UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2002
--------------
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______ to _________
Commission File Number 1-12474
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Torch Energy Royalty Trust
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(Exact name of registrant as specified in its charter)
Delaware 74-6411424
------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1100 North Market Street, Wilmington, Delaware 19890
-------------------------------------------------- -----------
(Address of principal executive offices) (Zip Code)
302/651-8584
----------------------
(Registrant's telephone number, including area code)
Not Applicable
------------------------------------------------------------------------------
Former name, former address and former fiscal year,
if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No_______
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TORCH ENERGY ROYALTY TRUST
PART 1 - FINANCIAL INFORMATION
Item I. Financial Statements
-----------------------------
The document includes "forward looking statements" within the meaning of Section
27A of the Securities Act of 1993, as amended, and Section 21E of the Securities
Exchange Act of 1934. All statements other than statements of historical facts
included in this document, including without limitation, statements under
"Discussion and Analysis of Financial Condition and Results of Operations"
regarding the financial position, reserve quantities and values of the Torch
Energy Royalty Trust ("Trust") are forward-looking statements. Torch Energy
Advisors Incorporated ("Torch") and the Trust can give no assurances that the
assumptions upon which these statements are based will prove to be correct.
Factors which could cause such forward looking statements not to be correct
include, among others, the cautionary statements set forth in the Trust's Annual
Report on Form 10-K filed with the Securities Exchange Commission, the
volatility of oil and gas prices, future production costs, operating hazards and
environmental conditions.
Introduction
------------
The financial statements included herein have been prepared by Torch, pursuant
to an administrative services agreement between Torch and the Trust, pursuant to
the rules and regulations of the Securities and Exchange Commission. Wilmington
Trust Company serves as the trustee ("Trustee") of the Trust pursuant to the
trust agreement dated October 1, 1993. Certain information and footnote
disclosures normally included in the annual financial statements have been
omitted pursuant to such rules and regulations, although Torch believes that the
disclosures are adequate to make the information presented not misleading. These
financial statements should be read in conjunction with the December 31, 2001
financial statements and notes thereto included in the Trust's latest annual
report on Form 10-K. In the opinion of Torch, all adjustments necessary to
present fairly the assets, liabilities and trust corpus of the Trust as of March
31, 2002 and December 31, 2001, the distributable income and changes in trust
corpus for the three-month periods ended March 31, 2002 and 2001 have been
included. All such adjustments are of a normal recurring nature. The
distributable income for such interim periods is not necessarily indicative of
the distributable income for the full year.
2
TORCH ENERGY ROYALTY TRUST
STATEMENTS OF ASSETS, LIABILITIES AND TRUST CORPUS
(In thousands)
ASSETS
March 31, 2002 December 31, 2001
------------------ -------------------
(Unaudited)
Cash.................................. $ 2 $ 2
Net profits interests in oil and
gas properties (Net of accumulated
amortization of $145,824 and
$143,906 at March 31, 2002 and
December 31, 2001, respectively)...... 34,776 36,694
---------- ----------
$ 34,778 $ 36,696
========== ==========
LIABILITIES AND TRUST CORPUS
Trust expense payable................. $ 182 $ 185
Trust corpus.......................... 34,596 36,511
---------- ----------
$ 34,778 $ 36,696
========== ==========
See notes to financial statements.
3
TORCH ENERGY ROYALTY TRUST
STATEMENTS OF DISTRIBUTABLE INCOME
(In thousands, except Units and per Unit amounts)
(Unaudited)
Three Months Ended March 31,
----------------------------
2002 2001
---------- ----------
Net profits income................. $ 2,233 $ 4,945
Interest income.................... 1 4
---------- ----------
2,234 4,949
---------- ----------
General and administrative
expenses.......................... 176 157
---------- ----------
Distributable income............... $ 2,058 $ 4,792
========== ==========
Distributable income per Unit
(8,600,000 Units)................. $ .24 $ .56
========== ==========
Distributions per Unit............. $ .24 $ .56
========== ==========
See notes to financial statements.
4
TORCH ENERGY ROYALTY TRUST
STATEMENTS OF CHANGES IN TRUST CORPUS
(In thousands)
(Unaudited)
Three Months Ended March 31,
-------------------------------
2002 2001
------------- -------------
Trust corpus, beginning of period......... $ 36,511 $ 44,783
Amortization of Net Profits Interests..... (1,918) (1,073)
Distributable income...................... 2,058 4,792
Distributions to Unitholders.............. (2,055) (4,790)
----------- ------------
Trust corpus, end of period............... $ 34,596 $ 43,712
=========== ============
See notes to financial statements.
5
TORCH ENERGY ROYALTY TRUST
Notes to Financial Statements
1. Trust Organization and Nature of Operations
The Trust was formed effective October 1, 1993 under the Delaware Business Trust
Act pursuant to a trust agreement ("Trust Agreement") among Trustee, Torch
Royalty Company ("TRC") and Velasco Gas Company, Ltd. ("Velasco"), as owners of
certain oil and gas properties ("Underlying Properties"), and Torch as grantor.
TRC and Velasco created net profits interests ("Net Profits Interests") and
conveyed such interests to Torch. Torch conveyed the Net Profits Interests to
the Trust in exchange for an aggregate of 8,600,000 units of beneficial interest
("Units"). Such Units were sold to the public through various underwriters
beginning November 1993. Pursuant to an administrative services agreement with
the Trust, Torch provides accounting, bookkeeping, informational and other
services related to the Net Profits Interests.
The Underlying Properties constitute working interests in the Chalkley Field in
Louisiana ("Chalkley Field"), the Robinson's Bend Field in the Black Warrior
Basin in Alabama ("Robinson's Bend Field"), fields that produce from the Cotton
Valley formations in Texas ("Cotton Valley Fields") and fields that produce from
the Austin Chalk formation in Texas ("Austin Chalk Fields"). Sales of coal seam
and tight sands gas attributable to the Net Profits Interests between November
23, 1993 and January 1, 2003 result in the unitholders ("Unitholders") receiving
quarterly allocations of tax credits under Section 29 of the Internal Revenue
Code of 1986 ("Section 29 Credits"). The Section 29 Credits available for 2001
and 2000 production from qualifying coal seam properties were approximately
$1.08 and $1.06, respectively, for each MMBtu of gas produced and sold during
the years ended December 31, 2001 and 2000. This rate is adjusted annually for
inflation. The Section 29 Credit available for production from qualifying tight
sands properties is approximately $0.52 for each MMBtu of gas produced and sold
and such amount is not adjusted for inflation.
The only assets of the Trust, other than cash and temporary investments being
held for the payment of expenses and liabilities and for distribution to
Unitholders, are the Net Profits Interests. The Net Profits Interests (other
than the Net Profits Interest covering the Robinson's Bend Field) entitle the
Trust to receive 95% of the net proceeds ("Net Proceeds") attributable to oil
and gas produced and sold from wells (other than infill wells) on the Underlying
Properties. Net Proceeds are generally defined as gross revenues received from
the sale of production attributable to the Underlying Properties during any
period less property, production, severance and similar taxes, and development,
operating, and certain other costs. In calculating Net Proceeds from the
Robinson's Bend Field, operating and development costs incurred prior to January
1, 2003 are not deducted. In addition, the amounts paid to the Trust from the
Robinson's Bend Field during any calendar quarter are subject to a volume
limitation ("Volume
6
TORCH ENERGY ROYALTY TRUST
Notes to Financial Statements
Limitation") equal to the gross proceeds from the sale of 912.5 MMcf of gas,
less property, production, severance and related taxes. Production for the
three-month periods ended December 31, 2001 and 2000 from the Underlying
Properties in the Robinson's Bend Field was approximately 42% (387 MMcf) and 41%
(371 MMcf), respectively, below the Volume Limitation.
The Net Profits Interests also entitle the Trust to 20% of the Net Proceeds
(defined below) of wells drilled on the Underlying Properties since the Trust's
establishment into formations in which the Trust has an interest, other than
wells drilled to replace damaged or destroyed wells ("Infill Wells"). Infill
Well Net Proceeds represent the aggregate gross revenues received from Infill
Wells less the aggregate amount of the following Infill Well costs: i)
property, production, severance and similar taxes; ii) development costs; iii)
operating costs; and iv) interest on the recovered portion, if any, of the
foregoing costs computed at a rate of interest announced publicly by Citibank,
N.A. in New York as its base rate. Distributions received by unitholders have
not been impacted by these wells as the aggregate gross revenues have not
exceeded aggregate costs and expenses for these wells.
2. Basis of Accounting
The financial statements of the Trust are prepared on a modified cash basis and
are not intended to present the financial position and results of operations in
conformity with generally accepted accounting principles ("GAAP"). Preparation
of the Trust's financial statements on such basis includes the following:
- Revenues are recognized in the period in which amounts are received by the
Trust. Therefore, revenues recognized during the three-month periods ended
March 31, 2002 and 2001 are derived from oil and gas production sold during
the three-month periods ended December 31, 2001 and 2000, 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 the sum of the estimated undiscounted future cash
flows attributable to the Trust's oil and gas reserves plus the estimated
future Section
7
TORCH ENERGY ROYALTY TRUST
Notes to Financial Statements
29 Credits for Federal income tax purposes. No impairment loss was
recognized during the first quarter of 2002 and 2001.
The financial statements of the Trust differ from financial statements prepared
in accordance with GAAP because net profits income is not accrued in the period
of production and amortization of the Net Profits Interests is not charged
against operating results.
3. Federal Income Taxes
Tax counsel has advised the Trustee that, under current tax law, the Trust is
classified as a grantor trust for Federal income tax purposes. However, the
opinion of tax counsel is not binding on the Internal Revenue Service. As a
grantor trust, the Trust is not subject to Federal income tax.
Because the Trust is treated as a grantor trust for Federal income tax purposes
and a Unitholder is treated as directly owning an interest in the Net Profits
Interests, each Unitholder is taxed directly on such Unitholder's pro rata share
of income attributable to the Net Profits Interests consistent with the
Unitholder's method of accounting and without regard to the taxable year or
accounting method employed by the Trust. Amounts payable with respect to the
Net Profits Interests are paid to the Trust on the quarterly record date
established for quarterly distributions in respect to each calendar quarter
during the term of the Trust, and the income, deductions and income tax credits
relating to Section 29 Credits resulting from such payments are allocated to the
Unitholders of record on such date.
4. Distributions and Income Computations
Distributions are determined for each quarter and are based on the amount of
cash available for distribution to Unitholders. Such amount (the "Quarterly
Distribution Amount") is equal to the excess, if any, of the cash received by
the Trust, on the last day of the second month following the previous calendar
quarter (or the next business day thereafter) ending prior to the dissolution of
the Trust, from the Net Profits Interests then held by the Trust plus, with
certain exceptions, any other cash receipts of the Trust during such quarter,
subject to adjustments for changes made during such quarter in any cash reserves
established for the payment of contingent or future obligations of the Trust.
Based on the payment procedures relating to the Net Profits Interests, cash
received by the Trust on the last day of the second month of a particular
quarter from the Net Profits Interests generally represents proceeds from the
sale of oil and gas produced from the Underlying Properties during the preceding
calendar quarter. The
8
TORCH ENERGY ROYALTY TRUST
Notes to Financial Statements
Quarterly Distribution Amount for each quarter is payable to Unitholders of
record on the last day of the second month of the calendar quarter unless such
day is not a business day in which case the record date is the next business day
thereafter. The Quarterly Distribution Amount is distributed within
approximately ten days after the record date to each person who was a Unitholder
of record on the associated record date.
5. Related Party Transactions
Marketing Arrangements
TRC and Velasco, as owners of the Underlying Properties subject to and burdened
by the Net Profits Interests, contracted to sell the oil and gas production from
such properties to Torch Energy Marketing, Inc. ("TEMI"), a subsidiary of Torch,
under a purchase contract ("Purchase Contract"). Under the Purchase Contract,
TEMI is obligated to purchase all net production attributable to the Underlying
Properties for an index price for oil and gas ("Index Price"), less certain
gathering, treating and transportation charges, which are calculated monthly.
The Index Price equals 97% of the average spot market prices of oil and gas
("Average Market Prices") at the four locations where TEMI sells production.
The Purchase Contract also provides that the minimum price paid by TEMI for gas
production is $1.70 per MMBtu ("Minimum Price"). When TEMI pays a purchase
price based on the Minimum Price, it receives price credits ("Price Credits")
equal to the difference between the Index Price and the Minimum Price that it is
entitled to deduct in determining the purchase price when the Index Price for
gas exceeds the Minimum Price. No Price Credits were deducted in calculating
the purchase price related to distributions received by Unitholders during the
quarters ended March 31, 2002 and 2001. As of March 31, 2002, TEMI had no
accumulated Price Credits. In addition, if the Index Price for gas exceeds $2.10
per MMBtu, TEMI is entitled to deduct 50% of such excess ("Price Differential")
in calculating the purchase price. The deduction of the Price Differential in
calculating the purchase price of gas resulted in distributions received by
Unitholders during the three months ended March 31, 2002 and 2001 being reduced
by $.2 million and $2.3 million, respectively.
Beginning January 1, 2002, TEMI has an annual option to discontinue the Minimum
Price commitment. However, if TEMI discontinues the Minimum Price commitment,
it will no longer be entitled to deduct the Price Differential in calculating
the purchase price and will forfeit all accrued Price Credits. TEMI elected to
continue the Minimum Price commitment in 2002, and in accordance with the
Purchase Contract, the
9
TORCH ENERGY ROYALTY TRUST
Notes to Financial Statements
Minimum Price and Sharing Price commencing January 1, 2002, adjusted for
inflation, is $1.71 per MMBtu and $2.12 per MMBtu, respectively. TEMI has
purchased put option contracts granting TEMI the right to sell estimated gas
production in excess of the Specified Quantities at a price intended to limit
TEMI's losses in the event the Index Price falls below the Minimum Price.
Gross revenues (before deductions for applicable gathering, treating and
transportation charges) from TEMI included in net profits income for the three
months ended March 31, 2002 and 2001 were $3.1 million and $6.2 million,
respectively.
Gathering, Treating and Transportation Arrangements
The Purchase Contract entitles TEMI to deduct certain gas gathering, treating
and transportation costs in calculating the purchase price for gas in the
Robinson's Bend, Austin Chalk and Cotton Valley Fields. The amounts that may be
deducted in calculating the purchase price for such gas are set forth in the
Purchase Contract and are not affected by the actual costs incurred by TEMI to
gather, treat and transport gas. In the Robinson's Bend Field, TEMI is entitled
to deduct a gathering, treating and transportation fee of $0.26 per MMBtu
adjusted for inflation ($0.286 per MMBtu and $0.283 per MMBtu for 2001 and 2000
production, respectively), plus fuel usage equal to 5% of revenues, payable to
Bahia Gas Gathering, Ltd. ("Bahia"), an affiliate of Torch, pursuant to a gas
gathering agreement. Additionally, a fee of $0.05 per MMBtu, representing a
gathering fee payable to a non-affiliate of TEMI, is deducted in calculating the
purchase price for production from 68 of 394 wells in the Robinson's Bend Field.
TEMI also deducts $0.38 per MMBtu plus 17% of revenues in calculating the
purchase price for production from the Austin Chalk Fields, as a fee to gather,
treat and transport gas production. TEMI deducts from the purchase price for
gas in the Cotton Valley Fields a transportation fee of $0.045 per MMBtu for
production attributable to certain wells. Such transportation fee is paid to a
third party. During the three months ended March 31, 2002 and 2001, gathering,
treating and transportation fees deducted by TEMI in calculating the purchase
price for production during the three months ended December 31, 2001 and 2000 in
the Robinson's Bend, Austin Chalk and Cotton Valley Fields, totaled $.2 million
and $.4 million, respectively. No amounts for gathering, treating or
transportation are deducted in calculating the purchase price from the Chalkley
Field.
10
TORCH ENERGY ROYALTY TRUST
Notes to Financial Statements
Administrative Services Agreement
Pursuant to the Trust Agreement, Torch and the Trust entered into an
administrative services agreement effective October 1, 1993. The Trust is
obligated, throughout the term of the Trust, to pay to Torch each quarter an
administrative services fee for accounting, bookkeeping, informational and other
services relating to the Net Profits Interests. The administrative services fee
is $87,500 per calendar quarter commencing October 1, 1993. The amount of the
administrative services fee is adjusted annually based upon the change in the
Producer's Price Index as published by the Department of Labor, Bureau of Labor
Statistics. Administrative services during the three months ended March 31,
2002 and 2001 were $97,000 and $96,000, respectively.
Compensation of the Trustee and Transfer Agent
The Trust Agreement provides that the Trustee be compensated for its
administrative services, out of the Trust assets, in an annual amount of
$41,000, plus an hourly charge for services in excess of a combined total of 250
hours annually at its standard rate. The Trustee receives a transfer agency fee
of $5.00 annually per account (minimum of $15,000 annually), subject to change
each December, beginning December 1994, based upon the change in the Producer's
Price Index as published by the Department of Labor, Bureau of Labor Statistics,
plus $1.00 for each certificate issued. Total administrative and transfer agent
fees during the three months ended March 31, 2002 and 2001 were $14,000 per
period. The Trustee is also entitled to reimbursement for out-of-pocket
expenses.
11
TORCH ENERGY ROYALTY TRUST
Item 2. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations
---------------------
Three Months Ended March 31, 2002 Compared to Three Months Ended March 31, 2001
-------------------------------------------------------------------------------
Because a modified cash basis of accounting is utilized by the Trust, net
profits income of the Trust for the three months ended March 31, 2002 and 2001
is derived from actual oil and gas produced during the three months ended
December 31, 2001 and 2000, respectively. Oil and gas sales attributable to the
working interests burdened by the Underlying Properties for such periods are as
follows:
Three Months Ended March 31,
-----------------------------------------
2002 2001
------------------- -------------------
Bbls Mcf Bbls Mcf
of Oil of Gas of Oil of Gas
-------- --------- -------- ----------
Chalkley Field 2,524 540,910 3,822 732,273
Robinson's Bend Field --- 552,829 --- 570,149
Cotton Valley Fields 984 270,753 565 283,364
Austin Chalk Fields 3,514 6,700 4,115 41,279
-------- --------- -------- ----------
7,022 1,371,192 8,502 1,627,065
======== ========= ======== ==========
For the three months ended March 31, 2002, net profits income was $2.2 million,
down 55% from net profits income of $4.9 million for the same period in 2001.
Such decreases are mainly due to significant decreases in the average price paid
for oil and gas production attributable to the Underlying Properties during 2002
as compared to 2001.
Gas production attributable to the distributions received by Unitholders during
the three months ended March 31, 2002 was 1,371,192 Mcf, or 16% lower than gas
production of 1,627,065 Mcf for the same period in 2001. Oil production
attributable to distributions received by Unitholders during the quarter ended
March 31, 2002 was 7,022 Bbls as compared to 8,502 Bbls for the same period in
2001. Such decreases in production are mainly due to normal production
declines.
The average price used to calculate Net Proceeds for gas and oil during the
three months ended March 31, 2002 was $2.12 per MMBtu for gas and $14.21 per Bbl
for oil as compared to $3.57 per MMBtu for gas and $26.67 per Bbl for oil during
the same period in 2001. When TEMI pays a purchase price for gas based on the
Minimum Price of $1.70 per MMBtu, TEMI receives Price Credits which it is
entitled to deduct in determining the purchase price when the Index Price for
gas exceeds the Minimum
12
TORCH ENERGY ROYALTY TRUST
Price. No Price Credits were deducted in calculating the purchase price related
to distributions received by Unitholders during the quarters ended March 31,
2002 and 2001. As of March 31, 2002, TEMI had no accumulated Price Credits.
Additionally, if the Index Price for gas exceeds $2.10 per MMBtu, TEMI is
entitled to deduct 50% of such excess in calculating the purchase price. The
deduction of the Price Differential in calculating the purchase price had the
effect of reducing distributions received by Unitholders during the three months
ended March 31, 2002 and 2001 by $.2 million and $2.3 million respectively.
General and administrative expenses amounted to $176,000 for the three months
ended March 31, 2002 as compared to $157,000 during the three months ended March
31, 2001. These expenses primarily relate to administrative services provided
by Torch and the Trustee.
The foregoing resulted in distributable income of $2.1 million, or $.24 per
Unit, for the three months ended March 31, 2002, as compared to $4.8 million, or
$.56 per Unit, for the same period in 2001. Cash distributions of $2.1 million,
or $0.24 per Unit, were made during the quarter ended March 31, 2002 as compared
to $4.8 million, or $0.56 per Unit, for the same period in 2001. The Section 29
Credits relating to these distributions, generated from production during the
three months ended December 31, 2001 and 2000, were approximately $0.07 per Unit
and $0.08 per Unit, respectively.
13
TORCH ENERGY ROYALTY TRUST
Net profits income (in thousands) received by the Trust during the three month
periods ended March 31, 2002 and 2001, derived from production sold during the
three months ended December 31, 2001 and 2000, respectively, was computed as
shown in the following table:
Three Months Ended March 31, 2002 Three Months Ended March 31, 2001
------------------------------------------- --------------------------------------------
Chalkley, Chalkley,
Cotton Valley Cotton Valley
and Austin Robinson's and Austin Robinson's
Chalk Fields Bend Field Total Chalk Fields Bend Field Total
------------- ------------ ------------ -------------- ------------- ----------
Oil and gas revenues................ $ 1,869 $ 975 $ 2,844 $ 4,049 $ 1,784 $ 5,833
------------- ------------ ------------ -------------- ------------- ----------
Direct operating expenses:
Lease operating expenses and
Property tax...................... 313 --- 313 373 --- 373
Severance tax...................... 135 40 175 104 127 231
------------- ------------ ------------ -------------- ------------- ----------
448 40 488 477 127 604
------------- ------------ ------------ -------------- ------------- ----------
Net proceeds before capital 5,229
Expenditures....................... 1,421 935 2,356 3,572 1,657
Capital expenditures................ 5 --- 5 24 --- 24
------------- ------------ ------------ -------------- ------------- ----------
Net proceeds........................ 1,416 935 2,351 3,548 1,657 5,205
Net profits percentage.............. 95% 95% 95% 95% 95% 95%
------------- ------------ ------------ -------------- ------------- ----------
Net profits income.................. $ 1,345 $ 888 $ 2,233 $ 3,371 $ 1,574 $ 4,945
============= ============ ============ ============== ============= ==========
Following December 31, 2002, Net Proceeds Attributable to the Robinson's Bend
-----------------------------------------------------------------------------
Field Will Decrease
-------------------
Prior to December 31, 2002, lease operating expenses will not be deducted in
calculating the Net Proceeds payable to the Trust from the Robinson's Bend
Field. After 2002, lease operating expenses will be deducted in calculating Net
Proceeds. As a result, Net Proceeds paid to the Trust will decrease
substantially following 2002.
Lease operating expenses in the Robinson's Bend Field during the quarter ended
March 31, 2002 were $1.5 million. Because lease operating expenses for the
Robinson's Bend Field during this period exceeded Net Proceeds paid to the Trust
from the Robinson's Bend Field, deduction of lease operating expenses during the
first quarter of 2002 would have reduced the Net Proceeds paid to the Trust
attributable to the Robinson's Bend Field to zero and amounts paid to the Trust
during the quarter ended March 31, 2002 would have been reduced from $2.1
million to $1.2 million, or $0.24 per Unit to $0.14 per Unit. Torch currently
estimates that if gas prices are below $5.10 per Mcf in 2003, lease operating
expenses will be greater than Net Proceeds and so the Trust would not receive
any Net Proceeds attributable to the Robinson's Bend Field under this pricing
scenario. Approximately $1.2 million of the $1.5 million of the lease operating
expenses pertaining to quarter ended March 31, 2002 distributions were paid to
Torch and its
14
TORCH ENERGY ROYALTY TRUST
affiliates pursuant to a water disposal contract and operating agreements
covering the wells in the Robinson's Bend Field.
The Trust May Terminate After 2002
----------------------------------
The Trust will terminate on March 1, of any year after 2002 if it is determined
that the pre-tax future net cash flows, discounted at 10%, attributable to
estimated net proved reserves of the Net Profits Interests on the preceding
December 31 are less than $25 million. The estimated price of natural gas per
Mcf which would result in a termination of the Trust is dependent on the oil and
gas reserve estimates. Any revisions of oil and natural gas reserve estimates
would impact the estimated price per Mcf that would cause the Trust to
terminate. Torch currently projects, based on oil and gas reserve estimates at
December 31, 2001 prepared by independent reserve engineers, that unless the
price of natural gas on December 31, 2002 exceeds $3.00 per Mcf, the Trust will
terminate. Upon termination of the Trust, the Trustee is required to sell the
Net Profits Interests. No assurance can be given that the Trustee will be able
to sell the Net Profits Interests, or as to the price that will be received for
such Net Profits Interests or the amount that will be distributed to Unitholders
following such a sale. Such distributions could be below the market value of
the Units.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
-------------------------------------------------------------------
The Trust is exposed to market risk, including adverse changes in commodity
prices. The Trust's assets constitute Net Profits Interests in the Underlying
Properties. As a result, the Trust's operating results can be significantly
affected by fluctuations in commodity prices caused by changing market forces
and the price received for production from the Underlying Properties.
All production from the Underlying Properties is sold pursuant to a Purchase
Contract between TRC and Velasco, as the owners of the Underlying Properties,
and TEMI. Pursuant to the Purchase Contract, TEMI is obligated to purchase all
net production attributable to the Underlying Properties for an Index Price,
less certain other charges. Substantially all of the Index Price is calculated
based on market prices of oil and gas and therefore is subject to commodity
price risk. The Purchase Contract expires upon termination of the Trust and
provides a Minimum Price of $1.70 per MMBtu paid by TEMI for gas until December
31, 2001. When TEMI pays a purchase price based on the Minimum Price it receives
Price Credits equal to the difference between the Index Price and the Minimum
Price that it is entitled to deduct when the Index Price exceeds the Minimum
Price. Additionally, if the Index Price exceeds $2.10 per MMBtu, TEMI is
entitled to deduct 50% of such excess, the Price Differential. Beginning January
1, 2002, TEMI has an annual option to discontinue the Minimum Price commitment.
However, if TEMI discontinues the Minimum Price commitment, it will no longer be
15
TORCH ENERGY ROYALTY TRUST
entitled to deduct the Price Differential and will forfeit all accrued Price
Credits. TEMI elected to continue the Minimum Price Commitment in 2002, and in
accordance with the Purchase Contract, the Minimum Price and Sharing Price
commencing January 1, 2002, adjusted for inflation, is $1.71 per MMBtu and $2.12
per MMBtu, respectively.
16
TORCH ENERGY ROYALTY TRUST
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
------ -----------------
None.
ITEM 2. Changes in Securities
------ ---------------------
None.
ITEM 3. Defaults upon Senior Securities
------ -------------------------------
None.
ITEM 4. Submission of Matters to a Vote of Unitholders
------ ----------------------------------------------
None.
ITEM 5. Other Information
------ -----------------
None.
ITEM 6. Exhibits and Reports on Form 8-K
------ --------------------------------
None.
17
TORCH ENERGY ROYALTY TRUST
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TORCH ENERGY ROYALTY TRUST
By: Wilmington Trust Company,
Trustee
By: \s\ Bruce L. Bisson
-------------------
Bruce L. Bisson
Vice President
Date: May 13, 2002
(The Trust has no employees, directors or executive officers.)
18