<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, 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
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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 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 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
June 30, 2000 and December 31, 1999, the distributable income and changes in
trust corpus for the three-month and six-month periods ended June 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>
June 30, 2000 December 31,1999
------------- ----------------
(Unaudited)
<S> <C> <C>
Cash............................................... $ 7 $ 2
Net profits interests in oil and gas properties
(Net of accumulated amortization of $135,124
and $131,459 at June 30, 2000 and
December 31, 1999, respectively).................. 45,476 49,141
------- -------
$45,483 $49,143
======= =======
LIABILITIES AND TRUST CORPUS
Trust expense payable.............................. $ 135 $ 161
Trust corpus....................................... 45,348 48,982
------- -------
$45,483 $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 June 30, Six Months Ended June 30,
--------------------------- -------------------------
2000 1999 2000 1999
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net profits income...................... $3,090 $2,213 $5,909 $4,683
Interest income......................... 4 2 5 5
------ ------ ------ ------
3,094 2,215 5,914 4,688
------ ------ ------ ------
General and
administrative expenses............... 125 172 285 351
------ ------ ------ ------
Distributable income.................... $2,969 $2,043 $5,629 $4,337
====== ====== ====== ======
Distributable income per Unit
(8,600 Units)......................... $ .35 $ .24 $ .65 $ .50
====== ====== ====== ======
Distributions per Unit.................. $ .34 $ .24 $ .65 $ .51
====== ====== ====== ======
</TABLE>
See notes to financial statements.
4
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TORCH ENERGY ROYALTY TRUST
STATEMENTS OF CHANGES IN TRUST CORPUS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
2000 1999 2000 1999
------- -------- ------- -------
<S> <C> <C> <C> <C>
Trust corpus, beginning of period.......... $47,192 $54,698 $48,982 $56,860
Amortization of net profits interests...... (1,872) (2,054) (3,665) (4,188)
Distributable income....................... 2,969 2,043 5,629 4,337
Distributions to Unitholders............... (2,941) (2,038) (5,598) (4,360)
------- ------- ------- -------
Trust corpus, end of period................ $45,348 $52,649 $45,348 $52,649
======= ======= ======= =======
</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,
6
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TORCH ENERGY ROYALTY TRUST
2003 are not deducted. In addition, the amounts paid to the Trust from the
Robinson's Bend Field during any calendar quarter are subject to a volume
limitation ("Volume Limitation") equal to the gross proceeds from the sale of
912.5 MMcf of gas, less property, production, severance and related taxes.
Production for the three-month periods ended March 31, 2000 and 1999 from the
Underlying Properties in the Robinson's Bend Field was approximately 38% (351
MMcf) and 35% (322 MMcf), respectively, below the Volume Limitation. Production
for the six-month periods ended March 31, 2000 and 1999 from the Underlying
Properties in the Robinson's Bend Field was approximately 36% (666 MMcf) and 32%
(576 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
(defined below) of wells drilled on the Underlying Properties since the Trust's
establishment into formations in which the Trust has an interest, other than
wells drilled to replace damaged or destroyed wells ("Infill Wells"). Infill
Well Net Proceeds represent the aggregate gross revenues received from Infill
Wells less the aggregate amount of the following Infill Well costs: i)
property, production, severance and similar taxes; ii) development costs; iii)
operating costs; and iv) interest on the unrecovered portion, if any, of the
foregoing costs computed at a rate of interest announced publicly by Citibank,
N.A. in New York as its base rate. Distributions received by Unitholders have
not been impacted by these wells as 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 six-month
periods ended June 30, 2000 and 1999 are derived from oil and gas
production sold during the three-month and six-month periods ended March
31, 2000 and
7
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TORCH ENERGY ROYALTY TRUST
1999, 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 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 six-month periods ending June 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.
8
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TORCH ENERGY ROYALTY TRUST
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 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
9
<PAGE>
TORCH ENERGY ROYALTY TRUST
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 currently receive weightings of approximately 10% and less. The Average
Market Prices receive 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.
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 totaling $16,000 were deducted
in calculating the purchase price related to distributions received by
Unitholders during the six-month period ended June 30, 1999. No Price Credits
were deducted in determining the purchase price attributable to distributions
received by Unitholders during the six months ended June 30, 2000. As of June
30, 2000, 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 had the
effect of reducing distributions received by Unitholders during the six-month
period ended June 30, 2000 by $498,000. No Price Differential adjustments were
deducted in calculating the purchase price relating to distributions received by
the Unitholders during the six-month period ended June 30, 1999.
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 June 30, 2000 and 1999 were $4,025,000 and $3,140,000,
respectively. Such gross revenues for the six-month periods ended June 30, 2000
and 1999 were $7,826,000 and $6,729,000, respectively.
10
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TORCH ENERGY ROYALTY TRUST
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 and $0.274, respectively, per
MMBtu for 2000, 1999 and 1998 production), plus fuel usage equal to 5% of
revenues, payable to Bahia Gas Gathering, Ltd. ("Bahia"), an affiliate of Torch,
pursuant to a gas gathering agreement. Additionally, a fee of $0.05 per MMBtu,
representing a gathering fee payable to a non-affiliate of Torch, is deducted in
calculating the purchase price for production from 68 of 394 wells in the
Robinson's Bend Field. TEMI also deducts $0.38 per MMBtu plus 17% of revenues
in calculating the purchase price for production from the Austin Chalk Fields,
as a fee to gather, treat and transport gas production. TEMI deducts from the
purchase price for gas in the 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 June 30, 2000 and 1999, gathering, treating and transportation fees
charged to the Trust by TEMI, attributable to production during the three-month
periods ended March 31, 2000 and 1999 in the Robinson's Bend, Austin Chalk and
Cotton Valley Fields, totaled $312,000 and $302,000, respectively. During the
six-month periods ended June 30, 2000 and 1999, such fees, attributable to
production during the six-month periods ended March 31, 2000 and 1999, totaled
$633,000 and $646,000, 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 and is adjusted annually based upon the change
in the Producer's Price Index as published by the Department of Labor, Bureau of
Labor Statistics. Administrative services during the three-month periods ended
June 30, 2000 and 1999 were $95,000 and $94,000, respectively. During the six-
month periods ended June 30, 2000 and 1999, such fees were $190,000 and
$188,000, respectively.
11
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TORCH ENERGY ROYALTY TRUST
Compensation of the Trustee and Transfer Agent
The Trust Agreement provides that the Trustee be compensated for its
administrative services, out of the Trust assets, in an annual amount of
$41,000, plus an hourly charge for services in excess of a combined total of 250
hours annually at its standard rate. The Trustee also receives a transfer
agency fee of $5.00 annually per account (minimum of $15,000 annually). Such
fees are subject to change each December based upon the change in the Producer's
Price Index as published by the Department of Labor, Bureau of Labor Statistics,
plus $1.00 for each certificate issued. Total administrative and transfer agent
fees during the three-month periods ended June 30, 2000 and 1999 were $14,000
per period. Such fees during the six-month periods June 30, 2000 and 1999 were
$28,000 per period. The Trustee is also entitled to reimbursement for out-of-
pocket expenses.
12
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TORCH ENERGY ROYALTY TRUST
ITEM 2. DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Results of Operations
Because a modified cash basis of accounting is utilized by the Trust, net
profits income of the Trust for the three-month periods ended June 30, 2000 and
1999 is derived from oil and gas produced during the three-month periods ended
March 31, 2000 and 1999, respectively. Net profits income for the six-month
periods ended June 30, 2000 and 1999 is derived from oil and gas produced during
the six-month periods ended March 31, 2000 and 1999. 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,
---------------------------------------
2000 1999
------------------ ------------------
Bbls Mcf Bbls Mcf
of Oil of Gas of Oil of Gas
------ --------- ------ ---------
Chalkley Field 4,516 692,180 5,498 711,178
Robinson's Bend Field --- 591,199 --- 621,694
Cotton Valley Fields 1,233 284,719 929 300,054
Austin Chalk Fields 5,374 54,445 7,901 66,479
------ --------- ------ ---------
11,123 1,622,543 14,328 1,699,405
====== ========= ====== =========
Six Months Ended June 30,
---------------------------------------
2000 1999
------------------ ------------------
Bbls Mcf Bbls Mcf
of Oil of Gas of Oil of Gas
------ --------- ------ ---------
Chalkley Field 9,065 1,272,366 11,190 1,392,188
Robinson's Bend Field --- 1,220,259 --- 1,315,111
Cotton Valley Fields 2,224 580,913 2,079 625,896
Austin Chalk Fields 10,573 102,327 14,838 137,656
------ --------- ------ ---------
21,862 3,175,865 28,107 3,470,851
====== ========= ====== =========
13
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TORCH ENERGY ROYALTY TRUST
THREE-MONTH PERIOD ENDED JUNE 30, 2000 COMPARED TO THREE-MONTH PERIOD ENDED
JUNE 30, 1999
For the three-month period ended June 30, 2000, net profits income was
$3,090,000, up 40% from net profits income of $2,213,000 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 three-month
period ended March 31, 2000 was 1,622,543 Mcf, or 5% lower than gas production
of 1,699,405 Mcf for the same period in 1999. Oil production attributable to
the Underlying Properties for the three-month period ended March 31, 2000 was
11,123 Bbls as compared to 14,328 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 March 31, 2000 was $2.25 per MMBtu for gas
and $22.55 per Bbl for oil as compared to $1.70 per MMBtu for gas and $7.66 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. In determining the purchase price of
gas related to distributions received by Unitholders during the quarter ended
June 30, 1999, TEMI accrued net Price Credits in the amount of $81,000. No Price
Credits were deducted in calculating the purchase price attributable to
distributions received by Unitholders during the quarter ended June 30, 2000.
As of June 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 of gas resulted in distributions
received by Unitholders during the three months ended June 30, 2000 being
reduced by $235,000. No Price Differential adjustment was deducted in
determining the purchase price for distributions received by Unitholders during
the three-month period ended June 30, 1999.
General and administrative expenses amounted to $125,000 for the three-month
period ended June 30, 2000 as compared to $172,000 during the three-month period
ended June 30, 1999. These expenses primarily relate to administrative services
provided by Torch and the Trustee. The decrease in general administrative costs
during the current period mainly resulted from third party reserve engineer
fees.
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TORCH ENERGY ROYALTY TRUST
The foregoing resulted in distributable income of $2,969,000, or $0.35 per Unit,
for the three-month period ended June 30, 2000, as compared to $2,043,000, or
$0.24 per Unit, for the same period in 1999. Cash distributions of $2,941,000,
or $0.34 per Unit, were made to Unitholders during the quarter ended June 30,
2000 as compared to $2,038,000, or $0.24 per Unit, for the same period in 1999.
The Section 29 Credits relating to the distributions received by Unitholders
during the quarter ended June 30, 2000 and 1999, generated from production
during the three-month periods ended March 31, 2000 and 1999, were approximately
$0.08 and $0.09 per Unit, respectively.
SIX-MONTH PERIOD ENDED JUNE 30, 2000 COMPARED TO SIX-MONTH PERIOD ENDED JUNE 30,
1999
For the six-month period ended June 30, 2000, net profits income was $5,909,000,
up 26% from net profits income of $4,683,000 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 six-month
period ended March 31, 2000 was 3,175,865 Mcf, or 8% lower than gas production
of 3,470,851 Mcf for the same period in 1999. Oil production attributable to
the Underlying Properties for the six-month period ended March 31, 2000 was
21,862 Bbls, as compared to 28,107 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 six-month period ended March 31, 2000 was $2.25 per MMBtu for gas and
$20.99 per Bbl for oil as compared to $1.79 per MMBtu for gas and $8.54 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 totaling $16,000 were
deducted in calculating the purchase price related to distributions received by
Unitholders during the six-month period ended June 30, 1999. No price credits
were deducted in calculating the purchase price related to distributions
received by Unitholders during the six months ended June 30, 2000. As of June
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 from the purchase price. The deduction of the Price Differential in
calculating the purchase price had the effect of reducing distributions received
by Unitholders during the six-month period ended June 30, 2000 by $498,000. No
Price Differential adjustment was deducted in calculating the purchase price
relating
15
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TORCH ENERGY ROYALTY TRUST
to distributions received by Unitholders during the six-month period
ended June 30, 1999.
General and administrative expenses amounted to $285,000 for the six-month
period ended June 30, 2000 as compared to $351,000 during the six-month period
ended June 30, 1999. These expenses primarily relate to administrative services
provided by Torch and the Trustee. The decrease in general administrative costs
during the current period mainly resulted from third party reserve engineer
fees.
The foregoing resulted in distributable income of $5,629,000, or $0.65 per Unit,
for the six-month period ended June 30, 2000 as compared to $4,337,000, or $0.50
per Unit, for the same period in 1999. Cash distributions of $5,598,000, or
$0.65 per Unit, were made to Unitholders during the six-month period ended June
30, 2000, as compared to $4,360,000, or $0.51 per Unit, for the same period in
1999. The Section 29 Credits relating to these distributions, generated from
production during the six-month periods ended March 31, 2000 and 1999, were
approximately $0.16 and $0.18, respectively.
Net profits income (in thousands) received by the Trust during the three-month
and six- month periods ended June 30, 2000 and 1999, derived from production
sold during the three-month and six-month periods ended March 31, 2000 and 1999,
respectively, was computed as shown in the following tables:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, 2000 THREE MONTHS ENDED JUNE 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............... $2,590 $1,123 $1,969 $869
------ ------ ------ ----
Direct operating expenses:
Lease operating expenses and
property tax..................... 305 -- 405 --
Severance tax..................... 100 49 86 15
------ ------ ------ ----
405 49 491 15
------ ------ ------ ----
Net proceeds before capital
expenditures...................... 2,185 1,074 1,478 854
Capital expenditures............... 6 -- 2 --
------ ------ ------ ----
Net proceeds....................... 2,179 1,074 1,476 854
Net profits percentage............. 95% 95% 95% 95%
------ ------ ------ ----
Net profits income.................. $2,070 $1,020 $3,090 $1,402 $811 $2,213
====== ====== ====== ====== ==== ======
</TABLE>
16
<PAGE>
TORCH ENERGY ROYALTY TRUST
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 2000 SIX MONTHS ENDED JUNE 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................ $4,880 $2,313 $4,133 $1,950
------ ------ ------ ------
Direct operating expenses:
Lease operating expenses and
property tax...................... 679 --- 898 ---
Severance tax...................... 175 132 173 46
----- ------ ------ ------
854 132 1,071 46
----- ------ ------ ------
Net proceeds before capital
expenditures....................... 4,026 2,181 3,062 1,904
Capital expenditures................ (13) --- 37 ---
------ ------ ------ ------
Net proceeds........................ 4,039 2,181 3,025 1,904
Net profits percentage.............. 95% 95% 95% 95%
------ ------ ------ ------
Net profits income.................. $3,837 $2,072 $5,909 $2,874 $1,809 $4,683
====== ====== ====== ====== ====== ======
</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 six-month periods ended
June 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 proved
reserves attributable to the Net
17
<PAGE>
TORCH ENERGY ROYALTY TRUST
Profits Interest is equal to or less than $25 million. Based on Torch
management's pricing assumptions and production estimates by independent reserve
engineers at December 31, 1999, Torch projects that the present value of the
estimated pre-tax future net cash flow, discounted at 10%, for the proved
reserves attributable to the Net Profits Interest will be less than $25 million
in 2003. Pursuant to the Trust Agreement, the Trust would then dissolve and the
remaining assets of the Trust would be sold and the proceeds therefrom would be
distributed to the Unitholders.
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.
18
<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
Exhibit 27 - Financial Data Schedule.
19
<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/ Charlotte Paglia
---------------------------------------
Charlotte Paglia
Financial Services Officer
Date: August 10, 2000
(The Trust has no employees, directors or executive officers.)
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