley Field |
|
|
2,152 |
|
|
|
348 |
|
Robinson’s Bend Field |
|
|
33,404 |
|
|
|
14,288 |
|
Cotton Valley Fields |
|
|
4,411 |
|
|
|
2,606 |
|
Austin Chalk Fields |
|
|
28,364 |
|
|
|
5,090 |
|
|
|
|
|
|
|
|
|
|
Total |
|
|
68,331 |
|
|
|
22,332 |
|
|
|
|
|
|
|
|
|
|
Drilling Activity
The following table sets forth the results of drilling activity for the Underlying Properties
during the three years ended December 31, 2008. Gross wells, as it applies to wells in the
following table, refers to the number of wells in which a working interest is owned directly by the
owners of the Underlying Properties and Infill Wells (“Gross Well”). A net well (“Net Well”)
represents the sum of the fractional ownership working interests in the Gross Wells expressed as
whole numbers and percentages thereof.
All of the wells shown below represent Infill Wells drilled on the Underlying Properties in the
Chalkley Field, Cotton Valley Fields and the Robinson’s Bend Field. The Net Profits Interest
entitle the Trust to 20% of Infill Well Net Proceeds which is defined as gross proceeds from the
sale of production attributable to Infill Wells less all production, drilling and completion costs
of such wells. Infill Well Net Proceeds are calculated by aggregating the proceeds and costs from
Infill Wells on a state by state basis.
13
Torch Energy Royalty Trust
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Development Wells — Chalkley Field (a) |
| |
|
Gross |
|
Net |
| |
|
Productive |
|
Dry Holes |
|
Total |
|
Productive |
|
Dry Holes |
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
2007 |
|
|
1 |
|
|
|
0 |
|
|
|
1 |
|
|
|
0.03 |
|
|
|
0 |
|
|
|
0.03 |
|
2006 |
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Development Wells — Cotton Valley Fields |
| |
|
Gross |
|
Net |
| |
|
Productive |
|
Dry Holes |
|
Total |
|
Productive |
|
Dry Holes |
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
1 |
|
|
|
0 |
|
|
|
1 |
|
|
|
0.2 |
|
|
|
0 |
|
|
|
0.2 |
|
2007 |
|
|
2 |
|
|
|
0 |
|
|
|
2 |
|
|
|
0.3 |
|
|
|
0 |
|
|
|
0.3 |
|
2006 |
|
|
4 |
|
|
|
0 |
|
|
|
4 |
|
|
|
0.6 |
|
|
|
0 |
|
|
|
0.6 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Development Wells — Robinson’s Bend Field (b) |
| |
|
Gross |
|
Net |
| |
|
Productive |
|
Dry Holes |
|
Total |
|
Productive |
|
Dry Holes |
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
3 |
|
|
|
0 |
|
|
|
3 |
|
|
|
0.2 |
|
|
|
0 |
|
|
|
0.2 |
|
2007 |
|
|
8 |
|
|
|
0 |
|
|
|
8 |
|
|
|
1.2 |
|
|
|
0 |
|
|
|
1.2 |
|
2006 |
|
|
12 |
|
|
|
0 |
|
|
|
12 |
|
|
|
0.6 |
|
|
|
0 |
|
|
|
0.6 |
|
|
|
|
| (a) |
|
The Trust has not received cash distributions with respect to the Infill Well drilled in the
Chalkley Field. As of December 31, 2008, costs and expenses exceeded gross revenues by
approximately $2.5 million (before interest). The Trust will receive no payments for distributions
with respect to the Chalkley Field Infill Well until the future proceeds exceed the sum of future
costs and expenses and the cumulative excess of such costs and expenses including interest. |
| |
| (b) |
|
The Trust has not received cash distributions with respect to the Infill Wells drilled in the
Robinson’s Bend Field. As of December 31, 2008 (pertaining to sales through September 30, 2008),
costs and expenses exceeded gross revenues by approximately $1.3 million. The Trust will receive
no payments for distributions with respect to the Robinson’s Bend Infill Wells until the future
proceeds exceed the sum of future costs and expenses and the cumulative excess of such costs and
expenses including interest. |
There was no other drilling activity on the Underlying Properties during the three years ended
December 31, 2008.
Oil and Gas Sales Prices and Production Costs
The following table sets forth, for the Underlying Properties, the net production volumes of gas
and oil, the weighted average lifting cost and taxes per Mcfe deducted in calculating Net Proceeds
and the weighted average sales price per Mcf of gas and Bbl of oil for production attributable to
Net Proceeds received by the Trust during the years ended December 31, 2008, 2007 and 2006 (derived
from production during the twelve months ended September 30, 2008, 2007 and 2006, respectively).
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Chalkley, Cotton Valley And Austin Chalk Fields |
| |
|
2008 |
|
2007 |
|
2006 |
Production: |
|
|
|
|
|
|
|
|
|
|
|
|
Gas (MMcf) |
|
|
1,544 |
|
|
|
1,811 |
|
|
|
1,955 |
|
Oil (Mbbl) |
|
|
14 |
|
|
|
15 |
|
|
|
19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average lifting cost per Mcfe |
|
$ |
.92 |
|
|
$ |
1.15 |
|
|
$ |
1.01 |
|
Weighted average taxes on production per Mcfe |
|
$ |
.47 |
|
|
$ |
.39 |
|
|
$ |
.42 |
|
Weighted average sales price (a) |
|
|
|
|
|
|
|
|
|
|
|
|
Gas ($/Mcf) |
|
$ |
5.51 |
|
|
$ |
4.29 |
|
|
$ |
5.27 |
|
Oil ($/Bbl) |
|
$ |
95.11 |
|
|
$ |
57.51 |
|
|
$ |
58.56 |
|
14
Torch Energy Royalty Trust
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Robinson’s Bend Field |
| |
|
2008 |
|
2007 |
|
2006 |
Production: |
|
|
|
|
|
|
|
|
|
|
|
|
Gas (MMcf) |
|
|
1,579 |
|
|
|
1,667 |
|
|
|
1,762 |
|
Oil (Mbbl) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average lifting cost per Mcfe |
|
$ |
4.19 |
|
|
$ |
3.59 |
|
|
$ |
3.43 |
|
Weighted average taxes on production per Mcfe |
|
$ |
.47 |
|
|
$ |
.34 |
|
|
$ |
.45 |
|
Weighted average sales price (a) |
|
|
|
|
|
|
|
|
|
|
|
|
Gas ($/Mcf) |
|
$ |
4.85 |
|
|
$ |
3.83 |
|
|
$ |
4.71 |
|
Oil ($/Bbl) |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
|
|
| (a) |
|
Average sales prices are reflective of gas prices received by the Trust less certain
gathering, treating and transportation charges. |
Item 3. Legal Proceedings
On October 16, 2008, Trust Venture Company, LLC and Wilmington Trust Company, solely in its
capacity as Trustee for the Torch Energy Royalty Trust, (together, “Plaintiffs”) filed a petition
against Torch Royalty Company, Torch E&P Company, and Constellation Energy Partners LLC
(collectively, “Defendants”) in the District Court of Harris County, Texas. The petition sought to
vacate the arbitration award issued by the JAMS Panel in Defendants’ favor on July 18, 2008 in the
arbitration captioned Torch Royalty Co., et al. v. Wilmington Trust Co., et al., JAMS Reference No.
13100017310. See Item 1. Business — General for a description of the arbitration.
Defendants filed a motion to dismiss the Plaintiffs’ petition and to confirm the arbitration award.
On or about December 10, 2008, the Court entered an Order dismissing the petition and granting the
Defendants’ motion to confirm the arbitration award.
On December 22, 2008, the Trustee received a demand letter from Trust Venture Company, LLC with
respect to certain enumerated costs — including administrative costs and costs for water gathering,
treating and disposal — that are deducted by the working interest owners of the Underlying
Properties from the Net Profit Interests before remitting the Net Proceeds to the Trustee and the
Trust. Trust Venture Company, LLC has concluded that the Trust has been overcharged (and continues
to be overcharged) by the working interest owners of certain of the Underlying Properties and that
these overcharges have damaged the Trust (and as a result, all of the Trust’s Unitholders). In
addition, Trust Venture Company, LLC asserts that the working interest owners have failed to
provide the required accountings as set forth in the Conveyances and that the Trust may request the
court to require the working interest owners to provide such an accounting. Trust Venture Company,
LLC requested that the Trustee either institute legal action against the working interest owners,
or authorize Trust Venture Company, LLC to commence a derivative action against the current working
interest owner of the Alabama property in accordance with, inter alia, Section 3816 of the Delaware
Statutory Trust Act, codified at 12 Del. C. 3816(a), to recover all overcharges related to
administrative costs, water gathering, treating and disposal costs and all overcharges reflected in
the accounting. The Trustee responded on December 22, 2008 to Trust Venture Company, LLC with a
request for additional information which it has now received. The Trustee carefully considered
Trust Venture Company, LLC’s demand letter, and concluded, in the reasoned exercise of its business
judgment, that it is in the best interest of the Trust and all Unitholders to authorize Trust
Venture Company, LLC to commence a derivative action and provided its authorization as of December
30, 2008.
As disclosed by the Trust in its Annual Report on Form 10-K for the year ended December 31, 2007
(“2007 Annual Report”), Trust Venture intended to commence a derivative action against
Constellation Energy Partners LLC, the working interest owners of certain oil and gas fields
located in Alabama, in accordance with, inter alia, Section 3816 of the Delaware Statutory Trust
Act, codified at 12 Del. C. 3816(a), to (i) recover any overcharges to the Trust by Constellation
Energy Partners LLC related to administrative costs, water gathering, treating and disposal costs
and severance taxes and (ii) require Constellation Energy Partners LLC to provide an accounting of
its revenues and expenses as required under the Net Overriding Royalty Conveyance filed of record
in Tuscaloosa County, Alabama. On December 30, 2008, Trust Venture filed and subsequently served a
derivative lawsuit against Constellation Energy Partners LLC in Alabama state court alleging such
overcharges, challenging the calculation of the Net Profits Interests under the conveyances that
were used to transfer the net profits interests in each state, and demanding an accounting of
Constellation Energy Partners LLC’s revenues and expenses. In response to the derivative lawsuit,
on
February 9, 2009, Constellation Energy Partners LLC filed in Alabama state court a motion to
dismiss such lawsuit without prejudice in favor of arbitration in Texas on various grounds,
including Trust Venture’s alleged lack of standing and Trust Venture’s alleged failure to comply
with certain contractual agreements.
15
Torch Energy Royalty Trust
The Alabama state court denied Constellation Energy Partners
LLC’s motion to dismiss on February 25, 2009, and so the Alabama derivative action is proceeding
against Constellation Energy Partners LLC.
On February 12, 2009, the Trustee received a certified copy of a demand for arbitration dated
February 9, 2009 by Constellation Energy Partners LLC before JAMS in Texas (the “Demand Notice”)
seeking a declaratory judgment that Constellation Energy Partners LLC (i) correctly calculated and
paid the Net Profits Interests payments due to the Trust, (ii) correctly charged the Trust for
certain well accounting services and severance taxes, and (iii) has complied with its contractual
reporting requirements due to the Trust. In the Demand Notice, Constellation Energy Partners LLC
claimed that, because the Trust authorized Trust Venture to file the derivative lawsuit, “there
exists a judicable conflict between Constellation Energy Partners LLC and the Trust that is subject
to resolution by arbitration.”
On February 12, 2009, Trust Venture filed an emergency motion in Alabama state court to stay the
arbitration demanded by Constellation Energy Partners LLC until such time as the court issues a
judgment as to the enforceability of the arbitration agreement made by and between the Trust and
Constellation Energy Partners LLC. The court denied that motion on February 25, 2009. On March 9,
2009, the Trustee filed its own motion in the same Alabama state court seeking to intervene in the
derivative action for the limited purpose of moving for a stay of the Texas arbitration until
resolution of the derivative action. The Alabama state court heard oral argument on the Trustee’s
motion on March 25, 2009, and on April 1, 2009, the Alabama state court denied the Trustee’s motion
to stay the Texas arbitration and further denied Constellation Energy Partners LLC’s motion to stay
the Alabama state court derivative action. Subsequently, the Trustee filed a motion to dismiss or
stay the Texas arbitration with JAMS and the arbitration panel heard oral argument on April 10,
2009 and on April 13, 2009 granted the Trustee’s motion to stay the Texas arbitration proceedings
pending the outcome of the Alabama derivative action. The arbitration panel subsequently entered an
Order of Dismissal with respect to the Texas arbitration dated July 27, 2009. There can be no
assurance as to the outcome or result of the Alabama derivative litigation or that Constellation
Energy Partners LLC will not challenge the Order of Dismissal entered by the arbitration panel on
July 27, 2009 or file other arbitration claims. On August 21, 2009, the Alabama state court added
the Trust as a nominal plaintiff in the Alabama derivative action that is proceeding against
Constellation Energy Partners LLC.
Item 4. Submission of Matters to a Vote of Unitholders
The Trust received the affirmative vote of the Unitholders of more than 66 2/3% of the outstanding
Units to terminate the Trust at the meeting of Unitholders held on January 29, 2008. Upon
termination of the Trust, among other things, the Trustee is required to sell the Net Profits
Interests. Specifically, pursuant to Section 9.03(e) of the Trust Agreement if the property of the
Trust Estate (as defined in the Trust Agreement) has not been sold prior to the end of one calendar
year following the termination date, the Trustee, thereafter, must cause such assets to be sold at
public auction. As the Trust was terminated by a vote of the Unitholders on January 29, 2008, the
Trustee anticipates it will continue to consult with the Trust’s and Trustee’s financial and legal
advisors in preparing the sales process and obtaining the necessary information required for
disclosure regarding the units to carry out the sale requirement under Section 9.03(e). No
assurances can be given that the Trustee will be able to sell the Net Profits Interests, or the
price that will be distributed to Unitholders following such a sale. Such distributions could be
below the market value of the Units.
The Trust can give no assurances of the effect of the results of the affirmative vote to terminate
the Trust by the Unitholders on the continued listing of the units on the New York Stock Exchange
(NYSE) or any other national quotation system.
16
Torch Energy Royalty Trust
PART II
Item 5. Market for Registrant’s Units and Related Unitholder Matters
The Units are listed and traded on the New York Stock Exchange under the symbol “TRU.” At March
31, 2009 and November 20, 2009, there were 8,600,000 Units outstanding and approximately 198 and
188 Unitholders of record, respectively. The following table sets forth, for the periods
indicated, the high and low sales prices per Unit on the New York Stock Exchange (“NYSE”) and the
amount of quarterly cash distributions per Unit made by the Trust:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Cash |
| |
|
High |
|
Low |
|
Distributions |
Fiscal Year Ended December 31, 2007: |
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended March 31, 2007 |
|
$ |
7.30 |
|
|
$ |
6.16 |
|
|
$ |
.10 |
|
Quarter ended June 30, 2007 |
|
$ |
8.31 |
|
|
$ |
6.33 |
|
|
$ |
.10 |
|
Quarter ended September 30, 2007 |
|
$ |
10.00 |
|
|
$ |
7.11 |
|
|
$ |
.12 |
|
Quarter ended December 31, 2007 |
|
$ |
11.82 |
|
|
$ |
7.51 |
|
|
$ |
.16 |
|
Fiscal Year Ended December 31, 2008: |
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended March 31, 2008 |
|
$ |
10.91 |
|
|
$ |
8.47 |
|
|
$ |
.03 |
|
Quarter ended June 30, 2008 |
|
$ |
12.65 |
|
|
$ |
6.57 |
|
|
$ |
.00 |
|
Quarter ended September 30, 2008 |
|
$ |
9.74 |
|
|
$ |
1.63 |
|
|
$ |
.00 |
|
Quarter ended December 31, 2008 |
|
$ |
4.18 |
|
|
$ |
1.01 |
|
|
$ |
.00 |
|
Interim Period: |
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended March 31, 2009 |
|
$ |
2.99 |
|
|
$ |
1.19 |
|
|
$ |
.00 |
|
Quarter ended June 30, 2009 |
|
$ |
4.80 |
|
|
$ |
1.44 |
|
|
$ |
.35 |
|
Quarter ended September 30, 2009 |
|
$ |
8.74 |
|
|
$ |
3.20 |
|
|
$ |
.00 |
|
On March 31, 2009, the high and low sales price per unit on the NYSE was $2.25 and $2.18,
respectively. On June 30, 2009, the high and low sales price per unit on the NYSE was $4.10 and
$3.90, respectively. On September 30, 2009, the high and low sales price per unit on the NYSE was
$7.24 and $6.83, respectively.
On November 19, 2009, the high and low sales price per unit on the NYSE was $6.76 and $6.60,
respectively.
Item 6. Selected Financial Data (In thousands, except per Unit amounts)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, |
| |
|
2008 |
|
2007 |
|
2006 |
|
2005 |
|
2004 |
Net profits income |
|
$ |
6,217 |
|
|
$ |
4,842 |
|
|
$ |
7,796 |
|
|
$ |
5,818 |
|
|
$ |
6,161 |
|
Distributable income |
|
$ |
3,162 |
|
|
$ |
4,133 |
|
|
$ |
7,262 |
|
|
$ |
5,601 |
|
|
$ |
5,657 |
|
Distributions declared |
|
$ |
258 |
|
|
$ |
4,102 |
|
|
$ |
7,250 |
|
|
$ |
5,590 |
|
|
$ |
5,728 |
|
Distributable income
per Unit |
|
$ |
0.37 |
|
|
$ |
0.48 |
|
|
$ |
0.84 |
|
|
$ |
0.65 |
|
|
$ |
0.66 |
|
Cash Reserve per Unit |
|
$ |
0.46 |
|
|
$ |
0.00 |
|
|
$ |
0.00 |
|
|
$ |
0.00 |
|
|
$ |
0.00 |
|
Distributions per Unit |
|
$ |
0.03 |
|
|
$ |
0.48 |
|
|
$ |
0.84 |
|
|
$ |
0.65 |
|
|
$ |
0.67 |
|
Total assets (at end of
period) |
|
$ |
19,623 |
|
|
$ |
16,694 |
|
|
$ |
18,386 |
|
|
$ |
21,675 |
|
|
$ |
23,801 |
|
Distributable income of the Trust consists of the excess of net profits income plus Infill Well Net
Proceeds and other income less general and administrative expenses and interest expense of the
Trust. The Trust recognizes net profits income during the period in which amounts are received by
the Trust.
17
Torch Energy Royalty Trust
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of
Operations
Results of Operations
Discussion of Years Ended December 31, 2008, 2007, and 2006
Because a modified cash basis of accounting is utilized by the Trust, Net Proceeds attributable to
the Underlying Properties for the years ended December 31, 2008, 2007 and 2006 are derived from
actual oil and gas production from October 1, 2007 through September 30, 2008, October 1, 2006
through September 30, 2007 and October 1, 2005 through September 30, 2006, respectively. The
following tables set forth oil and gas sales attributable to the Underlying Properties during the
three years ended December 31, 2008.
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Bbls of Oil |
| |
|
2008 |
|
2007 |
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Chalkley Field |
|
|
3,550 |
|
|
|
4,027 |
|
|
|
4,520 |
|
Robinson’s Bend Field |
|
|
— |
|
|
|
— |
|
|
|
— |
|
Cotton Valley Fields |
|
|
1,552 |
|
|
|
1,855 |
|
|
|
1,529 |
|
Austin Chalk Fields |
|
|
9,069 |
|
|
|
9,229 |
|
|
|
12,787 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
14,171 |
|
|
|
15,111 |
|
|
|
18,836 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Mcf of Gas |
| |
|
2008 |
|
2007 |
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Chalkley Field |
|
|
822,474 |
|
|
|
976,994 |
|
|
|
1,102,855 |
|
Robinson’s Bend Field |
|
|
1,579,276 |
|
|
|
1,666,553 |
|
|
|
1,761,754 |
|
Cotton Valley Fields |
|
|
580,232 |
|
|
|
643,745 |
|
|
|
664,283 |
|
Austin Chalk Fields |
|
|
140,911 |
|
|
|
190,591 |
|
|
|
187,423 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
3,122,893 |
|
|
|
3,477,883 |
|
|
|
3,716,315 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2008, net profits income was $6.2 million, as compared to $4.8
million and $7.8 million for the same periods in 2007 and 2006, respectively. The increase in net
profits income during 2008 as compared to 2007 is mainly due to higher average oil and gas prices
paid to the Trust in 2008. The decrease in net profits income during 2007 as compared to 2006 is
due to lower average oil and gas prices paid to the Trust in 2007 combined with payments received
by the Trust in 2006 with respect to the Robinson’s Bend Field.
Commencing with the second quarter of 2003 distribution (pertaining to the quarter ended March 31,
2003 production) lease operating expenses and capital expenditures have been deducted in
calculating Robinson’s Bend Net Proceeds. The Trust received no payments for distributions to
Unitholders with respect to the Robinson’s Bend Field during each of the years ended December 31,
2008 and 2007. The Trust received approximately $0.6 million in 2006 (pertaining to production
during the twelve month period ended September 30, 2006) for payments for distributions to
Unitholders with respect to the Robinson’s Bend Field.
The Robinson’s Bend Field Cumulative Deficit (pertaining to production as of September 30, 2008) is
approximately $42,000. Neither the Trust nor Unitholders are liable to pay such deficit. However,
the Trust will receive no payments with respect to the Robinson’s Bend Field until future proceeds
exceed the Robinson’s Bend Cumulative Deficit.
Gas production attributable to the Underlying Properties in the Chalkley, Cotton Valley and Austin
Chalk Fields was 1,543,617 Mcf, 1,811,330 Mcf and 1,954,561 Mcf in 2008, 2007 and 2006,
respectively. Gas
production attributable to the Underlying Properties in the Robinson’s Bend Field was 1,579,276
Mcf, 1,666,553 Mcf and 1,761,754 Mcf in 2008, 2007 and 2006, respectively. Gas production decreased
during
18
Torch Energy Royalty Trust
each of the years ended December 31, 2008 as a result of normal production declines. Oil
production attributable to the Underlying Properties for the year ended December 31, 2008 was
14,171 Bbls as compared to 15,111 Bbls and 18,836 Bbls for the same periods in 2007 and 2006,
respectively.
The average price used to calculate Net Proceeds for gas, before gathering, treating and
transportation deductions, during the year ended December 31, 2008 was $5.42 per MMBtu as compared
to $4.33 and $5.28 per MMBtu for the years ended December 31, 2007 and 2006, respectively. The
average price used to calculate Net Proceeds for oil during the years ended December 31, 2008, 2007
and 2006 was $95.11, $57.51 and $58.56 per Bbl, respectively.
Prior to the Trust’s termination on January 29, 2008, TEMI deducted the Price Differential and was
committed to pay a Minimum Price for gas. When TEMI paid a purchase price for gas based on the
Minimum Price, TEMI received Price Credits which it was entitled to deduct in determining the
purchase price when the Index Price for gas exceeded the Minimum Price. TEMI had not exercised its
right to discontinue the Minimum Price commitment and had no outstanding Price Credits on the
Termination Date. Additionally, if the Index Price for gas exceeded $2.10 per MMBtu, adjusted
annually for inflation ($2.30 per MMBtu, $2.26 per MMBtu and $2.22 per MMBtu for 2008, 2007 and
2006 production, respectively), TEMI deducted 50% of such excess in calculating the Net Proceeds
payable to the Trust.
Upon the Trust’s termination, the Working Interest Owners used the same pricing mechanisms
(including the Sharing Price and Minimum Price commitment mechanisms) in calculating Net Proceeds
due to the Trust. The Working Interest Owners also have the same annual option to discontinue the
Minimum Price commitment. As of December 31, 2008, the Working Interest Owners had no outstanding
Price Credits and had not exercised their right to discontinue the Minimum Price commitment. No
Price Credits were deducted in calculating the purchase price related to net profits income during
the three years ended December 31, 2008. The deduction of the Price Differential in connection
with the Sharing Price mechanism reduced Net Proceeds paid to the Trust during the years ended
December 31, 2008, 2007, and 2006 by $10.1 million, $7.1 million and $11.1 million, respectively.
During the years ended December 31, 2008, 2007 and 2006, the Trust was distributed approximately
$161,000, $400,000 and $516,000, respectively, of Infill Well Proceeds generated from Infill Wells
located in the Cotton Valley Fields.
Lease operating expenses and capital expenditures attributable to the Underlying Properties in the
Chalkley, Cotton Valley and Austin Chalk Fields deducted in calculating Trust distributions during
the years ended December 31, 2008, 2007 and 2006 totaled $2.5 million, $2.8 million and $3.0
million, respectively.
General and administrative expenses during the year ended December 31, 2008 were $3.3 million as
compared to $1.2 million and $1.0 million during each of the years ended December 31, 2007 and
2006, respectively. The increase in general and administrative expenses in 2008 as compared to 2007
is primarily due to legal fees incurred by the Trust during 2008 in connection with the arbitration
proceeding between the Trust and certain working interest owners of the Underlying Properties
relating to the proper calculation of the quarterly Net Profits Interests payments owed to
the Trust following the termination of the Trust. See Item 3. Legal Proceedings. The
increase in general and administrative expenses in 2007 as compared to 2006 is mainly due to an
increase during 2007 for legal fees in connection with the termination of the Trust and for
accounting and other service providers fees in connection with Sarbanes-Oxley Section 404
compliance. During each of the three years ended December 31, 2008, general and administrative
expenses
include costs pertaining to administrative services provided by Torch and the Trustee, legal fees,
accounting fees, reserve report preparation fees, and Unitholder report printing fees.
Pursuant to Section 3.07 of the Trust Agreement, the Trustee established a Cash Reserve following
the Trust’s termination in 2008 for the payment of actual, contingent and uncertain liabilities
associated with the
19
Torch Energy Royalty Trust
liquidation and winding down of the Trust and the Trust’s arbitration. During 2008, the Trust
received cash payments totaling $7.1 million (including $0.7 million paid to the Trust by a certain
working interest owner that is classified as restricted cash due to potential overpayment —
see note 6 to the audited financial statements) from the Working Interest Owners of the
Underlying Properties pertaining to net profits income attributable to production from the
Underlying Properties during the twelve months ended September 30, 2008. Of these cash receipts,
$6.1 million was allocated into the Cash Reserve. The Cash Reserve as of December 31, 2008 was
$4.0 million.
For the year ended December 31, 2008, distributable income was $3.2 million, or $0.37 per Unit, as
compared to $4.1 million, or $0.48 per Unit, and $7.3 million, or $0.84 per Unit, for the same
periods in 2007 and 2006, respectively. Total cash distributions of $0.3 million, or $0.03 per
Unit, were made during the year ended December 31, 2008 as compared to $4.1 million, or $0.48 per
Unit, and $7.3 million, or $0.84 per Unit, for the same periods in 2007 and 2006, respectively.
Net profits received by the Trust during the years ended December 31, 2008, 2007 and 2006, derived
from production sold during the twelve months ended September 30, 2008, 2007 and 2006,
respectively, was computed as shown in the following table (in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, |
|
| |
|
2008 |
|
|
2007 |
|
|
2006 |
|
| |
|
Chalkley,
Cotton |
|
|
|
|
|
|
|
|
|
|
Chalkley,
Cotton |
|
|
|
|
|
|
|
|
|
|
Chalkley,
Cotton |
|
|
|
|
|
|
|
| |
|
Valley and |
|
|
|
|
|
|
|
|
|
|
Valley and |
|
|
|
|
|
|
|
|
|
|
Valley and |
|
|
|
|
|
|
|
| |
|
Austin
Chalk |
|
|
Robinson’s
Bend |
|
|
|
|
|
|
Austin
Chalk |
|
|
Robinson’s
Bend |
|
|
|
|
|
|
Austin
Chalk |
|
|
Robinson’s
Bend |
|
|
|
|
| |
|
Fields |
|
|
Field |
|
|
Total |
|
|
Fields |
|
|
Field |
|
|
Total |
|
|
Fields |
|
|
Field |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil and gas revenues |
|
$ |
9,846 |
|
|
$ |
7,662 |
|
|
|
|
|
|
$ |
8,649 |
|
|
$ |
6,391 |
|
|
|
|
|
|
$ |
11,409 |
|
|
$ |
8,292 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease operating expenses
(including property tax) |
|
|
1,491 |
|
|
|
6,619 |
|
|
|
|
|
|
|
2,195 |
|
|
|
5,986 |
|
|
|
|
|
|
|
2,078 |
|
|
|
6,051 |
|
|
|
|
|
Severance tax |
|
|
771 |
|
|
|
743 |
|
|
|
|
|
|
|
741 |
|
|
|
568 |
|
|
|
|
|
|
|
877 |
|
|
|
797 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,262 |
|
|
|
7,362 |
|
|
|
|
|
|
|
2,936 |
|
|
|
6,554 |
|
|
|
|
|
|
|
2,955 |
|
|
|
6,848 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net proceeds before
capital expenditures |
|
|
7,584 |
|
|
|
300 |
|
|
|
|
|
|
|
5,713 |
|
|
|
(163 |
) |
|
|
|
|
|
|
8,454 |
|
|
|
1,444 |
|
|
|
|
|
Capital expenditures |
|
|
1,040 |
|
|
|
4 |
|
|
|
|
|
|
|
616 |
|
|
|
141 |
|
|
|
|
|
|
|
929 |
|
|
|
189 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,544 |
|
|
|
296 |
|
|
|
|
|
|
|
5,097 |
|
|
|
(304 |
) |
|
|
|
|
|
|
7,525 |
|
|
|
1,255 |
|
|
|
|
|
Cumulative Deficit |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
(763 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,544 |
|
|
|
296 |
|
|
|
|
|
|
|
5,097 |
|
|
|
(304 |
) |
|
|
|
|
|
|
7,525 |
|
|
|
492 |
|
|
|
|
|
Net profits percentage |
|
|
95 |
% |
|
|
— |
(a) |
|
|
|
|
|
|
95 |
% |
|
|
— |
(a) |
|
|
|
|
|
|
95 |
% |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net profits income |
|
$ |
6,217 |
|
|
$ |
— |
|
|
$ |
6,217 |
|
|
$ |
4,842 |
|
|
$ |
— |
|
|
$ |
4,842 |
|
|
$ |
7,149 |
|
|
$ |
647 |
|
|
$ |
7,796 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (a) |
|
With respect to the Robinson’s Bend Field, the Trust received no cash distributions during
each of the years ended December 31, 2008 and 2007 (pertaining to production during the twelve
months ended September 30, 2008 and 2007, respectively.) |
Critical Accounting Policies
Reserve Estimates
The proved reserves of the Trust are estimated quantities of oil and gas which geological and
engineering data demonstrate, with reasonable certainty, to be recoverable in future years from
known reservoirs under existing economic and operating conditions. The accuracy of any reserve
estimate is a function of the quality of available data, engineering and geological interpretation,
and judgment. For example, estimates are made regarding the amount and timing of future operating
costs, production volumes and severance taxes, all of
20
Torch Energy Royalty Trust
which may in fact vary considerably from actual results. In addition, as prices and cost levels
change from year to year, the estimate of proved reserves also change. Any variance in these
assumptions could materially affect the estimated quantity and value of the Trust’s reserves.
Independent petroleum engineering firms are engaged to estimate the Trust’s proved hydrocarbon
liquid and gas reserves.
As disclosed by the Trust in its Annual Report on Form 10-K for the year ended December 31, 2007
and in this Annual Report, on December 30, 2008, Trust Venture Company, LLC filed and subsequently
served a derivative lawsuit against Constellation Energy Partners LLC in Alabama state court
alleging counts, in accordance with, inter alia, Section 3816 of the Delaware Statutory Trust Act,
codified at 12 Del. C. 3816(a), to (i) recover any overcharges to the Trust by Constellation Energy
Partners LLC related to administrative costs, water gathering, treating and disposal costs and
severance taxes and (ii) require Constellation Energy Partners LLC to provide an accounting of its
revenues and expenses as required under the Net Overriding Royalty Conveyance filed of record in
Tuscaloosa County, Alabama. There can be no assurance as to the outcome or result of this
derivative lawsuit or the effect of the derivative lawsuit may have on the calculation of the
reserve reports and the estimated reserve quantities.
Modified Cash Basis
The financial statements of the Trust are prepared on a modified cash basis although financial
statements filed with the Securities and Exchange Commission are normally required to be prepared
in accordance with accounting principles generally accepted in the United States. Since the
operations of the Trust are limited to the distribution of income from the Net Profits Interests,
the item of primary importance to the reader of the financial statements of the Trust is the amount
of cash distributions to the Unitholders for the period reported.
Item 7a. 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 during the period from the inception of the Trust to
the Trust’s termination on January 29, 2008 was sold pursuant to a Purchase Contract between TRC,
Velasco, and TEMI. The Purchase Contract expired upon the Trust’s termination. Pursuant to the
Purchase Contract, TEMI was obligated to purchase all net production attributable to the Underlying
Properties for an Index Price, less certain other charges, which were calculated monthly. The
Index Price calculation was based on market prices of oil and gas and therefore was subject to
commodity price risk. The Purchase Contract also provided a Minimum Price paid by TEMI for gas.
The Minimum Price was adjusted annually for inflation and was $1.87, $1.83 and $1.80 per MMBtu for
2008, 2007 and 2006, respectively. When TEMI paid a purchase price based on the Minimum Price, it
received Price Credits equal to the difference between the Index Price and the Minimum Price that
TEMI was entitled to deduct when the Index Price exceeded the
Minimum Price. Additionally, if the Index Price exceeded the Sharing Price, TEMI was entitled to
deduct such excess, the Price Differential. The Sharing Price was $2.30, $2.26 and $2.22 per MMBtu
in 2008, 2007 and 2006, respectively. TEMI had the annual option to discontinue the Minimum Price
commitment. However, if TEMI discontinued the Minimum Price commitment, it would no longer be
entitled to deduct the Price Differential and would forfeit all accrued Price Credits. TEMI did
not exercise its right to discontinue the Minimum Price commitment and had no outstanding Price
Credits on the Termination Date.
Upon the Trust’s termination, the Working Interest Owners calculated Net Proceeds owed to the Trust
utilizing the same pricing mechanisms (including the Sharing Price and Minimum Price commitment
mechanisms) as the terminated Purchase Contract. See Item 1. Business and Item 1A. Risk
Factors relating
21
Torch Energy Royalty Trust
to the termination of the Trust and the arbitration proceeding relating to the proper calculation
of the Net Profits Interests payments owed to the Trust following termination of the Trust and the
current Alabama litigation. The Working Interest Owners also have the same annual option to
discontinue the Minimum Price commitment. However, if the Working Interest Owners discontinue the
Minimum Price commitment, they will no longer be entitled to deduct the Price Differential and will
forfeit all accrued Price Credits. The Working Interest Owners have not exercised their option to
discontinue the Minimum Price commitment and have no outstanding Price Credits as of December 31,
2008.
Item 8. Financial Statements and Supplementary Data
INDEX TO FINANCIAL STATEMENTS
| |
|
|
|
|
| |
|
Page |
|
| |
|
|
|
23 |
|
|
|
|
24 |
|
|
|
|
25 |
|
|
|
|
26 |
|
Notes to Financial Statements |
|
|
27 |
|
22
Torch Energy Royalty Trust
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Wilmington Trust Company
as Trustee of Torch Energy Royalty Trust
and to the Unitholders:
We have audited the accompanying statements of assets, liabilities and trust corpus of the Torch
Energy Royalty Trust (the “Trust”) as of December 31, 2008 and 2007, and the related statements of
distributable income and changes in trust corpus for each of the three years in the period ended
December 31, 2008. These financial statements are the responsibility of the Trust. Our
responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by the Trust, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
We were not engaged to examine the Trustee’s assertion about the effectiveness of the Trust’s
internal control over financial reporting as of December 31, 2008 included in the accompanying
annual report on Form 10-K and, accordingly we do not express an opinion thereon.
As described in Note 2, the accompanying financial statements are prepared on a modified cash basis
of accounting, which is a comprehensive basis of accounting other than accounting principles
generally accepted in the United States of America.
In our opinion, the financial statements referred to above present fairly, in all material
respects, the financial position of the Trust as of December 31, 2008 and 2007, and the results of
its operations and its cash flows for each of the three years in the period ended December 31,
2008, in conformity with the basis of accounting described in Note 2.
As discussed in Note 1 to the financial statements, the Trust terminated effective January 29,
2008. Certain responsibilities of the Trustee, including those associated with selling the assets
of the Trust, are also described in Note 1.
| |
|
|
|
|
| |
|
|
| /s/ UHY LLP
|
|
|
| Houston, Texas |
|
|
| November 25, 2009 |
|
|
23
Torch Energy Royalty Trust
STATEMENTS OF ASSETS, LIABILITIES AND TRUST CORPUS
(In Thousands)
| |
|
|
|
|
|
|
|
|
| |
|
December 31, |
|
|
December 31, |
|
| |
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
Cash |
|
$ |
3,963 |
|
|
$ |
55 |
|
Restricted cash |
|
|
730 |
|
|
|
— |
|
Net profits interests in oil and gas properties (net of accumulated
amortization of $165,670 and $163,961 at December 31, 2008
and 2007, respectively) |
|
|
14,930 |
|
|
|
16,639 |
|
|
|
|
|
|
|
|
|
|
$ |
19,623 |
|
|
$ |
16,694 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND TRUST CORPUS
|
|
|
|
|
|
|
|
|
|
Trust expense payable |
|
$ |
1,979 |
|
|
$ |
245 |
|
Trust corpus |
|
|
17,644 |
|
|
|
16,449 |
|
|
|
|
|
|
|
|
|
|
$ |
19,623 |
|
|
$ |
16,694 |
|
|
|
|
|
|
|
|
The accompanying notes to financial statements
are an integral part of these statements.
24
Torch Energy Royalty Trust
STATEMENTS OF DISTRIBUTABLE INCOME
(In thousands, except per Unit amounts)
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, |
|
| |
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net profits income |
|
$ |
6,217 |
|
|
$ |
4,842 |
|
|
$ |
7,796 |
|
Infill Well Net Proceeds |
|
|
161 |
|
|
|
400 |
|
|
|
516 |
|
Other income |
|
|
37 |
|
|
|
54 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,415 |
|
|
|
5,296 |
|
|
|
8,312 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses |
|
|
3,253 |
|
|
|
1,163 |
|
|
|
965 |
|
Interest Expense |
|
|
— |
|
|
|
— |
|
|
|
85 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,253 |
|
|
|
1,163 |
|
|
|
1,050 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributable income |
|
$ |
3,162 |
|
|
$ |
4,133 |
|
|
$ |
7,262 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributable income per Unit (8,600 Units) |
|
$ |
0.37 |
|
|
$ |
0.48 |
|
|
$ |
0.84 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions per Unit |
|
$ |
0.03 |
|
|
$ |
0.48 |
|
|
$ |
0.84 |
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes to financial statements
are an integral part of these statements.
25
Torch Energy Royalty Trust
STATEMENTS OF CHANGES IN TRUST CORPUS
(In thousands)
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, |
|
| |
|
2008 |
|
|
2007 |
|
|
2006 |
|
Trust corpus, beginning of year |
|
$ |
16,449 |
|
|
$ |
18,164 |
|
|
$ |
21,441 |
|
Amortization of Net Profits Interests |
|
|
(1,709 |
) |
|
|
(1,746 |
) |
|
|
(3,289 |
) |
Distributable income |
|
|
3,162 |
|
|
|
4,133 |
|
|
|
7,262 |
|
Distributions to Unitholders |
|
|
(258 |
) |
|
|
(4,102 |
) |
|
|
(7,250 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trust Corpus, end of year |
|
$ |
17,644 |
|
|
$ |
16,449 |
|
|
$ |
18,164 |
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes to financial statements
are an integral part of these statements.
26
Torch Energy Royalty Trust
Notes to the Financial Statements
1. Nature of Operations
The Torch Energy Royalty Trust (“Trust”) was formed effective October 1, 1993, pursuant to a trust
agreement (“Trust Agreement”) among Wilmington Trust Company, not in its individual capacity but
solely as trustee of the Trust (“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. The Trust was formed under the Delaware
statutory trust act (formerly known as the Delaware business trust act). TRC and Velasco created
net profits interests (“Net Profits Interests”) and conveyed such interests to Torch. TRC and
Velasco created net profits interests (“Net Profits Interests”) which burden certain oil and gas
properties (“Underlying Properties”) and 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 in November 1993. The current working interest
owners of the Underlying Properties are Torch Royalty Company, Torch E&P Company, Samson Lone Star
Limited Partnership and Constellation Energy Partners LLC (“Working Interest Owners”).
The Trust has no officers, directors or employees. The Trust and Trustee rely solely on receiving
accurate information, reports and other representations from Torch and other service providers to
the Trust. 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.
The Trust received the affirmative vote of the Unitholders of more than 66 2/3% of the outstanding
Units to terminate the Trust at the meeting of Unitholders held on January 29, 2008. Upon
termination of the Trust, among other things, the Trustee is required to sell the Net Profits
Interests. Specifically, pursuant to Section 9.03(e) of the Trust Agreement if the property of the
Trust Estate (as defined in the Trust Agreement) has not been sold prior to the end of one calendar
year following the termination date, the Trustee, thereafter, must cause such assets to be sold at
public auction. As the Trust was terminated by a vote of the Unitholders on January 29, 2008 (the
“Termination Date”), the Trustee anticipates it will continue to consult with the Trust’s and
Trustee’s financial and legal advisors in preparing the sales process and obtaining the necessary
information required for disclosure regarding the Units to carry out the sale requirement under
Section 9.03(e). Therefore, after termination of the Trust, the remaining assets of the Trust will
be sold, and the proceeds therefrom (after expenses) will be distributed to the unitholders
(“Unitholders”). The sole purpose of the Trust is to hold the Net Profits Interests, to receive
payments from TRC and Velasco, and to make payments to Unitholders. The Trust does not conduct any
business activity.
No assurances can be given that the Trustee will be able to sell the Net Profits Interests, or the
price that will be distributed to Unitholders following such a sale. Such distributions could be
below the market value of the Units. The Trust can give no assurances of the effect of the results
of the affirmative vote to terminate the Trust by the Unitholders on the continued listing of the
Units on the New York Stock Exchange (NYSE) or any other national quotation system.
TRC and Velasco receive payments reflecting the proceeds of oil and gas sold and aggregate these
payments, deduct applicable costs and make payments to the Trustee each quarter for the amounts due
to the Trust. Prior to the Trust’s termination on January 29, 2008, Unitholders received quarterly
cash distributions relating to oil and gas produced and sold from the Underlying Properties.
Pursuant to Section 3.07 of the Trust Agreement, the Trustee established a cash reserve (“Cash
Reserve”) in 2008
following the Trust’s termination. See Note 4 (Distributions and Income Computations) of
the Trust’s financial statements for additional information regarding cash distributions in 2008
and the Cash Reserve.
27
Torch Energy Royalty Trust
Because no additional properties will be contributed to the Trust, the assets of the Trust
deplete over time and a portion of each cash distribution made by the Trust is analogous to a
return of capital.
The only assets of the Trust, other than cash, the cash reserve account and temporary investments
being held for the payment of actual, contingent and uncertain liabilities and for distribution to
Unitholders, are the Net Profits Interests. Under the Trust Agreement, the Trustee receives the
payments attributable to the Net Profits Interests and pays all expenses, liabilities and
obligations of the Trust. The Trustee has the discretion to establish a cash reserve for the
payment of any liability that is contingent or uncertain in amount or that otherwise is not
currently due and payable. The Trustee is entitled to cause the Trust to borrow money to pay
expenses, liabilities and obligations that cannot be paid out of cash held by the Trust. The
Trustee is entitled to cause the Trust to borrow from any source, including from the entity serving
as Trustee, provided that the entity serving as Trustee shall not be obligated to lend to the
Trust. To secure payment of any such indebtedness (including any indebtedness to the Trustee), the
Trustee is authorized to (i) mortgage and otherwise encumber the entire Trust estate or any portion
thereof; (ii) carve out and convey production payments; (iii) include all terms, powers, remedies,
covenants and provisions it deems necessary or advisable, including confession of judgment and the
power of sale with or without judicial proceedings; and (iv) provide for the exercise of those and
other remedies available to a secured lender in the event of a default on such loan. The terms of
such indebtedness and security interest, if funds were loaned by the Trustee, must be similar to
the terms which the Trustee would grant to a similarly situated commercial customer with whom it
did not have a fiduciary relationship, and the Trustee shall be entitled to enforce its rights with
respect to any such indebtedness and security interest as if it were not then serving as Trustee.
The Trustee is authorized and directed to sell and convey the Net Profits Interests without
Unitholder approval in certain instances as described in the Trust Agreement, including upon
termination of the Trust. The Trustee is empowered by the Trust Agreement to employ consultants,
legal and financial advisors and agents (including Torch) and to make payments of all fees for
services or expenses out of the assets of the Trust.
2. Basis of Accounting and Significant Accounting Policies
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 accepted accounting
principles generally accepted in the United States of America (“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 years ended December 31, 2008, 2007 and 2006 are derived from oil and gas production sold during the
twelve-month periods ended September 30, 2008, 2007 and 2006, 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 such impairment was recorded during the three years ended December 31, 2008. |
28
Torch Energy Royalty Trust
| • |
|
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. |
Restricted cash represents monies paid to the Trust by a working interest owner of the Underlying
Properties that may represent a potential overpayment pertaining to oil and gas sales from certain
Infill Wells during periods subsequent to the Trust’s termination.
3. Federal Income Taxes and Texas State Margin Tax
Tax counsel has advised the Trust and Trustee 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 business
entity. 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 and deductions from
such payments are allocated to the Unitholders of record on such date.
In May 2006, the State of Texas passed legislation to implement a new margin tax at a rate of 1% to
be imposed generally on federal gross revenues (up to 70%), as apportioned to Texas less certain
costs and deductions, as specifically set forth in the new legislation. The effective date of the
new legislation is January 1, 2008, but the tax generally will be imposed on revenues generated in
2007 and thereafter (earlier for certain fiscal year taxpayers). Entities subject to tax generally
include trusts unless otherwise exempt, and most other types of entities having limited liability
protection. Trusts that meet certain statutory requirements are generally exempt from the margin
tax as “passive entities.”
Since the Trust is exempt from the margin tax at the Trust level as a passive entity, each
Unitholder that is a taxable entity would generally include its share of the Trust’s revenue in its
margin tax computation. This revenue would be sourced to Texas under Texas Comptroller guidance
that provides such income is sourced according to the principal place of business of the Trust,
which is Texas.
4. Distributions and Income Computations
Each quarter the amount of cash available for distribution to Unitholders (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 by the Trustee during such quarter in the Cash Reserve established for the payment of
actual, contingent and uncertain liabilities of the Trust. Based on the payment procedures
relating to the Net Profits Interest, 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
29
Torch Energy Royalty Trust
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 Trust distributes the Quarterly Distribution Amount within approximately 10
days after the record date to each person who was a Unitholder of record on the associated record
date.
On March 10, 2008, the Trust paid a 3.0 cents per Unit cash distribution to Unitholders of Record
on February 29, 2008. This cash distribution was attributable to the fourth quarter 2007 production
from the Underlying Properties. This cash distribution was reduced by $1.0 million for monies
allocated to the Cash Reserve. The Trust made no additional cash distributions to Unitholders
during the year ended December 31, 2008.
In June 2008, the Trust received cash payments totaling $1,660,173 from the Working Interest Owners
mainly pertaining to Underlying Property production during the first quarter of 2008. Such
payments related to periods prior to the Termination Date of the Trust on January 29, 2008 and the
post termination period of the first quarter of 2008. The Working Interest Owners were required to
deposit all proceeds of production following the Termination Date of the Trust on January 29, 2008
payable to the Trust or the Louisiana Trust attributable to the Conveyances into a non-interest
bearing account (the “Trust Account”). Due to the fact that the Net Profits Interests were not
sold or a definitive agreement for sale thereof was not entered into prior to the 150th day
following the Termination Date of the Trust (i.e., June 27, 2008), the Working Interest Owners paid
all amounts deposited in the Trust Account to the Trust and all amounts attributable to the
Conveyances thereafter payable to the Trust are required to be paid to the Trust and the Louisiana
Trust in accordance with the terms of such Conveyances. All of the $1,660,173 cash payment was
allocated to the Cash Reserve.
During the year ended December 31, 2008, the Trust received cash payments totaling $7.1 million
(including $0.7 million paid to the Trust by a certain working interest owner that is classified as
restricted cash due to potential overpayment — see note 6 to the financial statements)
from the Working Interest Owners for net profits income pertaining to production from the
Underlying Properties during the twelve months ended September 30, 2008. Of these cash receipts,
$6.1 million was allocated into the Cash Reserve. As of December 31, 2008 the Cash Reserve was
$4.0 million.
On May 22, 2009, the Trust announced a cash distribution of 35.0 cents per Unit, payable on June
10, 2009 to Unitholders of record on June 1, 2009. A significant amount of this cash distribution
was attributable to the release of a portion of the Cash Reserve, totaling $2.4 million or 27 cents
per Unit. Also included in this cash distribution were Net Proceeds pertaining to Underlying
Property production during the quarter ended March 31, 2009 totaling $0.6 million, or 8.0 cents per
Unit.
5. Related Party Transactions
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”). Upon termination of the Trust, the Purchase Contract expired and the Working Interest
Owners calculate the Net Proceeds owed to the Trust utilizing the same pricing mechanisms
(including the sharing price and minimum price commitment mechanisms) as the expired Purchase
Contract. The continuation of the sharing price and minimum price terms and conditions of the
Purchase Contract terms was the subject of an arbitration and the Trust has assumed the
applicability of such terms for purpose of this report. See Item 1. Business, Item 1A.
Risk Factors and Item 3. Legal Proceedings regarding developments concerning the termination of the
Trust and arbitration with respect to certain terms and conditions of the Purchase Contract
continuing after the termination of the Trust.
30
Torch Energy Royalty Trust
Marketing Arrangements and Price Sharing
In connection with the formation of the Trust, TRC, Velasco and TEMI entered into the Purchase
Contract which expired on the Termination Date. Under the Purchase Contract, TEMI was 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 were
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 sold production.
The Purchase Contract also provided that TEMI paid a minimum price (“Minimum Price”) for gas
production. The Minimum Price was adjusted annually for inflation and was $1.87, $1.83 and $1.80
per MMBtu for 2008, 2007 and 2006, respectively. When TEMI paid a purchase price based on the
Minimum Price it received price credits (“Price Credits”), equal to the difference between the
Index Price and the Minimum Price, that it was entitled to deduct in determining the purchase price
when the Index Price for gas exceeded the Minimum Price. In addition, if the Index Price for gas
exceeded the sharing price, which was adjusted annually for inflation (“Sharing Price”), TEMI was
entitled to deduct 50% of such excess (“Price Differential”) in determining the purchase price.
The Sharing Price was $2.30, $2.26 and $2.22 per MMBtu in 2008, 2007 and 2006, respectively. TEMI
had an annual option to discontinue the Minimum Price commitment. However, if TEMI discontinued the
Minimum Price commitment, it would no longer be entitled to deduct the Price Differential in
calculating the purchase price and would have forfeited all accrued Price Credits. As of the
Termination Date, TEMI had no outstanding Price Credits and had not exercised its option to
discontinue the Minimum Price commitment.
Upon the Trust’s termination, the Working Interest Owners utilized the same pricing mechanisms
(including the Sharing Price and Minimum Price commitment mechanisms) as the expired Purchase
Contract in calculating Net Proceeds due to the Trust. The Working Interest Owners also have the
same annual option to discontinue the Minimum Price commitment. See Item 1. Business for
additional information concerning the pricing mechanism utilized to compute the Trust’s Net
Proceeds during the periods prior to and subsequent to the Trust’s termination and the related
arbitration. As of December 31, 2008, the Working Interest Owners had no outstanding Price Credits
and had not exercised their right to discontinue the Minimum Price commitment.
Gross revenues (before deductions for applicable gathering, treating and transportation charges)
included in the Net Proceeds calculations attributable to the Underlying Properties for the years
ended December 31, 2008, 2007 and 2006 were $18.9 million, $16.5 million and $21.4 million,
respectively.
Gas production is purchased at the wellhead and, therefore, distributions do not include any
amounts received in connection with extracting natural gas liquids from such production at gas
processing or treating facilities.
Gathering, Treating and Transportation Arrangements
The Purchase Contract, which expired upon the Trust’s termination, entitled TEMI to deduct certain
gas gathering, treating and transportation fees in calculating the purchase price for gas in the
Robinson’s Bend, Austin Chalk and Cotton Valley Fields. The amounts that were deducted in
calculating the purchase price for such gas were set forth in the Purchase Contract and were not
affected by the actual costs incurred by TEMI to gather, treat and transport gas. For the
Robinson’s Bend Field, TEMI deducted a gathering, treating and transportation fee of $0.260 per
MMBtu adjusted for inflation ($0.314,
31
Torch Energy Royalty Trust
$0.308 and $0.303 per MMBtu for 2008, 2007, and 2006, respectively), plus fuel usage equal to
5% of revenues. Additionally, a gathering fee of $0.05 per MMBtu was deducted in calculating the
purchase price for production from 73 of the 426 wells in the Robinson’s Bend Field. TEMI deduct
$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 deducted from the
purchase price for gas for production attributable to certain wells in the Cotton Valley Fields a
transportation fee of $0.045 per MMBtu. Upon the Trust’s termination, the Working Interest Owners
became entitled to deduct the same gas gathering, treating and transportation fees that had
previously been deducted by TEMI pursuant to the Purchase Contract in calculating Net Proceeds due
to the Trust.
During the years ended December 31, 2008, 2007 and 2006, such fees deducted from the Net Proceeds
calculations, attributable to production during the twelve months ended September 30, 2008, 2007
and 2006, in the Robinson’s Bend, Austin Chalk and Cotton Valley Fields, totaled $1.4 million, $1.5
million and $1.7 million, respectively. No amounts for gathering, treating or transportation are
deducted in calculating the purchase price from the Chalkley Field.
Operator Overhead Fees
A subsidiary of Torch operates certain oil and gas interests burdened by the Net Profits Interests
in the Cotton Valley and Austin Chalk Fields. The Underlying Properties are charged, on the same
basis as other third parties, for all customary expenses and costs reimbursements associated with
these activities. Operator overhead fees deducted from the Net Proceeds computations for the
Cotton Valley and Austin Chalk fields totaled $215,000, $200,000 and $191,000 for the years ended
December 31, 2008, 2007 and 2006, respectively.
Administrative Services Agreements
The sole purpose of the Trust is to hold the Net Profits Interests, to receive payments from TRC
and Velasco, and to make payments to Unitholders. The Trust does not conduct any business activity
and has no officers, directors or employees. The Trust and Trustee rely on third party service
providers to perform administrative services for the Trust.
Torch provided accounting, bookkeeping, informational and other services to the Trust related to
the Net Profits Interests pursuant to the Administrative Services Agreement effective October 1,
1993 and an oral arrangement after termination of the Administrative Services Agreement on January
29, 2008 through April 1, 2008. On November 7, 2008, an agreement was entered into between the
Trust and Torch that engaged Torch to provide certain accounting services in connection with the
Trust’s preparation and filing of the Trust’s Form 10-K for the year ended December 31, 2007.
To facilitate the winding down of the Trust, Torch and the Trust entered into a services agreement
on March 26, 2009. Pursuant to the services agreement, Torch currently provides certain accounting
and other services for the Trust. The initial term of such agreement expires March 31, 2010 or as
sooner terminated by written notice from either party within 5 business days notice.
Services fees of $371,000, $414,000 and $407,000 were paid by the Trust to Torch during the three
years ended December 31, 2008, 2007 and 2006, 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 $80,000, plus an hourly charge for services in excess
of a combined
32
Torch Energy Royalty Trust
total of 250 hours annually at its standard rate. In accordance with provisions in the Trust
Agreement, the Trustee may increase its compensation for its administrative services as a result of
unusual or extraordinary services rendered by the Trustee.
Additionally, 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. The Trustee is entitled to reimbursement for out-of-pocket
expenses.
Total administrative and transfer agent fees charged by the Trustee during the year ended December
31, 2008 were $177,000. Such fees charged by the Trustee during each of the years ended December
31, 2007 and 2006 were $95,000.
6. Trust Expense Payable
The Trust expense payable as reflected on the Trust’s balance sheet as of December 31, 2008 is $2.0
million. Of this amount, $1.3 million represents general and administrative expense accruals mainly
pertaining to the Trust’s legal fees, accounting and audit fees, Sarbanes-Oxley Section 404
compliance services and administrative services fees. The remaining $0.7 million Trust expense
payable represents a potential overpayment from a working interest owner of the Underlying
Properties pertaining to oil and gas sales from certain Infill Wells during periods subsequent to
the Trust’s termination.
7. Supplemental Oil and Gas Information (Unaudited)
Total proved oil and gas reserves attributable to the Net Profits Interests as of December 31,
2008, 2007 and 2006 are based upon reserve reports prepared by T.J. Smith & Company, Inc. and
Netherland, Sewell & Associates, Inc. (“Independent Reserve Engineers”). Future net cash flows
were computed by applying end-of-period Purchase Contract prices for oil and gas to estimated
future production, less the estimated future expenditures (based on current costs) to be incurred
in developing and producing the reserves. The estimated reserve quantities in this report are
based on many assumptions that may prove to be inaccurate. Any material inaccuracies in these
reserve estimates or underlying assumptions will materially affect the quantities and present value
of the Trust’s reserves. See Item 1A. Risk Factors for information regarding assumptions and price
volatility.
Reserve Quantities:
The following table sets forth the estimated total proved and proved developed oil and gas reserves
attributable to the Trust’s Net Profits Interests (all located in the United States) for the years
ended December 31, 2008, 2007 and 2006, based on reserve reports prepared by Independent Reserve
Engineers. As a net profits interest does not entitle the Trust to a specific quantity of oil or
gas, but to a portion of oil and gas sufficient to yield a specified portion of the Net Proceeds
derived therefrom, proved reserves attributable to a net profits interest are calculated by
deducting an amount of oil or gas sufficient, if sold at the prices used in preparing the reserve
estimates for the Underlying Properties, to pay an amount of applicable future estimated production
expenses, development costs and taxes for such Underlying Properties (“Net Equivalent Volumes”).
The use of disclosing Net Equivalent Volumes to estimate reserve volumes attributable to the Net
Profits Interests is standard practice in the industry.
Year-end reserves at December 31, 2008 were 7.7 billion cubic feet equivalent (“Bcfe”) as compared
to year-end 2007 and 2006 reserves of 10.5 Bcfe and 10.6 Bcfe, respectively. In accordance with
Securities and Exchange Commission reporting guidelines, year-end reserves and the related future
net revenues attributable to the Trust’s Net Profits Interests are estimated utilizing the Purchase
Contract Price for gas,
33
Torch Energy Royalty Trust
after gathering fees ($4.14, $4.71 and $4.06 per Mcf for 2008, 2007 and 2006, respectively).
Such Purchase Contract prices were calculated utilizing the Henry Hub gas prices on the last day of
the entity’s fiscal year ($5.71, $6.80 and $5.64 per MMBtu for 2008, 2007 and 2006, respectively).
The revisions of the estimated oil and gas volumes and the related present value of the estimated
net future revenues as of December 31, 2008, 2007 and 2006 is primarily a result of fluctuations of
natural gas prices on each of the years then ended. The Robinson’s Bend Field estimated reserves
as of December 31, 2008, 2007 and 2006 were estimated to have no value.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Description |
|
2008 |
|
|
2007 |
|
|
2006 |
|
| |
|
Oil |
|
|
Gas |
|
|
Oil |
|
|
Gas |
|
|
Oil |
|
|
Gas |
|
| |
|
(Mbbl) |
|
|
(MMcf) |
|
|
(Mbbl) |
|
|
(MMcf) |
|
|
(Mbbl) |
|
|
(MMcf) |
|
Proved reserves at beginning of year |
|
|
48 |
|
|
|
10,202 |
|
|
|
42 |
|
|
|
10,302 |
|
|
|
56 |
|
|
|
19,164 |
|
Revisions |
|
|
(3 |
) |
|
|
(1,710 |
) |
|
|
15 |
|
|
|
1,032 |
|
|
|
(5 |
) |
|
|
(7,687 |
) |
Extensions and discoveries |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
30 |
|
Production |
|
|
(8 |
) |
|
|
(1,001 |
) |
|
|
(9 |
) |
|
|
(1,132 |
) |
|
|
(9 |
) |
|
|
(1,205 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proved reserves at end of year |
|
|
37 |
|
|
|
7,491 |
|
|
|
48 |
|
|
|
10,202 |
|
|
|
42 |
|
|
|
10,302 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proved developed reserves at beginning
of year |
|
|
48 |
|
|
|
10,202 |
|
|
|
42 |
|
|
|
10,273 |
|
|
|
54 |
|
|
|
18,789 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proved developed reserves at end of year |
|
|
37 |
|
|
|
7,491 |
|
|
|
48 |
|
|
|
10,202 |
|
|
|
42 |
|
|
|
10,273 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Oil and Gas
Reserves (in thousands):
Estimated future net cash flows from the Net Profits Interests in proved oil and gas reserves at
December 31, 2008, 2007 and 2006 are presented in the following table:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, |
|
| |
|
2008 |
|
|
2007 |
|
|
2006 |
|
Future cash inflows |
|
$ |
55,206 |
|
|
$ |
84,417 |
|
|
$ |
73,506 |
|
Future costs and expenses |
|
|
(22,702 |
) |
|
|
(31,595 |
) |
|
|
(28,941 |
) |
|
|
|
|
|
|
|
|
|
|
Net future cash flows |
|
|
32,504 |
|
|
|
52,822 |
|
|
|
44,565 |
|
Discount at 10% for timing of cash flows |
|
|
(12,090 |
) |
|
|
(21,944 |
) |
|
|
(18,189 |
) |
|
|
|
|
|
|
|
|
|
|
Present value of future net cash flows for proved reserves |
|
$ |
20,414 |
|
|
$ |
30,878 |
|
|
$ |
26,376 |
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth the changes in the present value of estimated future net
revenues from proved reserves attributable to the Trust’s Net Profits Interests during the years
ended December 31, 2008, 2007 and 2006:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, |
|
| |
|
2008 |
|
|
2007 |
|
|
2006 |
|
Balance at beginning of year |
|
$ |
30,878 |
|
|
$ |
26,376 |
|
|
$ |
60,785 |
|
Sales of oil and gas produced, net of production costs |
|
|
(6,286 |
) |
|
|
(5,584 |
) |
|
|
(5,843 |
) |
Accretion of discount |
|
|
3,088 |
|
|
|
2,638 |
|
|
|
6,079 |
|
Extensions and discoveries |
|
|
0 |
|
|
|
0 |
|
|
|
82 |
|
Revision of prior-year estimates, change in prices
and other |
|
|
(7,266 |
) |
|
|
7,448 |
|
|
|
(34,727 |
) |
|
|
|
|
|
|
|
|
|
|
Balance at end of year |
|
$ |
20,414 |
|
|
$ |
30,878 |
|
|
$ |
26,376 |
|
|
|
|
|
|
|
|
|
|
|
Estimates of future net cash flows from proved reserves of gas and oil condensate were made in
accordance with Financial Accounting Standards Board Statement 69, “Disclosure about Oil and Gas
34
Torch Energy Royalty Trust
Producing Activities.” The Trust has not filed or included in reports to any other Federal
authority or agency any estimates of proved net oil and gas reserves.
7. Quarterly Financial Data (Unaudited — in thousands, except per Unit amounts)
The following table sets forth, for the periods indicated, summarized quarterly financial data:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Distributable |
|
| |
|
Net Profits |
|
|
Distributable |
|
|
Income |
|
| |
|
Income |
|
|
Income |
|
|
Per Unit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended March 31, 2008 |
|
$ |
1,484 |
|
|
$ |
686 |
|
|
$ |
.08 |
|
Quarter ended June 30, 2008 |
|
|
1,582 |
|
|
|
172 |
|
|
|
.02 |
|
Quarter ended September 30, 2008 |
|
|
1,655 |
|
|
|
1,092 |
|
|
|
.13 |
|
Quarter ended December 31, 2008 |
|
|
1,496 |
|
|
|
1,212 |
|
|
|
.14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
6,217 |
|
|
$ |
3,162 |
|
|
$ |
.37 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended March 31, 2007 |
|
$ |
1,081 |
|
|
$ |
825 |
|
|
$ |
.10 |
|
Quarter ended June 30, 2007 |
|
|
1,158 |
|
|
|
818 |
|
|
|
.10 |
|
Quarter ended September 30, 2007 |
|
|
1,360 |
|
|
|
1,082 |
|
|
|
.12 |
|
Quarter ended December 31, 2007 |
|
|
1,243 |
|
|
|
1,408 |
|
|
|
.16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
4,842 |
|
|
$ |
4,133 |
|
|
$ |
.48 |
|
|
|
|
|
|
|
|
|
|
|
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures.
The Trustee carried out an evaluation of the effectiveness of the design and operation of the
Trust’s disclosure controls and procedures pursuant to Exchange Act Rules 13a-15 and 15d-15 as of
the end of the period covered by this report. Based upon that evaluation, the Trustee concluded
that the Trust’s
disclosure controls and procedures are effective in timely alerting the Trustee to material
information relating to the Trust required to be included in the Trust’s periodic filings with the
SEC. In their evaluation of disclosure controls and procedures, the Trustee and Trust have relied,
to the extent considered reasonable, on information provided by Watkins Meegan LLC.
Changes in Internal Control over Financial Reporting.
There has not been any change in the Trust’s internal control over financial reporting during the
fourth quarter of 2008 that has materially affected, or is reasonably likely to materially affect,
the Trust’s internal control over financial reporting. The Trust and Trustee rely on third party
service providers to perform administrative services for the Trust. Torch provided accounting,
bookkeeping, informational and other services to the Trust related to the Net Profits Interests
pursuant to the Administrative Services Agreement effective October 1, 1993 and an oral arrangement
after termination of the Administrative Services Agreement on January 29, 2008 through April 1,
2008. To facilitate the winding down of the Trust, Torch and the Trust entered into a services
agreement on March 26, 2009. Pursuant to the services agreement, Torch provides certain accounting
and other services for the Trust. The initial term of such agreement expires March 31, 2010 or as
sooner terminated by written notice from either party within 5 business days notice.
35
Torch Energy Royalty Trust
Report on Internal Control Over Financial Reporting.
The Trust and Trustee are responsible for establishing and maintaining adequate control over
financial reporting, as such term is defined in Rule 13a-15 promulgated under the Securities
Exchange Act of 1934, as amended.
The internal control over financial reporting includes those policies and procedures that (i)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the Trust; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with a modified cash basis of accounting as described in Note 2 to the notes to financial
statements, and that receipts and expenditures of the Trust are being made only in accordance with
authorizations of the Trustee of the Trust; and (iii) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition of the Trust’s
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal controls over financial reporting may not prevent or
detect misstatements. All internal control systems, no matter how well designed, have inherent
limitations, including the possibility of human error and the circumvention of overriding controls.
Accordingly, even effective internal control over financial reporting can provide only reasonable
assurance with respect to financial statement preparation. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
The Trustee assessed the effectiveness of the internal control over financial reporting as of
December 31, 2008. In making this assessment, it used the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated
Framework. Based on the assessment, the Trustee believes that, as of December 31, 2008, the
Trust’s internal control over financial reporting was effective based on those criteria.
This annual report does not include an attestation report of our independent registered public
accounting firm regarding internal control over financial reporting. The Trustee’s report was not
subject to attestation by our independent registered public accounting firm pursuant to temporary
rules of the Securities and Exchange Commission that permit us to provide only the Trustee’s report
in this annual report.
Item 9B. Other Information
None.
36
Torch Energy Royalty Trust
PART III
Item 10. Directors, Executive Officers and Corporate Governance.
The Registrant has no directors, executive officers or employees. The Trustee is a corporate
trustee that may be removed as trustee under the Trust Agreement, with or without cause, at a
meeting duly called and held by the affirmative vote of Unitholders of not less than a majority of
all the Units then outstanding. Any such removal of the Trustee shall be effective only at such
time as a successor trustee fulfilling the requirements of Section 3807(a) of the Delaware
Statutory Trust Act has been appointed and has accepted such appointment.
The Registrant has not adopted a code of ethics applicable to its principal executive officer,
principal financial officer, principal accounting officer or controller, or persons performing
similar functions because the Trust does not have any such officers or employees. The Trust has no
directors and therefore no audit committee or audit committee financial expert or a nominating
committee.
Section 16(a) of the Securities Exchange Act of 1934 requires that beneficial owners of more than
10% of the registrant’s equity securities file initial reports of beneficial ownership and reports
of changes in beneficial ownership with the Securities and Exchange Commission and the New York
Stock Exchange. To the Trustee’s knowledge, based solely on the information furnished to the Trust,
the Trust is unaware of any person that failed to file on a timely basis reports required by
Section 16(a) filing requirements with respect to the Units during and for the year ended December
31, 2008.
Item 11. Executive Compensation
The following is a description of certain fees and expenses paid or borne by the Trust, including
fees paid to Torch, the Trustee, the transfer agent or their affiliates.
Ongoing Administrative Expenses. The Trust is responsible for paying all legal, accounting,
engineering and stock exchange fees, printing costs and other administrative and out-of-pocket
expenses incurred by or at the direction of the Trustee in its capacity as Trustee and/or transfer
agent.
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
$80,000, plus an hourly charge for services in excess of a combined total of 250 hours annually at
its standard rate. In accordance with provisions in the Trust Agreement, the Trustee may increase
its compensation for its administrative services as a result of unusual or extraordinary services
rendered by the Trustee.
Additionally, 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. The Trustee is entitled to reimbursement for out-of-pocket
expenses.
Fees to Torch. Torch receives a service fee for accounting, bookkeeping and informational services
related to the Net Profits Interests as described below in “Item 13 — Administrative Services
Agreement.”
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth, as of March 31, 2009, certain information with respect to the
ownership of Units held by all persons known by the Trust to be the beneficial owners of 5% or more
of the outstanding Units. Information set forth in the table with respect to beneficial ownership
of Units has
37
Torch Energy Royalty Trust
been obtained from filings made by the named beneficial owners with the Securities and Exchange
Commission as of March 31, 2009. The Trust has no employees, officers or directors. The Trust
does not have an “Equity Compensation Plan”.
| |
|
|
|
|
|
|
|
|
| |
|
Shares Beneficially Owned |
| Name of Beneficial Owner and Address |
|
Units |
|
Percent of Class |
5% Unitholder: (1) |
|
|
|
|
|
|
|
|
Trust
Venture Company, LLC (2)
Two Greenwich Plaza, First Floor
Greenwich, CT 06830 |
|
|
6,502,762 |
|
|
|
75.6 |
% |
Trust Acquisition Company, LLC (2)
Two Greenwich Plaza, First Floor
Greenwich, CT 06830 |
|
|
|
|
|
|
|
|
Silver Point Capital, L.P. (2)
Two Greenwich Plaza, First Floor
Greenwich, CT 06830 |
|
|
|
|
|
|
|
|
Edward A. Mulé (2)
Two Greenwich Plaza, First Floor
Greenwich, CT 06830 |
|
|
|
|
|
|
|
|
Robert J. O’Shea (2)
Two Greenwich Plaza, First Floor
Greenwich Plaza, First Floor
Greenwich, CT 06830 |
|
|
|
|
|
|
|
|
|
|
|
| (1) |
|
Based on Form 4 filed on April 30, 2008. |
| |
| (2) |
|
Trust Venture Company, LLC, Trust Acquisition Company, LLC, Silver Point Capital, L.P., Edward
A. Mule and Robert J. O’Shea are each a reporting person and member of a reporting group pursuant
to a Joint Filing Agreement dated as of July 6, 2007 for purposes of the Securities Exchange Act of
1934, as amended. |
Item 13. Certain Relationships and Related Transactions
Administrative Services Agreement
Pursuant to the Trust Agreement, Torch and the Trust entered into the Administrative Services
Agreement effective October 1, 1993. The following summary of certain provisions of the
Administrative Services Agreement does not purport to be complete and is subject to, and is
qualified in its entirety by reference to, the provisions of the Administrative Services Agreement.
The Trust and Trustee rely on third party service providers to perform administrative services for
the Trust.
Prior to April 1, 2008, Torch provided accounting, bookkeeping, informational and other services to
the Trust related to the Net Profits Interests pursuant to an administrative services agreement
effective October 1, 1993 (“Administrative Services Agreement”) and an oral arrangement after
termination of the Administrative Services Agreement on January 29, 2008 through April 1, 2008.
On November 7, 2008, an agreement was entered into between the Trust and Torch which engaged Torch
to provide certain accounting services in connection with the Trust’s preparation and filing of the
Trust’s Form 10-K for the year ended December 31, 2007. Such agreement expired on December 23,
2008.
To facilitate the winding down of the Trust, Torch provides certain accounting and other services
for the Trust pursuant to an agreement with the Trust dated March 26, 2009. The initial term of
such agreement expires March 31, 2010 or as sooner terminated by written notice from either party
within 5 business days notice.
38
Torch Energy Royalty Trust
Administrative services fees of $371,000, $414,000 and $407,000 were paid by the Trust to Torch
during the three years ended December 31, 2008, 2007 and 2006, respectively.
Marketing Arrangements and Price Sharing
In connection with the formation of the Trust, TRC, Velasco and TEMI entered into a Purchase
Contract which expired upon the termination of the Trust (January 29, 2008). Pursuant to the
Purchase Contract, TEMI was obligated to purchase all net production attributable to the Underlying
Properties for an Index Price for oil and gas less certain gathering, treating and transportation
charges, which were calculated monthly. The Purchase Contract also provided that TEMI pay a
Minimum Price for gas production. The Minimum Price was adjusted annually for inflation and was
$1.87, $1.83 and $1.80 per MMBtu for 2008, 2007 and 2006, respectively. When TEMI paid a purchase
price based on the Minimum Price it received Price Credits equal to the difference between the
Index Price and the Minimum Price, that it was entitled to deduct in determining the purchase price
when the Index Price for gas exceeded the Minimum Price. In addition, if the Index Price for gas
exceeded the Sharing Price, which was adjusted annually for inflation, TEMI was entitled to deduct
50% of such excess (“Price Differential”) in determining the purchase price. The Sharing Price was
$2.30, $2.26 and $2.22 per MMBtu in 2008, 2007 and 2006, respectively. TEMI had an annual option
to discontinue the Minimum Price commitment. However, if TEMI discontinued the Minimum Price
commitment, it would no longer be entitled to deduct the Price Differential in calculating the
purchase price and would have forfeited all accrued Price Credits. As of the Termination Date,
TEMI had no outstanding Price Credits and had not exercised its option to discontinue the Minimum
Price Commitment.
Upon the Trust’s termination, the Working Interest Owners utilized the same pricing mechanisms
(including the Sharing Price and Minimum Price commitment mechanisms) as the expired Purchase
Contract in calculating Net Proceeds due to the Trust. The Working Interest Owners also have the
same annual option to discontinue the Minimum Price commitment. As of December 31, 2008, the
Working Interest Owners had no accumulated Price Credits and had not exercised their right to
discontinue the Minimum Price commitment.
No Price Credits were deducted in calculating the purchase price related to distributions received
by Unitholders during the three years ended December 31, 2008. As a result the Sharing Price
arrangement, Net Proceeds attributable to the Underlying Properties during the years ended December
31, 2008, 2007 and 2006 were reduced by $10.1 million, $7.1 million and $11.1 million,
respectively.
Gathering, Treating and Transportation Arrangements
The Purchase Contract, which expired upon the Trust’s termination, entitled TEMI to deduct certain
gas gathering, treating and transportation fees in calculating the purchase price for gas in the
Robinson’s Bend, Austin Chalk and Cotton Valley Fields. The amounts that were deducted in
calculating the purchase price for such gas were set forth in the Purchase Contract and were not
affected by the actual costs incurred by TEMI to gather, treat and transport gas. For the
Robinson’s Bend Field, TEMI was entitled to deduct a gathering, treating and transportation fee of
$0.260 per MMBtu adjusted for inflation ($0.314, $0.308 and $0.303 per MMBtu for 2008, 2007, and
2006, respectively), plus fuel usage equal to 5% of revenues. Additionally, a gathering fee of
$0.05 per MMBtu was deducted in calculating the purchase price for production from 73 of the 426
wells in the Robinson’s Bend Field. TEMI was entitled to deduct $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 deducted from the purchase price for gas for
production attributable to certain wells in the Cotton Valley Fields a transportation fee of $0.045
per MMBtu. Upon the Trust’s termination, the Working Interest Owners
39
Torch Energy Royalty Trust
became entitled to deduct the same gas gathering, treating and transportation fees that had
previously been deducted by TEMI pursuant to the Purchase Contract in calculating Net Proceeds due
to the Trust.
During the years ended December 31, 2008, 2007 and 2006, gathering, treating and transportation
fees deducted from the Net Proceeds calculations pertaining to production during the twelve months
ended September 30, 2008, 2007 and 2006 in the Robinson’s Bend, Austin Chalk and Cotton Valley
Fields, totaled $1.4 million, $1.5 million and $1.7 million for 2008, 2007 and 2006, respectively.
No amounts for gathering, treating or transportation are deducted in calculating the purchase price
from the Chalkley Field.
Item 14. Principal Accountant Fees and Services
UHY LLP personnel work under the direct control of UHY LLP partners and are leased from
wholly-owned subsidiaries of UHY Advisors, Inc. in an alternative practice structure.
The Trust does not have an audit committee, and has no audit committee pre-approval policy with
respect to fees paid to UHY. Any pre-approval of services performed by UHY and related fees is
granted by the Trustee. The outside auditors are appointed and engaged by the Trust. Fees for
services performed by UHY for the years ended December 31, 2008 and 2007 are:
| |
|
|
|
|
|
|
|
|
| |
|
2008 |
|
|
2007 |
|
Audit Fees |
|
$ |
120,000 |
|
|
$ |
121,000 |
|
Audit Related Fees |
|
|
0 |
|
|
|
0 |
|
Tax Fees |
|
|
0 |
|
|
|
0 |
|
All Other Fees |
|
|
0 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
$ |
120,000 |
|
|
$ |
121,000 |
|
|
|
|
|
|
|
|
40
Torch Energy Royalty Trust
PART IV
Item 15. Exhibits and Financial Statement Schedules
| (a) |
|
The following documents are filed as part of this report: |
| |
1. |
|
Financial Statements: |
| |
| |
|
|
Torch Energy Royalty Trust |
Report of Independent Registered Public Accounting Firm
Statements of Assets, Liabilities and Trust Corpus at December 31, 2008 and 2007
Statements of Distributable Income for the Years Ended December 31, 2008, 2007 and 2006
Statements of Changes in Trust Corpus for the Years Ended December 31, 2008, 2007 and 2006
Notes to Financial Statements
| |
2. |
|
Financial Statement Schedules |
Financial statement schedules are omitted because of the absence of conditions under which they
are required or because the required information is included in the financial statements and
notes thereto.
Exhibit
Number Exhibit
| |
4. |
|
Instruments 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.* |
| |
10.1 |
|
- Purchase Agreement between TRC, Velasco and TEMI.* |
| |
| |
10.2 |
|
- Gas Gathering Agreement between TEMI and Bahia Gas Gathering, Ltd.* |
| |
| |
10.3 |
|
- Amendment to Gas Gathering Agreement.* |
| |
| |
10.4 |
|
- Water Gathering and Disposal Agreement and First Amendment between Torch
Energy Associates, Ltd. and Velasco.* |
| |
| |
10.5 |
|
- Form of Texas Conveyance.* |
| |
| |
10.6 |
|
- Form of Louisiana Conveyance.* |
| |
| |
10.7 |
|
- Form of Alabama Conveyance.* |
| |
| |
10.8 |
|
- Standby Performance Agreement between Torch and the Trust.* |
| |
| |
10.9 |
|
- Amendment to Water Gathering Contract.* |
| |
| |
10.10 |
|
- First Amendment to Oil and Gas Purchase Contract (previously filed on form 10-Q for
the quarter ended September 30, 1994). * |
| |
| |
10.11 |
|
-Second amendment to Water Gathering and Disposal Agreement (previously filed on Form
8-K on February 11, 2008).** |
41
Torch Energy Royalty Trust
| |
23. |
|
Consents of Experts and Counsel. |
| |
23.1 |
|
- Consent of T.J. Smith & Company, Inc. |
| |
| |
23.2 |
|
- Consent of Netherland, Sewell and Associates, Inc. |
| |
| |
23.3 |
|
- Consent of Watkins Meegan LLC |
| |
31. |
|
Rule 13a-14(a)/15d-14(a) Certifications. |
| |
31.1 |
|
- Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| |
32. |
|
Section 1350 Certifications. |
| |
32.1 |
|
- 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. |
| |
| ** |
|
Incorporated by reference from Form 8-K dated February 11, 2008. |
42
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,
|
|
| |
|
not in its individual capacity but |
|
| |
|
solely as Trustee for the Trust |
|
| |
| |
|
|
| |
By: |
/s/ Bruce L. Bisson
|
|
| |
|
Bruce L. Bisson, Vice President |
|
| |
|
|
|
| |
Date: November 25, 2009
(The Trust has no employees, directors or executive officers.)
43