e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-Q
(Mark One)
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2010
OR
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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
Torch Energy Royalty Trust
(Exact Name of Registrant as Specified in Its Charter)
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Delaware
(State or Other Jurisdiction of
Incorporation or Organization)
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74-6411424
(I.R.S. Employer
Identification Number) |
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Rodney Square North
1100 North Market Street, Wilmington, Delaware
(Address of Principal Executive Offices)
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19890
(Zip Code) |
302/636-6016
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes o No þ
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).
Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in
Rule 12b-2 of the Exchange Act.
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Accelerated filer o
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Non-accelerated filer o
(Do not check if a smaller reporting company)
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Small reporting company þ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o
No þ
As of September 30, 2010, 8.6 million Units of Beneficial Interest of the Trust were outstanding.
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 1993, as amended, and Section 21E of the Securities Exchange Act of 1934. All
statements other than statements of historical facts included in this document, including without
limitation, statements under “Discussion and Analysis of Financial Condition and Results of
Operations” regarding the financial position, reserve quantities and net present values of reserves
of the Torch Energy Royalty Trust (“Trust”) and statements that include the words “believes”,
“expects”, “anticipates”, “intends”, “estimates”, “projects”, “target”, “goal”, “plans”,
“objectives”, “should” or similar expressions or variations are forward-looking statements. Torch
Energy Advisors Incorporated (“Torch”) and the Trust can give no assurances that the assumptions
upon which these statements are based will prove to be correct. Factors which could cause such
forward looking statements not to be correct include, among others, the cautionary statements set
forth in the Trust’s Annual Report on Form 10-K with the Securities Exchange Commission for the
most recent fiscal year, cautionary statements contained in this report, the volatility of oil and
natural gas prices, future production costs, future oil and natural gas production quantities,
operating hazards, and environmental conditions.
Introduction
The financial statements included herein have been prepared pursuant to the rules and regulations
of the Securities and Exchange Commission. The Trust was formed effective October 1, 1993,
pursuant to a trust agreement (“Trust Agreement”) among Wilmington Trust Company, not in its
individual capacity but solely as trustee of the Trust (“Trustee”), Torch Royalty Company (“TRC”)
and Velasco Gas Company, Ltd. (“Velasco”) as owners of certain oil and natural gas properties
(“Underlying Properties”) and Torch Energy Advisors Incorporated (“Torch”) as grantor. TRC and
Velasco created net profits interests (“Net Profits Interests”) and conveyed such interests to
Torch. The Trust was formed under the Delaware statutory trust act (formerly known as the Delaware
business trust act). The Net Profits Interests burden the Underlying Properties and Torch conveyed
the Net Profits Interests to the Trust in exchange for an aggregate of 8,600,000 units of
beneficial interest (“Units”). Such Units were sold to the public through various underwriters in
November 1993. The current working interest owners of the Underlying Properties are TRC, Torch E&P
Company, Samson Lone Star Limited Partnership and Constellation Energy Partners LLC (“Working
Interest Owners”).
Certain information and footnote disclosures normally included in the annual financial statements
have been omitted pursuant to such rules and regulations, although the Trustee believes that the
disclosures are adequate to make the information presented
2
TORCH ENERGY ROYALTY TRUST
not misleading. These financial statements should be read in conjunction with the December 31, 2010 and 2009 financial statements
and notes thereto included in the Trust’s applicable annual report on Form 10-K. All adjustments
necessary to present fairly the assets, liabilities and trust corpus of the Trust as of September
30, 2010 and December 31, 2009, the distributable income and changes in trust corpus for the
three-month and nine-month periods ended September 30, 2010 and 2009 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.
Torch currently provides certain accounting and other services for the Trust pursuant to an
agreement with the Trust with a termination date of March 31, 2012. The Trust has no officers,
directors or employees. The Trust has no officers, directors or employees. The Trust and Trustee
rely solely on receiving accurate information, reports and other representations from Torch and
other service providers to the Trust. In executing and submitting this report on behalf of the
Trust and with respect to Bruce L. Bisson in executing the certifications relating to this report,
the Trustee and Bruce L. Bisson have relied upon the accuracy of such reports, information and
representations.
3
TORCH ENERGY ROYALTY TRUST
STATEMENTS OF ASSETS, LIABILITIES AND TRUST CORPUS
(In thousands)
ASSETS
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September 30, |
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December 31, |
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2010 |
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2009 |
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(Unaudited) |
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Cash reserve |
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$ |
869 |
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$ |
847 |
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Restricted cash |
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1,488 |
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1,288 |
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Net profits interests in
oil and natural gas properties
(Net of accumulated
amortization of $168,491 and
$167,485 at September 30, 2010
and
December 31, 2009, respectively) |
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12,109 |
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13,115 |
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$ |
14,466 |
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$ |
15,250 |
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LIABILITIES AND TRUST CORPUS
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Trust expense payable |
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$ |
1,966 |
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$ |
2,076 |
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Trust corpus |
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12,500 |
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13,174 |
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$ |
14,466 |
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$ |
15,250 |
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See notes to financial statements
4
TORCH ENERGY ROYALTY TRUST
STATEMENTS OF DISTRIBUTABLE INCOME
(In thousands, except per Unit amounts)
(Unaudited)
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Three Months Ended |
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Nine Months Ended |
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September 30, |
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September 30, |
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2010 |
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2009 |
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2010 |
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2009 |
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Net profits income |
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$ |
337 |
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$ |
507 |
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$ |
847 |
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$ |
2,182 |
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Infill well proceeds and
other income |
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130 |
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1 |
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313 |
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96 |
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467 |
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508 |
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1,160 |
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2,278 |
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General and
administrative expenses |
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349 |
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319 |
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768 |
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1,062 |
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Interest expense |
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— |
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— |
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60 |
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— |
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Distributable income |
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$ |
118 |
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$ |
189 |
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$ |
332 |
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$ |
1,216 |
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Distributable income per Unit
(8,600 Units) |
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$ |
0.01 |
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$ |
0.02 |
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$ |
0.04 |
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$ |
0.14 |
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Distributions per Unit |
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$ |
0.00 |
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$ |
0.00 |
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$ |
0.00 |
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$ |
0.35 |
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See notes to financial statements
5
TORCH ENERGY ROYALTY TRUST
STATEMENT OF CHANGES IN TRUST CORPUS
(In thousands)
(Unaudited)
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Three Months Ended |
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Nine Months Ended |
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September 30, |
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September 30, |
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2010 |
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2009 |
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2010 |
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2009 |
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Trust corpus, beginning of period |
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$ |
12,753 |
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$ |
14,736 |
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$ |
13,174 |
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$ |
17,644 |
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Amortization of Net Profits
Interests |
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(371 |
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(440 |
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(1,006 |
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(1,365 |
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Distributable income |
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118 |
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189 |
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332 |
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1,216 |
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Distributions to Unitholders |
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— |
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— |
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— |
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(3,010 |
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Trust corpus, end of period |
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$ |
12,500 |
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$ |
14,485 |
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$ |
12,500 |
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$ |
14,485 |
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See notes to financial statements
6
TORCH ENERGY ROYALTY TRUST
Notes to Financial Statements
1. Nature of Operations
The Trust was formed effective October 1, 1993, pursuant to a trust agreement (“Trust Agreement”)
among Wilmington Trust Company, not in its individual capacity but solely as trustee of the Trust
(“Trustee”), Torch Royalty Company (“TRC”) and Velasco Gas Company, Ltd. (“Velasco”) as owners of
certain oil and natural gas properties (“Underlying Properties”) and Torch Energy Advisors
Incorporated (“Torch”) as grantor. The Trust was formed under the Delaware statutory trust act
(formerly known as the Delaware business trust act). TRC and Velasco created net profits interests
(“Net Profits Interests”) and conveyed such interests to Torch. The Net Profits Interests burden
the Underlying Properties and Torch conveyed the Net Profits Interests to the Trust in exchange for
an aggregate of 8,600,000 units of beneficial interest (“Units”). Such Units were sold to the
public through various underwriters in November 1993. The current working interest owners of the
Underlying Properties are Torch Royalty Company, Torch E&P Company, Samson Lone Star Limited
Partnership and Constellation Energy Partners LLC (“Working Interest Owners”).
The Net Profits Interests entitle the Trust to receive 95% of the Net Proceeds attributable to oil
and gas produced and sold from wells (other than infill wells) on the Underlying Properties. 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”).
The sole purpose of the Trust is to hold the Net Profits Interests, to receive payments from the
Working Interest Owners, and to make payments to Unitholders. The Trust does not conduct any
business activity and has no officers, directors or employees. The Trust and the Trustee rely on
third party service providers to perform administrative services for the Trust. Torch provided
accounting, bookkeeping, informational and other services to the Trust related to the Net Profits
Interests pursuant to the Administrative Services Agreement effective October 1, 1993 and an oral
arrangement after termination of the Administrative Services Agreement on January 29, 2008 through
April 1, 2008. From November 7, 2008 through December 23, 2008, Torch provided certain accounting
services in connection with the Trust’s preparation of its Form 10-K for the year ended December
31, 2007 pursuant to an agreement between the Trust and Torch dated November 7, 2008. Torch
currently provides certain accounting and other services for the Trust pursuant to an agreement
with the Trust with an expiration date of March 31, 2012 unless sooner terminated.
In connection with the formation of the Trust, TRC and Velasco contracted to sell the oil and
natural gas production from the Underlying Properties to Torch Energy Marketing
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TORCH ENERGY ROYALTY TRUST
Notes to Financial Statements
Inc. (“TEMI”), a
subsidiary of Torch, under a purchase contract (“Purchase Contract”) which expired upon termination
of the Trust on January 29, 2008 (“Termination Date”). See footnote 5, Related Party
Transactions: Marketing Arrangements, for oil and natural gas pricing information pertaining to the
Underlying Properties. The Working Interest
Owners receive payments reflecting the proceeds of oil and natural gas sold and aggregate these
payments, deduct applicable costs and make payments to the Trustee each quarter for the amounts due
to the Trust. Prior to the termination of the Trust, Unitholders received quarterly cash
distributions relating to oil and natural gas produced and sold from the Underlying Properties.
Pursuant to Section 3.07 of the Trust Agreement, the Trustee established a non-interest bearing
cash reserve account (“Cash Reserve”) following the Trust’s termination for certain actual,
contingent and uncertain liabilities of the Trust. See footnote 4, Distributions and
Income Computations, for additional information concerning the Cash Reserve. Because no additional
properties will be contributed to the Trust, the assets of the Trust deplete over time and a
portion of each cash distribution made by the Trust is analogous to a return of capital.
The Underlying Properties constitute working interests in the Chalkley Field in Louisiana
(“Chalkley Field”), the Robinson’s Bend Field in the Black Warrior Basin in Alabama (“Robinson’s
Bend Field”), fields that produce from the Cotton Valley formations in Texas (“Cotton Valley
Fields”) and fields that produce from the Austin Chalk formation in Texas (“Austin Chalk Fields”).
The Underlying Properties represent interests in all productive formations from 100 feet below the
deepest productive formation in each field to the surface when the Trust was formed. The Trust
therefore has no interest in deeper productive formations.
Separate conveyances (“Conveyances”) were used to transfer the Net Profits Interests in each state.
Net proceeds (“Net Proceeds”), generally defined as gross revenues received from the sale of
production attributable to the Underlying Properties during any period less property, production,
severance and similar taxes, and development, operating, and certain other costs (excluding
operating and development costs from the Robinson’s Bend Field prior to January 1, 2003), are
calculated separately for each Conveyance. If, during any period, costs and expenses deducted in
calculating Net Proceeds exceed gross proceeds under a Conveyance, neither the Trust nor
Unitholders are liable to pay such excess directly, but the Trust will receive no payments for
distribution to Unitholders with respect to such Conveyance until future gross proceeds exceed
future costs and expenses plus the cumulative excess of such costs and expenses not previously
recouped by the Working Interest Owners plus interest thereon. The complete definitions of Net
Proceeds are set forth in the Conveyances.
The Trust received the affirmative vote of the Unitholders of more than 66 2/3% of the outstanding
Units to terminate the Trust at the meeting of Unitholders held on January
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TORCH ENERGY ROYALTY TRUST
Notes to Financial Statements
29, 2008. Upon
termination of the Trust, among other things, the Trustee is required to sell the Net Profits
Interests. Specifically, pursuant to Section 9.03(e) of the Trust Agreement if the property of the
Trust Estate (as defined in the Trust Agreement) has not been sold prior to the end of one calendar
year following the termination date, the Trustee must cause such assets to be sold at public
auction. As the Trust was terminated by a vote of the Unitholders on January 29, 2008 (the
“Termination Date”), the Trustee anticipates it will continue to consult with the Trust’s and
Trustee’s financial and legal advisors in preparing the sales process and obtaining the necessary
information required for disclosure regarding the Units to carry out the sale requirement under
Section 9.03(e). No assurances can be given that the Trustee will be able to sell the Net Profits
Interests, or the price that will be distributed to Unitholders following such a sale. Such
distributions could be below the market value of the Units. The Trust can give no assurances of
the effect of the results of the affirmative vote to terminate the Trust by the Unitholders on the
continued listing of the Units on the New York Stock Exchange (NYSE) or any other national
quotation system.
As previously disclosed by the Trust in certain of its filings with the Securities and Exchange
Commission (“SEC”), the Trust and certain working interest owners (TRC, Torch E&P Company and
Constellation) of the Underlying Properties were involved in an arbitration proceeding relating to
the proper calculation of the quarterly Net Profits Interests payments owed to the Trust following
the termination of the Trust. The working interest owners contended that the pricing mechanism
contained in the terminated Purchase Contract (including the sharing price and minimum price
mechanism) should continue to be utilized to calculate the quarterly Net Profits Interests
payments. In the arbitration proceeding, the Trustee contended that the sharing price mechanism of
the Purchase Contract (which determined the calculation of the Net Profits Interests prior to the
termination of the Purchase Contract) did not survive the termination of the Purchase Contract or
the termination of the Trust. On April 11, 2008, Trust Venture Company, LLC (“Trust Venture”),
which owns the majority of Units in the Trust, submitted an unopposed request to intervene in the
arbitration and became a party to the arbitration. Trust Venture agreed with the Trustee, and took
the position in the arbitration, that the sharing price mechanism of the Purchase Contract did not
survive the termination of the Purchase Contract or the termination of the Trust.
The hearing on the merits in the arbitration commenced on June 16, 2008 and was completed on June
20, 2008. On July 18, 2008, an alternate dispute resolution provider, JAMS, through a panel of
three arbitrators (“Arbitrators”), released an award notice to all parties (the “Award Notice”). In
the Award Notice, the Arbitrators found that the Conveyances are not ambiguous and the pricing
mechanism of the Purchase Contract is incorporated by reference into the Conveyances
notwithstanding termination of the
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TORCH ENERGY ROYALTY TRUST
Notes to Financial Statements
Purchase Contract. The Arbitrators therefore concluded that the
pricing mechanism (including the sharing price and minimum price mechanism) continues to burden the
Net Profits Interests and will do so for the life of the Conveyances. The Arbitrators also denied
each party’s request for fees and costs; each party was required to bear its own fees and costs
related to the arbitration. The Trust and Trustee incurred expenses as a result of the arbitration
and expect to continue to incur expenses, including but not limited to legal fees, as a result of
the winding down of the Trust. See also Part II, Item 1. Legal Proceedings for
subsequent event information concerning the arbitration, Award Notice and the Alabama litigation.
2. Basis of Accounting, Significant Accounting Policies
The financial statements of the Trust are prepared on a modified cash basis and are not intended to
present the financial position and results of operations in conformity with generally accepted
accounting principles generally accepted in the United States of America (“GAAP”). Preparation of
the Trust’s financial statements on such basis includes the following:
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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, 2010 and 2009 are derived from oil and natural gas production
sold during the three-month and nine-month periods ended June 30, 2010 and 2009, respectively. General and administrative
expenses are recognized on an accrual basis. |
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Amortization of the Net Profits Interests is calculated on a unit-of-production basis and charged directly to trust corpus. |
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Distributions to Unitholders are recorded when declared by the Trustee. |
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The Trust reviews the Net Profits Interests for impairment whenever events or changes in circumstances indicate the
carrying amount of the Net Profits Interests may not be recoverable. Recoverability is measured by a comparison of the
carrying amount of an asset to future net cash flows expected to be generated by the Net Profits Interests. If such asset
is considered to be impaired, the impairment recognized is measured by the amount by which the carrying amount of the
assets exceeds either the fair value or the estimated discounted cash flows of the assets, whichever is more readily
measurable. At September 30, 2010 and 2009, no impairment was deemed necessary. |
10
TORCH ENERGY ROYALTY TRUST
Notes
to Financial Statements
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Restricted cash represents monies paid to the Trust by a certain working interest owner of the Underlying Properties that
may represent a potential overpayment during periods subsequent to the Trust’s termination pertaining to oil and natural
gas sales from the Infill Wells located in the Cotton Valley Fields. |
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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 and Texas State Margin Tax
Tax counsel has advised the Trust and Trustee that, under current tax law, the Trust is classified
as a grantor trust for Federal income tax purposes and not an association taxable as a business
entity. However, the opinion of tax counsel is not binding on the Internal Revenue Service. As a
grantor trust, the Trust is not subject to Federal income tax.
Because the Trust is treated as a grantor trust for Federal income tax purposes and a Unitholder is
treated as directly owning an interest in the Net Profits Interests, each Unitholder is taxed
directly on such Unitholder’s pro rata share of income attributable to the Net Profits Interests
consistent with the Unitholder’s method of accounting and without regard to the taxable year or
accounting method employed by the Trust. Amounts payable with respect to the Net Profits Interests
are paid to the Trust on the quarterly record date established for quarterly distributions in
respect to each calendar quarter during the term of the Trust, and the income and deductions from
such payments are allocated to the Unitholders of record on such date.
In May 2006, the State of Texas passed legislation to implement a new margin tax at a rate of 1% to
be imposed generally on federal gross revenues (up to 70%), as apportioned to Texas less certain
costs and deductions, as specifically set forth in the new legislation. The effective date of the
legislation was January 1, 2008, but the tax was generally imposed on revenues generated in 2007
and thereafter (earlier for certain fiscal year taxpayers). Entities subject to tax generally
include trusts unless otherwise exempt, and most other types of entities having limited liability
protection. Trusts that meet certain statutory requirements are generally exempt from the margin
tax as “passive entities.”
Since the Trust is exempt from the margin tax at the Trust level as a passive entity, each
Unitholder that is a taxable entity would generally include its share of the Trust’s
11
TORCH ENERGY ROYALTY TRUST
Notes
to Financial Statements
revenue in its
margin tax computation. This revenue would be sourced to Texas under Texas Comptroller guidance
that provides such income is sourced according to the principal place of business of the Trust,
which is Texas.
4. Distributions and Income Computations
Each quarter the amount of cash available for distribution to Unitholders (the “Quarterly
Distribution Amount”) is generally equal to the excess, if any, of the cash received by the Trust,
on the last day of the second month following the previous calendar quarter (or the next business
day thereafter) ending prior to the dissolution of the Trust, from the Net Profits Interests then
held by the Trust plus, with certain exceptions, any other cash receipts of the Trust during such
quarter, subject to adjustments for changes made by the Trustee during such quarter in the Cash
Reserve established for the payment of actual, contingent and uncertain liabilities of the Trust.
Based on the payment procedures relating to the Net Profits Interest, cash received by the Trust on
the last day of the second month of a particular quarter from the Net Profits Interests generally
represents proceeds from the sale of oil and natural 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 Trust historically distributed the Quarterly Distribution Amount within approximately 10 days
after the record date to each person
who was a Unitholder of record on the associated record date; however, the Trust made no cash
distributions in 2010 and did not make a cash distribution during each quarter in 2009.
Pursuant to Section 3.07 of the Trust Agreement, the Trustee established a Cash Reserve following
the Trust’s termination in 2008 for the payment of actual, contingent and uncertain liabilities
associated with the liquidation and winding down of the Trust and the Trust’s arbitration. During
the three months ended September 30, 2010 and 2009, the Trust received cash payments totaling $0.6
million and $0.7 million, respectively, from the Working Interest Owners of the Underlying
Properties mainly pertaining to net profits income attributable to production from the Underlying
Properties during the three months ended June 30, 2010 and 2009. Included in such net profits
income payments received by the Trust during the three months ended September 30, 2010 and 2009 are
$0.1 million and $0.2 million, respectively, paid to the Trust by a certain working interest owner
that is classified as restricted cash and as accounts payable due to potential overpayment and are
not considered part of the net profits income.
12
TORCH ENERGY ROYALTY TRUST
Notes
to Financial Statements
Cash receipts received by the Trust during the nine months ended September 30, 2010 were reduced by
$752,000 (including $60,000 of interest expense) pertaining to net profits income generated by the
Underlying Properties in the Austin Chalk Fields (“Austin Chalk Gas Volume Adjustment”). The
Austin Chalk Gas Volume Adjustment recouped overpayments to the Trust by TRC during the five year
period ended December 31, 2009 which resulted from TRC utilizing estimated wellhead gas volumes for
certain wells in the Austin Chalk Fields in computing Net Proceeds due to the Trust. During the
nine months ended September 30, 2010, the Austin Chalk Gas Volume Adjustment was calculated
utilizing actual wellhead gas sales volumes and resulted in a 174 MMcf downward adjustment to gas
sales volumes included in the net profits income calculations with respect to the Austin Chalk
Fields. Gas revenues, net of applicable revenue deducts and before interest expense, included in
Net Proceeds paid to the Trust during the nine months ended June 30, 2010 were adjusted downward by
$692,000. The Austin Chalk Gas Volume Adjustment did not affect oil revenues, severance taxes,
lease operating expenses and capital expenditures included in Net Proceeds due to the Trust during
the five year period ended December 31, 2009. The Trust, Trustee and the Trust’s service providers
continue to review and analyze the appropriateness of and verify the information and data provided
by TRC concerning the Austin Chalk gas production volumes.
The Trust allocated $0.5 million of net profits income received by the Trust during each
three-month period ended September 30, 2010 and September 30, 2009 into the Cash Reserve and is
included in the net profits income. The Cash Reserve as of September 30, 2010 and December 31,
2009 was $0.9 million and $0.8 million, respectively. The Trust made no cash distributions to
Unitholders during each of the three-month periods ending September 30, 2010 and 2009.
5. Related Party Transactions
TRC and Velasco contracted to sell the oil and natural gas production from the Underlying
Properties to Torch Energy Marketing, Inc. (“TEMI”), a subsidiary of Torch, under a purchase
contract (“Purchase Contract”). Upon termination of the Trust, the Purchase Contract expired and
the Working Interest Owners calculate the Net Proceeds owed to the Trust utilizing the same pricing
mechanisms (including the sharing price and minimum price commitment mechanisms) as the expired
Purchase Contract. The continuation of the sharing price and minimum price terms and conditions of
the Purchase Contract terms was the subject of an arbitration and the Trust has assumed the
applicability of such terms for purpose of this report. See Item 1. Business, Item 1A. Risk
Factors and Item 3. Legal Proceedings of the Form 10-K for the year ended December 31, 2010 filed
with the SEC on April 22, 2011 regarding developments
13
TORCH ENERGY ROYALTY TRUST
Notes
to Financial Statements
concerning the termination of the Trust and
arbitration with respect to certain terms and conditions of the Purchase Contract continuing after
the termination of the Trust.
Marketing Arrangements and Price Sharing
In connection with the formation of the Trust, TRC, Velasco and TEMI entered into the Purchase
Contract which expired upon termination of the Trust. Pursuant to the Purchase Contract, TEMI was
obligated to purchase all net production attributable to the Underlying Properties for an index
price for oil and natural gas (“Index Price”), less certain gathering, treating and transportation
charges, which were calculated monthly. The Index Price equals 97% of the weighted average spot
market prices of oil and natural gas (“Average Market Prices”) at the four locations where TEMI
sold production.
The Purchase Contract also provided that TEMI pay a minimum price (“Minimum Price”) for natural gas
production, adjusted annually for inflation. When TEMI paid a purchase price based on the Minimum
Price it received price credits (“Price Credits”), equal to the difference between the Index Price
and the Minimum Price that it was entitled to deduct in determining the purchase price when the
Index Price for natural gas exceeded the Minimum Price. In addition, if the Index Price for
natural gas exceeded the sharing price, which was adjusted annually for inflation (“Sharing
Price”), TEMI was entitled to deduct 50% of such excess (“Price Differential”) in determining the
purchase price. TEMI had an annual option to discontinue the Minimum Price commitment. However, if
TEMI discontinued the Minimum Price commitment, it would no longer be entitled to deduct the Price
Differential in calculating the purchase price and would have forfeited all accrued Price Credits.
As of the Termination Date, TEMI had no outstanding Price Credits and had not exercised its option
to discontinue the Minimum Price commitment.
Upon the Trust’s termination, pursuant to each Conveyance, the Working Interest Owners utilized the
same pricing mechanisms (including the Sharing Price and Minimum Price commitment mechanisms) as
the expired Purchase Contract in
calculating Net Proceeds due to the Trust. The Minimum Price per MMBtu was $1.97, $1.95 and $1.87
for 2010, 2009 and 2008, respectively. The Sharing Price per MMBtu was $2.43, $2.40 and $2.30 in
2010, 2009 and 2008, respectively. Pursuant to each Conveyance, the Working Interest Owners also
have the same annual option to discontinue the Minimum Price commitment. As a result of the
Sharing Price arrangement, Net Proceeds attributable to the Underlying Properties during the three
months ended September 30, 2010 and 2009, were reduced by $0.5 million and $0.3 million,
respectively. Such Sharing Price arrangement reduced Net Proceeds attributable to the Underlying
Properties during the nine months ended September 30,
14
TORCH ENERGY ROYALTY TRUST
Notes
to Financial Statements
2010 and 2009 by $1.9 million and $2.8
million, respectively. As of September 30, 2010, the Working Interest Owners had no outstanding
Price Credits and had not exercised its right to discontinue the Minimum Price commitment.
Under each Conveyance, natural gas volumes are determined at the wellhead. Therefore, Net Proceeds
do not include any amounts received in connection with extracting natural gas liquids from such
production at natural gas processing or treating facilities.
Gathering, Treating and Transportation Arrangements
The Purchase Contract, which expired upon the Trust’s termination, entitled TEMI to deduct certain
natural gas gathering, treating and transportation fees in calculating the purchase price for
natural gas in the Robinson’s Bend, Austin Chalk and Cotton Valley Fields. The amounts that were
deducted in calculating the purchase price for such natural gas were set forth in the Purchase
Contract and were not affected by the actual costs incurred by TEMI to gather, treat and transport
natural gas. Upon the Trust’s termination, pursuant to each Conveyance, the Working Interest Owners
became entitled to deduct the same natural gas gathering, treating and transportation fees that had
previously been deducted by TEMI pursuant to the Purchase Contract in calculating Net Proceeds due
to the Trust.
For the Robinson’s Bend Field, a gathering, treating and transportation fee of $0.260 per MMBtu
adjusted for inflation ($0.331, $0.327 and $0.314 per MMBtu for 2010, 2009, and 2008,
respectively), plus fuel usage equal to 5% of revenues is deducting in computing Net Proceeds due
to the Trust. Additionally, a gathering fee of $0.05 per MMBtu is deducted in calculating the
purchase price for production from 73 of the 426 wells in the Robinson’s Bend Field. In computing
Net Proceeds due to the Trust for the Austin Chalk Fields, $0.38 per MMBtu plus 17% of revenues are
deducted as a fee to gather, treat and transport natural gas production. TEMI deducted from the
purchase price for natural gas for production attributable to certain wells in the Cotton Valley
Fields a transportation fee of $0.045 per MMBtu.
During the three months ended September 30, 2010 and 2009, such fees deducted from the Net Proceeds
calculations, attributable to production during each three-month period ended June 30, 2010 and
2009, in the Robinson’s Bend, Austin Chalk and
Cotton Valley Fields, totaled $0.2 million. During the nine months ended September 30, 2010 and
2009, such fees deducted from the Net Proceeds calculations, attributable to production during each
nine-month period ended September 30, 2010 and 2009, in the Robinson’s Bend, Austin Chalk and
Cotton Valley Fields, totaled $0.7 million. No
15
TORCH ENERGY ROYALTY TRUST
Notes to Financial Statements
amounts for gathering, treating or transportation are deducted in calculating the purchase price
from the Chalkley Field.
Administrative Services Agreement
The sole purpose of the Trust is to hold the Net Profits Interests, to receive payments from the
Working Interest Owners, and to make payments to Unitholders. The Trust does not conduct any
business activity and has no officers, directors or employees. The Trust and Trustee rely on third
party service providers to perform administrative services for the Trust.
Torch provided accounting, bookkeeping, informational and other services to the Trust related to
the Net Profits Interests pursuant to the Administrative Services Agreement effective October 1,
1993 and an oral arrangement after termination of the Administrative Services Agreement on January
29, 2008 through April 1, 2008. On November 7, 2008, an agreement was entered into between the
Trust and Torch that engaged Torch to provide certain accounting services in connection with the
Trust’s preparation and filing of the Trust’s Form 10-K for the year ended December 31, 2007.
To facilitate the winding down of the Trust, Torch and the Trust entered into an agreement on March
26, 2009, as amended on March 31, 2010 and March 31, 2011. Pursuant to the agreement, Torch
currently provides certain accounting and other services for the Trust. The term of such agreement
expires March 31, 2012 or as sooner terminated by written notice from either party within 5
business days notice.
Services fees paid by the Trust to Torch during each of the three-month periods ended September 30,
2010 and 2009 were $0.1 million. Services fees paid by the Trust to Torch during each of the
nine-month periods ended September 30, 2010 and 2009 were $0.3 million.
Operator Overhead Fees
A subsidiary of Torch operates certain oil and natural gas interests burdened by the Net Profits
Interests. The Underlying Properties are charged, on the same basis as other third parties, for all
customary expenses and costs reimbursements associated with these activities. Operator overhead
fees deducted from the Net Proceeds computations for the Chalkley, Cotton Valley and Austin Chalk
Fields totaled $59,000 during each three-month period ended September 30, 2010 and 2009,
respectively. Such fees deducted from the Net Proceeds computations for the Chalkley, Cotton Valley
and Austin Chalk Fields totaled $177,000 and $169,000 during the nine months ended September 30,
2010 and 2009, respectively.
16
TORCH ENERGY ROYALTY TRUST
Notes to Financial Statements
Compensation of the Trustee and Transfer Agent
The Trust Agreement provides that the Trustee be compensated for its administrative services, out
of the Trust assets, in an annual amount of $80,000, plus an hourly charge for services in excess
of a combined total of 250 hours annually at its standard rates. In accordance with provisions in
the Trust Agreement, the Trustee may increase its compensation for its administrative services as a
result of unusual or extraordinary services rendered by the Trustee.
Additionally, the Trustee receives a transfer agency fee of $5.00 annually per account (minimum of
$15,000 annually), subject to change each December, beginning December 1994, based upon the change
in the Producer’s Price Index as published by the Department of Labor, Bureau of Labor Statistics,
plus $1.00 for each certificate issued.
Total administrative and transfer agent fees charged by the Trustee during the three months ended
September 30, 2010 and 2009 were $36,000 and $31,000, respectively. Such fees charged by the
Trustee during the nine months ended September 30, 2010 and 2009 were $86,000 and $100,000,
respectively.
6. Trust Expense Payable
The Trust expense payable as of September 30, 2010 and December 31, 2009 was $2.0 million and $2.1
million, respectively. Such liability as of September 30, 2010 and December 31, 2009 includes $0.5
million and $0.7 million, respectively, of general and administrative expense accruals mainly
pertaining to the Trust’s legal fees, accounting and audit fees, and administrative services fees.
The remaining liability as of September 30, 2010 and December 31, 2009 of $1.5 million and $1.3
million, respectively, represents a potential overpayment from a certain working interest owner of
the Underlying Properties pertaining to oil and natural gas sales from the Infill Wells located in
the Cotton Valley Fields during periods subsequent to the Trust’s termination.
7. Subsequent Events
Except as set forth below, no events occurred from December 31, 2010 to the date of this filing
that are reportable pursuant to FASB ASC 855
On February 23, 2011, the Trust issued a press release and disclosed information regarding the
ongoing Alabama derivative litigation on its Current Report on Form 8-K. In the press release, the
Trust announced that it and the derivative unitholder plaintiff
17
TORCH ENERGY ROYALTY TRUST
Notes to Financial Statements
reached an agreement in principle with Constellation Energy Partners LLC to settle certain claims
in the litigation, captioned Trust Venture Company, LLC v. Constellation Energy Partners LLC
(CV-2008-900751), filed by the derivative plaintiff on the Trust’s behalf in the Circuit Court of
Tuscaloosa County, Alabama (the “Settlement”).
As stated in the press release and the Notice of Pendency of Derivative Action, Proposed Settlement
of Derivative Action, Settlement Hearing, and Right to Appear, in the form approved by the Court
and attached to the Form 8-K filed with the SEC on February 23, 2011, subject to the approval of
the Court, the derivative plaintiff (Trust Venture Company, LLC) and the Trust have agreed to
settle the claims against Constellation Energy Partners LLC in the derivative action, and to enter
into mutual, general releases with Constellation Energy Partners LLC in return for (i) a payment of
one million two hundred thousand United States dollars ($1,200,000) to the derivative plaintiff by
Robinson’s Bend Production II (“RBP II”), which is a Delaware limited liability company and an
affiliate of Constellation Energy Partners LLC, to reimburse the derivative plaintiff for the legal
fees and expenses it incurred in prosecuting the derivative action, (ii) an irrevocable bid by RBP
II of not less than one million United States dollars ($1,000,000) for its purchase from the Trust
of the net overriding royalty interest (“Alabama NORRI”), when such Alabama NORRI is separately
offered for sale by the Trust at public auction within 180 days of the effective date of the
Settlement, with such bid amount to be deposited by RBP II in a third-party escrow account pending
the public auction, and (iii) a third amendment to that certain Water Gathering and Disposal
Agreement providing that, for a period of ten years commencing on the first day of the month
following the effective date of the settlement, the charges for the gathering, separation, and
disposal of water from oil and gas wells located in Tuscaloosa County, Alabama that are owned and
operated by RBP II (“Wells”) shall be fifty-three cents ($0.53) per barrel of water. (RBP II
currently charges one United States dollar ($1.00) per barrel of water for the gathering,
separation, and disposal of such water from the Wells).
The Alabama Circuit Court of Tuscaloosa County, Alabama convened a hearing on the settlement on
April 11, 2011, at 2:00 p.m. CDT (the “Settlement Hearing”). At the Settlement Hearing, the Court
determined whether or not (i) to approve the Settlement as memorialized in the proposed Settlement
and Release Agreement with Constellation Energy Partners LLC, and (ii) to approve an Order ending
this derivative action. On February 23, 2011, the Trust sent the Notice of Pendency of Derivative
Action, Proposed Settlement of Derivative Action, Settlement Hearing, and Right to Appear to the
Trust’s unitholders of record as of February 11, 2011, as required by the Settlement. On April 18,
2011, the Trust issued a press release and disclosed information on its Current Report on Form 8-K
that the Alabama Circuit Court of Tuscaloosa County,
18
TORCH ENERGY ROYALTY TRUST
Notes to Financial Statements
Alabama approved in all respects the settlement as memorialized in the proposed Settlement and
Release Agreement and ordered that the matter be dismissed, with prejudice, costs taxed as paid.
In the Order and Final Judgment entered by the Court dated as of April 13, 2011, the Circuit Court
acknowledged receiving the report from counsel for the trustee of the Trust that no objections to
the proposed settlement in this matter had been received, and the Court confirmed after review that
the Settlement and
Release Agreement is fair, reasonable and adequate. The proposed Settlement and Release Agreement
shall become effective on the date on which the Order and Final Judgment becomes final and
unappealable, which absent appeal, is anticipated to be June 13, 2011.
19
TORCH ENERGY ROYALTY TRUST
Item 2. Management’s 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 Proceeds attributable to
the Underlying Properties for the three months ended September 30, 2010 and 2009 is derived from
actual oil and natural gas produced during the three months ended June 30, 2010 and 2009,
respectively. Net Proceeds attributable to the Underlying Properties for the nine months ended
September 30, 2010 and 2009 is derived from oil and natural gas produced during the nine months
ended June 30, 2010 and 2009, respectively.
During the nine months ended September 30, 2010, Net Proceeds paid to the Trust with respect to net
profits income generated in the Austin Chalk Fields were reduced by $752,000 (including interest
expense of $60,000) to recoup overpayments to the Trust by TRC during the five year period ended
December 31, 2009 (“Austin Chalk Gas Volume Adjustment”). The effect of the Austin Chalk Gas Volume
Adjustment has been excluded from the data set forth in the table below, except for information
contained in footnote (a). See Note 4 to the Trust’s financial statements for additional
information.
Oil and natural gas sales attributable to the Underlying Properties during the three and nine month
periods ended June 30, 2010 and 2009 are as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended September 30, |
|
| |
|
2010 |
|
|
2009 |
|
| |
|
Bbls |
|
|
Mcf of |
|
|
Bbls |
|
|
Mcf of |
|
| |
|
of Oil |
|
|
Natural Gas |
|
|
of Oil |
|
|
Natural Gas |
|
Chalkley Field |
|
|
551 |
|
|
|
155,184 |
|
|
|
604 |
|
|
|
173,114 |
|
Robinson’s Bend Field |
|
|
— |
|
|
|
366,111 |
|
|
|
— |
|
|
|
379,306 |
|
Cotton Valley Fields |
|
|
234 |
|
|
|
111,779 |
|
|
|
358 |
|
|
|
122,720 |
|
Austin Chalk Fields |
|
|
1,809 |
|
|
|
18,308 |
(a) |
|
|
2,135 |
|
|
|
32,744 |
(a) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,594 |
|
|
|
651,382 |
|
|
|
3,097 |
|
|
|
707,884 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Nine Months Ended September 30, |
|
| |
|
2010 |
|
|
2009 |
|
| |
|
Bbls |
|
|
Mcf of |
|
|
Bbls |
|
|
Mcf of |
|
| |
|
of Oil |
|
|
Natural Gas |
|
|
of Oil |
|
|
Natural gas |
|
Chalkley Field |
|
|
1,817 |
|
|
|
466,597 |
|
|
|
2,264 |
|
|
|
537,857 |
|
Robinson’s Bend Field |
|
|
— |
|
|
|
1,096,748 |
|
|
|
— |
|
|
|
1,145,838 |
|
Cotton Valley Fields |
|
|
826 |
|
|
|
328,846 |
|
|
|
1,181 |
|
|
|
393,232 |
|
Austin Chalk Fields |
|
|
7,614 |
|
|
|
93,424 |
(a) |
|
|
7,252 |
|
|
|
80,738 |
(a) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,257 |
|
|
|
1,985,615 |
|
|
|
10,697 |
|
|
|
2,157,665 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20
TORCH ENERGY ROYALTY TRUST
(a) Excludes the effect of the Austin Chalk Gas Volume Adjustment. Such adjustment adversely
affected gas sales attributable to the Underlying Properties in the Austin Chalk Fields during the
three-month periods ended June 30, 2010 and 2009 by 0 MMcf and 13 MMcf, respectively. The Austin
Chalk Gas Volume Adjustment adversely affected gas sales attributable to the Underlying Properties
in the Austin Chalk Fields during the nine-month periods ended
June 30, 2010 and June 30, 2009 by 6 MMcf and 26 MMcf, respectively. Oil sales were not impacted by this adjustment. The total natural
gas sales volumes pertaining to the Austin Chalk Gas Volume Adjustment of 174 MMcf were compensated
with natural gas sales volumes during the nine months ended June 30, 2010.
Three Months Ended September 30, 2010 Compared to Three Months Ended September 30, 2009
For the three months ended September 30, 2010, net profits income was $337,000, down 34% from net
profits income of $507,000 for the same period in 2009. Such decrease
is mainly attributable to the Austin Chalk Gas Volume Adjustment
which reduced nets profits income during the three months ended
September 30, 2010 by $149,000. See Note 4 to the
Trust’s financial statements for additional information.
The Trust received no payments with respect to the Robinson’s Bend Field during the three months
ended September 30, 2010 and 2009. In calculating the Robinson’s Bend Field Net Proceeds
pertaining to production during the three months ended June 30, 2010, costs and expenses exceeded
gross revenues by approximately $908,000. The Trust will receive no payments with respect to the
Robinson’s Bend Field until future proceeds exceed the sum of future costs and expenses and the
cumulative excess of such costs and expenses, including interest (“Robinson’s Bend Deficit”). The
Trust does not anticipate that the Net Proceeds attributable to the Robinson’s Bend Field, if any,
will be significant in the future. As of September 30, 2010 (pertaining to production through June
30, 2010), the Robinson’s Bend Cumulative Deficit was approximately $5.3 million.
Prior to
the effect of the Austin Chalk Gas Volume Adjustment (see Note 4
to the Trust’s financial statements), natural gas production attributable to the Underlying Properties in the Chalkley, Cotton Valley and
Austin Chalk Fields was 285,271 Mcf and 328,578 Mcf during the three months ended June 30, 2010 and
2009, respectively.
The Austin Chalk Gas Volume Adjustment, which reduced Net Proceeds
received by the Trust during the three months ended September
30, 2010, decreased gas volumes included in net profits income
calculations during the three months ended September 30, 2010.
The Trust, Trustee and the Trust service providers continue to review
and analyze the appropriateness of and verify the information and
data provided by TRC concerning the Austin Chalk gas production
volumes.
Natural gas production attributable to the Underlying Properties in the
Robinson’s Bend Field was 366,111 Mcf and 379,306 Mcf during the three months ended June 30, 2010
and 2009, respectively. Oil production attributable to the Underlying Properties for the three
months ended June 30, 2010 and 2009 was 2,594 Bbls and 3,097 Bbls, respectively. Natural gas and
oil production decreased during the quarter ended June 30, 2010 as compared to the same period in
2009 as a result of normal production declines.
21
TORCH ENERGY ROYALTY TRUST
During the three months ended September 30, 2010, the average price used to calculate Net Proceeds
for natural gas, before gathering, treating and transportation deductions, was $3.18 per MMBtu as
compared to $2.85 per MMBtu for the three
months ended September 30, 2009. Such average price calculations
exclude the impact of the Austin Chalk Gas Volume Adjustment
discussed in Note 4 of the Trust’s financial statements.
During the three months ended September 30, 2010, the average
price used to calculate Net Proceeds for oil was $69.87 per Bbl as compared to $49.44 per Bbl for
the three months ended September 30, 2009.
Prior to the Trust’s termination on January 29, 2008, TEMI deducted the Price Differential and was
committed to pay a Minimum Price for natural gas. When TEMI paid a purchase price for natural gas
based on the Minimum Price, TEMI received Price Credits which it was entitled to deduct in
determining the purchase price when the Index Price for natural gas exceeded the Minimum Price.
TEMI had not exercised its right to discontinue the Minimum Price commitment and had no outstanding
Price Credits on the Termination Date. Additionally, if the Index Price for natural gas exceeded
$2.10 per MMBtu, adjusted annually for inflation, TEMI deducted 50% of such excess in calculating
the Net Proceeds payable to the Trust.
Upon the Trust’s termination, pursuant to each Conveyance, the Working Interest Owners used the
same pricing mechanisms as the expired Purchase Contract (including the Sharing Price and Minimum
Price commitment mechanisms) in calculating Net Proceeds due to the Trust. The Minimum Price per
MMBtu was $1.97 per MMBtu, $1.95 per MMBtu and $1.87 per MMBtu for 2010, 2009 and 2008 production,
respectively. The Sharing Price per MMBtu was $2.43 per MMBtu, $2.40 per MMBtu and $2.30 per MMBtu
for 2010, 2009 and 2008 production, respectively. Pursuant to each Conveyance, the Working Interest
Owners also have the same annual option to discontinue the Minimum Price commitment. As of
September 30, 2010, the Working Interest Owners had no outstanding Price Credits and had not
exercised their right to discontinue the Minimum Price commitment. No Price Credits were deducted
in calculating the purchase price related to net profits income during the nine months ended
September 30, 2010 and 2009. The deduction of the Price Differential in connection with the
Sharing Price mechanism reduced Net Proceeds paid to the Trust during the three months ended
September 30, 2010 and 2009 by $0.5 million and $0.3 million, respectively.
During the three months ended September 30, 2010, the Trust recognized Infill Well income of
$130,000, mainly generated from Infill Wells in the Cotton Valley Field. The Trust recognized no
Infill Well income during the same period in 2009. Such Infill Wells are operated by Samson Lone
Star Limited Partnership.
Lease operating expenses and capital expenditures attributable to the Underlying Properties in the
Chalkley, Cotton Valley and Austin Chalk Fields deducted in calculating Net Proceeds due to the
Trust for each of the three-month periods ended
22
TORCH ENERGY ROYALTY TRUST
September 30, 2010 and 2009 totaled $0.5 million. With respect to the Robinsons’ Bend Field, lease
operating expenses and capital expenditures of $1.8 million were deducted in calculating the Net
Proceeds payable to the Trust from the Robinson’s Bend Field for each of the three-month periods
ended September 30, 2010 and 2009.
General and administrative expenses amounted to $0.3 million for each of the three-month periods
ended September 30, 2010 and 2009. During each of the three month periods ended September 30, 2010
and 2009, general and administrative expenses include costs pertaining to the administrative
services provided by Torch and the Trustee, legal fees, accounting and audit fees, reserve report
preparation fees, and Unitholder report printing fees.
During the three months ended September 30, 2010 and 2009, the Trust received cash payments
totaling $0.6 million and $0.7 million, respectively, from the Working Interest Owners of the
Underlying Properties. Included in such cash receipts during the three months ended September 30,
2010 and 2009 are $0.1 million and $0.2 million, respectively, paid to the Trust by a certain
working interest owner that is classified as restricted cash due to potential overpayment. Cash
payments received by the Trust during the three months ended September 30, 2010 and 2009 mainly
pertain to net profits income attributable to production from the Underlying Properties during the
three months ended June 30, 2010 and 2009, respectively.
The Trust allocated net profits income received by the Trust during each three-month period ended
September 30, 2010 and 2009 of $0.5 million into the Cash Reserve. The Cash Reserve as of
September 30, 2010 and December 31, 2009 was $0.9 million and $0.8 million, respectively.
The foregoing resulted in distributable income of $0.1 million, or $0.01 per Unit, for the three
months ended September 30, 2010 as compared to $0.2 million, or $0.02 per Unit, for the three
months ended September 30, 2009. The Trust made no cash distributions to Unitholders during each
of the three-month periods ended September 30, 2010 and 2009.
Nine Months Ended September 30, 2010 Compared to Nine Months Ended September 30, 2009
For the nine months ended September 30, 2010, net profits income was $0.8 million, down 64% from
net profits income of $2.2 million for the same period in 2009. Such decrease is mainly due to the
Austin Chalk Gas Volume Adjustment which reduced net profits income during the nine months ended
September 30, 2010 by $0.7 million. See Note 4 to the Trust’s financial statements for
additional information.
23
TORCH ENERGY ROYALTY TRUST
The Trust received no payments with respect to the Robinson’s Bend Field during the nine months
ended September 30, 2010 and 2009. In calculating the Robinson’s Bend Field Net Proceeds
pertaining to production during the nine months ended June 30, 2010, costs and expenses exceeded
gross revenues by approximately $2.3 million. The Trust will receive no payments with respect to
the Robinson’s Bend Field until future proceeds exceed the Robinson’s Bend Deficit. The Trust does
not anticipate that the Net Proceeds attributable to the Robinson’s Bend Field, if any, will be
significant in
the future. As of September 30, 2010 (pertaining to production through June 30, 2010), the
Robinson’s Bend Cumulative Deficit was approximately $5.3 million.
Prior to the effect of the Austin Chalk Gas Volume Adjustment (see Note 4 to the Trust’s
financial statements), natural gas production attributable to the Underlying Properties in the
Chalkley, Cotton Valley and Austin Chalk Fields was 888,867 Mcf and 1,011,827 Mcf during the nine
months ended June 30, 2010 and 2009, respectively. The Austin Chalk Gas Volume Adjustment, which
reduced Net Proceeds received by the Trust during the nine months ended September 30, 2010,
decreased gas volumes included in net profits income calculations during the nine months ended
September 30, 2010. The Trust, Trustee and the Trust service providers continue to review and
analyze the appropriateness of and verify the information and data provided by TRC concerning the
Austin Chalk gas production volumes.
Natural gas production attributable to the Underlying Properties in the Robinson’s Bend Field was
1,096,748 Mcf and 1,145,838 Mcf during the nine months ended June 30, 2010 and 2009, respectively.
Oil production attributable to the Underlying Properties for the nine months ended June 30, 2010
and 2009 was 10,257 Bbls and 10,697 Bbls, respectively.
During the nine months ended September 30, 2010, the average price used to calculate Net Proceeds
for natural gas, before gathering, treating and transportation deductions, was $3.36 per MMBtu as
compared to $3.61 per MMBtu for the nine months ended September 30, 2009. Such average price
calculations exclude the impact of the Austin Chalk Gas Volume Adjustment discussed in Note 4 of
the Trust financial statements. During the nine months ended September 30, 2010, the average price
used to calculate Net Proceeds for oil was $69.38 per Bbl as compared to $45.92 per Bbl for the
nine months ended September 30, 2009.
Prior to the Trust’s termination on January 29, 2008, TEMI deducted the Price Differential and was
committed to pay a Minimum Price for natural gas. When TEMI paid a purchase price for natural gas
based on the Minimum Price, TEMI received Price Credits which it was entitled to deduct in
determining the purchase price when the Index Price for natural gas exceeded the Minimum Price.
TEMI had not exercised its right to discontinue the Minimum Price commitment and had no outstanding
Price Credits on the Termination Date. Additionally, if the Index Price for natural gas exceeded
$2.10
24
TORCH ENERGY ROYALTY TRUST
per MMBtu, adjusted annually for inflation, TEMI deducted 50% of such excess in calculating the Net
Proceeds payable to the Trust.
Upon the Trust’s termination, pursuant to each Conveyance, the Working Interest Owners used the
same pricing mechanisms (including the Sharing Price and Minimum Price commitment mechanisms) in
calculating Net Proceeds due to the Trust. The Minimum Price per MMBtu was $1.97 per MMBtu, $1.95
per MMBtu and $1.87 per MMBtu for 2010, 2009 and 2008 production, respectively. The Sharing Price
per MMBtu was $2.43 per MMBtu, $2.40 per MMBtu and $2.30 per MMBtu for 2010, 2009
and 2008 production, respectively. Pursuant to each Conveyance, the Working Interest Owners also
have the same annual option to discontinue the Minimum Price commitment, pursuant to each
Conveyance. As of September 30, 2010, the Working Interest Owners had no outstanding Price Credits
and had not exercised their right to discontinue the Minimum Price commitment. No Price Credits
were deducted in calculating the purchase price related to net profits income during the nine
months ended September 30, 2010 and 2009. The deduction of the Price Differential in connection
with the Sharing Price mechanism reduced Net Proceeds paid to the Trust during the nine months
ended September 30, 2010 and 2009 by $1.9 million and $2.8 million, respectively.
During the nine months ended September 30, 2010 and 2009, the Trust recognized Infill Well income
of $313,000 and $72,000, respectively, mainly pertaining to Infill Wells located in the Cotton
Valley Fields. The Cotton Valley Field Infill Wells are operated by Samson Lone Star Partnership.
Lease operating expenses and capital expenditures attributable to the Underlying Properties in the
Chalkley, Cotton Valley and Austin Chalk Fields deducted in calculating Net Proceeds due to the
Trust during the nine months ended September 30, 2010 and 2009 totaled $1.7 million and $1.6
million, respectively. With respect to the Robinsons’ Bend Field, lease operating expenses and
capital expenditures of $5.3 million and $5.2 million were deducted in calculating the Net Proceeds
payable to the Trust from the Robinson’s Bend Field for the nine months ended September 30, 2010
and 2009, respectively.
General and administrative expenses amounted to $0.8 million and $1.1 million, respectively, for
the nine months ended September 30, 2010 and 2009. The decrease in general and administrative
expenses in 2010 as compared to 2009 is primarily due to legal fees incurred by the Trust during
2009 in connection with the Alabama derivative litigation discussed in Part II, Item 1. Legal
Proceedings. During each of the nine-month periods ended September 30, 2010 and 2009, general and
administrative expenses include costs pertaining to the administrative services provided by Torch
and the Trustee, legal fees, accounting and audit fees, reserve report preparation fees, and
Unitholder report printing fees.
25
TORCH ENERGY ROYALTY TRUST
During the nine months ended September 30, 2010 and 2009, the Trust received cash payments totaling
$1.3 million and $2.8 million, respectively, from the Working Interest Owners of the Underlying
Properties. Included in such cash receipts during the nine months ended September 30, 2010 and 2009
are $0.2 million and $0.6 million, respectively, paid to the Trust by a certain working interest
owner that is classified as restricted cash due to potential overpayment. Cash payments received
by the Trust during the nine months ended September 30, 2010 and 2009 mainly pertain to net profits
income attributable to production from the Underlying Properties during the nine months ended June
30, 2010 and 2009, respectively.
The Cash Reserve as of September 30, 2010 and December 31, 2009 was $0.9 million and $0.8 million,
respectively. The foregoing resulted in distributable income of $0.3 million, or $0.04 per Unit,
for the nine months ended September 30, 2010, as compared to $1.2 million, or $0.14 per Unit, for
the same period in 2009. No cash distributions were made during the nine months ended September
30, 2010. Cash distributions of $3.0 million, or $0.35 per Unit, were made during the nine months
ended September 30, 2009.
Net profits income received by the Trust during the three and nine month periods ended September
30, 2010 and 2009, derived from production sold during the three and nine months ended June 30,
2010 and 2009, respectively, was computed as shown in the following table (in thousands):
26
TORCH ENERGY ROYALTY TRUST
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
|
Three Months Ended |
|
| |
|
September 30, 2010 |
|
|
September 30, 2009 |
|
| |
|
Chalkley, Cotton |
|
|
|
|
|
|
|
|
|
|
Chalkley, Cotton |
|
|
|
|
|
|
|
| |
|
Valley and Austin |
|
|
Robinson’s Bend |
|
|
|
|
|
|
Valley and Austin |
|
|
Robinson’s Bend |
|
|
|
|
| |
|
Chalk Fields |
|
|
Field |
|
|
Total |
|
|
Chalk Fields |
|
|
Field |
|
|
Total |
|
Oil and
natural gas revenues(a) |
|
$ |
930 |
|
|
$ |
994 |
|
|
$ |
1,924 |
|
|
$ |
1,101 |
|
|
$ |
915 |
|
|
$ |
2,016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease operating expenses
and property tax |
|
|
363 |
|
|
|
1,838 |
|
|
|
2,201 |
|
|
|
487 |
|
|
|
1,767 |
|
|
|
2,254 |
|
Severance tax |
|
|
100 |
|
|
|
64 |
|
|
|
164 |
|
|
|
73 |
|
|
|
57 |
|
|
|
130 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
463 |
|
|
|
1,902 |
|
|
|
2,365 |
|
|
|
560 |
|
|
|
1,824 |
|
|
|
2,384 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net proceeds before capital
expenditures |
|
|
467 |
|
|
|
(908 |
) |
|
|
(441 |
) |
|
|
541 |
|
|
|
(909 |
) |
|
|
(368 |
) |
Capital expenditures |
|
|
112 |
|
|
|
— |
|
|
|
112 |
|
|
|
7 |
|
|
|
1 |
|
|
|
8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net proceeds |
|
|
355 |
|
|
|
(908 |
) |
|
|
(553 |
) |
|
|
534 |
|
|
|
(910 |
) |
|
|
(376 |
) |
Net profits percentage |
|
|
95 |
% |
|
|
— |
|
|
|
— |
|
|
|
95 |
% |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net profits income |
|
$ |
337 |
|
|
$ |
— |
|
|
$ |
337 |
|
|
$ |
507 |
|
|
$ |
— |
|
|
$ |
507 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Nine Months Ended |
|
|
Nine Months Ended |
|
| |
|
September 30, 2010 |
|
|
September 30, 2009 |
|
| |
|
Chalkley, Cotton |
|
|
|
|
|
|
|
|
|
|
Chalkley, Cotton |
|
|
|
|
|
|
|
| |
|
Valley and Austin |
|
|
Robinson’s Bend |
|
|
|
|
|
|
Valley and Austin |
|
|
Robinson’s Bend |
|
|
|
|
| |
|
Chalk Fields |
|
|
Field |
|
|
Total |
|
|
Chalk Fields |
|
|
Field |
|
|
Total |
|
Oil and natural gas revenues (a) |
|
$ |
2,964 |
|
|
$ |
3,183 |
|
|
$ |
6,147 |
|
|
$ |
4,207 |
|
|
$ |
3,562 |
|
|
$ |
7,769 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease operating expenses
and property tax |
|
|
1,351 |
|
|
|
5,289 |
|
|
|
6,640 |
|
|
|
1,421 |
|
|
|
5,178 |
|
|
|
6,599 |
|
Severance tax |
|
|
333 |
|
|
|
225 |
|
|
|
558 |
|
|
|
355 |
|
|
|
302 |
|
|
|
657 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,684 |
|
|
|
5,114 |
|
|
|
7,198 |
|
|
|
1,776 |
|
|
|
5,480 |
|
|
|
7,256 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net proceeds before capital
expenditures |
|
|
1,280 |
|
|
|
(2,331 |
) |
|
|
(1,051 |
) |
|
|
2,431 |
|
|
|
(1,918 |
) |
|
|
513 |
|
Capital expenditures |
|
|
388 |
|
|
|
— |
|
|
|
388 |
|
|
|
134 |
|
|
|
1 |
|
|
|
135 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net proceeds |
|
|
892 |
|
|
|
(2,331 |
) |
|
|
(1,439 |
) |
|
|
2,297 |
|
|
|
(1,919 |
) |
|
|
378 |
|
Net profits percentage |
|
|
95 |
% |
|
|
— |
|
|
|
— |
|
|
|
95 |
% |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net profits income |
|
$ |
847 |
|
|
$ |
— |
|
|
$ |
847 |
|
|
$ |
2,182 |
|
|
$ |
— |
|
|
$ |
2,182 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (a) |
|
Net of the Austin Chalk Gas Volume Adjustment which reduced net profits income during
the three and nine months ended September 30, 2010 by $149,000
and $692,000, respectively. See Note 4 to the Trust’s financial statements for additional information. |
27
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 during the period from the inception of the Trust to
the Trust’s termination on January 29, 2008 was sold pursuant to a Purchase Contract between TRC,
Velasco, and TEMI. The Purchase Contract expired upon the Trust’s termination. Pursuant to the
Purchase Contract, TEMI was obligated to purchase all net production attributable to the Underlying
Properties for an Index Price, less certain other charges, which were calculated monthly. The
Index Price calculation was based on market prices of oil and natural gas and therefore was subject
to commodity price risk. The Purchase Contract also provided a Minimum Price paid by TEMI for
natural gas. When TEMI paid a purchase price based on the Minimum Price, it received Price Credits
equal to the difference between the Index Price and the Minimum Price that TEMI was entitled to
deduct when the Index Price exceeded the Minimum Price. Additionally, if the Index Price exceeded
the Sharing Price, TEMI was entitled to deduct such excess, the Price Differential. TEMI had the
annual option to discontinue the Minimum Price commitment. However, if TEMI discontinued the
Minimum Price commitment, it would no longer be entitled to deduct the Price Differential and would
forfeit all accrued Price Credits. TEMI did not exercise its right to discontinue the Minimum
Price commitment and had no outstanding Price Credits on the Termination Date.
Upon the Trust’s termination, pursuant to each Conveyance, the Working Interest Owners calculated
Net Proceeds owed to the Trust utilizing the same pricing mechanisms (including the Sharing Price
and Minimum Price commitment mechanisms) as the terminated Purchase Contract. The Minimum Price
was adjusted annually for inflation and was $1.97, $1.95 and $1.87 per MMBtu for 2010, 2009 and
2008, respectively. The Sharing Price was $2.43, $2.40 and $2.30 per MMBtu in 2010, 2009 and 2008,
respectively. Pursuant to each Conveyance, the Working Interest Owners also have the same annual
option to discontinue the Minimum Price commitment. However, if the Working Interest Owners
discontinue the Minimum Price commitment, they will no longer be entitled to deduct the Price
Differential and will forfeit all accrued Price Credits. The Working Interest Owners have not
exercised their option to discontinue the Minimum Price commitment and have no outstanding Price
Credits as of September 30, 2010.
28
TORCH ENERGY ROYALTY TRUST
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures.
The Trustee carried out an evaluation of the effectiveness of the design and operation of the
Trust’s disclosure controls and procedures pursuant to Exchange Act Rules 13a-15 and 15d-15 as of
the end of the period covered by this report. Based upon that evaluation, the Trustee concluded
that the Trust’s disclosure controls and procedures are effective in timely alerting the Trustee to
material information relating to the Trust required to be included in the Trust’s periodic filings
with the SEC. In their evaluation of disclosure controls and procedures, the Trustee and Trust has
relied, to the extent considered reasonable, on information provided by Torch and Watkins Meegan
LLC, an accounting firm contracted by the Trust to perform certain Sarbanes-Oxley compliance for
the Trust.
Changes in Internal Control over Financial Reporting.
There has not been any change in the Trust’s internal control over financial reporting during the
three months ended September 30, 2010 that has materially affected, or is reasonably likely to
materially affect, the Trust’s internal control over financial reporting. The Trust and Trustee
rely on third party service providers to perform administrative services for the Trust. Torch
provided accounting, bookkeeping, informational and other services to the Trust related to the Net
Profits Interests pursuant to the Administrative Services Agreement effective October 1, 1993 and
an oral arrangement after termination of the Administrative Services Agreement on January 29, 2008
through April 1, 2008. To facilitate the winding down of the Trust, Torch and the Trust entered
into an agreement whereby Torch provides certain accounting and other services for the Trust. The
term of such agreement expires March 31, 2012 or as sooner terminated by written notice from either
party within 5 business days notice.
29
TORCH ENERGY ROYALTY TRUST
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On October 16, 2008, Trust Venture Company, LLC and Wilmington Trust Company, solely in its
capacity as Trustee for the Torch Energy Royalty Trust, (together, “Plaintiffs”) filed a petition
against TRC, Torch E&P Company, and Constellation Energy Partners LLC (collectively, “Defendants”)
in the District Court of Harris County, Texas. The petition sought to vacate the arbitration award
issued by the JAMS Panel in Defendants’ favor on July 18, 2008 in the arbitration captioned Torch
Royalty Co., et al. v. Wilmington Trust Co., et al., JAMS Reference No. 13100017310. See Item 1.
Business — General of the annual report of Trust for the year ended December 31, 2008 filed with
the SEC on November 25, 2009 for a description of the arbitration. Defendants filed a motion to
dismiss the Plaintiffs’ petition and to confirm the arbitration award. On or about December 10,
2008, the Court entered an Order dismissing the petition and granting the Defendants’ motion to
confirm the arbitration award.
On December 22, 2008, the Trustee received a demand letter from Trust Venture Company, LLC with
respect to certain enumerated costs — including administrative costs and costs for water gathering,
treating and disposal — that are deducted by the working interest owners of certain of the
Underlying Properties from the Net Profit Interests before remitting the Net Proceeds to the
Trustee and the Trust. Trust Venture Company, LLC has concluded that the Trust has been
overcharged (and continues to be overcharged) by the working interest owners of certain of the
Underlying Properties and that these overcharges have damaged the Trust (and as a result, all of
the Trust’s Unitholders). In addition, Trust Venture Company, LLC asserts that the working
interest owners have failed to provide the required accountings as set forth in the Conveyances and
that the Trust may request the court to require the working interest owners to provide such an
accounting. Trust Venture Company, LLC requested that the Trustee either institute legal action
against the working interest owners, or authorize Trust Venture Company, LLC to commence a
derivative action against the current working interest owner of the Alabama property in accordance
with, inter alia, Section 3816 of the Delaware Statutory Trust Act, codified at 12 Del. C. 3816(a),
to recover all overcharges related to administrative costs, water gathering, treating and disposal
costs and all overcharges reflected in the accounting. The Trustee responded on December 22, 2008
to Trust Venture Company, LLC with a request for additional information which it has now received.
The Trustee carefully considered Trust Venture Company, LLC’s demand letter, and concluded, in the
reasoned exercise of its business judgment, that it is in the best interest of the Trust and all
Unitholders to authorize Trust Venture Company, LLC to commence a derivative action and provided
its authorization as of December 30, 2008.
30
TORCH ENERGY ROYALTY TRUST
As disclosed by the Trust in its Annual Report on Form 10-K for the year ended December 31, 2007
(“2007 Annual Report”), Trust Venture intended to commence a derivative action against
Constellation Energy Partners LLC, the working interest owner
of certain oil and natural gas fields located in Alabama, in accordance with, inter alia, Section
3816 of the Delaware Statutory Trust Act, codified at 12 Del. C. 3816(a), to (i) recover any
overcharges to the Trust by Constellation Energy Partners LLC related to administrative costs,
water gathering, treating and disposal costs and severance taxes and (ii) require Constellation
Energy Partners LLC to provide an accounting of its revenues and expenses as required under the
Conveyance filed of record in Tuscaloosa County, Alabama. On December 30, 2008, Trust Venture
Company, LLC filed and subsequently served a derivative lawsuit against Constellation Energy
Partners LLC in Alabama state court alleging such overcharges, challenging the calculation of the
Net Profits Interests under the Conveyances that were used to transfer the net profits interests in
each state, and demanding an accounting of Constellation Energy Partners LLC’s revenues and
expenses. In response to the derivative lawsuit, on February 9, 2009, Constellation Energy Partners
LLC filed in Alabama state court a motion to dismiss such lawsuit without prejudice in favor of
arbitration in Texas on various grounds, including Trust Venture Company, LLC’s alleged lack of
standing and Trust Venture’s alleged failure to comply with certain contractual agreements. The
Alabama state court denied Constellation Energy Partners LLC’s motion to dismiss on February 25,
2009, and so the Alabama derivative action is proceeding against Constellation Energy Partners LLC.
On February 12, 2009, the Trustee received a certified copy of a demand for arbitration dated
February 9, 2009 by Constellation Energy Partners LLC before JAMS in Texas (the “Demand Notice”)
seeking a declaratory judgment that Constellation Energy Partners LLC (i) correctly calculated and
paid the Net Profits Interests payments due to the Trust, (ii) correctly charged the Trust for
certain well accounting services and severance taxes, and (iii) has complied with its contractual
reporting requirements due to the Trust. In the Demand Notice, Constellation Energy Partners LLC
claimed that, because the Trust authorized Trust Venture to file the derivative lawsuit, “there
exists a judicable conflict between Constellation Energy Partners LLC and the Trust that is subject
to resolution by arbitration.”
On February 12, 2009, Trust Venture Company, LLC filed an emergency motion in Alabama state court
to stay the arbitration demanded by Constellation Energy Partners LLC until such time as the court
issues a judgment as to the enforceability of the arbitration agreement made by and between the
Trust and Constellation Energy Partners LLC. The court denied that motion on February 25, 2009. On
March 9, 2009, the Trustee filed its own motion in the same Alabama state court seeking to
intervene in the derivative action for the limited purpose of moving for a stay of the Texas
arbitration until resolution of the derivative action. The Alabama state court heard oral argument
on the Trustee’s motion on March 25, 2009, and on April 1, 2009, the Alabama state court
31
TORCH ENERGY ROYALTY TRUST
denied the Trustee’s motion to stay the Texas arbitration and further denied Constellation Energy
Partners LLC’s motion to stay the Alabama state court derivative action. Subsequently, the Trustee
filed a motion to dismiss or stay the Texas arbitration with JAMS and the arbitration panel heard
oral argument on April 10, 2009 and on April 13, 2009 granted the Trustee’s motion to stay the
Texas arbitration proceedings
pending the outcome of the Alabama derivative action. The arbitration panel subsequently entered an
Order of Dismissal with respect to the Texas arbitration dated July 27, 2009. There can be no
assurance as to the outcome or result of the Alabama derivative litigation or that Constellation
Energy Partners LLC will not challenge the Order of Dismissal entered by the arbitration panel on
July 27, 2009 or file other arbitration claims. On August 21, 2009, the Alabama state court added
the Trust as a nominal plaintiff in the Alabama derivative action that is proceeding against
Constellation Energy Partners LLC.
The Trust has also previously disclosed information regarding the termination of the Trust, the
ongoing Alabama derivative litigation, the concluded Texas arbitration and other information
regarding the Trust on its 2007, 2008 and 2009 Annual Report on Form 10-K filed with the SEC and
its Current Reports on Form 8-K filed with the SEC. The Unitholders are urged to read the above
mentioned and all other filings by the Trust with the SEC carefully and in their entirety.
On February 23, 2011, the Trust issued a press release and disclosed information regarding the
ongoing Alabama derivative litigation on its Current Report on Form 8-K. In the press release, the
Trust announced that it and the derivative unitholder plaintiff reached an agreement in principle
with Constellation Energy Partners LLC to settle certain claims in the litigation, captioned Trust
Venture Company, LLC v. Constellation Energy Partners LLC (CV-2008-900751), filed by the derivative
plaintiff on the Trust’s behalf in the Circuit Court of Tuscaloosa County, Alabama (the
“Settlement”).
As stated in the press release and the Notice of Pendency of Derivative Action, Proposed Settlement
of Derivative Action, Settlement Hearing, and Right to Appear, in the form approved by the Court
and attached to the Form 8-K filed with the SEC on February 23, 2011, subject to the approval of
the Court, the derivative plaintiff (Trust Venture Company, LLC) and the Trust have agreed to
settle the claims against Constellation Energy Partners LLC in the derivative action, and to enter
into mutual, general releases with Constellation Energy Partners LLC in return for (i) a payment of
one million two hundred thousand United States dollars ($1,200,000) to the derivative plaintiff by
Robinson’s Bend Production II (“RBP II”), which is a Delaware limited liability company and an
affiliate of Constellation Energy Partners LLC, to reimburse the derivative plaintiff for the legal
fees and expenses it incurred in prosecuting the derivative action, (ii) an irrevocable bid by RBP
II of not less than one million United States dollars ($1,000,000) for its purchase from the Trust
of the net overriding royalty interest (“Alabama NORRI”), when such Alabama NORRI is separately
offered for sale
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TORCH ENERGY ROYALTY TRUST
by the Trust at public auction within 180 days of the effective date of the Settlement, with such
bid amount to be deposited by RBP II in a third-party escrow account pending the public auction,
and (iii) a third amendment to that certain Water Gathering and Disposal Agreement providing that,
for a period of ten years commencing on the first day of the month following the effective date of
the settlement, the charges for the gathering, separation, and disposal of water from oil and gas
wells located in Tuscaloosa County, Alabama that are owned and operated by RBP II (“Wells”) shall
be
fifty-three cents ($0.53) per barrel of water. (RBP II currently charges one United States dollar
($1.00) per barrel of water for the gathering, separation, and disposal of such water from the
Wells).
The Alabama Circuit Court of Tuscaloosa County, Alabama convened a hearing on the settlement on
April 11, 2011, at 2:00 p.m. CDT (the “Settlement Hearing”). At the Settlement Hearing, the Court
determined whether or not (i) to approve the Settlement as memorialized in the proposed Settlement
and Release Agreement with Constellation Energy Partners LLC, and (ii) to approve an Order ending
this derivative action. On February 23, 2011, the Trust sent the Notice of Pendency of Derivative
Action, Proposed Settlement of Derivative Action, Settlement Hearing, and Right to Appear to the
Trust’s unitholders of record as of February 11, 2011, as required by the Settlement. On April 18,
2011, the Trust issued a press release and disclosed information on its Current Report on Form 8-K
that the Alabama Circuit Court of Tuscaloosa County, Alabama approved in all respects the
settlement as memorialized in the proposed Settlement and Release Agreement and ordered that the
matter be dismissed, with prejudice, costs taxed as paid. In the Order and Final Judgment entered
by the Court dated as of April 13, 2011, the Circuit Court acknowledged receiving the report from
counsel for the trustee of the Trust that no objections to the proposed settlement in this matter
had been received, and the Court confirmed after review that the Settlement and Release Agreement
is fair, reasonable and adequate. The proposed Settlement and Release Agreement shall become
effective on the date on which the Order and Final Judgment becomes final and unappealable, which
absent appeal, is anticipated to be June 13, 2011.
As previously disclosed on current Report Form 8-K filed on January 31, 2008, the Trust received
the affirmative vote of the Unitholders of more than 66 2/3% of the outstanding units to terminate
the Trust at the meeting of Unitholders held January 29, 2008. Pursuant to the Trust Agreement of
the Trust, the “Termination Date” of the Trust is January 29, 2008.
Upon termination of the Trust, among other things, the Trustee is required to sell the Net Profits
Interests. Specifically, pursuant to Section 9.03(e) of the Trust Agreement if the property of the
Trust Estate (as defined in the Trust Agreement) has not been sold prior to the end of one calendar
year following the termination date, the Trustee must cause such assets to be sold at public
auction. As the Trust was terminated by a vote of
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TORCH ENERGY ROYALTY TRUST
the Unitholders on the Termination Date, the Trustee anticipates it will continue to consult with
the Trust’s and Trustee’s financial and legal advisors in preparing the sales process and obtaining
the necessary information required for disclosure regarding the Units to carry out the sale
requirement under Section 9.03(e) of the Trust Agreement.
No assurances can be given that the Trustee will be able to sell the Net Profits Interests or the
amount that will be distributed to Unitholders following such a sale. Such distributions could be
below the market value of the Units. The Trust can give no assurances of the effect of the results
of the affirmative vote to terminate the Trust by
the Unitholders on the continued listing of the Units on the New York Stock Exchange (NYSE) or any
other national quotation system.
The Trust believes there have been no material changes to risk factors previously disclosed in our
Annual Report on Form 10-K for the fiscal year ended December 31, 2010, filed with the SEC on April
22, 2011 (the “2010 Form 10-K”). You should carefully consider such risk factors as presented in
the 2010 Form 10-K and other information set forth in this Quarterly Report on Form 10-Q, including
our financial statements and the related notes.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults upon Senior Securities
None.
Item 4. (Removed and Reserved)
Item 5. Other Information
None.
Item 6. Exhibits
(a) Exhibits
4. Instruments of defining the rights of security holders, including indentures.
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4.1
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Form of Torch Energy Royalty Trust Agreement. * |
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4.2
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Form of Louisiana Trust Agreement. * |
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TORCH ENERGY ROYALTY TRUST
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4.3
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Specimen Trust Unit Certificate. * |
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4.4
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Designation of Ancillary Trustee. * |
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31.1
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Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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32.1
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Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002. |
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| * |
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Incorporated by reference from Registration Statements on Form S-1 of Torch Energy
Advisors Incorporated (Registration No. 33-68688) dated November 16, 1993. |
35
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.
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TORCH ENERGY ROYALTY TRUST
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By: |
Wilmington Trust Company,
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not in its individual capacity but solely as |
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Trustee for the Trust |
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By: |
/s/ Bruce L. Bisson
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Bruce L. Bisson |
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Vice President |
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Date: April 22, 2011
(The Trust has no employees, directors or executive officers.)
36