UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

Form 10-Q

(Mark One)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2006

OR

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission File Number: 1-12474

Torch Energy Royalty Trust

(Exact Name of Registrant as Specified in Its Charter)

Delaware (State or Other Jurisdiction of Incorporation or Organization)		74-6411424 (I.R.S. Employer Identification Number)
Rodney Square North
1100 North Market Street, Wilmington, Delaware		19890
(Address of Principal Executive Offices)		(Zip Code)

302/636-6016
(Registrant’s telephone number, including area code)

Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ       No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated filer o       Accelerated filer o       Nonacclerated filer þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o       No þ

As of September 30, 2006, 8.6 million Units of Beneficial Interest were outstanding.

 

 

TORCH ENERGY ROYALTY TRUST

PART 1 — FINANCIAL INFORMATION

Item I. Financial Statements

This document includes “forward looking statements” within the meaning of Section 27A of the Securities Act of 1993, as amended, and Section 21E of the Securities Exchange Act of 1934. All statements other than statements of historical facts included in this document, including without limitation, statements under “Discussion and Analysis of Financial Condition and Results of Operations” regarding the financial position, reserve quantities and net present values of reserves of the Torch Energy Royalty Trust (“Trust”) and statements that include the words “believes”, “expects”, “anticipates”, “intends”, “estimates”, “projects”, “target”, “goal”, “plans”, “objectives”, “should” or similar expressions or variations are forward-looking statements. Torch Energy Advisors Incorporated (“Torch”) and the Trust can give no assurances that the assumptions upon which these statements are based will prove to be correct. Factors which could cause such forward looking statements not to be correct include, among others, the cautionary statements set forth in the Trust’s Annual Report on Form 10-K filed with the Securities Exchange Commission for the most recent fiscal year, cautionary statements contained in this report, the volatility of oil and gas prices, future production costs, future oil and gas production quantities, operating hazards, and environmental conditions.

Introduction

The financial statements included herein have been prepared by Torch, pursuant to an administrative service agreement between Torch and the Trust, pursuant to the rules and regulations of the Securities and Exchange Commission. Wilmington Trust Company serves as the trustee (“Trustee”) of the Trust pursuant to the trust agreement dated October 1, 1993. Certain information and footnote disclosures normally included in the annual financial statements have been omitted pursuant to such rules and regulations, although Torch believes that the disclosures are adequate to make the information presented not misleading. These financial statements should be read in conjunction with the December 31, 2005 financial statements and notes thereto included in the Trust’s annual report on Form 10-K for the most recent fiscal year. In the opinion of Torch, all adjustments necessary to present fairly the assets, liabilities and trust corpus of the Trust as of September 30, 2006 and December 31, 2005, the distributable income and changes in trust corpus for the three-month and nine-month periods ended September 30, 2006 and 2005 have been included. All such adjustments are of a normal recurring nature. The distributable income for such interim periods is not necessarily indicative of the distributable income for the full year.

The Trust has no officers, directors or employees. The Trustee relies solely on receiving accurate information, reports and other representations from Torch in the

TORCH ENERGY ROYALTY TRUST

ordinary course of its duties as Trustee. In executing and submitting this report on behalf of the Trust and with respect to Bruce L. Bisson in executing the certifications relating to this report, the Trustee and Bruce L. Bisson have relied upon the accuracy of such reports, information and representations of Torch.

TORCH ENERGY ROYALTY TRUST

STATEMENTS OF ASSETS, LIABILITIES AND TRUST CORPUS
(In thousands)

		September 30,				December 31,
		2006				2005
		(Unaudited)
ASSETS
Cash		$	1			$	1
Net profits interests in oil and gas properties (Net of accumulated amortization of $160,173 and $158,926 at September 30, 2006 and December 31, 2005, respectively)			20,427				21,674
		$	20,428			$	21,675
LIABILITIES AND TRUST CORPUS
Trust expense payable		$	226			$	234
Trust corpus			20,202				21,441
		$	20,428			$	21,675

See notes to financial statements.

TORCH ENERGY ROYALTY TRUST

STATEMENTS OF DISTRIBUTABLE INCOME
(In thousands, except per Unit amounts)

(Unaudited)

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2006				2005				2006				2005
Net profits income		$	1,488			$	1,482			$	6,718			$	4,429
Infill Well Net Proceeds			—				22				516				465
			1,488				1,504				7,234				4,894
General and administrative expenses			240				214				730				690
Interest expense			—				—				81				—
			240				214				811				690
Distributable income		$	1,248			$	1,290			$	6,423			$	4,204
Distributable income per Unit (8,600 Units)		$	.15			$	.15			$	.75			$	.49
Distributions per Unit		$	.14			$	.15			$	.75			$	.49

See notes to financial statements

TORCH ENERGY ROYALTY TRUST

STATEMENTS OF CHANGES IN TRUST CORPUS
(In thousands)

(Unaudited)

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2006				2005				2006				2005
Trust corpus, beginning of period		$	20,580			$	22,427			$	21,441			$	23,556
Amortization of Net Profits Interests			(396	)			(550	)			(1,246	)			(1,695	)
Distributable income			1,248				1,290				6,423				4,204
Distributions to Unitholders			(1,230	)			(1,273	)			(6,416	)			(4,171	)
Trust corpus, end of period		$	20,202			$	21,894			$	20,202			$	21,894

See notes to financial statements.

TORCH ENERGY ROYALTY TRUST

Notes to Financial Statements

1. Trust Organization and Nature of Operations

The Trust was formed effective October 1, 1993 under the Delaware Statutory Trust Act (formerly known as the Delaware Business Trust Act) pursuant to a trust agreement (“Trust Agreement”) among 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 1993. Pursuant to an administrative services agreement with the Trust, Torch provides accounting, bookkeeping, informational and other services related to the Net Profits Interests.

The Underlying Properties constitute working interests in the Chalkley field in Louisiana (“Chalkley Field”), the Robinson’s Bend field in the Black Warrior Basin in Alabama (“Robinson’s Bend Field”), fields that produce from the Cotton Valley formations in Texas (“Cotton Valley Fields”) and fields that produce from the Austin Chalk formation in Texas (“Austin Chalk Fields”). The Underlying Properties represent interest 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 formations.

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. As of September 30, 2006, the Trust has not terminated, as none of the aforementioned events have occurred. 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.

The only assets of the Trust, other than cash and temporary investments being held for the payment of expenses and liabilities and for distribution to Unitholders, are the Net Profits Interests. The Net Profits Interests (other than the Net Profits Interest covering the Robinson’s Bend Field) entitle the Trust to receive 95% of the net proceeds (“Net Proceeds”) attributable to oil and gas produced and sold from

TORCH ENERGY ROYALTY TRUST

Notes to Financial Statements

wells (other than infill wells) on the Underlying Properties. Net Proceeds are generally defined as gross revenues received from the sale of production attributable to the Underlying Properties during any period less property, production, severance and similar taxes, and development, operating, and certain other costs. In calculating Net Proceeds from the Robinson’s Bend Field, operating and development costs incurred prior to January 1, 2003 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 and operating and development costs subsequent to January 1, 2003. Since the fourth quarter of 1995, production from the Underlying Properties in the Robinson’s Bend Field has been less than the Volume Limitation. See Note 2 to the financial statements for an explanation of the Trust’s method of accounting.

The Net Profits Interests also entitle the Trust to 20% of the Infill Well Net Proceeds (as defined herein) of wells drilled on the Underlying Properties since the Trust’s establishment into formations in which the Trust has an interest, other than wells drilled to replace damaged or destroyed wells (“Infill Wells”). Infill Well Net Proceeds represent the aggregate gross revenues received from Infill Wells less the aggregate amount of the following Infill Well costs: (i) property, production, severance and similar taxes; (ii) development costs; (iii) operating costs; and (iv) interest on the recovered portion, if any, of the foregoing costs computed at the publicly announced base rate of Citibank, N.A. in New York.

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. Information contained on the Trust’s website or any other websites is not incorporated by reference into this report and does not constitute a part of this report.

2. Basis of Accounting

The financial statements of the Trust are prepared on a modified cash basis and are not intended to present the financial position and results of operations in conformity with generally accepted accounting principles (“GAAP”). Preparation of the Trust’s financial statements on such basis includes the following:

¯

Revenues are recognized in the period in which amounts are received by the Trust. Therefore, revenues recognized during the three-month and nine-month periods ended September 30, 2006 and 2005 are derived from oil and gas production sold during the three-month and nine-month periods ended June 30, 2006 and 2005, respectively. General and administrative expenses are recognized on an accrual basis.

TORCH ENERGY ROYALTY TRUST

Notes to Financial Statements

¯		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 impairment loss was recognized during the three-month and nine-month periods ended September 30, 2006 and 2005.
¯		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.
¯		Estimates and assumptions have been made in preparing the financial statements of the Trust in order for the financial statements to be in conformity with accounting principles generally accepted in the United States.

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. 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 Interest is 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 resulting from such payments were allocated to the Unitholders of record on such date.

4. Distributions and Income Computations

Distributions are determined for each quarter and are based on the amount of cash available for distribution to Unitholders. Such amount (the “Quarterly Distribution Amount”) is equal to the excess, if any, of the cash received by the Trust, on the last day of the second month following the previous

TORCH ENERGY ROYALTY TRUST

Notes to Financial Statements

calendar quarter (or the next business day thereafter) ending prior to the dissolution of the Trust, from the Net Profits Interests then held by the Trust plus, with certain exceptions, any other cash receipts of the Trust during such quarter, subject to adjustments for changes made during such quarter in any cash reserves established for the payment of contingent or future obligations of the Trust. Based on the payment procedures relating to the Net Profits Interests, cash received by the Trust on the last day of the second month of a particular quarter from the Net Profits Interests generally represents proceeds from the sale of oil and gas produced from the Underlying Properties during the preceding calendar quarter. The Quarterly Distribution Amount for each quarter is payable to Unitholders of record on the last day of the second month of the calendar quarter unless such day is not a business day in which case the record date is the next business day thereafter. The Quarterly Distribution Amount is distributed within approximately ten days after the record date to each person who was a Unitholder of record on the associated record date.

5. Related Party Transactions

Marketing Arrangements

TRC and Velasco 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 the 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. No Price Credits were deducted in calculating the purchase price related to distributions received by Unitholders during the three-month and nine-month periods ended September 30, 2006 and 2005. As of September 30, 2006, TEMI had no accumulated Price Credits.

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 calculating the purchase price. As a result of such Sharing Price arrangement, Net Proceeds attributable to the Underlying Properties during the three months ended September 30, 2006 and 2005 were reduced by $1.8 million and $2.0 million, respectively. During the nine months ended September 30, 2006 and 2005, the Sharing Price arrangement reduced Net Proceeds attributable to the Underlying Properties by $9.3 million and $6.2 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

TORCH ENERGY ROYALTY TRUST

Notes to Financial Statements

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 for Underlying Property production is adjusted annually for inflation and is $1.80 per MMBtu for 2006 production and was $1.77 per MMBtu for 2005 production. The Sharing Price for Underlying Property production is $2.22 per MMBtu for 2006 production and was $2.18 per MMBtu for 2005 production.

Gross revenues (before deductions for applicable gathering, treating and transportation charges) from TEMI included in the Net Proceeds calculations attributable to the Underlying Properties during the quarters ended September 30, 2006 and 2005 were $4.2 million and $4.6 million, respectively. Such gross revenues for the nine-month periods ended September 30, 2006 and 2005 were $17.1 million and $13.8 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 adjusted for inflation ($0.303 and $0.298 per MMBtu for 2006 and 2005 production, respectively), plus fuel usage equal to 5% of revenues pursuant to a gas gathering agreement. Additionally, a fee of $0.05 per MMBtu, representing a gathering fee payable to a non-affiliate of TEMI, is deducted in calculating the purchase price for production from 68 of 394 wells in the Robinson’s Bend Field. TEMI also deducts $0.38 per MMBtu plus 17% of revenues in calculating the purchase price for production from the Austin Chalk Fields, as a fee to gather, treat and transport gas production. From the purchase price for gas in the Cotton Valley Fields, TEMI deducts 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 three months ended September 30, 2006 and 2005, such fees deducted from the Net Proceeds calculations, attributable to production during the three-month periods ended June 30, 2006 and 2005, in the Robinson’s Bend, Austin Chalk and Cotton Valley Fields, totaled $0.3 million and $0.4 million, respectively. During the nine months ended September 30, 2006 and 2005, such fees deducted from the Net Proceeds calculations, attributable to production during the nine-month periods ended June 30, 2006 and 2005, in the Robinson’s Bend, Austin Chalk and Cotton Valley Fields, totaled $1.4 million and $1.1 million, respectively. No amounts for gathering, treating or transportation are deducted in calculating the purchase price from the Chalkley Field.

TORCH ENERGY ROYALTY TRUST

Notes to Financial Statements

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 amount of the administrative services fee is adjusted annually based upon the change in the Producer’s Price Index as published by the Department of Labor, Bureau of Labor Statistics. Administrative services during the three-month periods ended September 30, 2006 and 2005 were $102,000 and $100,000, respectively. During the nine-month periods ended September 30, 2006 and 2005, such fees were $305,000 and $300,000, respectively.

Operator Overhead Fees

A subsidiary of Torch operates certain oil and gas interests burdened by the Net Profits Interests. The Underlying Properties are charged, on the same basis as other third parties, for all customary expenses and costs reimbursements associated with these activities. Operator overhead fees deducted from the Net Proceeds computations for the Chalkley, Cotton Valley and Austin Chalk Fields totaled $48,000 for each of the three-month periods ended September 30, 2006 and 2005. During the nine-month periods ended September 30, 2006 and 2005, such operator overhead fees were $145,000 and $139,000, respectively.

Compensation of the Trustee and Transfer Agent

The Trust Agreement provides that the Trustee is 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. In accordance with the Trust Agreement, the Trustee may increase its compensation for its administrative services as a result of unusual or extraordinary services rendered by the Trustee. During 2005, due to the impact of the Sarbanes-Oxley Act on the Trust, the Trustee increased its compensation for administrative services to $80,000 per year.

Additionally, the Trustee receives a transfer agency fee of $5.00 annually per account (minimum of $15,000 annually), subject to change for inflation each December, based upon the change in the Producer’s Price Index as published by the Department of Labor, Bureau of Labor Statistics, plus $1.00 for each certificate issued.

Total administrative and transfer agent fees during the three-month periods ended September 30, 2006 and 2005 were $24,000 per period. Such fees during the nine-month periods ended September 30, 2006 and 2005 were $71,000 and $52,000, respectively. The Trustee is also entitled to reimbursement for out-of-pocket expenses.

TORCH ENERGY ROYALTY TRUST

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Results of Operations

Net profits income received by the Trust during the three and nine month periods ended September 30, 2006 and 2005, derived from production sold during the three and nine months ended June 30, 2006 and 2005, respectively, was computed as shown in the following table (in thousands):

		Three Months Ended												Nine Months Ended
		September 30, 2006												September 30, 2005
		Chalkley,												Chalkley,
		Cotton Valley												Cotton Valley
		and Austin				Robinson’s								and Austin				Robinson’s
		Chalk Fields				Bend Field				Total				Chalk Fields				Bend Field				Total
Oil and gas revenues		$	2,227			$	1,636			$	3,863			$	2,479			$	1,746			$	4,225
Direct operating expenses:
Lease operating expenses and property tax			480				1,551				2,031				467				1,437				1,904
Severance tax			172				138				310				182				152				334
			652				1,689				2,341				649				1,589				2,238
Net proceeds before capital expenditures			1,575				(53	)			1,522				1,830				157				1,987
Capital expenditures			9				137				146				270				55				325
Net proceeds			1,566				(190	)			1,376				1,560				102				1,662
Net profits percentage			95	%			—				—				95	%			—				—
Net profits income		$	1,488			$	—			$	1,488			$	1,482			$	—			$	1,482

		Nine Months Ended												Nine Months Ended
		September 30, 2006												September 30, 2005
		Chalkley,												Chalkley,
		Cotton Valley												Cotton Valley
		and Austin				Robinson’s								and Austin				Robinson’s
		Chalk Fields				Bend Field				Total				Chalk Fields				Bend Field				Total
Oil and gas revenues		$	9,062			$	6,620			$	15,682			$	7,514			$	5,171			$	12,685
Direct operating expenses:
Lease operating expenses and property tax			1,590				4,566				6,156				1,579				4,425				6,004
Severance tax			642				647				1,289				546				455				1,001
			2,232				5,213				7,445				2,125				4,880				7,005
Net proceeds before capital Expenditures			6,830				1,407				8,237				5,389				291				5,680
Capital expenditures			420				363				783				727				831				1,558
			6,410				1,044				7,454				4,662				(540	)			4,122
Cumulative Deficit			—				(574	)			(574	)			—				—				—
Net proceeds			6,410				470				6,880				4,662				(540	)			4,122
Net profits percentage			95	%			—				—				95	%			—				—
Net profits income		$	6,090			$	628			$	6,718			$	4,429			$	—			$	4,429

TORCH ENERGY ROYALTY TRUST

Because a modified cash basis of accounting is utilized by the Trust, Net Proceeds attributable to the Underlying Properties for the three months ended September 30, 2006 and 2005 is derived from actual oil and gas produced during the three months ended June 30, 2006 and 2005, respectively. Net Proceeds attributable to the Underlying Properties for the nine months ended September 30, 2006 and 2005 is derived from oil and gas produced during the nine months ended June 30, 2006 and 2005, respectively. Oil and gas sales attributable to the Underlying Properties for such periods are as follows:

		Three Months Ended September 30,
		2006								2005
		Bbls				Mcf				Bbls				Mcf
		of Oil				of Gas				of Oil				of Gas
Chalkley Field			1,024				270,463				1,250				310,705
Robinson’s Bend Field			—				428,437				—				455,962
Cotton Valley Fields			393				147,007				519				164,928
Austin Chalk Fields			2,528				43,156				3,784				37,511
			3,945				889,063				5,553				969,106

		Nine Months Ended September 30,
		2006								2005
		Bbls				Mcf				Bbls				Mcf
		of Oil				of Gas				of Oil				of Gas
Chalkley Field			3,450				853,698				3,957				931,567
Robinson’s Bend Field			—				1,316,530				—				1,366,661
Cotton Valley Fields			1,170				472,718				1,569				521,633
Austin Chalk Fields			9,240				144,080				11,698				129,929
			13,860				2,787,026				17,224				2,949,790

Three Months Ended September 30, 2006 Compared to Three Months Ended September 30, 2005

For the three months ended September 30, 2006 and September 30, 2005, net profits income was $1.5 million per period.

Gas production attributable to the Underlying Properties in the Chalkley, Cotton Valley and Austin Chalk Fields was 460,626 Mcf and 513,144 Mcf during the three months ended June 30, 2006 and 2005, respectively. Gas production attributable to the Underlying Properties in the Robinson’s Bend Field was 428,437 Mcf and 455,962 Mcf during the three months ended June 30, 2006 and 2005, respectively. Gas production decreased during 2006 as a result of normal production declines. Oil production attributable to the Underlying Properties for the three months ended June 30, 2006 and 2005 was 3,945 Bbls and 5,553 Bbls, respectively.

TORCH ENERGY ROYALTY TRUST

During the three months ended September 30, 2006, the average price used to calculate Net Proceeds for gas, before gathering, treating and transportation deductions, was $4.31 per MMBtu as compared to $4.32 per MMBtu for the three months ended September 30, 2005. During the three months ended September 30, 2006, the average price used to calculate Net Proceeds for oil was $63.95 as compared to $45.89 per Bbl for the three months ended September 30, 2005. When TEMI pays a purchase price for gas based on the Minimum Price ($1.80 per MMBtu and $1.77 per MMBtu for 2006 and 2005 production, respectively), 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. No Price Credits were deducted in calculating the purchase price related to distributions received by Unitholders during the three months ended September 30, 2006 and 2005. As of September 30, 2006, TEMI had no accumulated Price Credits. Additionally, if the Index Price for gas exceeds the Sharing Price ($2.22 per MMBtu and $2.18 per MMBtu for 2006 and 2005 production, respectively), TEMI is entitled to deduct 50% of such excess in calculating the purchase price. The deduction of the Price Differential in calculating the purchase price had the effect of reducing distributions received by Unitholders during the three months ended September 30, 2006 and 2005 by $1.8 million and $2.0 million, respectively.

During the three months ended September 30, 2006 and September 30, 2005, the Trust received no payments with respect to the Robinson’s Bend Field, since costs and expenses exceeded gross revenues generated from the Robinson’s Bend Field during each period. 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 excess of such costs and expenses including interest (Robinson’s Bend Cumulative Deficit”). As of September 30, 2006 (pertaining to production through June 30, 2006), the Robinson’s Bend Cumulative Deficit was approximately $190,000.

During the three months ended September 30, 2005, the Trust distributed approximately $22,000 of Infill Well Net Proceeds pertaining to oil and gas sales during the quarter ended March 31, 2005. During the three months ended September 30, 2006, the Trust received no payments with respect to the Infill Wells since costs and expenses exceeded gross revenues generated from the Infill Wells. Such Infill Wells are located in the Cotton Valley Fields and are operated by Samson Lone Star Limited Partnership.

Lease operating expenses and capital expenditures attributable to the Underlying Properties in the Chalkley, Cotton Valley and Austin Chalk Fields deducted in calculating distributions during the three months ended September 30, 2006 and 2005 totaled $0.5 million and $0.7 million, respectively. With respect to the Robinsons’ Bend Field, lease operating expenses and capital expenditures of $1.7 million and $1.5 million were deducted in calculating the Net Proceeds payable to the Trust from the Robinson’s Bend Field for the three months ended September 30, 2006 and 2005, respectively.

General and administrative expenses amounted to $0.2 million for each of the three months ended September 30, 2006 and 2005. These expenses primarily relate to administrative services provided by Torch and the Trustee, and legal fees.

The foregoing resulted in distributable income of $1.2 million, or $0.15 per Unit, for the three months ended September 30, 2006, as compared to $1.3 million, or $0.15 per Unit, for the same period in 2005.

TORCH ENERGY ROYALTY TRUST

Cash distributions of $1.2 million, or $0.14 per Unit, were made during the three months ended September 30, 2006 as compared to $1.3 million, or $0.15 per Unit, for the same period in 2005.

Nine Months Ended September 30, 2006 Compared to Nine Months Ended September 30, 2005

For the nine months ended September 30, 2006, net profits income was $6.7 million, up 52% from net profits income of $4.4 million for the same period in 2005. Such increase is mainly attributable to higher oil and gas prices paid to the Trust during the nine months ended September 30, 2006. Additionally, distributions received by Unitholders during the nine months ended September 30, 2006 were favorably impacted by Net Proceeds received by the Trust in 2006 pertaining to the net profits interests in the Robinson’s Bend Field.

Gas production attributable to the Underlying Properties in the Chalkley, Cotton Valley and Austin Chalk Fields was 1,470,496 Mcf and 1,583,129 Mcf during the nine months ended June 30, 2006 and 2005, respectively. Gas production attributable to the Underlying Properties in the Robinson’s Bend Field was 1,316,530 Mcf and 1,366,661 Mcf during the nine months ended June 30, 2006 and 2005, respectively. Gas production decreased during 2006 mainly as a result of normal production declines. Oil production attributable to the Underlying Properties for the nine months ended June 30, 2006 and June 30, 2005 was 13,860 Bbls and 17,224 Bbls, respectively.

During the nine months ended September 30, 2006, the average price used to calculate Net Proceeds for gas, before gathering, treating and transportation deductions, was $5.63 per MMBtu as compared to $4.22 per MMBtu for the nine months ended September 30, 2005. During the nine months ended September 30, 2006, the average price used to calculate Net Proceeds for oil was $57.24 as compared to $43.62 per Bbl for the nine months ended September 30, 2005. When TEMI pays a purchase price for gas based on the Minimum Price ($1.80 per MMBtu and $1.77 per MMBtu for 2006 and 2005 production, respectively), 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. No Price Credits were deducted in calculating the purchase price related to distributions received by Unitholders during the nine-month periods ended September 30, 2006 and 2005. As of September 30, 2006, TEMI had no accumulated Price Credits. Additionally, if the Index Price for gas exceeds the Sharing Price ($2.22 per MMBtu and $2.18 per MMBtu for 2006 and 2005 production, respectively), TEMI is entitled to deduct 50% of such excess in calculating the purchase price. The deduction of the Price Differential in calculating the purchase price had the effect of reducing distributions received by Unitholders during the nine months ended September 30, 2006 and 2005 by $9.3 million and $6.2 million, respectively.

During the nine months ended September 30, 2005, the Trust received no payments with respect to the Robinson’s Bend Field, since costs and expenses exceeded gross revenues generated from the Robinson’s Bend Field. During the six months ended June 30, 2006, the Trust distributed approximately $547,000 (net of interest expense) of Net Proceeds generated from the Net Profits Interests in the Robinson’s Bend Field pertaining to gas sales during the six months ended March 31, 2006. The Trust received no Net Proceeds from the Net Profits Interests in the Robinson’s Bend Field during the three months ended September 30, 2006 (pertaining to production during the three months ended June 30,

TORCH ENERGY ROYALTY TRUST

2006) since costs and expenses exceeded gross revenues by approximately $190,000. 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 excess of such costs and expenses including interest (Robinson’s Bend Cumulative Deficit”). As of September 30, 2006 (pertaining to production through June 30, 2006), the Robinson’s Bend Cumulative Deficit was approximately $190,000. During the nine months ended September 30, 2006 and 2005, the Trust distributed approximately $516,000 and $465,000, respectively, of Infill Well Net Proceeds pertaining to oil and gas sales during the nine months ended March 31, 2006 and 2005. Such Infill Wells are located in the Cotton Valley Fields and are operated by Samson Lone Star Limited Partnership.

Lease operating expenses and capital expenditures attributable to the Underlying Properties in the Chalkley, Cotton Valley and Austin Chalk Fields deducted in calculating distributions during the nine months ended September 30, 2006 and 2005 totaled $2.0 million and $2.3 million, respectively. Costs and expenses in 2005 were greater than costs and expenses in 2006 as a result of certain workovers costs deducted from Net Proceeds pertaining to the Austin Chalk Fields during the nine months ended September 30, 2005. With respect to the Robinsons’ Bend Field, lease operating expenses and capital expenditures of $4.9 million and $5.3 million were deducted in calculating the Net Proceeds payable to the Trust from the Robinson’s Bend Field during the nine months ended September 30, 2006 and 2005, respectively. Costs and expenses of $4.9 million in 2006 were lower than costs and expenses of $5.3 million in 2005 as a result of capital expenditures pertaining to certain gas well workovers performed by the operator of the Robinson’s Bend Field during the nine months ended June 30, 2005.

General and administrative expenses amounted to $0.7 million for each of the nine months period ended September 30, 2006 and 2005, respectively. These expenses primarily relate to administrative services provided by Torch and the Trustee and legal fees.

The foregoing resulted in distributable income of $6.4 million, or $0.75 per Unit, for the nine months ended September 30, 2006, as compared to $4.2 million, or $0.49 per Unit, for the same period in 2005. Cash distributions of $6.4 million, or $0.75 per Unit, were made during the nine months ended September 30, 2006 as compared to $4.2 million, or $0.49 per Unit, for the same period in 2005.

TORCH ENERGY ROYALTY TRUST

Item 3. Quantitative and Qualitative Disclosures about Market Risk

The Trust is exposed to market risk, including adverse changes in commodity prices. The Trust’s assets constitute Net Profits Interests in the Underlying Properties. As a result, the Trust’s operating results can be significantly affected by fluctuations in commodity prices caused by changing market forces and the price received for production from the Underlying Properties.

All production from the Underlying Properties is sold pursuant to a Purchase Contract between TRC, 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 is $1.80 per MMBtu for 2006 production and was $1.77 per MMBtu for 2005 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 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 is $2.22 per MMBtu for 2006 production and was $2.18 per MMBtu for 2005 production. 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.

TORCH ENERGY ROYALTY TRUST

Item 4. Controls and Procedures

Based on their evaluation as of the end of the period covered by this quarterly report on Form 10-Q, 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 were effective as of the end of the period covered by this quarterly report on Form 10-Q. In its evaluation of disclosure controls and procedures, the Trustee has relied, to the extent considered reasonable, on information provided by Torch and others.

There were no significant changes in the Trust’s internal control over financial reporting during the Trust’s last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Trust’s internal control over financial reporting.

TORCH ENERGY ROYALTY TRUST

PART II. OTHER INFORMATION

ITEM 1. Legal Proceedings

None.

ITEM 1A. Risk Factors

There have been no material changes to our risk factors since our annual report on Form 10-K for the year ended December 31, 2005.

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

ITEM 3. Defaults upon Senior Securities

None.

ITEM 4. Submission of Matters to a Vote of Unitholders

None.

ITEM 5. Other Information

None

ITEM 6. Exhibits

(a) Exhibits

4. Instruments of defining the rights of security holders, including indentures.

	4.1		Form of Torch Energy Royalty Trust Agreement. *
	4.2		Form of Louisiana Trust Agreement. *
	4.3		Specimen Trust Unit Certificate. *
	4.4		Designation of Ancillary Trustee. *
	31.1		Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	32.1		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

TORCH ENERGY ROYALTY TRUST

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date: November 13, 2006

(The Trust has no employees, directors or executive officers.)

Index to Exhibits

	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. *
	31.1		Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	32.1		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.