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SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
 FORM 10-K (Mark One)þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d)OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year endedDecember 31, 2004ORo
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period fromtoCommission File Number 1-12474
 TORCH ENERGY ROYALTY TRUST  Delaware
    
    74-6411424(State or Other Jurisdiction of
    
    (I.R.S. Employer Identification No.)Incorporation or Organization)Rodney Square North1100 North Market Street, Wilmington, Delaware
    
    19890(Address of Principal Executive Offices)
    
    (Zip Code)
 Registrants telephone number, including area code: (302) 651-8775 Securities registered pursuant to Section 12(b) of the Act: Title of each class
    
    Name of each exchange on which registeredUnits of Beneficial Interest
    
    New York Stock Exchange
 Securities registered pursuant to Section 12 (g) of the Act:  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 þ NO o Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of
the Act). YES þ NO o Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K þ. The aggregate market values of outstanding units of beneficial interest of the registrant held by
non-affiliates of the registrant at March 1, 2005 and June 30, 2004 were approximately $63.0
million and $50.5 million, respectively. As of March 1, 2005, 8.6 million units of beneficial interest were outstanding.




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Torch Energy Royalty Trust Annual Report on Form 10-K
For the fiscal year ended December 31, 2004  
 TABLE OF CONTENTS PageNumberPART IItem 1. Business
    
    
    3Item 2. Properties
    
    
    9Item 3. Legal Proceedings
    
    
    11Item 4. Submission of Matters to a Vote of Unitholders
    
    
    11PART IIItem 5. Market for Registrants Units and Related Unitholder Matters
    
    
    12Item 6. Selected Financial Data
    
    
    12Item 7. Managements Discussion and Analysis of Financial Condition
and Results of Operations
    
    
    12Item 7a. Quantitative and Qualitative Disclosures About
Market Risk
    
    
    16Item 8. Financial Statements and Supplementary Data
    
    
    17Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
    
    
    31Item 9A. Controls and Procedures
    
    
    31Item 9B. Other Information
    
    
    31PART IIIItem 10. Directors and Executive Officers of the Registrant
    
    
    32Item 11. Executive Compensation
    
    
    32Item 12. Security Ownership of Certain Beneficial Owners and Management
    
    
    32Item 13. Certain Relationships and Related Transactions
    
    
    32Item 14. Principal Accountant Fees and
Services
    
    
    34PART IVItem 15. Exhibits and Financial Statement Schedules
    
    
    35     Signatures
    
    
    37Consent of T.J. Smith & Company, Inc.Netherland, Sewell and Associates, Inc.Consent of Ryder Scott Company, L.P.Certification pursuant to Section 302Certification of Wilmington Trust Company pursuant to Section 1350
 2




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Torch Energy Royalty Trust 
 PART I 
 Item 1. Business This document includes forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934. All
statements other than statements of historical facts included in this document, including without
limitation, statements under Managements Discussion and Analysis of Financial Condition and
Results of Operations regarding the financial position, estimated quantities and net present
values of reserves of the Torch Energy Royalty Trust (Trust) and statements that include the
words believe, 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. Important factors
that could cause actual results to differ materially from Torchs expectations (Cautionary
Statements) are disclosed under Risk Factors elsewhere in this document. All subsequent written
and oral forward-looking statements attributable to the Trust or persons acting on its behalf are
expressly qualified by the Cautionary Statements. General The Trust was formed effective October 1, 1993 under the Delaware Business Trust Act pursuant to a
trust agreement (Trust Agreement) among Wilmington Trust Company, as trustee (Trustee), Torch
Royalty Company (TRC), Velasco Gas Company Ltd. (Velasco) and Torch as grantor. TRC and
Velasco created net profits interests (Net Profits Interests) which burden certain oil and gas
properties (Underlying Properties) and conveyed such interests to Torch. Torch conveyed the Net
Profits Interests to the Trust in exchange for an aggregate of 8,600,000 units of beneficial
interest (Units). Such Units were sold to the public through various underwriters in November
1993. Pursuant to an administrative services agreement (Administrative Services Agreement),
Torch provides accounting, bookkeeping, informational and other services related to the Net Profits
Interest. The Trust will terminate upon the first to occur of (i) an affirmative vote of the holders of not
less than 66-2/3% of the outstanding Units to liquidate the Trust; (ii) such time as the ratio of
the cash amounts received by the Trust from the Net Profits Interests to administrative costs of
the Trust is less than 1.2 to 1.0 for three consecutive quarters; (iii) March 1 of any year if it
is determined, based on a reserve report as of December 31 of the prior year, that the present
value of estimated pre-tax future net cash flows, discounted at 10%, of proved reserves
attributable to the Net Profits Interests is equal to or less than $25.0 million; or (iv) December
31, 2012. The Trust has not terminated as none of the aforementioned events have occurred. (See
Termination of Trust disclosure on page 8 for additional information.) Upon termination of the
Trust, the remaining assets of the Trust will be sold and the proceeds therefrom (after expenses)
will be distributed to the unitholders (Unitholders). The sole purpose of the Trust is to hold
the Net Profits Interests, to receive payments from TRC and Velasco, and to make payments to
Unitholders. The Trust does not conduct any business activity and has no employees. TRC and Velasco contracted to sell the oil and gas production from the Underlying Properties to
Torch Energy Marketing Inc. (TEMI), a subsidiary of Torch, under a purchase contract (Purchase
Contract). TRC and Velasco receive payments reflecting the proceeds of oil and gas sold and
aggregate these payments, deduct applicable costs and make payments to the Trustee each quarter for
the amounts due to the Trust. Unitholders receive quarterly cash distributions relating to oil and
gas produced and sold from the Underlying Properties. 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. 3




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Torch Energy Royalty Trust 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 TRC and Velasco plus interest thereon. The complete definitions of Net Proceeds are
set forth in the Conveyances. Marketing Arrangements In connection with the formation of the Trust, TRC, Velasco and TEMI entered into the Purchase
Contract, which expires upon the termination of the Trust. Under the Purchase Contract, TEMI is
obligated to purchase all net production attributable to the Underlying Properties for an index
price for oil and gas (Index Price), less certain gathering, treating and transportation charges,
which are calculated monthly. The Index Price equals the average spot market prices of oil and gas
(Average Market Prices) at the four locations where TEMI sells production. The Purchase Contract also provides that TEMI pay a minimum price (Minimum Price) for gas
production. The Minimum Price is adjusted annually for inflation and was $1.73, $1.71 and $1.71
per MMBtu for 2004, 2003 and 2002, respectively. When TEMI pays a purchase price based on the
Minimum Price it receives price credits (Price Credits), equal to the difference between the
Index Price and the Minimum Price, that it is entitled to deduct in determining the purchase price
when the Index Price for gas exceeds the Minimum Price. In addition, if the Index Price for gas
exceeds the sharing price, which is adjusted annually for inflation (Sharing Price), TEMI is
entitled to deduct 50% of such excess (Price Differential) in determining the purchase price.
The Sharing Price was $2.13, $2.12 and $2.12 per MMBtu in 2004, 2003 and 2002, respectively. TEMI
has an annual option to discontinue the Minimum Price commitment. However, if TEMI discontinues the
Minimum Price commitment, it will no longer be entitled to deduct the Price Differential in
calculating the purchase price and will forfeit all accrued Price Credits. TEMI has not exercised
its option to discontinue the Minimum Price Commitment. Gas production is purchased at the wellhead. Therefore, Net Proceeds do not include any
amounts received in connection with extracting natural gas liquids from such production at gas
processing or treating facilities. 4




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Torch Energy Royalty Trust Gathering, Treating and Transportation Arrangements The Purchase Contract entitles TEMI to deduct certain gas gathering, treating and transportation
fees in calculating the purchase price for gas in the Robinsons Bend, Austin Chalk and Cotton
Valley Fields. The amounts that may be deducted in calculating the purchase price for such gas are
set forth in the Purchase Contract and are not affected by the actual costs incurred by TEMI to
gather, treat and transport gas. For the Robinsons Bend Field, TEMI is entitled to deduct a
gathering, treating and transportation fee of $0.260 per MMBtu adjusted for inflation ($0.292,
$0.289 and $0.289 per MMBtu for 2004, 2003, and 2002, respectfully), plus fuel usage equal to 5%
of revenues, payable to Bahia Gas Gathering, Ltd. (Bahia), an affiliate of Torch, pursuant to a
gas gathering agreement. Additionally, a fee of $.05 per MMBtu, representing a gathering fee
payable to a non-affiliate of Torch, is deducted in calculating the purchase price for production
from 68 of the 394 wells in the Robinsons Bend Field. TEMI deducts $0.38 per MMBtu plus 17% of
revenues in calculating the purchase price for production from the Austin Chalk Fields as a fee to
gather, treat and transport gas production. TEMI deducts from the purchase price for gas for
production attributable to certain wells in the Cotton Valley Fields a transportation fee of $0.045
per MMBtu. During the years ended December 31, 2004, 2003 and 2002, gathering, treating and
transportation fees deducted from the Net Proceeds calculations pertaining to production during the
twelve months ended September 30, 2004, 2003 and 2002 in the Robinsons Bend, Austin Chalk and
Cotton Valley Fields, totaled $1.4 million, $1.3 million and $1.0 million for 2004, 2003 and 2002,
respectively. No amounts for gathering, treating or transportation are deducted in calculating the
purchase price from the Chalkley Field. Net Profits Interests 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. In
calculating Net Proceeds from the Robinsons Bend Field, operating and development costs incurred
prior to January 1, 2003 were not deducted. In addition, the amounts paid to the Trust from the
Robinsons Bend Field during any calendar quarter are subject to a volume limitation (Volume
Limitation) equal to the gross proceeds from the sale of 912.5 MMcf of gas, less property,
production, severance and related taxes. The Robinsons Bend Field production attributable to the
Trust did not meet the Volume Limitation during the years ended December 31, 2004, 2003 and 2002
and is not expected to do so in the future. The Net Profits Interests also entitle the Trust to 20% of the Net Proceeds of wells drilled on the
Underlying Properties since the Trusts establishment into formations in which the Trust has an
interest, other than wells drilled to replace damaged or destroyed wells (Infill Wells). Infill
well net proceeds (Infill Well Net Proceeds) represent the aggregate gross revenues received from
Infill Wells less the aggregate amount of the following Infill Well costs: i) property, production,
severance and similar taxes; ii) development costs; iii) operating costs; and iv) interest on the
recovered portion, if any, of the foregoing costs computed at a rate of interest announced publicly
by Citibank, N.A. in New York as its base rate. Availability of Reports The Trusts Website address is www.torchroyalty.com. The Trust provides access through this
website to its annual report on Form 10-K, quarterly reports on Form 10-Q and any current reports
on Form 8-K, and all amendments to those reports as soon as reasonably practicable after these
reports are filed or furnished electronically with the Securities and Exchange Commission. 5




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Torch Energy Royalty Trust RISK FACTORS Volatility of Oil and Gas Prices The Trusts cash distributions, operating results and the value of the Net Profits Interest are
substantially dependent on prices of gas and, to a lesser extent, oil. Prices for oil and gas are
subject to large fluctuations in response to relatively minor changes in the supply of and demand
for oil and gas, market uncertainty and a variety of additional factors beyond the control of
Torch. These factors include weather conditions in the United States, the condition of the United
States economy, the actions of the Organization of Petroleum Exporting Countries, governmental
regulation, political stability in the Middle East and elsewhere, the risk of war and terrorist
actions, the foreign supply of oil and gas, the price of foreign imports and the availability of
alternate fuel sources. Any substantial and extended decline in the price of oil and gas would
have an adverse effect on the Trusts revenues, cash distributions and value of the Net Profits
Interests. Uncertainty of Estimates of Reserves and Future Net Cash Flows Estimates of economically recoverable oil and gas reserves and of future net cash flows are based
upon a number of variable factors and assumptions, all of which are to some degree speculative and
may vary considerably from actual results. Therefore, actual production, revenues, taxes and
development and operation expenditures may not occur as estimated. Future results of the Trust
will depend upon the ability of the owners of the Underlying Properties to develop, produce and
sell their oil and natural gas reserves. The reserve data included herein are estimates only and
are subject to many uncertainties. Actual quantities of oil and natural gas may differ
considerably from the amounts set forth herein. In addition, different reserve engineers may make
different estimates of reserve quantities and cash flows based upon the same available data. The
present value, discounted at 10%, of future net cash flows from proved reserves attributable to the
Net Profits Interests does not represent the fair market value of the proved reserves, or the price
at which the Net Profits Interests could be sold. A determination of fair market value would
involve consideration of many factors in addition to the present value, discounted at 10%. An
impairment loss is recognized when the net carrying value of the Net Profits Interests exceeds its
fair market value. No impairment loss was recognized during the years ended December 31, 2004, 2003
and 2002. Operating Risks Cash payments to the Trust are derived from the production and sale of oil and gas, which
operations are subject to risk inherent in such activities, such as blowouts, cratering,
explosions, uncontrollable flows of oil, gas or well fluids, fires, pollution and other
environmental risks. These risks could result in substantial losses which are deducted in
calculating the Net Proceeds paid to the Trust due to injury and loss of life, severe damage to and
destruction of property and equipment, pollution and other environmental damage and suspension of
operations. Competition and Markets The Trusts distributions are dependent on gas production and prices and, to a lesser extent,
oil production and prices from the Underlying Properties. The gas industry is highly competitive
in all of its phases. In marketing production from the Underlying Properties, TEMI encounters
competition from major gas companies, independent gas concerns, and individual producers and
operators. Many of these competitors have greater financial and other resources than TEMI.
Competition may also be presented by alternative fuel sources, including heating oil and other
fossil fuels. 6




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Torch Energy Royalty Trust Market prices are typically volatile as a result of uncertainties caused by world events. Demand
for natural gas production has historically been seasonal in nature, and prices for gas fluctuate
accordingly. Such price fluctuations will directly impact Trust distributions, estimated reserves
attributable to the Trust and estimated future net revenues from Trust reserves. Regulation of Natural Gas The production, transportation and sale of natural gas from the Underlying Properties are subject
to Federal and state governmental regulation, including regulation of tariffs charged by pipelines,
taxes, the prevention of waste, the conservation of gas, pollution controls and various other
matters. The United States has governmental power to impose pollution control measures. Federal Regulation The Underlying Properties will be subject to the jurisdiction of FERC with respect to various
aspects of gas operations including the marketing and production of gas. The Natural Gas Act and
the Natural Gas Policy Act (collectively, the Acts) mandate Federal regulation of interstate
transportation of gas. The Natural Gas Wellhead Decontrol Act of 1989 terminated wellhead price
controls on all domestic gas on January 1, 1993. Numerous questions have been raised concerning
the interpretation and implementation of several significant provisions of the Acts and of the
regulations and policies promulgated by FERC thereunder. A number of lawsuits and administrative
proceedings have been instituted which challenge the validity of regulations implementing the Acts.
In addition, FERC currently has under consideration various policies and proposals that may affect
the marketing of gas under new and existing contracts. Accordingly, Torch is unable to predict the
impact of any such government regulation. In the past, Congress has been very active in the area of gas regulation. Recently enacted
legislation repeals incremental pricing requirements and gas use restraints previously applicable.
At the present time, it is impossible to predict what proposals, if any, might actually be enacted
by Congress or the various state legislatures and what effect, if any, such proposals might have on
the Underlying Properties and the Trust. State Regulation Many state jurisdictions have at times imposed limitations on the production of gas by restricting
the rate of flow for gas wells below their actual capacity to produce and by imposing acreage
limitations for the drilling of a well. States may also impose additional regulations of these
matters. Most states regulate the production of gas, including requirements for obtaining drilling
permits, the method of developing new fields, provisions for the unitization or pooling of gas
properties, the spacing, operation, plugging and abandonment of wells and the prevention of waste
of gas resources. The rate of production may be regulated and the maximum daily production
allowable from gas wells may be established on a market demand or conservation basis or both. Environmental Regulation Activities on the Underlying Properties are subject to existing Federal, state and local laws,
rules and regulations relating to the protection of public health and welfare, safety and the
environment, including, without limitation, laws regulating the release of materials into the
environment and laws protecting areas of particular environmental concern. It is anticipated that,
absent the occurrence of an unanticipated event, compliance with these laws will not have a
material adverse effect upon the Trust or Unitholders. Torch has informed the Trust that it cannot
predict what effect future regulation or legislation, 7




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Torch Energy Royalty Trust enforcement policies thereunder, and claims
for damages to property, employees, other persons and the environment resulting from operations on
the Underlying Properties could have on the Trust or Unitholders. However, pursuant to the terms
of the Conveyances, any costs or expenses incurred by TRC or Velasco in connection with
environmental liabilities, to the extent arising out of or relating to activities occurring on, or
in connection with, or conditions existing on or under, the Underlying Properties before October 1,
1993, will be borne by TRC or Velasco and not the Trust and will not be deducted in calculating Net
Proceeds and will, therefore, not reduce amounts payable to the Trust. Net Proceeds Attributable to the Robinsons Bend Field Have Declined Significantly. Prior to December 31, 2002, lease operating expenses were not deducted in calculating the Net
Proceeds payable to the Trust from the Robinsons Bend Field. In accordance with the provisions of
the net profits interest conveyance covering the Robinsons Bend Field, commencing with the second
quarter 2003 distribution (pertaining to the quarter ended March 31, 2003 production) lease
operating expenses and capital expenditures have been deducted in calculating Net Proceeds.
Commencing July 1, 2003, the Trust ceased receiving payments with respect to the Robinsons Bend
Field. Since July 1, 2003, Robinsons Bend Field costs and expenses (including interest) exceeded
net revenues by approximately $446,000. The Trust will receive no payments with respect to the
Robinsons Bend Field until future proceeds exceed the sum of costs and expenses and the cumulative
Robinsons Bend Field costs and expenses including interest. Torch does not anticipate that the Net
Proceeds attributable to the Robinsons Bend Field, if any, will be significant in the future. Termination of the Trust The Trust will terminate on March 1 of any year if it is determined that the pre-tax future net
cash flows, discounted at 10%, attributable to the estimated net proved reserves of the Net Profits
Interests on the preceding December 31 are less than $25.0 million. The pre-tax future net cash
flows, discounted at 10%, attributable to estimated net proved reserves of the Net Profits
Interests as of December 31, 2004 was approximately $39.0 million. Such reserve report was prepared
pursuant to Securities and Exchange Commission guidelines and utilized an unescalated Purchase
Contract price (after gathering, treating and transportation fees) of $4.18 per Mcf. The
computation of the $4.18 per Mcf Purchase Contract price was based on an unescalated Henry Hub spot
price for natural gas on December 31, 2004 of $6.18 per MMBtu. The December 31, 2004 reserve value
was greater than $25.0 million. Therefore, the Trust did not terminate on March 1, 2005. Based on
oil and gas reserve estimates at December 31, 2004 prepared by independent reserve engineers, Torch
projects that unless the Henry Hub spot price for natural gas on December 31, 2005 exceeds
approximately $4.50 per MMBtu, the Trust will terminate on March 1, 2006. Upon termination of
the Trust, the Trustee is required to sell the Net Profits Interests. No assurances can be given
that the Trustee will be able to sell the Net Profits Interests, or the amounts that will be
distributed to Unitholders following such a sale. Such distributions could be below the market
price of the Units. Financial Condition of Torch and its Subsidiaries Torch is the administrative service provider to the Trust and a party to that certain
Administrative Services Agreement whereby Torch provides certain administrative and related
services to the Trust. See Item 13  Administrative Services Agreement. TEMI, a subsidiary of
Torch, is a party to the Purchase Contract. Torch was the maker of a Senior Subordinated Note
payable-affiliate of $23.1 million which was due on September 30, 2004. The note was not repaid at
maturity, and effective January 1, 2005, the Senior Subordinated Note payable was restructured into
a $23.0 million promissory note due May 1, 2008. Accordingly, Torch classified $21.3 million of
the note payable to long-term at December 31, 2004. 8




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Torch Energy Royalty Trust Management of Torch believes that Torch has
adequate financial resources to fund Torchs cash requirements through December 31, 2005. The
Consolidated Financial Statements of Torch are provided as an exhibit to the Annual Report on Form
10-K of the Trust while the Minimum Price commitment (which relates to the Purchase Contract
between the Trust and Torch) is in full force and effect. The Audit Report containing the
Consolidated Financial Statements has not been completed due to delay in completion of the annual
audit of P2 Energy Solutions, Inc. (a joint venture and a significant equity investee of Torch
accounted for under the equity method of accounting). This Annual Report on Form 10-K for the
Trust will be amended to include Torchs financial statements when the underlying annual report
from P2ES becomes available. The ability of Torch or TEMI to meet its obligations and to continue
to be a going concern is a significant factor to the Trust. 
 Item 2. Properties Description of the Underlying Properties Chalkley Field. The Underlying Properties in the Chalkley Field, located in Cameron Parish,
Louisiana, include an average 16.2% working interest (12.1% net revenue interest) in four unitized
wells producing from the Miogyp B reservoir. The wells produce from a depth in excess of 14,000
feet. A subsidiary of ExxonMobil Corporation operates the unitized wells. Robinsons Bend Field. The Underlying Properties include an average 42.7% working interest (30.2%
net revenue interest) in 394 wells in the Robinsons Bend Field in the Black Warrior Basin of
Alabama. All of the wells in the Robinsons Bend Field are operated by Everlast Energy LLC. Cotton Valley Fields. The Underlying Properties include an average 31.5% working interest
(24.5% net revenue interest) in 60 wells in four fields that produce from the Upper and Lower
Cotton Valley formations in Texas. All of the wells in the Cotton Valley Fields are operated by a
subsidiary of Torch. Austin Chalk Fields. The Underlying Properties include an average of 16.8% working interest
(13.3% net revenue interest) in 79 wells in the Austin Chalk Fields of Central Texas. Production
from these fields is derived primarily from the highly fractured Austin Chalk formation using
horizontal drilling techniques. A subsidiary of Torch operates three wells in the Austin Chalk
Fields. The remaining wells in the Austin Chalk Fields are operated by third parties. Oil and Gas Reserves The pre-tax future net cash flows, discounted at 10%, attributable to the net proved reserves of
the Net Profits Interests attributable to the Chalkey Field, Cotton Valley Fields and Austin Chalk
Fields was approximately $39.0 million as of December 31, 2004. Future cash flows attributable to
the Robinsons Bend Fields Net Profits Interest were estimated to have no value to the Trust as of
December 31, 2004. See Note 6 of the audited financial statements for additional information
concerning the net proved reserves of the Net Profits Interests. 9




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Torch Energy Royalty Trust Well Count and Acreage Summary The following table shows, as of December 31, 2004, the gross and net interest in oil and gas wells
for the Underlying Properties: Gas Wells
    
    
    Oil WellsGross
    
    
    Net
    
    
    Gross
    
    
    NetChalkley Field
    
    
    4
    
    
    
    .6
    
    
    
    
    
    
    
    Robinsons Bend Field
    
    
    394
    
    
    
    168.3
    
    
    
    
    
    
    
    Cotton Valley Fields
    
    
    60
    
    
    
    22.6
    
    
    
    
    
    
    
    Austin Chalk Fields
    
    
    34
    
    
    
    6.0
    
    
    
    45
    
    
    
    7.7Total
    
    
    492
    
    
    
    197.50
    
    
    
    45
    
    
    
    7.7
 The following table shows the gross and net acreage for the Underlying Properties as of
December 31, 2004. A gross acre in the following table refers to the number of acres in which a
working interest is owned directly by the Trust. The number of net acres is the sum of the
fractional ownership of working interests owned directly by the Trust in the gross acres expressed
as a whole number and percentages thereof. A net acre is deemed to exist when the sum of
fractional ownership of working interests in gross acres equals one. AcreageGross
    
    
    NetChalkley Field
    
    
    2,152
    
    
    
    348Robinsons Bend Field
    
    
    33,404
    
    
    
    14,288Cotton Valley Fields
    
    
    4,411
    
    
    
    2,608Austin Chalk Fields
    
    
    29,343
    
    
    
    5,263Total
    
    
    69,310
    
    
    
    22,507
 Drilling Activity The following table sets forth the results of drilling activity for the Underlying Properties
during the three years ended December 31, 2004. Gross wells, as it applies to wells in the
following table, refers to the number of wells in which a working interest is owned directly by the
owners of the Underlying Properties and Infill Wells (Gross Well). A net well (Net Well)
represents the sum of the fractional ownership working interests in the Gross Wells expressed as
whole numbers and percentages thereof. All of the wells shown below represent Infill Wells drilled on the Underlying Properties. Such
wells are operated by Samson Lone Star Limited Partnership (Samson). The Net Profits Interest
entitle the Trust to 20% of Infill Well Net Proceeds which is defined as gross proceeds from the
sale of production attributable to Infill Wells less all production, drilling and completion costs
of such wells. Infill Well Net Proceeds are calculated by aggregating the proceeds and costs from
Infill Wells on a state by state basis. Development WellsGross
    
    
    NetDry
    
    
    
    
    
    
    
    
    
    
    DryProductive
    
    
    Holes
    
    
    Total
    
    
    Productive
    
    
    Holes
    
    
    Total2004
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    02003
    
    
    1
    
    
    
    0
    
    
    
    1
    
    
    
    .2
    
    
    
    0
    
    
    
    .22002
    
    
    5
    
    
    
    0
    
    
    
    5
    
    
    
    .8
    
    
    
    0
    
    
    
    .8
 There was no other drilling activity on the Underlying Properties during the three years ended
December 31, 2004. 10




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##### Table of Contents



Torch Energy Royalty Trust Oil and Gas Sales Prices and Production Costs The following table sets forth, for the Underlying Properties, the net production volumes of gas
and oil, the weighted average lifting cost and taxes per Mcfe deducted in calculating Net Proceeds
and the weighted average sales price per Mcf of gas and Bbl of oil for production attributable to
cash distributions received by Unitholders during years ended December 31, 2004, 2003 and 2002
(derived from production during the twelve months ended September 30, 2004, 2003 and 2002,
respectively). Chalkley, Cotton ValleyAnd Austin Chalk Fields2004
    
    
    2003
    
    
    2002Production:Gas (MMcf)
    
    
    2,496
    
    
    
    2,835
    
    
    
    3,121Oil (Mbbl)
    
    
    25
    
    
    
    24
    
    
    
    26Weighted average lifting cost per Mcfe
    
    $
    .77
    
    
    $
    .53
    
    
    $
    .45Weighted average taxes on production per Mcfe
    
    $
    .30
    
    
    $
    .24
    
    
    $
    .20Weighted average sales price (b)Gas ($/Mcf)
    
    $
    3.72
    
    
    $
    3.64
    
    
    $
    2.41Oil ($/Bbl)
    
    $
    30.58
    
    
    $
    24.00
    
    
    $
    18.56
 Robinsons Bend Field2004
    
    
    2003
    
    
    2002Production:Gas (MMcf)
    
    
    1,927
    
    
    
    2,014
    
    
    
    2,105Oil (Mbbl)
    
    
    
    
    
    
    
    
    
    
    Weighted average lifting cost per Mcfe
    
    $
    3.04
    (a)
    
    $
    2.75
    (a)
    
    $
    2.69
    (a)Weighted average taxes on production per Mcfe
    
    $
    .27
    
    
    $
    .25
    
    
    $
    .10Weighted average sales price (b)Gas ($/Mcf)
    
    $
    3.25
    
    
    $
    3.12
    
    
    $
    1.99Oil ($/Bbl)
    
    $
    
    
    
    $
    
    
    
    $
    
   (a)
    
    Prior to December 31, 2002, lease operating expenses were not deducted in calculating the Net
Proceeds payable to the Trust from the Robinsons Bend Field. Commencing with the second
quarter of 2003 distribution (pertaining to the quarter ended March 31, 2003 production) lease
operating expenses and capital expenditures were deducted in calculating Net Proceeds in the
Robinsons Bend Field.(b)
    
    Average sales prices are reflective of purchase prices paid by TEMI, pursuant to the Purchase
Contract, less certain gathering, treating and transportation charges. 
 Item 3. Legal Proceedings There are no pending legal proceedings, as of the date of this filing, to which the Trust is a
party. 
 Item 4.Submission of Matters to a Vote of Unitholders During the year ended December 31, 2004, no matter was submitted to the Unitholders for a vote. 11




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##### Table of Contents



Torch Energy Royalty Trust 
 PART II 
 Item 5. Market for Registrants Units and Related Unitholder Matters The Units are listed and traded on the New York Stock Exchange under the symbol TRU. At March 1,
2005, there were 8,600,000 Units outstanding and approximately 427 Unitholders of record. The
following table sets forth, for the periods indicated, the high and low sales prices per Unit on
the New York Stock Exchange (NYSE) and the amount of quarterly cash distributions per Unit made
by the Trust: CashHigh
    
    
    Low
    
    
    DistributionsQuarter ended March 31, 2003
    
    $
    5.59
    
    
    $
    3.89
    
    
    $
    .31Quarter ended June 30, 2003
    
    $
    7.40
    
    
    $
    4.64
    
    
    $
    .28Quarter ended September 30, 2003
    
    $
    9.29
    
    
    $
    7.00
    
    
    $
    .20Quarter ended December 31, 2003
    
    $
    8.03
    
    
    $
    5.62
    
    
    $
    .14Quarter ended March 31, 2004
    
    $
    7.10
    
    
    $
    5.68
    
    
    $
    .15Quarter ended June 30, 2004
    
    $
    7.58
    
    
    $
    5.16
    
    
    $
    .17Quarter ended September 30, 2004
    
    $
    6.70
    
    
    $
    5.70
    
    
    $
    .19Quarter ended December 31, 2004
    
    $
    7.75
    
    
    $
    6.23
    
    
    $
    .16
 On March 1, 2005, the high and low sales price per unit on the NYSE was $7.48 and $7.28,
respectively. 
 Item 6. Selected Financial Data (In thousands, except per Unit amounts) Year Ended December 31,2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000Net profits income
    
    $
    6,161
    
    
    $
    8,969
    
    
    $
    9,357
    
    
    $
    16,843
    
    
    $
    13,243Distributable income
    
    $
    5,657
    
    
    $
    8,036
    
    
    $
    8,616
    
    
    $
    16,181
    
    
    $
    12,674Distributions declared
    
    $
    5,728
    
    
    $
    7,989
    
    
    $
    8,652
    
    
    $
    16,211
    
    
    $
    12,668Distributable income
per Unit
    
    $
    0.66
    
    
    $
    0.93
    
    
    $
    1.00
    
    
    $
    1.88
    
    
    $
    1.47Distributions per Unit
    
    $
    0.67
    
    
    $
    0.93
    
    
    $
    1.01
    
    
    $
    1.89
    
    
    $
    1.47Total assets (at end
of period)
    
    $
    23,801
    
    
    $
    26,458
    
    
    $
    31,265
    
    
    $
    36,696
    
    
    $
    44,941
 Distributable income of the Trust consists of the excess of net profits income plus interest
income less general and administrative expenses of the Trust. The Trust recognizes net profits
income during the period in which amounts are received by the Trust. 
 Item 7. Managements Discussion and Analysis of Financial Condition and Results of
Operations Results of Operations Discussion of Years Ended December 31, 2004, 2003, and 2002 Because a modified cash basis of accounting is utilized by the Trust, Net Proceeds attributable to
the Underlying Properties for the years ended December 31, 2004, 2003 and 2002 are derived from
actual oil and gas production from October 1, 2003 through September 30, 2004, October 1, 2002
through September 30, 2003 and October 1, 2001 through September 30, 2002, respectively. The following
tables 12




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##### Table of Contents



Torch Energy Royalty Trust set forth oil and gas sales attributable to the Underlying Properties during the three years
ended December 31, 2004. Bbls of Oil2004
    
    
    2003
    
    
    2002Chalkley Field
    
    
    6,756
    
    
    
    7,887
    
    
    
    9,494Robinsons Bend Field
    
    
    
    
    
    
    
    
    
    
    Cotton Valley Fields
    
    
    2,077
    
    
    
    3,532
    
    
    
    3,413Austin Chalk Fields
    
    
    16,574
    
    
    
    12,683
    
    
    
    12,737Total
    
    
    25,407
    
    
    
    24,102
    
    
    
    25,644
 Mcf of Gas2004
    
    
    2003
    
    
    2002Chalkley Field
    
    
    1,514,308
    
    
    
    1,750,133
    
    
    
    2,045,016Robinsons Bend Field
    
    
    1,926,899
    
    
    
    2,013,653
    
    
    
    2,104,869Cotton Valley Fields
    
    
    836,987
    
    
    
    1,004,949
    
    
    
    1,045,196Austin Chalk Fields
    
    
    144,270
    
    
    
    79,514
    
    
    
    30,745Total
    
    
    4,422,464
    
    
    
    4,848,249
    
    
    
    5,225,826
 For the year ended December 31, 2004, net profits income was $6.2 million, as compared to $9.0
million and $9.4 million for the same periods in 2003 and 2002, respectively. The decrease in net
profits income during 2004 as compared to 2003 is primarily due to the Trust receiving no payments
with respect to the Robinsons Bend Field during 2004 in addition to increased lease operating
expenses and capital expenditures in 2004 as compared to 2003. The decrease in net profits income
during 2003 as compared to 2002 is due to the Trust receiving no payments with respect to the
Robinsons Bend Field during the six months ended December 31, 2003, which was partially offset by
higher average oil and gas prices paid to the Trust in 2003. Commencing with the second quarter of 2003 distribution (pertaining to the quarter ended March 31,
2003 production) lease operating expenses and capital expenditures have been deducted in
calculating Robinsons Bend Net Proceeds. The Trust received approximately $1.3 million and $3.8
million in 2003 and 2002, respectively, for payments for distributions to Unitholders with respect
to the Robinsons Bend Field. The Trust received no payments for distributions to Unitholders with
respect to the Robinsons Bend Field during the six months ended December 31, 2003 and during the
year ended December 31, 2004. The Trust will receive no payments for distributions to Unitholders
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
Field Cumulative Deficit). As of December 31, 2004, the Robinsons Bend Field Cumulative Deficit
was approximately $446,000. The Trust and Torch do not anticipate that there will be any Net
Proceeds attributable to the Robinsons Bend Field in the future. Gas production attributable to the Underlying Properties in the Chalkley, Cotton Valley and Austin
Chalk Fields was 2,495,565 Mcf, 2,834,596 Mcf and 3,120,957 Mcf in 2004, 2003 and 2002,
respectively. Gas production attributable to the Underlying Properties in the Robinsons Bend
Field was 1,926,899 Mcf, 2,013,653 Mcf and 2,104,869 Mcf in 2004, 2003 and 2002, respectively. Gas
production decreased during each of the years ended December 31, 2004 as a result of normal
production declines. Oil production attributable to the Underlying Properties for the year ended
December 31, 2004 was 25,407 Bbls as compared to 24,102 Bbls and 25,644 Bbls for the same periods
in 2003 and 2002, respectively. 13




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##### Table of Contents



Torch Energy Royalty Trust The average price used to calculate Net Proceeds for gas, before gathering, treating and
transportation deductions, during the year ended December 31, 2004 was $3.68 per MMBtu as compared
to $3.56 and $2.37 per MMBtu for the years ended December 31, 2003 and 2002, respectively. The
average price used to calculate Net Proceeds for oil during the years ended December 31, 2004, 2003
and 2002 was $30.58, $24.00 and $18.56 per Bbl, respectively. When TEMI pays a purchase price for
gas based on the Minimum Price, TEMI receives Price Credits which it is entitled to deduct in
determining the purchase price when the Index Price for gas exceeds the Minimum Price. As of
December 31, 2004, TEMI had no outstanding Price Credits. No Price Credits were deducted in
calculating the purchase price related to distributions during the three years ended December 31,
2004. Additionally, if the Index Price for gas exceeds $2.10 per MMBtu, adjusted annually for inflation
($2.13 per MMBtu for 2004 and $2.12 per MMBtu for 2003 and 2002), TEMI is entitled to deduct 50% of
such excess in calculating the purchase price. Such price sharing arrangement reduced Net Proceeds
during the years ended December 31, 2004, 2003, and 2002 by $6.8 million, $6.9 million and $1.6
million, respectively. During the year ended December 31, 2004, the Trust was distributed approximately $443,000 of Infill
Well Net Proceeds pertaining to sales during the six months ended June 30, 2004. Such Infill Wells
are located in the Cotton Valley Fields and are operated by Samson. The Trust did not
receive any proceeds pertaining to such wells during the years ended December 31, 2003 and December
31, 2002 as the Infill Wells costs and expenses exceeded gross revenues prior to January 1, 2004. Lease operating expenses and capital expenditures attributable to the Underlying Properties in the
Chalkley, Cotton Valley and Austin Chalk Fields deducted in calculating distributions during the
years ended December 31, 2004, 2003 and 2002 totaled $2.8 million, $2.1 million and $1.5 million,
respectively. The increase in costs and expenses during 2004 of $2.8 million as compared to costs
and expenses of $2.1 million for 2003 is mainly due to workovers performed in 2004 on certain wells
in the Austin Chalk Fields. Higher insurance expense and increased lease operating expenses in the
Chalkley Field during 2004 also contributed to the increase in costs and expenses in 2004. The
increase in costs and expenses for 2003 of $2.1 million as compared to costs and expenses of $1.5
million for 2002 is mainly due to capital expenditures incurred in 2003 in connection with the
re-drill of a well in the Austin Chalk Field. With respect to the Robinsons Bend Field, lease operating expenses and capital expenditures were
not deducted in calculating the Net Proceeds payable to the Trust from the Robinsons Bend Field
prior to January 1, 2003. Lease operating expenses and capital expenditures of $6.0 million and
$4.6 million were deducted in calculating Net Proceeds for the year ended December 31, 2004 and
December 31, 2003, respectively. No lease operating expenses and capital expenditures were
deducted in calculating Net Proceeds payable to the Trust from the Robinsons Bend Field in 2002. General and administrative expenses during the years ended December 31, 2004, 2003 and 2002
amounted to $0.9 million, $0.9 million and $0.7 million, respectively. These expenses primarily
relate to administrative services provided by Torch and the Trustee, and legal fees. For the year ended December 31, 2004, distributable income was $5.7 million, or $0.66 per Unit, as
compared to $8.0 million, or $0.93 per Unit, and $8.6 million, or $1.00 per Unit, for the same
periods in 2003 and 2002, respectively. Total cash distributions of $5.7 million, or $0.67 per
Unit, were made during the year ended December 31, 2004 as compared to $8.0 million, or $0.93 per
Unit, and $8.7 million, or $1.01 per Unit, for the same periods in 2003 and 2002, respectively. 14




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##### Table of Contents



Torch Energy Royalty Trust Net profits received by the Trust during the years ended December 31, 2004, 2003 and 2002, derived
from production sold during the twelve months ended September 30, 2004, 2003 and 2002,
respectively, was computed as shown in the following table (in thousands): Year Ended December 31,2004
    
    
    2003
    
    
    2002Chalkley,
    
    
    
    
    
    
    
    
    
    
    Chalkley,
    
    
    
    
    
    
    
    
    
    
    Chalkley,Cotton '
    
    
    
    
    
    
    
    
    
    
    Cotton
    
    
    
    
    
    
    
    
    
    
    CottonValley and
    
    
    
    
    
    
    
    
    
    
    Valley and
    
    
    
    
    
    
    
    
    
    
    Valley andAustin
    
    
    Robinsons
    
    
    
    
    
    
    Austin
    
    
    Robinsons
    
    
    
    
    
    
    Austin
    
    
    RobinsonsChalk
    
    
    Bend
    
    
    
    
    
    
    Chalk
    
    
    Bend
    
    
    
    
    
    
    Chalk
    
    
    BendFields
    
    
    Field
    
    
    Total
    
    
    Fields
    
    
    Field
    
    
    Total
    
    
    Fields
    
    
    Field
    
    
    TotalOil and gas revenues
    
    $
    10,053
    
    
    $
    6,268
    
    
    
    
    
    
    $
    10,892
    
    
    $
    6,283
    
    
    
    
    
    
    $
    7,989
    
    
    $
    4,182Direct operating expenses:Lease operating expenses
(including property tax)
    
    
    2,035
    
    
    
    5,852
    (a)
    
    
    
    
    
    
    1,571
    
    
    
    4,181
    (a)
    
    
    
    
    
    
    1,464
    
    
    
    
    (a)Severance tax
    
    
    782
    
    
    
    517
    
    
    
    
    
    
    
    717
    
    
    
    504
    
    
    
    
    
    
    
    640
    
    
    
    2152,817
    
    
    
    6,369
    
    
    
    
    
    
    
    2,288
    
    
    
    4,685
    
    
    
    
    
    
    
    2,104
    
    
    
    215Net proceeds before
capital expenditures
    
    
    7,236
    
    
    
    (101
    )
    
    
    
    
    
    
    8,604
    
    
    
    1,598
    
    
    
    
    
    
    
    5,885
    
    
    
    3,967Capital expenditures
    
    
    751
    
    
    
    136
    
    
    
    
    
    
    
    513
    
    
    
    441
    
    
    
    
    
    
    
    3
    
    
    
    Net proceeds
    
    
    6,485
    
    
    
    (237
    )
    
    
    
    
    
    
    8,091
    
    
    
    1,157
    
    
    
    
    
    
    
    5,882
    
    
    
    3,967Net profits percentage
    
    
    95
    %
    
    
    
    (b)
    
    
    
    
    
    
    95
    %
    
    
    
    (b)
    
    
    
    
    
    
    95
    %
    
    
    95
    %Net profits income
    
    $
    6,161
    
    
    $
    
    
    
    $
    6,161
    
    
    $
    7,686
    
    
    $
    1,283
    
    
    $
    8,969
    
    
    $
    5,588
    
    
    $
    3,769
    
    
    $
    9,357
   (a)
    
    Commencing with the second quarter 2003 distribution (pertaining to production during the
quarter ended March 31, 2003), lease operating expenses and capital expenditures were deducted
in calculating Net Proceeds from the Robinsons Bend Field. Lease operating expenses and
capital expenditures (in thousands) were $5,988, $5,969 and $5,573 during 2004, 2003 and 2002,
respectively.(b)
    
    With respect to the Robinsons Bend Field, the Trust received no cash distributions during
the six months ended December 31, 2003 and during the year ended December 31, 2004. During
such periods, the Robinsons Bend Field costs and expenses (including interest) exceeded
revenues by approximately $446,000. Termination of the Trust The Trust will terminate on March 1 of any year if it is determined that the pre-tax future net
cash flows, discounted at 10%, attributable to estimated net proved reserves of the Net Profits
Interests on the preceding December 31 are less than $25.0 million. The pre-tax future net cash
flows, discounted at 10%, attributable to estimated net proved reserves of the Net Profits
Interests as of December 31, 2004 was approximately $39.0 million. Such reserve report was prepared
pursuant to Securities and Exchange Commission guidelines and utilized an unescalated Henry Hub
spot price for natural gas on December 31, 2004 of $6.18 per MMBtu. The December 31, 2004 reserve
value was greater than $25.0 million. Therefore, the Trust did not terminate on March 1, 2005.
Based on oil and gas reserve estimates at December 31, 2004 prepared by independent reserve
engineers, Torch projects that unless the Henry Hub spot price for natural gas on December 31, 2005
exceeds approximately $4.50 per MMBtu, the Trust will terminate on March 1, 2006. Upon termination
of the Trust, the Trustee is required to sell the Net Profits Interests. 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. 15




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##### Table of Contents



Torch Energy Royalty Trust Critical Accounting Policy Reserve Estimates The proved reserves of the Trust are estimated quantities of oil and gas which geological and
engineering data demonstrate, with reasonable certainty, to be recoverable in future years from
known reservoirs under existing economic and operating conditions. The accuracy of any reserve
estimate is a function of the quality of available data, engineering and geological interpretation,
and judgement. For example, estimates are made regarding the amount and timing of future operating
costs, production volumes and severance taxes, all of which may in fact vary considerably from
actual results. In addition, as prices and cost levels change from year to year, the estimate of
proved reserves also change. Any variance in these assumptions could materially affect the
estimated quantity and value of the Trusts reserves. Despite the inherent imprecision in these engineering estimates, the reserves are significant to
the potential automatic termination of the Trust if it is determined that the pre-tax future net
cash flows, discounted at 10%, attributable to the estimated net proved reserves of the Net Profits
Interests are less than $25.0 million. Independent petroleum engineering firms are engaged to
estimate the Trusts proved hydrocarbon liquid and gas reserves. Modified Cash Basis The financial statements of the Trust are prepared on a modified cash basis although financial
statements filed with the Securities and Exchange Commission are normally required to be prepared
in accordance with accounting principles generally accepted in the United States. Since the
operations of the Trust are limited to the distribution of income from the Net Profits Interests,
the item of primary importance to the reader of the financial statements of the Trust is the amount
of cash distributions to the Unitholders for the period reported. 
 Item 7a. Quantitative and Qualitative Disclosures About Market Risk The Trust is exposed to market risk, including adverse changes in commodity prices. The Trusts
assets constitute Net Profits Interests in the Underlying Properties. As a result, the Trusts
operating results can be significantly affected by fluctuations in commodity prices caused by
changing market forces and the price received for production from the Underlying Properties. All production from the Underlying Properties is sold pursuant to a Purchase Contract between TRC,
Velasco, and TEMI. Pursuant to the Purchase Contract, TEMI is obligated to purchase all net
production attributable to the Underlying Properties for an Index Price, less certain other
charges, which are calculated monthly. The Index Price calculation is based on market prices of
oil and gas and therefore is subject to commodity price risk. The Purchase Contract expires upon
termination of the Trust and provides a Minimum Price paid by TEMI for gas. The Minimum Price is
adjusted annually for inflation and was $1.73, $1.71 and $1.71 per MMBtu for 2004, 2003 and 2002,
respectively. When TEMI pays a purchase price based on the Minimum Price, it receives Price
Credits equal to the difference between the Index Price and the Minimum Price that it is entitled
to deduct when the Index Price exceeds the Minimum Price. Additionally, if the Index Price exceeds
the Sharing Price, TEMI is entitled to deduct such excess, the Price Differential. The Sharing
Price was $2.13, $2.12 and $2.12 per MMBtu in 2004, 2003 and 2002, respectively. TEMI has an
annual option to discontinue the Minimum Price commitment. However, if TEMI discontinues the
Minimum Price commitment, it will no longer be entitled to deduct the Price Differential and will
forfeit all accrued Price Credits. TEMI has not exercised its option to discontinue the Minimum
Price Commitment. 16




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##### Table of Contents



Torch Energy Royalty Trust 
 Item 8. Financial Statements and Supplementary Data INDEX TO FINANCIAL STATEMENTS PageReports of Independent Registered Public Accounting Firms
    
    
    18Statements of Assets, Liabilities and Trust Corpus at December 31, 2004 and 2003
    
    
    20Statements of Distributable Income for the Years Ended December 31, 2004, 2003 and 2002
    
    
    21Statements of Changes in Trust Corpus for the Years Ended December 31, 2004, 2003 and
2002
    
    
    22Notes to Financial Statements
    
    
    23
 17




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Wilmington Trust Company
as Trustee of Torch Energy Royalty Trust
and to the Unitholders: We have audited the accompanying statement of assets, liabilities and trust corpus of the Torch
Energy Royalty Trust (the Trust) as of December 31, 2004, and the related statements of
distributable income and changes in trust corpus for the year then ended. These financial
statements are the responsibility of the Trustee. Our responsibility is to express an opinion on
these financial statements based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our opinion. As described in Note 2, the financial statements are prepared on a modified cash basis of
accounting, which is a comprehensive basis of accounting other than accounting principles generally
accepted in the United States of America. In our opinion, the financial statements referred to above present fairly, in all material
respects, the financial position of the Trust as of December 31, 2004, and the results of its
operations and its cash flows for the year then ended in conformity with the basis of accounting
described in Note 2. \s\ UHY Mann Frankfort Stein & Lipp CPAs, LLPHouston, TexasApril 11, 2005
 18




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##### Table of Contents



REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM Wilmington Trust Company
as Trustee of Torch Energy Royalty Trust
and to the Unitholders: We have audited the accompanying statement of assets, liabilities and trust corpus of the Torch
Energy Royalty Trust (the Trust) as of December 31, 2003 and the related statements of
distributable income and changes in trust corpus for each of the two years in the period ended
December 31, 2003. These financial statements are the responsibility of the Trustee. Our
responsibility is to express an opinion on these financial statements
based on our audits. We conducted our audits in accordance with the standards of the Public Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion. As described in Note 2, the financial statements are prepared on a modified cash basis of
accounting, which is a comprehensive basis of accounting other than accounting principles generally
accepted in the United States. In our opinion, the financial statements referred to above present fairly, in all material
respects, the financial position of the Trust as of December 31, 2003 and the results of its
operations and its cash flows for each of the two years in the period ended December 31, 2003 in
conformity with the accounting principles described in
Note 2. \s\ Ernst & Young LLP
 
 19




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##### Table of Contents



Torch Energy Royalty Trust 
 STATEMENTS OF ASSETS, LIABILITIES AND TRUST CORPUS
(In thousands) December 31,
    
    
    December 31,2004
    
    
    2003ASSETSCash
    
    $
    1
    
    
    $
    1Net profits interests in
oil and gas properties (net
of accumulated amortization
of $156,800 and $154,143 at
December 31, 2004 and 2003,
respectively)
    
    
    23,800
    
    
    
    26,457$
    23,801
    
    
    $
    26,458LIABILITIES AND TRUST CORPUSTrust expense payable
    
    $
    245
    
    
    $
    174Trust corpus
    
    
    23,556
    
    
    
    26,284$
    23,801
    
    
    $
    26,458
 The accompanying notes to financial statements
are an integral part of these statements. 20




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##### Table of Contents



Torch Energy Royalty Trust 
 STATEMENTS OF DISTRIBUTABLE INCOME
(In thousands, except per Unit amounts) Year Ended December 31,2004
    
    
    2003
    
    
    2002Net profits income
    
    $
    6,161
    
    
    $
    8,969
    
    
    $
    9,357Infill Well Net Proceeds
    
    
    443
    
    
    
    
    
    
    
    Interest income
    
    
    
    
    
    
    2
    
    
    
    46,604
    
    
    
    8,971
    
    
    
    9,361General and administrative expenses
    
    
    947
    
    
    
    935
    
    
    
    745Distributable income
    
    $
    5,657
    
    
    $
    8,036
    
    
    $
    8,616Distributable income per Unit (8,600 Units)
    
    $
    0.66
    
    
    $
    0.93
    
    
    $
    1.00Distributions per Unit
    
    $
    0.67
    
    
    $
    0.93
    
    
    $
    1.01
 The accompanying notes to financial statements
are an integral part of these statements. 21




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##### Table of Contents



Torch Energy Royalty Trust 
 STATEMENTS OF CHANGES IN TRUST CORPUS
(In thousands) Year Ended December 31,2004
    
    
    2003
    
    
    2002Trust corpus, beginning of year
    
    $
    26,284
    
    
    $
    31,044
    
    
    $
    36,511Amortization of Net Profits Interests
    
    
    (2,657
    )
    
    
    (4,806
    )
    
    
    (5,431
    )Distributable income
    
    
    5,657
    
    
    
    8,035
    
    
    
    8,616Distributions to Unitholders
    
    
    (5,728
    )
    
    
    (7,989
    )
    
    
    (8,652
    )Trust Corpus, end of year
    
    $
    23,556
    
    
    $
    26,284
    
    
    $
    31,044
 The accompanying notes to financial statements
are an integral part of these statements. 22




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##### Table of Contents



Torch Energy Royalty Trust 
 1. Nature of Operations The Torch Energy Royalty Trust (Trust) was formed effective October 1, 1993, pursuant to a trust
agreement (Trust Agreement) among Wilmington Trust Company, as trustee (Trustee), Torch Royalty
Company (TRC) and Velasco Gas Company, Ltd. (Velasco) as owners of certain oil and gas
properties (Underlying Properties) and Torch Energy Advisors Incorporated (Torch) as grantor.
TRC and Velasco created net profits interests (Net Profits Interests) and conveyed such interests
to Torch. Torch conveyed the Net Profits Interests to the Trust in exchange for an aggregate of
8,600,000 units of beneficial interest (Units). Such Units were sold to the public through
various underwriters in November 1993. The Trust will terminate upon the first to occur of: (i) an affirmative vote of the holders of not
less than 66-2/3% of the outstanding Units to liquidate the Trust; (ii) such time as the ratio of
the cash amounts received by the Trust from the Net Profits Interests to administrative costs of
the Trust is less than 1.2 to 1.0 for three consecutive quarters; (iii) March 1 of any year if it
is determined based on a reserve report as of December 31 of the prior year that the present value
of estimated pre-tax future net cash flows, discounted at 10%, of proved reserves attributable to
the Net Profits Interests is equal to or less than $25.0 million; or (iv) December 31, 2012. After
termination of the Trust, the remaining assets of the Trust will be sold, and the proceeds
therefrom (after expenses) will be distributed to the unitholders (Unitholders). The sole
purpose of the Trust is to hold the Net Profits Interests, to receive payments from TRC and
Velasco, and to make payments to Unitholders. The Trust does not conduct any business activity. TRC and Velasco receive payments reflecting the proceeds of oil and gas sold and aggregate these
payments, deduct applicable costs and make payments to the Trustee each quarter for the amounts due
to the Trust. Unitholders receive quarterly cash distributions relating to oil and gas produced
and sold from the Underlying Properties. 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 only assets of the Trust, other than cash and temporary investments being held for the payment
of expenses and liabilities and for distribution to Unitholders, are the Net Profits Interests.
Under the Trust Agreement, the Trustee receives the payments attributable to the Net Profits
Interests and pays all expenses, liabilities and obligations of the Trust. The Trustee has the
discretion to establish a cash reserve for the payment of any liability that is contingent or
uncertain in amount or that otherwise is not currently due and payable. The Trustee is entitled to
cause the Trust to borrow money to pay expenses, liabilities and obligations that cannot be paid
out of cash held by the Trust. The Trustee is entitled to cause the Trust to borrow from any
source, including from the entity serving as Trustee, provided that the entity serving as Trustee
shall not be obligated to lend to the Trust. To secure payment of any such indebtedness (including
any indebtedness to the Trustee), the Trustee is authorized to (i) mortgage and otherwise encumber
the entire Trust estate or any portion thereof; (ii) carve out and convey production payments;
(iii) include all terms, powers, remedies, covenants and provisions it deems necessary or
advisable, including confession of judgement and the power of sale with or without judicial
proceedings; and (iv) provide for the exercise of those and other remedies available to a secured
lender in the event of a default on such loan. The terms of such indebtedness and security
interest, if funds were loaned by the Trustee, must be similar to the terms which the Trustee would
grant to a similarly situated commercial customer with whom it did not have a fiduciary
relationship, and the Trustee shall be entitled to enforce its rights with respect to any such
indebtedness and security interest as if it were not then serving as Trustee. 23




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##### Table of Contents



Torch Energy Royalty Trust Notes to Financial Statements The Trustee is authorized and directed to sell and convey the Net Profits Interests without
Unitholder approval in certain instances as described in the Trust Agreement, including upon
termination of the Trust. The Trustee is empowered by the Trust Agreement to employ consultants
and agents (including Torch) and to make payments of all fees for services or expenses out of the
assets of the Trust. 2. Basis of Accounting The financial statements of the Trust are prepared on a modified cash basis and are not intended to
present the financial position and results of operations in conformity with generally accepted
accounting principles (GAAP). Preparation of the Trusts financial statements on such basis
includes the following:  -
    Revenues are recognized in the period in which amounts are received by the Trust. Therefore, revenues recognized
during the years ended December 31, 2004, 2003 and 2002 are derived from oil and gas production sold during the
twelve-month periods ended September 30, 2004, 2003 and 2002, respectively. General and administrative expenses are
recognized on an accrual basis.-
    Amortization of the Net Profits Interests is calculated on a unit-of-production basis and charged directly to trust
corpus.-
    Distributions to Unitholders are recorded when declared by the Trustee.-
    An impairment loss is recognized when the net carrying value of the Net Profits Interests exceeds its fair market
value. No such impairment was recorded during the three years ended December 31, 2004.-
    The financial statements of the Trust differ from financial statements prepared in accordance with GAAP because net
profits income is not accrued in the period of production and amortization of the Net Profits Interests is not charged
against operating results. 3. Federal Income Taxes Tax counsel has advised the Trustee that, under current tax law, the Trust is classified as a
grantor trust for Federal income tax purposes 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. 24




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##### Table of Contents



Torch Energy Royalty Trust Notes to Financial Statements 4. Distributions and Income Computations Each quarter the amount of cash available for distribution to Unitholders (the Quarterly
Distribution Amount) is equal to the excess, if any, of the cash received by the Trust, on the
last day of the second month following the previous calendar quarter (or the next business day
thereafter) ending prior to the dissolution of the Trust, from the Net Profits Interests then held
by the Trust plus, with certain exceptions, any other cash receipts of the Trust during such
quarter, subject to adjustments for changes made by the Trustee during such quarter in any cash
reserves established for the payment of contingent or future obligations of the Trust. Based on
the payment procedures relating to the Net Profits 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 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
distributes 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. 5. Related Party Transactions Marketing Arrangements TRC and Velasco contracted to sell the oil and gas production from the Underlying Properties to
Torch Energy Marketing, Inc. (TEMI), a subsidiary of Torch, under a purchase contract (Purchase
Contract). Under the Purchase Contract, TEMI is obligated to purchase all net production
attributable to the Underlying Properties for an index price for oil and gas (Index Price), less
certain gathering, treating and transportation charges, which are calculated monthly. The Index
Price equals 97% of the average spot market prices of oil and gas (Average Market Prices) at the
four locations where TEMI sells production. The Purchase Contract also provides that a minimum price paid by TEMI for gas production is $1.70
per MMBtu adjusted annually for inflation (Minimum Price). When TEMI pays a purchase price based
on the Minimum Price it receives price credits (Price Credits) equal to the difference between
the Index Price and the Minimum Price that it is entitled to deduct in determining the purchase
price when the Index Price for gas exceeds the Minimum Price. Price Credits are computed on a
monthly basis. As of December 31, 2004, TEMI had no outstanding Price Credits. No Price Credits
were deducted in calculating the purchase price related to distributions received by Unitholders
during the three years ended December 31, 2004. In addition, if the Index Price for gas exceeds $2.10 per MMBtu adjusted annually for inflation
(Sharing Price), TEMI is entitled to deduct 50% of such excess (Price Differential) in
determining the purchase price. As a result of such Sharing Price arrangement, Net Proceeds
attributable to the Underlying Properties during the years ended December 31, 2004, 2003 and 2002
were reduced by $6.8 million, $6.9 million and $1.6 million, respectively. TEMI has an annual
option to discontinue the Minimum Price commitment. However, if TEMI discontinues the Minimum
Price commitment, it will no longer be entitled to deduct the Price Differential in calculating the
purchase price and will forfeit all accrued Price Credits. TEMI has not exercised its option to
discontinue the Minimum Price Commitment. The Minimum Price in 2004, 2003 and 2002 was
approximately $1.73, $1.71 and $1.71 per MMBtu for 2004, 2003 and 2002, respectively. The Sharing
Price in 2004, 2003 and 2002 was approximately $2.13, $2.12 and $2.12 per MMBtu, respectively. 25




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##### Table of Contents



Torch Energy Royalty Trust Notes to Financial Statements Gross revenues (before deductions for applicable gathering, treating and transportation charges)
from TEMI included in the Net Proceeds calculations attributable to the Underlying Properties for
the years ended December 31, 2004, 2003 and 2002 were $17.7 million, $18.5 million and $13.2
million, respectively. Gas production is purchased at the wellhead and, therefore, distributions do not include any
amounts received in connection with extracting natural gas liquids from such production at gas
processing or treating facilities. Gathering, Treating and Transportation Arrangements The Purchase Contract entitles TEMI to deduct certain gas gathering, treating and transportation
costs in calculating the purchase price for gas in the Robinsons Bend, Austin Chalk and Cotton
Valley Fields. The amounts that may be deducted in calculating the purchase price for such gas are
set forth in the Purchase Contract and are not affected by the actual costs incurred by TEMI to
gather, treat and transport gas. In the Robinsons Bend Field, TEMI is entitled to deduct a
gathering, treating and transportation fee of $0.26 per MMBtu adjusted annually for inflation
($0.292, $0.289 and $0.289 per MMBtu for 2004, 2003 and 2002, respectively, plus fuel usage equal
to 5% of revenues, payable to Bahia Gas Gathering, Ltd. (Bahia), a subsidiary of Torch, pursuant
to a gas gathering agreement. Additionally, a fee of $0.05 per MMBtu, representing a gathering fee
payable to a non-affiliate of Torch, is deducted in calculating the purchase price for production
from 68 of the 394 wells in the Robinsons Bend Field. TEMI also deducts $0.38 per MMBtu plus 17%
of revenues in calculating the purchase price for production from the Austin Chalk Fields, as a fee
to gather, treat and transport gas production. TEMI deducts from the purchase price for gas in the
Cotton Valley Fields a transportation fee of $0.045 per MMBtu for production attributable to
certain wells. This transportation fee is paid to a third party. During the years ended December
31, 2004, 2003 and 2002, such fees deducted from the Net Proceeds calculations, attributable to
production during the twelve months ended September 30, 2004, 2003 and 2002, in the Robinsons
Bend, Austin Chalk and Cotton Valley Fields, totaled $1.4 million, $1.3 million and $1.0 million,
respectively. No amounts for gathering, treating or transportation are deducted in calculating the
purchase price from the Chalkley Field. Operator Overhead Fees A subsidiary of Torch operates certain oil and gas interests burdened by the Net Profits Interests
in the Cotton Valley and Austin Chalk Fields. 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
Cotton Valley and Austin Chalk fields totaled $184,000, $176,000 and $178,000 for the years ended
December 31, 2004, 2003 and 2002, respectively. Commencing January 2003, the Robinsons Bend
Field is operated by a third party, Everlast Energy LLC. Administrative Services Agreement Pursuant to the Trust Agreement, Torch and the Trust entered into an administrative services
agreement, effective October 1, 1993. The Trust is obligated, throughout the term of the Trust, to
pay to Torch each quarter an administrative services fee for accounting, bookkeeping, informational
and other services relating to the Net Profits Interests. The administrative services fee is
$87,500 per calendar quarter commencing October 1, 1993. The amount of the administrative services
fee is adjusted annually, based 26




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##### Table of Contents



Torch Energy Royalty Trust Notes to Financial Statements upon the change in the Producers Price Index as published by the Department of Labor, Bureau of
Labor Statistics. Administrative services fees of $391,000, $388,000 and $389,000 were paid by the
Trust to Torch during the three years ended December 31, 2004, 2003 and 2002, respectively. Torch is the administrative service provider to the Trust and a party to that certain
Administrative Services Agreement whereby Torch provides certain administrative and related
services to the Trust. See Item 13  Administrative Services Agreement. TEMI, a subsidiary of
Torch, is a party to the Purchase Contract. Torch was the maker of a Senior Subordinated Note
payable-affiliate of $23.1 million which was due on September 30, 2004. The note was not repaid at
maturity, and effective January 1, 2005, the Senior Subordinated Note payable was restructured into
a $23.0 million promissory note due May 1, 2008. Accordingly, Torch classified $21.3 million of
the note payable to long-term at December 31, 2004. Management of Torch believes that Torch has
adequate financial resources to fund Torchs cash requirements through December 31, 2005. The
Consolidated Financial Statements of Torch are provided as an exhibit to the Annual Report on Form
10-K of the Trust while the Minimum Price commitment (which relates to the Purchase Contract
between the Trust and Torch) is in full force and effect. The Audit Report containing the
Consolidated Financial Statements has not been completed due to delay in completion of the annual
audit of P2 Energy Solutions, Inc. (a joint venture and a significant equity investee of Torch
accounted for under the equity method of accounting). This Annual Report on Form 10-K for the
Trust will be amended to include Torchs financial statements when the underlying annual report
from P2ES becomes available. The ability of Torch or TEMI to meet its obligations and to continue
to be a going concern is a significant factor to the Trust. Compensation of the Trustee and Transfer Agent The Trust Agreement provides that the Trustee be compensated for its administrative services, out
of the Trust assets, in an annual amount of $41,000, plus an hourly charge for services in excess
of a combined total of 250 hours annually at its standard rate. The Trustee 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 were $56,000 in each of the
years ended December 31, 2004, 2003 and 2002. The Trustee is also entitled to reimbursement for
out-of-pocket expenses. 6. Supplemental Oil and Gas Information (Unaudited) Total proved oil and gas reserves attributable to the Net Profits Interests as of December 31, 2004
are primarily based upon reserve reports prepared by T.J. Smith & Company, Inc. and Netherland,
Sewell & Associates, Inc. Total proved oil and gas reserves attributable to the Net Profits
Interests as of December 31, 2003 and 2002 are primarily based on reserve reports prepared by T.J.
Smith & Company, Inc., Netherland, Sewell & Associates, Inc. and Ryder Scott Company, L.P.
(Independent Reserve Engineers). Future net cash flows were computed by applying end-of-period
Purchase Contract prices for oil and gas to estimated future production, less the estimated future
expenditures (based on current costs) to be incurred in developing and producing the reserves. Reserve Quantities: The following table sets forth the estimated total proved and proved developed oil and gas reserves
attributable to the Trusts Net Profits Interests (all located in the United States) for the years
ended December 31, 2004, 2003 and 2002, based on reserve reports prepared by Independent Reserve 27




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##### Table of Contents



Torch Energy Royalty Trust Notes to Financial Statements Engineers. As a net profits interest does not entitle the Trust to a specific quantity of oil or
gas, but to a portion of oil and gas sufficient to yield a specified portion of the net proceeds
derived therefrom, proved reserves attributable to a net profits interest are calculated by
deducting an amount of oil or gas sufficient, if sold at the prices used in preparing the reserve
estimates for the Underlying Properties, to pay an amount of applicable future estimated production
expenses, development costs and taxes for such Underlying Properties (Net Equivalent Volumes).
The use of disclosing Net Equivalent Volumes to estimate reserve volumes attributable to the Net
Profits Interests is standard practice in the industry. Year-end reserves at December 31, 2004 were 14.4 billion cubic feet equivalent (Bcfe) as compared
to year-end 2003 and 2002 reserves of 14.5 Bcfe and 18.1 Bcfe, respectively. In accordance with
Securities and Exchange Commission reporting guidelines, year-end reserves and the related future
net revenues attributable to the Trusts Net Profits Interests are estimated utilizing the Purchase
Contract Price for gas, after gathering fees ($4.18, $4.11 and $3.42 per MMBtu for 2004, 2003 and
2002). Such Purchase Contract prices were calculating utilizing the Henry Hub gas prices on the
last day of the entitys fiscal year ($6.18, $5.97 and $4.79 per MMBtu for 2004, 2003 and 2002,
respectively). Oil and gas reserves as of December 31, 2003 were restated to reflect Net Equivalent Volumes. The
oil and gas reserves as of December 31, 2003 reflected in the Trusts Annual Report on Form 10-K
for the year ended December 31, 2003 (20.2 Bcfe) reflected an estimate of the total production
anticipated from the Underlying Properties, net to the Trusts net profits interest percentage.
The reserve restatement had no effect on the Statement of Assets, Liabilities and Trust Corpus as
of December 31, 2003, or the Statement of Distributable Income and Statement of Changes in Trust
Corpus for the year ended December 31, 2003. Additionally, the restatement had no impact on the
estimate of the future net cash flows as of Decemeber 31, 2003. 20032004
    
    
    (Restated)
    
    
    2002Oil
    
    
    Gas
    
    
    Oil
    
    
    Gas
    
    
    Oil
    
    
    GasDescription
    
    (Mbbl)
    
    
    (MMcf)
    
    
    (Mbbl)
    
    
    (MMcf)
    
    
    (Mbbl)
    
    
    (MMcf)Proved reserves at beginning of year
    
    
    67
    
    
    
    14,079
    
    
    
    90
    
    
    
    17,592
    
    
    
    67
    
    
    
    16,074Revisions
    
    
    9
    
    
    
    1,568
    
    
    
    (9
    )
    
    
    (1,661
    )
    
    
    26
    
    
    
    5,369Extensions and discoveries
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Production
    
    
    (15
    )
    
    
    (1,592
    )
    
    
    (14
    )
    
    
    (1,852
    )
    
    
    (3
    )
    
    
    (3,851
    )Proved reserves at end of year
    
    
    61
    
    
    
    14,055
    
    
    
    67
    
    
    
    14,079
    
    
    
    90
    
    
    
    17,592Proved developed reserves at beginning
of year
    
    
    61
    
    
    
    12,022
    
    
    
    90
    
    
    
    17,592
    
    
    
    67
    
    
    
    16,074Proved developed reserves at end of year
    
    
    55
    
    
    
    12,025
    
    
    
    61
    
    
    
    12,022
    
    
    
    90
    
    
    
    17,592
 28




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##### Table of Contents



Torch Energy Royalty Trust Notes to Financial Statements Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Oil and Gas Reserves
(in thousands): Estimated future net cash flows from the Net Profits Interests in proved oil and gas reserves at
December 31, 2004, 2003 and 2002 are presented in the following table: December 31,2004
    
    
    2003
    
    
    2002Future cash inflows
    
    $
    92,844
    
    
    $
    83,202
    
    
    $
    97,340Future costs and expenses
    
    
    (31,965
    )
    
    
    (24,712
    )
    
    
    (34,410
    )Net future cash flows
    
    
    60,879
    
    
    
    58,490
    
    
    
    62,930Discount at 10% for timing of cash flows
    
    
    (21,892
    )
    
    
    (21,318
    )
    
    
    (22,092
    )Present value of future net cash flows for proved reserves
    
    $
    38,987
    
    
    $
    37,172
    
    
    $
    40,838
 The following table sets forth the changes in the present value of estimated future net
revenues from proved reserves attributable to the Trusts Net Profits Interests during the years
ended December 31, 2004, 2003 and 2002: Year Ended December 31,2004
    
    
    2003
    
    
    2002Balance at beginning of year
    
    $
    37,172
    
    
    $
    40,838
    
    
    $
    27,580Sales of oil and gas produced, net of production costs
    
    
    (7,476
    )
    
    
    (7,587
    )
    
    
    (9,991
    )Accretion to discount
    
    
    3,717
    
    
    
    4,084
    
    
    
    2,758Extensions and discoveries
    
    
    
    
    
    
    
    
    
    
    Revision of prior-year estimates, change in prices
and other
    
    
    5,574
    
    
    
    (163
    )
    
    
    20,491Balance at end of year
    
    $
    38,987
    
    
    $
    37,172
    
    
    $
    40,838
 Estimates of future net cash flows from proved reserves of gas and oil condensate were made in
accordance with Financial Accounting Standards Board Statement 69, Disclosure about Oil and Gas
Producing Activities. The Trust has not filed or included in reports to any other Federal
authority or agency any estimates of proved net oil and gas reserves. Torch is the administrative service provider to the Trust and a party to that certain
Administrative Services Agreement whereby Torch provides certain administrative and related
services to the Trust. See Item 13  Administrative Services Agreement. TEMI, a subsidiary of
Torch, is a party to the Purchase Contract. Torch was the maker of a Senior Subordinated Note
payable-affiliate of $23.1 million which was due on September 30, 2004. The note was not repaid at
maturity, and effective January 1, 2005, the Senior Subordinated Note payable was restructured into
a $23.0 million promissory note due May 1, 2008. Accordingly, Torch classified $21.2 million of
the note payable to long-term at December 31, 2004. Management of Torch believes that Torch has
adequate financial resources to fund Torchs cash requirements through December 31, 2005. The
Consolidated Financial Statements of Torch are provided as an exhibit to the Annual Report on Form
10-K of the Trust while the Minimum Price commitment (which relates to the Purchase Contract
between the Trust and Torch) is in full force and effect. The Audit Report containing the
Consolidated Financial Statements has not been completed due to delay in completion of the annual
audit of P2 Energy Solutions, Inc. (a joint venture and a significant equity investee of Torch
accounted for under the equity method of accounting). This Annual Report on Form 10-K for the
Trust will be amended to include Torchs financial statements when the underlying annual report
from P2ES becomes available. The ability of Torch or TEMI to meet its obligations and to continue
to be a going concern is a significant factor to the Trust. 29




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##### Table of Contents



Torch Energy Royalty Trust Notes to Financial Statements 7. Quarterly Financial Data (Unaudited  in thousands, except per Unit amounts) The following table sets forth, for the periods indicated, summarized quarterly financial data: DistributableNet Profits
    
    
    Distributable
    
    
    IncomeIncome
    
    
    Income
    
    
    Per UnitQuarter ended March 31, 2004
    
    $
    1,488
    
    
    $
    1,304
    
    
    $
    .15Quarter ended June 30, 2004
    
    
    1,687
    
    
    
    1,445
    
    
    
    .17Quarter ended September 30, 2004
    
    
    1,622
    
    
    
    1,570
    
    
    
    .18Quarter ended December 31, 2004
    
    
    1,364
    
    
    
    1,338
    
    
    
    .16$
    6,161
    
    
    $
    5,657
    
    
    $
    .66Quarter ended March 31, 2003
    
    $
    2,868
    
    
    $
    2,665
    
    
    $
    .31Quarter ended June 30, 2003
    
    
    2,610
    
    
    
    2,282
    
    
    
    .27Quarter ended September 30, 2003
    
    
    2,075
    
    
    
    1,843
    
    
    
    .21Quarter ended December 31, 2003
    
    
    1,416
    
    
    
    1,246
    
    
    
    .14$
    8,969
    
    
    $
    8,036
    
    
    $
    .93
 30




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##### Table of Contents



Torch Energy Royalty Trust 
 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure During August 2004, E&Y resigned as the Trusts independent auditor based upon its annual review of
its audit client portfolio. The Trust had no disagreements with Ernst & Young LLP (E&Y)
concerning their audit or the application of accounting principles. On October 21, 2004, the Trust
engaged UHY Mann Frankfort Stein & Lipp CPAs, LLP (UHY) as its principal independent registered
public accountants. 
 Item 9A. Controls and Procedures Based on their evaluation as of December 31, 2004, the Trustee has concluded that the Trusts
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities and Exchange Act of 1934 (the Exchange Act)) are effective to ensure that information
required to be disclosed by the Trust in reports that it files or submits under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified in the rules and
forms of the Securities and Exchange Commission. The Trustee, in making these determinations, has
relied to the extent reasonable on information provided by Torch. There were no changes in the Trusts internal control over financial reporting as defined in Rule
13a-15(f) under the Exchange Act during the quarter ended December 31, 2004 that have materially
affected, or are reasonably likely to materially affect, the Trusts internal control over
financing reporting. 
 Item 9B. Other Information None. 31




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Torch Energy Royalty Trust 
 PART III 
 Item 10. Directors and Executive Officers of the Registrant The Registrant has no directors or executive officers. The Trustee is a corporate trustee that may
be removed as trustee under the Trust Agreement, with or without cause, at a meeting duly called
and held by the affirmative vote of Unitholders of not less than a majority of all the Units then
outstanding. Any such removal of the Trustee shall be effective only at such time as a successor
trustee fulfilling the requirements of Section 3807(a) of the Delaware Business Trust Act has been
appointed and has accepted such appointment. The Registrant has not adopted a code of ethics applicable to its principal executive officer,
principal financial officer, principal accounting officer or controller, or persons performing
similar functions because the Trust does not have any such officers. 
 Item 11. Executive Compensation The following is a description of certain fees and expenses paid or borne by the Trust, including
fees paid to Torch, the Trustee, the transfer agent or their affiliates. Ongoing Administrative Expenses.The Trust is responsible for paying all legal, accounting,
engineering and stock exchange fees, printing costs and other administrative and out-of-pocket
expenses incurred by or at the direction of the Trustee in its capacity as Trustee and/or transfer
agent. Compensation of the Trustee and Transfer Agent.The Trust Agreement provides that the Trustee be
compensated for its administrative services, out of the Trust assets, in an annual amount of
$41,000, plus an hourly charge for services in excess of a combined total of 250 hours annually at
its standard rate. The Trustee receives a transfer agency fee of $5.00 annually per account
(minimum of $15,000 annually), subject to change each December, beginning December 1994, based upon
the change in the Producers Price Index as published by the Department of Labor, Bureau of Labor
Statistics, plus $1.00 for each certificate issued. The Trustee is entitled to reimbursement for
out-of-pocket expenses. Fees to Torch.Torch will receive, throughout the term of the Trust, an administrative services
fee for accounting, bookkeeping and informational services related to the Net Profits Interests as
described below in Item 13  Administrative Services Agreement. 
 Item 12. Security Ownership of Certain Beneficial Owners and Management As of March 1, 2005, no person or group of persons was known by the Trust to be the beneficial
owner of more than 5% of the Units. The Trust has no officers or directors. The Trust does not
have an Equity Compensation Plan. 
 Item 13. Certain Relationships and Related Transactions Administrative Services Agreement Pursuant to the Trust Agreement, Torch and the Trust entered into the Administrative Services
Agreement effective October 1, 1993. The following summary of certain provisions of the
Administrative Services 32




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Torch Energy Royalty Trust Agreement does not purport to be complete and is subject to, and is qualified in its entirety by
reference to, the provisions of the Administrative Services Agreement. The Trust is obligated, throughout the term of the Trust, to pay to Torch each quarter an
administrative services fee for accounting, bookkeeping, informational and other services relating
to the Net Profits Interests. The administrative services fee is $87,500 per calendar quarter,
adjusted annually, based upon the change in the Producers Price Index as published by the
Department of Labor, Bureau of Labor Statistics. Administrative services fees of $391,000,
$388,000 and $389,000 were paid by the Trust to Torch during the years ended December 31, 2004,
2003 and 2002, respectively. Marketing Arrangement TRC and Velasco contracted to sell the oil and gas production from the Underlying Properties to
TEMI under a Purchase Contract. Under the Purchase Contract, TEMI is obligated to purchase all net
production attributable to the Underlying Properties for an Index Price for oil and gas less
certain gathering, treating and transportation charges, which are calculated monthly. The Purchase
Contract also provides that TEMI pay the Minimum Price for gas production. When TEMI pays a
purchase price based on the Minimum Price, it receives Price Credits equal to the difference
between the Index Price and the Minimum Price that it is entitled to deduct in determining the
purchase price when the Index Price for gas exceeds the Minimum Price. Price Credits are computed
on a monthly basis, and as of December 31, 2004, TEMI had no outstanding Price Credits. In addition, if the Index Price for gas exceeds the Sharing Price, TEMI is entitled to deduct the
Price Differential in determining the purchase price. As a result of such Sharing Price
arrangement, Net Proceeds attributable to the Underlying Properties during the years ended December
31, 2004, 2003 and 2002 were reduced by $6.8 million, $6.9 million and $1.6 million, respectively.
TEMI has an annual option to discontinue the Minimum Price commitment. However, if TEMI
discontinues the Minimum Price commitment, it will no longer be entitled to deduct the Price
Differential in calculating the purchase price and will forfeit all accrued Price Credits. TEMI
has not exercised its option to discontinue the Minimum Price Commitment. The Minimum Price in
2004, 2003 and 2002 was approximately $1.73, $1.71 and $1.71 per MMBtu, respectively. The Sharing
Price in 2004, 2003 and 2002 was approximately $2.13, $2.12 and $2.12 per MMBtu, respectively. Gross revenues (before deductions for applicable gathering, treating and transportation charges)
from TEMI included in the Net Proceeds calculation attributable to the Underlying Properties for
the years ended December 31, 2004, 2003 and 2002 were $17.7 million, $18.5 million and $13.2
million, respectively. Gathering, Treating and Transportation Arrangements The Purchase Contract entitles TEMI to deduct certain gas gathering, treating and transportation
costs in calculating the purchase price for gas in the Robinsons Bend, Austin Chalk and Cotton
Valley Fields. The amounts that may be deducted in calculating the purchase price for such gas are
set forth in the Purchase Contract and are not affected by the actual costs incurred by TEMI to
gather, treat and transport gas. In the Robinsons Bend Field, TEMI is entitled to deduct a
gathering, treating and transportation fee of $0.26 per MMBtu commencing October 1, 1993 adjusted
for inflation ($0.292, $0.289 and $0.289 per MMBtu for 2004, 2003 and 2002, respectively), plus
fuel usage equal to 5% of revenues, payable to Bahia Gas Gathering, Ltd., a subsidiary of Torch,
pursuant to a gas gathering agreement. Additionally, a fee of $0.05 per MMBtu, representing a
gathering fee payable to a non-affiliate of Torch, is deducted in calculating the purchase price
for production from 68 of the 394 wells in the Robinsons Bend Field. 33




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##### Table of Contents



Torch Energy Royalty Trust TEMI also deducts $0.38 per MMBtu plus 17% of revenues in calculating the purchase price for
production from the Austin Chalk Fields, as a fee to gather, treat and transport gas production.
TEMI deducts from the purchase price for gas a transportation fee of $0.045 MMBtu for production
attributable to certain wells in the Cotton Valley Fields. During the years ended December 31,
2004, 2003 and 2002, gas gathering, treating and transportation fees, deducted by TEMI from the Net
Proceeds calculations attributable to production during the twelve months ended September 30, 2004,
2003 and 2002 in the Robinsons Bend, Austin Chalk and Cotton Valley Fields, totaled $1.4 million,
$1.3 million and $1.0 million, respectively. No amounts for gathering, treating or transportation
are deducted in calculating the purchase price from the Chalkley Field. 
 Item 14. Principal Accountant Fees and Services The Trust does not have an audit committee, and has no audit committee pre-approval policy with
respect to fees paid to Ernst & Young LLP (E&Y) and UHY. Any pre-approval of services performed
by UHY and E&Y and related fees is granted by Torch and the Trustee. The outside auditors are
appointed and engaged by Torch and the Trustee. Fees for services performed by E&Y and UHY for the
years ended December 31, 2004 and 2003 are: 2004
    
    
    2003Audit Fees
    
    $
    117,041
    
    
    $
    128,400Audit Related
Fees
    
    
    0
    
    
    
    0Tax Fees
    
    
    0
    
    
    
    0All Other Fees
    
    
    0
    
    
    
    0$
    117,041
    
    
    $
    128,400
 34




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##### Table of Contents



Torch Energy Royalty Trust 
 PART IV 
 Item 15. Exhibits and Financial Statement Schedules (a) The following documents are filed as part of this report: 1. Financial Statements: Torch Energy Royalty TrustReports of Independent Registered Public Accounting FirmsStatements of Assets, Liabilities and Trust Corpus at December 31, 2004 and 2003Statements of Distributable Income for the Years Ended December 31, 2004, 2003 and 2002Statements of Changes in Trust Corpus for the Years Ended December 31, 2004, 2003 and 2002Notes to Financial Statements
 2. Financial Statement Schedules Financial statement schedules are omitted because of the absence of conditions under which they
are required or because the required information is included in the financial statements and
notes thereto. 3. Exhibits Exhibit Number Exhibit
 4. Instruments Defining the Rights of Security Holders, Including Indentures.4.1 -
    
    Form of Torch Energy Royalty Trust Agreement.*4.2 -
    
    Form of Louisiana Trust Agreement.*4.3 -
    
    Specimen Trust Unit Certificate.*4.4 -
    
    Designation of Ancillary Trustee.*10. Material Contracts.10.1 -
    
    Purchase Agreement between TRC, Velasco and TEMI.*10.2 -
    
    Gas Gathering Agreement between TEMI and Bahia Gas Gathering, Ltd.*10.3 -
    
    Amendment to Gas Gathering Agreement.*10.4 -
    
    Water Gathering and Disposal Agreement between Torch Energy Associates, Ltd.
and Velasco.*10.5 -
    
    Form of Texas Conveyance.*10.6 -
    
    Form of Louisiana Conveyance.*10.7 -
    
    Form of Alabama Conveyance.*10.8 -
    
    Standby Performance Agreement between Torch and the Trust.*
 35




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##### Table of Contents



Torch Energy Royalty Trust10.9 -
    
    Amendment to Water Gathering Contract.*10.10-
    
    First Amendment to Oil and Gas Purchase Contract (previously filed on form 10-Q for
the quarter ended September 30, 1994).23. Consents of Experts and Counsel.23.1 -
    
    Consent of T.J. Smith & Company, Inc.23.2 -
    
    Netherland, Sewell and Associates, Inc.23.3 -
    
    Consent of Ryder Scott Company, L.P.31. Rule 13a-14(a)/15d-14(a) Certifications.31.1 -
    
    Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32. Section 1350 Certifications.32.1 -
    
    Certification of Wilmington Trust Company pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
  *
    
    Incorporated by reference from Registration Statements on Form S-1 of Torch Energy
Advisors Incorporated (Registration No. 33-68688) dated November 16, 1993.
 36




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##### Table of Contents



SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized. TORCH
    
    ENERGY ROYALTY TRUSTBy:
    
    Wilmington Trust Company,not in its individual capacity but
solely as Trustee for the TrustBy:
    
    /s/ Bruce L. BissonBruce L. Bisson, Vice PresidentDate: April 15, 2005
 (The Trust has no employees, directors or executive officers.) 37




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##### Table of Contents



Index to Exhibits 4. Instruments Defining the Rights of Security Holders, Including Indentures.4.1 -
    
    Form of Torch Energy Royalty Trust Agreement.*4.2 -
    
    Form of Louisiana Trust Agreement.*4.3 -
    
    Specimen Trust Unit Certificate.*4.4 -
    
    Designation of Ancillary Trustee.*10. Material Contracts.10.1 -
    
    Purchase Agreement between TRC, Velasco and TEMI.*10.2 -
    
    Gas Gathering Agreement between TEMI and Bahia Gas Gathering, Ltd.*10.3 -
    
    Amendment to Gas Gathering Agreement.*10.4 -
    
    Water Gathering and Disposal Agreement between Torch Energy Associates, Ltd.
and Velasco.*10.5 -
    
    Form of Texas Conveyance.*10.6 -
    
    Form of Louisiana Conveyance.*10.7 -
    
    Form of Alabama Conveyance.*10.8 -
    
    Standby Performance Agreement between Torch and the Trust.*10.9 -
    
    Amendment to Water Gathering Contract.*10.10-
    
    First Amendment to Oil and Gas Purchase Contract (previously filed on form 10-Q for
the quarter ended September 30, 1994).23. Consents of Experts and Counsel.23.1 -
    
    Consent of T.J. Smith & Company, Inc.23.2 -
    
    Netherland, Sewell and Associates, Inc.23.3 -
    
    Consent of Ryder Scott Company, L.P.31. Rule 13a-14(a)/15d-14(a) Certifications.31.1 -
    
    Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32. Section 1350 Certifications.32.1 -
    
    Certification of Wilmington Trust Company pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
    
    Incorporated by reference from Registration Statements on Form S-1 of Torch Energy
Advisors Incorporated (Registration No. 33-68688) dated November 16, 1993.