<PAGE>
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 June 30, 1998
-------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _________
Commission File Number 1-12474
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Torch Energy Royalty Trust
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(Exact name of registrant as specified in its charter)
Delaware 74-6411424
- ------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1100 North Market Street, Wilmington, Delaware 19890
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 302/651-8584
----------------------------
Not Applicable
- -------------------------------------------------------------------------------
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
------ ------
<PAGE>
TORCH ENERGY ROYALTY TRUST
PART 1 - FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
- -----------------------------
This document includes "forward looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended (the "Securities Act"),
and Section 21E of the Securities Exchange Act of 1934 ("Exchange Act"). 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 Trust's financial
position, reserve quantities, the Year 2000 issue and future production are
forward looking statements. No assurances can be given that such assumptions
will prove to have been correct. Factors which could cause such forward looking
statements not to be correct include, among the other cautionary statements set
forth in the Trust's Annual Report on Form 10-K filed with the Securities and
Exchange Commission, the volatility of oil and gas prices, future production
costs, operating hazards and environmental conditions.
INTRODUCTION
- ------------
The financial statements included herein have been prepared by Torch Energy
Advisors Incorporated ("Torch"), pursuant to an administrative services
agreement between Torch and Torch Energy Royalty Trust (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,
1997 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
June 30, 1998 and December 31, 1997, the distributable income and changes in
trust corpus for the three-month and six-month periods ended June 30, 1998 and
1997 have been included. All such adjustments are of a normal recurring nature.
The distributable income for such interim periods is not necessarily indicative
of the distributable income for the full year.
The financial statements as of June 30, 1998 and for the three-month and six-
month periods ended June 30, 1998 included herein have been reviewed by KPMG
Peat Marwick LLP, independent certified public accountants, as stated in their
report appearing herein.
2
<PAGE>
INDEPENDENT ACCOUNTANTS' REPORT
Wilmington Trust Company
as Trustee of Torch Energy Royalty Trust
and the Unitholders:
We have reviewed the accompanying statement of assets, liabilities and trust
corpus of the Torch Energy Royalty Trust as of June 30, 1998 and the related
statements of distributable income and changes in trust corpus for the three-
month and six-month periods ended June 30, 1998. These financial statements are
the responsibility of the Trustee.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data, and of making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted
in accordance with generally accepted auditing standards, the objective of which
is the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
As described in Note 2 to the financial statements, these financial statements
were prepared on the modified cash basis of accounting, which is a comprehensive
basis of accounting other than generally accepted accounting principles.
Based on our review, we are not aware of any material modifications that should
be made to such financial statements for them to be in conformity with the basis
of accounting described in Note 2.
We have previously audited, in accordance with generally accepted auditing
standards, the statement of assets, liabilities and trust corpus of Torch Energy
Royalty Trust as of December 31, 1997, and the related statements of
distributable income and changes in trust corpus for the year then ended (not
presented herein); and in our report dated March 25, 1998, we expressed an
unqualified opinion on those financial statements. In our opinion, the
information set forth in the accompanying statement of assets, liabilities and
trust corpus as of December 31, 1997 is fairly stated, in all material respects,
in relation to the statement of assets, liabilities and trust corpus from which
it has been derived.
/s/ KPMG PEAT MARWICK LLP
- -------------------------
KPMG PEAT MARWICK LLP
Houston, Texas
August 10, 1998
3
<PAGE>
TORCH ENERGY ROTALTY TRUST
STATEMENTS OF ASSETS, LIABILITIES AND TRUST CORPUS
(In thousands)
<TABLE>
<CAPTION>
ASSETS
June 30, 1998 December 31,1997
------------- ----------------
(Unaudited)
<S> <C> <C>
Cash............................................... $ 11 $ 7
Net profits interests in oil and gas properties
(Net of accumulated amortization of $87,338
and $79,762 at June 30, 1998 and
December 31, 1997, respectively)................... 93,262 100,838
--------- -----------
$ 93,273 $ 100,845
========= ===========
LIABILITIES AND TRUST CORPUS
Trust expense payable.............................. $ 216 $ 177
Trust corpus....................................... 93,057 100,668
--------- -----------
$ 93,273 $ 100,845
========= ===========
</TABLE>
See notes to financial statements and
accompanying accountants' review report.
4
<PAGE>
TORCH ENERGY ROYALTY TRUST
STATEMENTS OF DISTRIBUTABLE INCOME
(In thousands, except per Unit amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
---------------------------------- --------------------------------
1998 1997 1998 1997
------------ ------------- ------------ -----------
<S> <C> <C> <C> <C>
Net profits income...................... $ 3,518 $ 4,162 $ 7,670 $ 8,741
Interest income......................... 6 7 12 9
------------ ------------- ------------ -----------
3,524 4,169 7,682 8,750
------------ ------------- ------------ -----------
General and
administrative expenses............... 198 175 373 339
------------ ------------- ------------ -----------
Distributable income.................... $ 3,326 $ 3,994 $ 7,309 $ 8,411
============ ============= ============ ===========
Distributable income per Unit
(8,600,000 Units) $ .39 $ .46 $ .85 $ .98
============ ============= ============ ===========
Distributions per Unit.................. $ .39 $ .47 $ .85 $ .98
============ ============= ============ ===========
</TABLE>
See notes to financial statements and
accompanying accountants' review report.
5
<PAGE>
TORCH ENERGY ROYALTY TRUST
STATEMENTS OF CHANGES IN TRUST CORPUS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------------- ------------------------------------
1998 1997 1998 1997
-------------- -------------- --------------- ---------------
<S> <C> <C> <C> <C>
Trust corpus, beginning of period.......... $96,858 $117,841 $100,668 $121,362
Amortization of net profits interests...... (3,773) (3,183) (7,576) (6,701)
Distributable income....................... 3,326 3,994 7,309 8,411
Distributions to Unitholders............... (3,354) (3,999) (7,344) (8,419)
-------------- -------------- --------------- ---------------
Trust corpus, end of period................ $93,057 $114,653 $ 93,057 $114,653
============== ============== =============== ===============
</TABLE>
See notes to financial statements and
accompanying accountants' review report.
6
<PAGE>
TORCH ENERGY ROYALTY TRUST
1. Trust Organization and Nature of Operations
The Torch Energy Royalty Trust ("Trust") was formed effective October 1, 1993
under the Delaware Business Trust Act pursuant to a trust agreement ("Trust
Agreement") among Wilmington Trust Company, as trustee ("Trustee"), Torch
Royalty Company ("TRC") and Velasco Gas Company, Ltd. ("Velasco"), as owners of
certain oil and gas properties ("Underlying Properties"), and Torch Energy
Advisors Incorporated ("Torch") as grantor. TRC and Velasco created net profits
interests ("Net Profits Interests") and conveyed such interests to Torch. Torch
conveyed the Net Profits Interests to the Trust in exchange for an aggregate of
8,600,000 units of beneficial interest ("Units"). Such Units were sold to the
public through various underwriters beginning November 1993. Pursuant to an
administrative services agreement with the Trust, Torch provides accounting,
bookkeeping, informational and other services related to the Net Profits
Interests.
The Underlying Properties constitute working interests in the Chalkley Field in
Louisiana ("Chalkley Field"), the Robinson's Bend Field in the Black Warrior
Basin in Alabama ("Robinson's Bend Field"), fields that produce from the Cotton
Valley formations in Texas ("Cotton Valley Fields") and fields that produce from
the Austin Chalk formation in Texas ("Austin Chalk Fields"). Sales of coal seam
and tight sands gas attributable to the Net Profits Interests between November
23, 1993 and January 1, 2003 result in the unitholders ("Unitholders") receiving
quarterly allocations of tax credits under Section 29 of the Internal Revenue
Code of 1986 ("Section 29 Credits"). The Section 29 Credits available for 1997
and 1996 production from qualifying coal seam properties were approximately
$1.05 and $1.03, respectively, for each MMBtu of gas produced and sold. This
rate is adjusted annually for inflation. The Section 29 Credit available for
production from qualifying tight sands properties is 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
7
<PAGE>
TORCH ENERGY ROYALTY TRUST
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 March 31, 1998 and 1997 from the Underlying Properties
in the Robinson's Bend Field was approximately 26% (237 MMcf) and 19% (176
MMcf), respectively, below the Volume Limitation. Production for the six-month
periods ended March 31, 1998 and 1997 from the Underlying Properties in the
Robinson's Bend Field was approximately 24% (431 MMcf) and 17% (314 MMcf),
respectively, below the Volume Limitation. If average gas prices following 2002
do not substantially exceed prices received during the first and second quarters
of 1998, the Trust anticipates that it will not receive net profits payments
attributable to the Robinson's Bend Field after 2002.
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.
2. Basis of Accounting
The financial statements of the Trust are prepared on a modified cash basis and
are not intended to present the financial position and results of operations in
conformity with generally accepted accounting principles ("GAAP"). Preparation
of the Trust's financial statements on such basis includes the following:
- - Revenues are recognized in the period in which amounts are received by the
Trust. Therefore, revenues recognized during the three-month and six-month
periods ended June 30, 1998 and 1997 are derived from oil and gas
production sold during the three-month and six-month periods ended March
31, 1998 and 1997, 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.
8
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TORCH ENERGY ROYALTY TRUST
- - The net carrying value of the Net Profits Interests is limited to the sum
of the estimated future net cash flows attributable to the Trust's oil and
gas reserves plus the estimated future Section 29 Credit for Federal income
tax purposes. If the net amount of the Net Profits Interests exceeds this
amount, an impairment provision will be recorded and charged to the trust
corpus.
The financial statements of the Trust differ from financial statements prepared
in accordance with GAAP because net profits income is not accrued in the period
of production and amortization of the Net Profits Interests is not charged
against operating results.
3. Federal Income Taxes
Tax counsel has advised the Trust that, under current tax law, the Trust is
classified as a grantor trust for Federal income tax purposes and not an
association taxable as a corporation. However, the opinion of tax counsel is
not binding on the Internal Revenue Service. As a grantor trust, the Trust is
not subject to Federal income tax.
Because the Trust is treated as a grantor trust for Federal income tax purposes
and a Unitholder is treated as directly owning an interest in the Net Profits
Interests, each Unitholder is taxed directly on such Unitholder's pro rata share
of income attributable to the Net Profits Interests consistent with the
Unitholder's method of accounting and without regard to the taxable year or
accounting method employed by the Trust. Amounts payable with respect to the
Net Profits Interests are paid to the Trust on the quarterly record date
established for quarterly distributions in respect to each calendar quarter
during the term of the Trust, and the income, deductions and income tax credits
relating to Section 29 Credits resulting from such payments are allocated to the
Unitholders of record on such date.
4. Distributions and Income Computations
Distributions are determined for each quarter and are based on the amount of
cash available for distribution to Unitholders. Such amount (the "Quarterly
Distribution Amount") is equal to the excess, if any, of the cash received by
the Trust, on the last 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
9
<PAGE>
TORCH ENERGY ROYALTY TRUST
the Net Profits Interests generally represents proceeds from the sale of oil and
gas produced from the Underlying Properties during the preceding calendar
quarter. The Quarterly Distribution Amount for each quarter is payable to
Unitholders of record on the last day of the second month of the calendar
quarter unless such day is not a business day in which case the record date is
the next business day thereafter. The Quarterly Distribution Amount is
distributed within approximately ten days after the record date to each person
who was a Unitholder of record on the associated record date.
5. Related Party Transactions
Marketing Arrangements
TRC and Velasco, as owners of the Underlying Properties subject to and burdened
by the Net Profits Interests, contracted to sell the oil and gas production from
such properties to Torch Energy Marketing, Inc. ("TEMI"), a subsidiary of Torch,
under a purchase contract ("Purchase Contract"). Under the Purchase Contract,
TEMI is obligated to purchase all net production attributable to the Underlying
Properties for an index price for oil and gas ("Index Price"), less certain
gathering, treating and transportation charges, which are calculated monthly.
The Index Price equals 97% of the average spot market prices of oil and gas
("Average Market Prices") at the four locations where TEMI sells production,
which, prior to September 1, 2000, is adjusted to reflect the terms of a hedge
contract ("Hedge Contract") to which TEMI is a party. Under the Hedge Contract,
TEMI receives prices specified in the Hedge Contract ("Specified Prices") for
quantities of oil and gas specified therein ("Specified Quantities"). While the
Index Price calculation reflects the terms of the Hedge Contract, the Trust's
net profits income is not impacted by payments or receipts made by or received
by TEMI in connection with its participation in the Hedge Contract. In
calculating the Index Price for gas (which represents approximately 97% of the
estimated reserves as of January 1, 1998, on an Mcfe basis), the Specified
Prices received weightings ranging from 40% to 70% pertaining to production
prior to September 1, 1997 and thereafter, the Specified Prices receive
weightings of approximately 10%. The Average Market Prices receive the balance
of the weighting. The Specified Prices for gas increase each year from $1.83
per MMBtu in 1996 to $1.89 per MMBtu in 2000 and are adjusted to reflect the
difference between the settlement prices for oil and gas in the futures markets
and the Average Market Prices.
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
10
<PAGE>
TORCH ENERGY ROYALTY TRUST
determining the purchase price when the Index Price for gas exceeds the Minimum
Price. As of June 30, 1998, 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. No
Price Differential adjustments were deducted in calculating the purchase price
relating to distributions received by the Unitholders during the three-month
period ended June 30, 1998. Distributions received by Unitholders during the
three-month period ended June 30, 1997 were reduced by $91,000 for the Price
Differential adjustment. Distributions received by Unitholders during the six-
month periods ended June 30, 1998 and 1997 were reduced by $605,000 and
$325,000, respectively, for the Price Differential adjustment.
Beginning January 1, 2001, TEMI has an annual option to discontinue the Minimum
Price commitment. However, if TEMI discontinues the Minimum Price commitment,
it will no longer be entitled to deduct the Price Differential in calculating
the purchase price and will forfeit all accrued Price Credits. TEMI has
purchased put option contracts granting TEMI the right to sell estimated gas
production in excess of the Specified Quantities at a price intended to limit
TEMI's losses in the event the Index Price falls below the Minimum Price.
Gross revenues (before deductions for applicable gathering, treating and
transportation charges) from TEMI included in net profits income for the three-
month periods ended June 30, 1998 and 1997 were $4,674,000 and $5,539,000,
respectively. Such gross revenues for the six-month periods ended June 30, 1998
and 1997 were $10,247,000 and $11,555,000, respectively.
Gathering, Treating and Transportation Arrangements
The Purchase Contract entitles TEMI to deduct certain gas gathering, treating
and transportation costs in calculating the purchase price for gas in the
Robinson's Bend, Austin Chalk and Cotton Valley Fields. The amounts that may be
deducted in calculating the purchase price for such gas are set forth in the
Purchase Contract and are not affected by the actual costs incurred by TEMI to
gather, treat and transport gas. In the Robinson's Bend Field, TEMI is entitled
to deduct a gathering, treating and transportation fee of $0.26 per MMBtu
adjusted for inflation ($0.274, $0.274 and $0.272 per MMBtu for 1998, 1997 and
1996 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 Torch, is deducted in calculating
the purchase price for production from 68 of 395 wells in the Robinson's Bend
Field. TEMI also deducts $0.38 per MMBtu plus 17% of revenues in calculating
11
<PAGE>
TORCH ENERGY ROYALTY TRUST
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. The transportation fee is paid to a
third party. During the three-month periods ended June 30, 1998 and 1997,
gathering, treating and transportation fees charged to the Trust by TEMI,
attributable to production during the three-month periods ended March 31, 1998
and 1997 in the Robinson's Bend, Austin Chalk and Cotton Valley Fields, totaled
$395,000 and $524,000, respectively. During the six-month periods ended June 30,
1998 and 1997, such fees, attributable to production during the six-month
periods ended March 31, 1997 and 1996, totaled $859,000 and $1,085,000,
respectively. No amounts for gathering, treating or transportation are deducted
in calculating the purchase price from the Chalkley Field.
Administrative Services Agreement
Pursuant to the Trust Agreement, Torch and the Trust entered into an
administrative services agreement effective October 1, 1993. The Trust is
obligated, throughout the term of the Trust, to pay to Torch each quarter an
administrative services fee for accounting, bookkeeping, informational and other
services relating to the Net Profits Interests. The administrative services fee
is $87,500 per calendar quarter commencing October 1, 1993. The amount of the
administrative services fee is adjusted annually based upon the change in the
Producer's Price Index as published by the Department of Labor, Bureau of Labor
Statistics. Administrative services during the three-month periods ended June
30, 1998 and 1997 were $92,000 per period. During the six-month periods ended
June 30, 1998 and 1997, such fees were $184,000 per period.
Compensation of the Trustee and Transfer Agent
The Trust Agreement provides that the Trustee be compensated for its
administrative services, out of the Trust assets, in an annual amount of
$41,000, plus an hourly 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-month periods ended June 30, 1998 and 1997 were $14,000
per period. Such fees during the six-month periods June 30, 1998 and 1997 were
$28,000 per period. The Trustee is also entitled to reimbursement for out-of-
pocket expenses.
12
<PAGE>
ITEM 2. DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
At this time, the Trust's administrative services provider, Torch, does not
believe that costs incurred to address the Year 2000 issue with respect to its
financial and administrative systems will have any impact on the Trust's future
financial results on operations. Torch does not expect this issue to have a
significant operational impact.
Because a modified cash basis of accounting is utilized by the Trust, net
profits income of the Trust for the three-month periods ended June 30, 1998 and
1997 is derived from actual oil and gas produced during the three-month periods
ended March 31, 1998 and 1997, respectively. Net profits income for the six-
month periods ended June 30, 1998 and 1997 is derived from actual oil and gas
produced during the six-month periods ended March 31, 1998 and 1997. Oil and
gas sales attributable to the working interests burdened by the Underlying
Properties for such periods are as follows:
Three Months Ended June 30,
---------------------------------------
1998 1997
------------------ ------------------
Bbls Mcf Bbls Mcf
of Oil of Gas of Oil of Gas
------ --------- ------ ---------
Chalkley Field 7,299 864,519 10,342 1,110,041
Robinson's Bend Field --- 710,891 --- 775,412
Cotton Valley Fields 2,319 385,241 1,617 343,586
Austin Chalk Fields 11,016 103,798 14,654 159,235
------ --------- ------ ---------
20,634 2,064,449 26,613 2,388,274
====== ========= ====== =========
Six Months Ended June 30,
---------------------------------------
1998 1997
------------------ ------------------
Bbls Mcf Bbls Mcf
of Oil of Gas of Oil of Gas
------ --------- ------ ---------
Chalkley Field 14,557 1,702,295 23,260 2,310,019
Robinson's Bend Field --- 1,467,777 --- 1,590,008
Cotton Valley Fields 3,984 763,770 3,457 742,384
Austin Chalk Fields 22,342 214,964 35,258 349,539
------ --------- ------ ---------
40,883 4,148,806 61,975 4,991,950
====== ========= ====== =========
13
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TORCH ENERGY ROYALTY TRUST
THREE-MONTH PERIOD ENDED JUNE 30, 1998 COMPARED TO THREE-MONTH PERIOD ENDED JUNE
30, 1997
For the three-month period ended June 30, 1998, net profits income was
$3,518,000, down 15% from net profits income of $4,162,000 for the same period
in 1997. Such decrease is primarily due to normal declines in oil and gas
production attributable to the Underlying Properties.
Gas production attributable to the Underlying Properties for the three-month
period ended March 31, 1998 was 2,064,449 Mcf, or 14% lower than gas production
of 2,388,274 Mcf for the same period in 1997. Oil production attributable to
the Underlying Properties for the three-month period ended March 31, 1998 was
20,634 Bbls as compared to 26,613 Bbls for the same period in 1997. Such
decreases in production are mainly due to normal production declines.
The average price paid for gas production attributable to the Underlying
Properties during the three-month period ended March 31, 1998 was $2.03 per
MMBtu for gas and $12.36 per Bbl for oil as compared to $2.00 per MMBtu for gas
and $17.30 per Bbl for oil during the same period in 1997. 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 Price. As of
June 30, 1998, TEMI had no accumulated Price Credits. No Price Credits were
deducted in calculating the purchase price related to distributions received by
Unitholders during the quarters ended June 30, 1998 and 1997. 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. No Price Differential
adjustment was deducted from distributions received by Unitholders during the
three-month period ended June 30, 1998. Distributions received by Unitholders
during the three-month period ended June 30,1997 were reduced by $91,000 for the
Price Differential adjustment.
General and administrative expenses amounted to $198,000 for the three-month
period ended June 30, 1998 as compared to $175,000 during the three-month period
ended June 30, 1997. These expenses primarily relate to administrative services
provided by Torch and the Trustee.
The foregoing resulted in distributable income of $3,326,000, or $.39 per Unit,
for the three-month period ended June 30, 1998, as compared to $3,994,000, or
$.46 per Unit, for the same period in 1997. On June 11, 1998, the Trust made a
distribution to Unitholders of record on June 1, 1998. The Section 29 Credits
relating to these
14
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TORCH ENERGY ROYALTY TRUST
distributions, generated from production during the three-month periods ended
March 31, 1998 and 1997, were approximately $.10 per Unit for each period.
SIX-MONTH PERIOD ENDED JUNE 30, 1998 COMPARED TO SIX-MONTH PERIOD ENDED JUNE 30,
1997
For the six-month period ended June 30, 1998, net profits income was $7,670,000,
down 12% from net profits income of $8,741,000 for the same period in 1997.
Such decrease is primarily due to normal declines in oil and gas production
attributable to the Underlying Properties.
Gas production attributable to the Underlying Properties for the six-month
period ended March 31, 1998 was 4,148,806 Mcf, or 17% lower than gas production
of 4,991,950 Mcf for the same period in 1997. Oil production attributable to
the Underlying Properties for the six-month period ended March 31, 1998 was
40,883 Bbls, as compared to 61,975 Bbls for the same period in 1997. Such
decreases in production are mainly due to normal production declines.
The average price paid for gas production attributable to the Underlying
Properties during the six-month period ended March 31, 1998 was $2.21 per MMBtu
for gas and $14.18 per Bbl for oil as compared to $1.97 per MMBtu for gas and
$17.80 per Bbl for oil during the same period in 1997. 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 Price. As of
June 30, 1998, TEMI had no accumulated Price Credits. No Price Credits were
deducted in calculating the purchase price related to distributions received by
Unitholders during the six-month period ended June 30, 1998. Price Credits in
the amount of $330,000, net to the Trust, were deducted in calculating the
purchase price for the six-month period ended June 30, 1997. Additionally, if
the Index Price for gas exceeds $2.10 per MMBtu, TEMI is entitled to deduct 50%
of such excess from the purchase price. Distributions received by unitholders
during the six-month periods ended June 30, 1998 and 1997 were reduced by
$605,000 and $325,000, respectively, for the Price Differential adjustment.
General and administrative expenses amounted to $373,000 for the six-month
period ended June 30, 1998 as compared to $339,000 during the six-month period
ended June 30, 1997. These expenses primarily relate to administrative services
provided by Torch and the Trustee.
The foregoing resulted in distributable income of $7,309,000, or $.85 per Unit,
for the six-month period ended June 30, 1998 as compared to $8,411,000, or $.98
per Unit, for
15
<PAGE>
TORCH ENERGY ROYALTY TRUST
the same period in 1997. During the six-month period ended June 30, 1998, the
Trust made distributions to Unitholders of $7,344,000 or $.85 per Unit, as
compared to $8,419,000, or $.98 per Unit, for the same period in 1997. The
Section 29 Credits relating to these distributions, generated from production
during the six-month periods ended March 31, 1998 and 1997, were approximately
$.20 per Unit for each period.
Net profits income (in thousands) received by the Trust during the three-month
and six- month periods ended June 30, 1998 and 1997, derived from production
sold during the three-month and six-month periods ended March 31, 1998 and 1997,
respectively, was computed as shown in the following tables:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, 1998 THREE MONTHS ENDED JUNE 30, 1997
--------------------------------------- -----------------------------------
CHALKLEY, CHALKLEY,
COTTON VALLEY COTTON VALLEY
AND AUSTIN ROBINSON'S AND AUSTIN ROBINSON'S
CHALK FIELDS BEND FIELD TOTAL CHALK FIELDS BEND FIELD TOTAL
------------ ------------- -------- ------------ ----------- -------
<S> <C> <C> <C> <C> <C> <C>
Oil and gas revenues................ $ 3,041 $ 1,238 $ 3,702 $ 1,313
----------- ----------- ---------- ---------
Direct operating expenses:
Lease operating expenses and
property tax...................... 385 --- 324 ---
Severance tax...................... 111 48 151 94
----------- ----------- ---------- ---------
496 48 475 94
----------- ----------- ---------- ---------
Net proceeds before capital
expenditures....................... 2,545 1,190 3,227 1,219
Capital expenditures................ 32 --- 65 ---
----------- ----------- ---------- ---------
Net proceeds........................ 2,513 1,190 3,162 1,219
Net profits percentage.............. 95% 95% 95% 95%
----------- ----------- ---------- ---------
Net profits income.................. $ 2,387 $ 1,131 $ 3,518 $ 3,004 $ 1,158 $ 4,162
=========== =========== ======== ========== ========= ========
</TABLE>
16
<PAGE>
TORCH ENERGY ROYALTY TRUST
<TABLE>
<CAPTION>
!!!!
SIX MONTHS ENDED JUNE 30, 1998 SIX MONTHS ENDED JUNE 30, 1997
--------------------------------------- -----------------------------------
CHALKLEY, CHALKLEY,
COTTON VALLEY COTTON VALLEY
AND AUSTIN ROBINSON'S AND AUSTIN ROBINSON'S
CHALK FIELDS BEND FIELD TOTAL CHALK FIELDS BEND FIELD TOTAL
------------ ------------- -------- ------------ ----------- -------
<S> <C> <C> <C> <C> <C> <C>
Oil and gas revenues................ $ 6,578 $ 2,810 $ 7,822 $ 2,647
---------- ---------- --------- --------
Direct operating expenses:
Lease operating expenses and
property tax...................... 862 --- 897 ---
Severance tax...................... 230 126 346 161
---------- ---------- --------- --------
1,092 126 1,243 161
---------- ---------- --------- --------
Net proceeds before capital
expenditures....................... 5,486 2,684 6,579 2,486
Capital expenditures................ 97 --- (136) ---
---------- ---------- --------- --------
Net proceeds........................ 5,389 2,684 6,715 2,486
Net profits percentage.............. 95% 95% 95% 95%
---------- ---------- --------- --------
Net profits income.................. $ 5,120 $ 2,550 $ 7,670 $ 6,379 $ 2,362 $ 8,741
========== ========== ======== ========= ======== =======
</TABLE>
In calculating amounts paid to the Trust, lease operating expenses in the
Robinson's Bend Field are not deducted until after 2002. When these amounts are
deducted, the amounts paid to the Trust attributable to the Robinson's Bend
Field will be reduced substantially. If gas prices after 2002 are not
substantially greater than gas prices in December 1997, the Trust's current
reserve reports indicate that the Trust will not receive any payments
attributable to the Robinson's Bend Field.
17
<PAGE>
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
- ------- --------------------------------
Exhibit 27 - Financial Data Schedule.
18
<PAGE>
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: August 14, 1998
(The Trust has no employees, directors or executive officers.)
19
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> APR-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 11
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 93,262
<DEPRECIATION> 0
<TOTAL-ASSETS> 93,273
<CURRENT-LIABILITIES> 216
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 93,057
<TOTAL-LIABILITY-AND-EQUITY> 93,273
<SALES> 0
<TOTAL-REVENUES> 3,524
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 198
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 3,326
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,326
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
