<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 September 30, 2000
------------------
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
------------------------------------------------------------
(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 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 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, 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, 1999
financial statements and notes thereto included in the Trust's latest annual
report on Form 10-K. In the opinion of Torch, all adjustments necessary to
present fairly the assets, liabilities and trust corpus of the Trust as of
September 30, 2000 and December 31, 1999, and the distributable income and
changes in trust corpus for the three-month and nine-month periods ended
September 30, 2000 and 1999 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
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TORCH ENERGY ROYALTY TRUST
STATEMENTS OF ASSETS, LIABILITIES AND TRUST CORPUS
(In thousands)
ASSETS
<TABLE>
<CAPTION>
September 30, 2000 December 31,1999
------------------ ----------------
(Unaudited)
<S> <C> <C>
Cash............................................... $ 5 $ 2
Net profits interests in oil and gas properties
(Net of accumulated amortization of $136,984
and $131,459 at September 30, 2000 and
December 31, 1999, respectively)................... 43,616 49,141
-------- --------
$43,621 $49,143
======= =======
LIABILITIES AND TRUST CORPUS
Trust expense payable.............................. $ 141 $ 161
Trust corpus....................................... 43,480 48,982
------- -------
$43,621 $49,143
======= =======
</TABLE>
See notes to financial statements.
3
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TORCH ENERGY ROYALTY TRUST
STATEMENTS OF DISTRIBUTABLE INCOME
(In thousands, except per Unit amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
Sept. 30, Sept. 30,
----------------------- ---------------------
2000 1999 2000 1999
------- ------- ------ ------
<S> <C> <C> <C> <C>
Net profits income...................... $3,703 $2,471 $9,612 $7,154
Interest income......................... 6 2 11 7
------ ------ ------ ------
3,709 2,473 9,623 7,161
------ ------ ------ ------
General and
administrative expenses............... 139 166 424 517
------ ------ ------ ------
Distributable income.................... $3,570 $2,307 $9,199 $6,644
====== ====== ====== ======
Distributable income per Unit
(8,600 Units)......................... $ .42 $ .27 $ 1.07 $ . 77
====== ====== ====== ======
Distributions per Unit.................. $ .42 $ .27 $ 1.07 $ .78
====== ====== ====== ======
</TABLE>
See notes to financial statements.
4
<PAGE>
TORCH ENERGY ROYALTY TRUST
STATEMENTS OF CHANGES IN TRUST CORPUS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
Sept. 30, Sept. 30,
----------------------- ---------------------
2000 1999 2000 1999
------- ------- ------ ------
<S> <C> <C> <C> <C>
Trust corpus, beginning of period.......... $45,348 $52,649 $48,982 $56,860
Amortization of net profits interests...... (1,860) (1,988) (5,525) (6,176)
Distributable income....................... 3,570 2,307 9,199 6,644
Distributions to Unitholders............... (3,578) (2,305) (9,176) (6,665)
------- ------- ------- -------
Trust corpus, end of period................ $43,480 $50,663 $43,480 $50,663
======= ======= ======= =======
</TABLE>
See notes to financial statements.
5
<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 estimated Section 29 Credit rate for
2000 coal seam production is $1.04 for each MMBtu of gas produced and sold. The
Section 29 Credits available for 1999 and 1998 production from qualifying coal
seam properties were approximately $1.04 and $1.06, respectively, for each MMBtu
of gas produced and sold. This rate is adjusted annually for inflation. The
Section 29 Credit available for production from qualifying tight sands
properties is $0.517 for each MMBtu of gas produced and sold and such amount is
not adjusted for inflation.
The only assets of the Trust, other than cash and temporary investments being
held for the payment of expenses and liabilities and for distribution to
Unitholders, are the Net Profits Interests. The Net Profits Interests (other
than the Net Profits Interest covering the Robinson's Bend Field) entitle the
Trust to receive 95% of the net proceeds ("Net Proceeds") attributable to oil
and gas produced and sold from wells (other than infill wells) on the Underlying
Properties. Net Proceeds are generally defined as gross revenues received from
the sale of production attributable to the Underlying Properties during any
period less property, production, severance and similar taxes, and development,
operating, and certain other costs. In calculating Net Proceeds from the
Robinson's Bend Field, operating and development costs incurred prior to January
1, 2003 are not deducted. In addition, the amounts paid to the Trust from the
Robinson's
6
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TORCH ENERGY ROYALTY TRUST
Bend Field during any calendar quarter are subject to a volume limitation
("Volume Limitation") equal to the gross proceeds from the sale of 912.5 MMcf of
gas, less property, production, severance and related taxes. Production for the
three-month periods ended June 30, 2000 and 1999 from the Underlying Properties
in the Robinson's Bend Field was approximately 39% (357 MMcf) and 33% (301
MMcf), respectively, below the Volume Limitation. Production for the nine-month
periods ended June 30, 2000 and 1999 from the Underlying Properties in the
Robinson's Bend Field was approximately 37% (1,023 MMcf) and 32% (877 MMcf),
respectively, below the Volume Limitation. If gas prices after 2002 are not
substantially greater than gas prices in December 1999, the Trust's current
reserve reports indicate that the Trust will not receive any payments
attributable to the Robinson's Bend Field after 2002.
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 Well Net Proceeds
represent the aggregate gross revenues received from Infill Wells less the
aggregate amount of the following Infill Well costs: i) property, production,
severance and similar taxes; ii) development costs; iii) operating costs; and
iv) interest on the unrecovered portion, if any, of the foregoing costs computed
at a rate of interest announced publicly by Citibank, N.A. in New York as its
base rate. Distributions received by Unitholders have not been impacted by
these wells as gross revenues have not exceeded costs and expenses for the
Infill Wells.
Effective April 1, 2000, Torch sold its interest in eight infill wells and its
approximate 5% interest in the Cotton Valley field. The properties were
conveyed subject to the terms and conditions of the Trust Agreement. The
Trust's Net Profit Interest and Trust Corpus were not impacted by the sale.
2. Basis of Accounting
The financial statements of the Trust are prepared on a modified cash basis and
are not intended to present the financial position and results of operations in
conformity with generally accepted accounting principles ("GAAP"). Preparation
of the Trust's financial statements on such basis includes the following:
- Revenues are recognized in the period in which amounts are received by the
Trust. Therefore, revenues recognized during the three-month and nine-
month periods ended September 30, 2000 and 1999 are derived from oil and
gas production sold during the three-month and nine-month periods ended
June 30, 2000 and 1999, respectively. General and administrative expenses
are recognized on an accrual basis.
7
<PAGE>
TORCH ENERGY ROYALTY TRUST
- 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.
- An impairment loss is recognized when the net carrying value of the Net
Profits Interests exceeds the sum of the estimated undiscounted future cash
flows attributable to the Net Profits Interest plus the estimated future
tax credits under Section 29 of the Internal Revenue Code of 1986 ("Section
29 Credit") for Federal income tax purposes. The impairment loss is equal
to the difference between the carrying value of the Net Profits Interest
and the fair value of the Net Profits Interest. No impairment loss was
recognized during the nine-month periods ending September 30, 2000 and
1999.
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
8
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TORCH ENERGY ROYALTY TRUST
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
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, 2000, on an Mcfe basis), the Specified
Prices received weightings ranging from 3% to 13% during 1998, 1999 and 2000.
The Average Market Prices received the balance of the weighting. The Specified
Prices for gas increase each year from $1.85 per MMBtu in 1998 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.
6. Anticipated Termination of the Trust
The Trust will terminate on any March 1st after March 1, 2002 if the present
value, discounted at 10%, of estimated pre-tax future net cash flows of proved
reserves attributable to the Net Profits Interests is less than $25 million.
Based on the December 31, 1999 reserve reports, Torch estimates that if prices
remain at their current level of $4.62 per MMbtu for gas and $33.24 per Bbl for
oil, the present value of proved reserves will be below $25 million on March 31,
2005 and the Trust will terminate. If prices fall below current prices the
Trust may terminate earlier. Upon termination of the Trust, the Net Profits
Interests will be sold and the sales proceeds distributed to holders of Units.
No assurances can be made as to the price which will be received for the Net
Profits Interests in connection with their sale, or whether there will be a
market for the Net Profits Interests.
Prior to 2003, operating and development expenses are not deducted in
calculating Net Proceeds attributable to the Net Profits Interest in the
Robinson's Bend field. After 2003, operating and development expenses will be
deducted in calculating Net Proceeds from the Robinson's Bend field. Torch
currently estimates that production and development expenses will be
approximately $5.6 million during 2003, although actual expenses could be
materially higher or lower. These operating and development costs are primarily
overhead costs and water disposal costs which will be paid to a subsidiary of
Torch pursuant to contracts entered into when the Trust was formed. Based on
the production estimated in the December 31, 1999 reserve report for the Trust,
gas prices would have to exceed $4.68 per Mcf for the Net Profits Interest in
the Robinson's Bend field to generate positive Net Proceeds payable to the
Trust. The Trust will not be liable for the excess of the operating and
development costs over the revenues attributable to the Net Profits Interest in
the Robinson's Bend field, and the amount of such excess will not affect the Net
Profits Interests burdening Underlying Properties in Texas and Louisiana. The
excess of the operating and development costs over revenues is carried forward
to future periods, if any, when revenues exceed operating and development costs.
Interest is paid on the amount carried forward at the prime rate.
If the Net Profits Interest in the Robinson's Bend field does not generate Net
Proceeds, Torch believes that it will have no value to a purchaser upon
termination of the Trust, which could occur as early as March 1, 2003, depending
on the present value of reserves attributable to the Net Profits Interests.
9
<PAGE>
TORCH ENERGY ROYALTY TRUST
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. Net Price Credits in the amount of $97,000 were
deducted in calculating the purchase price related to distributions received by
Unitholders during the nine-months ended September 30, 1999. No Price Credits
were deducted in calculating the purchase price related to distributions
received by Unitholders during the nine-months ended September 30, 2000. As of
September 30, 2000, TEMI had no remaining 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 had the effect of reducing distributions received by Unitholders during
the nine-month periods ended September 30, 2000 and 1999 by $1,406,000 and
$13,000, respectively.
Beginning January 1, 2002, TEMI has an annual option to discontinue the Minimum
Price commitment. However, if TEMI discontinues the Minimum Price commitment,
it will no longer be entitled to deduct the Price Differential in calculating
the purchase price and will forfeit all accrued Price Credits. TEMI has
purchased put option contracts granting TEMI the right to sell estimated gas
production in excess of the Specified Quantities at a price intended to limit
TEMI's losses in the event the Index Price falls below the Minimum Price.
Gross revenues (before deductions for applicable gathering, treating and
transportation charges) from TEMI included in net profits income for the three-
month periods ended September 30, 2000 and 1999 were $4,726,000 and $3,553,000,
respectively. Such gross revenues for the nine-month periods ended September
30, 2000 and 1999 were $12,551,000 and $10,281,000, 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 annually for inflation ($0.283, $0.281
10
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TORCH ENERGY ROYALTY TRUST
and $0.274, respectively, per MMBtu for 2000, 1999 and 1998 production,
respectively, plus fuel usage equal to 5% of revenues, payable to 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-month periods
ended September 30, 2000 and 1999, gathering, treating and transportation fees
deducted by TEMI in calculating the purchase price for production during the
three-month periods ended June 30, 2000 and 1999 in the Robinson's Bend, Austin
Chalk and Cotton Valley Fields, totaled $344,000 and $323,000, respectively.
During the nine-month periods ended September 30, 2000 and 1999, such fees,
attributable to production during the nine-month periods ended June 30, 2000 and
1999, totaled $977,000 and $969,000, 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 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
September 30, 2000 and 1999 were $95,000 and $94,000, respectively. During the
nine-month periods ended September 30, 2000 and 1999, such fees were $285,000
and $283,000, respectively.
Compensation of the Trustee and Transfer Agent
The Trust Agreement provides that the Trustee be compensated for its
administrative services, out of the Trust assets, in an annual amount of
$41,000, plus an hourly charge for services in excess of a combined total of 250
hours annually at its standard rate. The Trustee also receives a transfer
agency fee of $5.00 annually per account (minimum of $15,000 annually). Such
fees are subject to change each December based upon the change in the Producer's
Price Index as published by the Department of Labor, Bureau of Labor Statistics,
plus $1.00 for each certificate issued. Total
11
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TORCH ENERGY ROYALTY TRUST
administrative and transfer agent fees during the three-month periods ended
September 30, 2000 and 1999 were $14,000 per period. Such fees during the nine-
month periods September 30, 2000 and 1999 were $42,000 per period. The Trustee
is also entitled to reimbursement for out-of-pocket expenses.
ITEM 2. DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Results of Operations
Because a modified cash basis of accounting is utilized by the Trust, net
profits income of the Trust for the three-month periods ended September 30, 2000
and 1999 is derived from actual oil and gas produced during the three-month
periods ended June 30, 2000 and 1999, respectively. Net profits income for the
nine-month periods ended September 30, 2000 and 1999 is derived from actual oil
and gas produced during the nine-month periods ended June 30, 2000 and 1999.
Oil and gas sales attributable to the working interests burdened by the
Underlying Properties for such periods are as follows:
<TABLE>
<CAPTION>
Three Months Ended September 30,
---------------------------------------
2000 1999
------------------ ------------------
Bbls Mcf Bbls Mcf
of Oil of Gas of Oil of Gas
------ --------- ------ ---------
<S> <C> <C> <C> <C>
Chalkley Field 4,332 646,985 4,917 634,643
Robinson's Bend Field --- 584,919 --- 643,637
Cotton Valley Fields 2,394 315,288 1,227 306,928
Austin Chalk Fields 6,103 53,306 7,483 60,954
------ --------- ------ ---------
12,829 1,600,498 13,627 1,646,162
====== ========= ====== =========
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended September 30,
---------------------------------------
2000 1999
------------------ ------------------
Bbls Mcf Bbls Mcf
of Oil of Gas of Oil of Gas
------ --------- ------ ---------
<S> <C> <C> <C> <C>
Chalkley Field 13,397 1,919,351 16,107 2,026,831
Robinson's Bend Field --- 1,805,178 --- 1,958,748
Cotton Valley Fields 4,618 896,201 3,306 932,824
Austin Chalk Fields 16,676 155,633 22,321 198,610
------ --------- ------ ---------
34,691 4,776,363 41,734 5,117,013
====== ========= ====== =========
</TABLE>
12
<PAGE>
TORCH ENERGY ROYALTY TRUST
THREE-MONTH PERIOD ENDED SEPTEMBER 30, 2000 COMPARED TO
THREE-MONTH PERIOD ENDED SEPTEMBER 30, 1999
For the three-month period ended September 30, 2000, net profits income was
$3,703,000, up 50% from net profits income of $2,471,000 for the same period in
1999. Such increase is mainly due to higher average prices paid for oil and gas
production attributable to the Underlying Properties.
Gas production attributable to the Underlying Properties for the three-month
period ended June 30, 2000 was 1,600,498 Mcf, or 3% lower than gas production of
1,646,162 Mcf for the same period in 1999. Oil production attributable to the
Underlying Properties for the three-month period ended June 30, 2000 was 12,829
Bbls as compared to 13,627 Bbls for the same period in 1999. Such decreases in
production are mainly due to normal production declines.
The average prices paid for production attributable to the Underlying Properties
during the three-month period ended June 30, 2000 was $2.68 per MMBtu for gas
and $23.04 per Bbl for oil as compared to $1.98 per MMBtu for gas and $14.25 per
Bbl for oil during the same period in 1999. 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. Price Credits in the amount of $81,000,
net to the Trust, were deducted in calculating the purchase price related to
distributions received by Unitholders during the quarter ended September 30,
1999. No Price Credits were deducted in calculating the purchase price related
to distributions received by Unitholders during the quarter ended September 30,
2000. As of September 30, 2000, TEMI had no remaining 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 of gas had
the effect of reducing distributions received by Unitholders by $907,000 and
$13,000, respectively, during the three-month periods ended September 30, 2000
and 1999.
General and administrative expenses amounted to $139,000 for the three-month
period ended September 30, 2000 as compared to $166,000 during the three-month
period ended September 30, 1999. These expenses primarily relate to
administrative services provided by Torch and the Trustee.
The foregoing resulted in distributable income of $3,570,000, or $0.42 per Unit,
for the three-month period ended September 30, 2000, as compared to $2,307,000,
or $0.27 per Unit, for the same period in 1999. Cash distributions of
$3,578,000, or $0.42 per Unit, were made during the quarter ended September 30,
2000 as compared to $2,305,000, or $0.27 per Unit, for the same period in 1999.
The Section 29 Credits
13
<PAGE>
TORCH ENERGY ROYALTY TRUST
relating to the distributions received by Unitholders during the quarter ended
September 30, 2000 and 1999, generated from production during the three-month
periods ended June 30, 2000 and 1999, were approximately $0.07 and $0.09 per
Unit, respectively, for each period.
NINE-MONTH PERIOD ENDED SEPTEMBER 30, 2000 COMPARED TO NINE-MONTH PERIOD ENDED
SEPTEMBER 30, 1999
For the nine-month period ended September 30, 2000, net profits income was
$9,612,000, up 34% from net profits income of $7,154,000 for the same period in
1999. Such increase is primarily due to higher average prices paid for oil and
gas production attributable to the Underlying Properties slightly offset by
normal declines in oil and gas production.
Gas production attributable to the Underlying Properties for the nine-month
period ended June 30, 2000 was 4,776,363 Mcf, or 7% lower than gas production of
5,117,013 Mcf for the same period in 1999. Oil production attributable to the
Underlying Properties for the nine-month period ended June 30, 2000 was 34,691
Bbls, as compared to 41,734 Bbls for the same period in 1999. Such decreases in
production are mainly due to normal production declines.
The average price paid for production attributable to the Underlying Properties
during the nine-month period ended June 30, 2000 was $2.39 per MMBtu for gas and
$21.75 per Bbl for oil as compared to $1.85 per MMBtu for gas and $10.40 per Bbl
for oil during the same period in 1999. 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. Net Price Credits in the amount of $97,000
were deducted in calculating the purchase price related to distributions
received by Unitholders during the nine-months ended September 30, 1999. No
Price Credits were deducted in calculating the purchase price related to
distributions received by Unitholders during the nine-months ended September 30,
2000. As of September 30, 2000, 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 nine-month
periods ended September 30, 2000 and 1999 by $1,406,000 and $13,000,
respectively.
General and administrative expenses amounted to $424,000 for the nine-month
period ended September 30, 2000 as compared to $517,000 during the nine-month
period ended September 30, 1999. These expenses primarily relate to
administrative services provided by Torch and the Trustee.
14
<PAGE>
TORCH ENERGY ROYALTY TRUST
The foregoing resulted in distributable income of $9,199,000, or $1.07 per Unit,
for the nine-month period ended September 30, 2000 as compared to $6,644,000, or
$0.77 per Unit, for the same period in 1999. During the nine-month period ended
September 30, 2000, the Trust made distributions to Unitholders of $9,176,000,
or $1.07 per Unit, as compared to $6,665,000, or $0.78 per Unit, for the same
period in 1999. The Section 29 Credits relating to these distributions,
generated from production during the nine-month periods ended June 30, 2000 and
1999, were approximately $0.23 and $0.27, respectively.
Net profits income (in thousands) received by the Trust during the three-month
and nine-month periods ended September 30, 2000 and 1999, derived from
production sold during the three-month and nine-month periods ended June 30,
2000 and 1999, respectively, was computed as shown in the following tables:
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
Sept. 30, 2000 Sept. 30, 1999
---------------------------------------- ------------------------------------------
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................ $3,036 $1,346 $2,179 $1,051
------- ------ ------ ------
Direct operating expenses:
Lease operating expenses and
property tax...................... 340 --- 430 ---
Severance tax...................... 94 71 85 43
------- ------ ------ ------
434 71 515 43
------- ------ ------ ------
Net proceeds before capital
expenditures....................... 2,602 1,275 1,664 1,008
Capital expenditures................ (21) --- 70 ---
------- ------ ------ ------
Net proceeds........................ 2,623 1,275 1,594 1,008
Net profits percentage.............. 95% 95% 95% 95%
------- ------ ------ ------
Net profits income.................. $2,492 $1,211 $3,703 $1,514 $957 $2,471
======= ====== ====== ====== ====== ======
</TABLE>
15
<PAGE>
TORCH ENERGY ROYALTY TRUST
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
Sept. 30, 2000 Sept. 30, 1999
---------------------------------------- ------------------------------------------
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................ $7,916 $3,658 $6,312 $3,000
------- ------- ------ --------
Direct operating expenses:
Lease operating expenses and
property tax...................... 1,020 --- 1,328 ---
Severance tax...................... 269 202 258 88
------- ------- ------ --------
1,289 202 1,586 2,912
------- ------- ------ --------
Net proceeds before capital
expenditures....................... 6,627 3,456 4,726 2,912
Capital expenditures................ (35) --- 107 ---
------- ------- ------ --------
Net proceeds........................ 6,662 3,456 4,619 2,912
Net profits percentage.............. 95% 95% 95% 95%
------- ------- ------ --------
Net profits income.................. $6,329 $3,283 $9,612 $4,388 $2,766 $7,154
======= ======= ====== ====== ======= ======
</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 1999, the Trust's current
reserve reports indicate that the Trust will not receive any payments
attributable to the Robinson's Bend Field after 2002.
An impairment loss is recognized when the net carrying value of the Net Profits
Interests exceeds the sum of the estimated undiscounted future cash flows
attributable to the Net Profits Interest plus the estimated future Section 29
Credits. The impairment loss is equal to the difference between the carrying
value of the Net Profits Interest and the fair value of the Net Profits
Interest. No impairment loss was recognized during the nine-month periods ended
September 30, 2000 and 1999.
The Trust will not terminate prior to January 1, 2003, except upon the
occurrence of certain events, including March 1 of any year that is determined
based on a reserve report as of December 31 of the prior year that the present
value of estimated pre-tax future net cash flow, discounted at 10%, for the
proved reserves attributable to the Net Profits Interest is equal to or less
than $25 million.
16
<PAGE>
TORCH ENERGY ROYALTY TRUST
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Trust is exposed to market risk, including adverse changes in commodity
prices. The Trust's assets constitute Net Profits Interests in the Underlying
Properties. As a result, the Trust's operating results can be significantly
affected by fluctuations in commodity prices caused by changing market forces
and the price received for production from the Underlying Properties.
All production from the Underlying Properties is sold pursuant to a Purchase
Contract between TRC and Velasco, as the owners of the Underlying Properties,
and TEMI. Pursuant to the Purchase Contract, TEMI is obligated to purchase all
net production attributable to the Underlying Properties for an Index Price,
less certain other charges. Substantially all of the Index Price is calculated
based on market prices of oil and gas and therefore is subject to commodity
price risk. The Purchase Contract expires upon termination of the Trust and
provides a Minimum Price of $1.70 per MMBtu paid by TEMI for gas until December
31, 2001. When TEMI pays a purchase price based on the Minimum Price it
receives Price Credits equal to the difference between the Index Price and the
Minimum Price that it is entitled to deduct when the Index Price exceeds the
Minimum Price. Additionally, if the Index Price exceeds $2.10 per MMBtu, TEMI
is entitled to deduct 50% of such excess, the Price Differential. Beginning
January 1, 2002, TEMI has an annual option to discontinue the Minimum Price
commitment. However, if TEMI discontinues the Minimum Price commitment, it will
no longer be entitled to deduct the Price Differential and will forfeit all
accrued Price Credits.
17
<PAGE>
TORCH ENERGY ROYALTY TRUST
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF UNITHOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
4. Instruments of defining the rights of security holders,
including indentures.
4.1 Form of Torch Energy Royalty Trust Agreement*
4.2 Form of Louisiana Trust Agreement*
4.3 Specimen Trust Unit Certificate*
4.4 Designation of Ancillary Trustee*
27. Financial Data Schedule.
-------
* Incorporated by reference from Registration Statements on Form S-1 of Torch
Energy Advisors Incorporated (Registration No. 33-68688) dated November 16,
1993.
18
<PAGE>
TORCH ENERGY ROYALTY TRUST
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TORCH ENERGY ROYALTY TRUST
By: Wilmington Trust Company,
Trustee
By: /s/ Bruce L. Bisson
---------------------------------------
Bruce L. Bisson
Vice President
Date: November 10, 2000
(The Trust has no employees, directors or executive officers.)
19
