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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2006
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 333-91014-01
TREASURE ISLAND ROYALTY TRUST
(Exact Name of Registrant as Specified in Its Charter)
TEXAS 02-6148888
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
WACHOVIA BANK, NATIONAL ASSOCIATION 77057
AS TRUSTEE OF THE TREASURE ISLAND ROYALTY TRUST (Zip Code)
CORPORATE TRUST DEPARTMENT
5847 SAN FELIPE, SUITE 1050
HOUSTON, TEXAS
(Address of Principal Executive Offices)
(713) 278-4320
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
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 [ ] Accelerated filer[ ] Non-accelerated filer [X]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
As of August 17, 2006, there were 42,574,298 trust units outstanding.
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TABLE OF CONTENTS
PART I
Page
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Item 1. Unaudited Financial Statements:
Balance Sheet at June 30, 2006 and December 31, 2005........................................... 1
Statement of Loss for the three and six months ended June 30, 2006 and 2005.................... 2
Notes to Financial Statements.................................................................. 3
Item 2. Trustee's Discussion and Analysis of Financial Condition and Results of Operations............. 4
Item 3. Quantitative and Qualitative Disclosures about Market Risk..................................... 5
Item 4. Controls and Procedures........................................................................ 5
PART II
Item 6. Exhibits....................................................................................... 6
i
TREASURE ISLAND ROYALTY TRUST
BALANCE SHEET
(UNAUDITED)
<Table>
<Caption>
JUNE 30, 2006 DECEMBER 31, 2005
----------------- ------------------
Assets:
Cash............................................................... $ 100 $ 100
Overriding royalty interests in oil and gas properties............. 835,645 835,645
--------------- ---------------
Total assets.................................................. $ 835,745 $ 835,745
=============== ===============
Liabilities and trust corpus:
Current trust expenses payable..................................... $ 48,547 $ 49,465
Loan payable to Newfield........................................... 294,545 246,190
Interest payable................................................... 42,780 32,013
Commitments and contingencies...................................... -- --
Trust corpus (42,574,298 units of beneficial interest authorized 835,745 835,745
and outstanding).................................................
Accumulated deficit................................................ (385,872) (327,668)
--------------- ---------------
Total liabilities and trust corpus............................ $ 835,745 $ 835,745
=============== ===============
</Table>
The accompanying notes are an integral part of this financial statement.
TREASURE ISLAND ROYALTY TRUST
STATEMENT OF LOSS
(UNAUDITED)
<Table>
<Caption>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------------- ---------------------------------
2006 2005 2006 2005
--------------- --------------- --------------- ---------------
Royalty income ....................... $ -- $ -- $ -- $ --
General and administrative expense ... 22,590 23,666 47,437 35,667
Interest expense ..................... 5,745 3,961 10,767 7,444
--------------- --------------- --------------- ---------------
Net loss .......................... $ 28,335 $ 27,627 $ 58,204 $ 43,111
=============== =============== =============== ===============
Distributable income ................. -- -- -- --
Distributable income per trust unit .. -- -- -- --
Outstanding trust units .............. 42,574,298 42,574,298 42,574,298 42,574,298
</Table>
The accompanying notes are an integral part of this financial statement.
2
TREASURE ISLAND ROYALTY TRUST
NOTES TO FINANCIAL STATEMENTS
1. FORMATION AND PURPOSE OF THE TRUST
Treasure Island Royalty Trust was established in connection with Newfield
Exploration Company's November 2002 acquisition of EEX Corporation to provide
the shareholders of EEX with the option to receive an interest in an exploration
concept being pursued by EEX prior to the acquisition. The concept, referred to
as "Treasure Island," targets "ultra deep" prospects in the shallow waters of
the Gulf of Mexico. The trust owns, or has the right to receive, overriding
royalty interests to be paid from Newfield's (or its transferees') interest in
any future production that may be achieved from horizons below specified depths
in the Treasure Island area. Treasure Island remains an exploration concept and
there are no proved reserves or production currently associated with the royalty
interests.
The trust was created under the laws of the State of Texas pursuant to a
trust agreement entered into in June 2002 between Newfield, as grantor, and
several employees of Newfield, as trustees. The beneficial interest in the trust
is divided into 42,574,298 trust units, each of which represents an equal
undivided portion of the trust. At the time of Newfield's acquisition of EEX,
Newfield and Wachovia Bank, National Association, as successor trustee, entered
into an amended and restated trust agreement with respect to the trust and the
trust issued all 42,574,298 trust units to Newfield. Newfield subsequently
transferred all of the trust units to the holders of EEX stock who elected to
receive trust units as a portion of their consideration in the acquisition.
The sole purpose of the trust is to hold non-expense bearing overriding
royalty interests in any future production from a specified area. The royalty
interests are passive in nature. The trustee of the trust and the trust's
unitholders have no control over, or responsibility for any costs related to,
drilling, development or operations. Neither Newfield nor any other operator of
Treasure Island properties has any contractual commitment to the trust to
conduct drilling on the properties or to maintain its ownership interest in any
of the properties.
These unaudited financial statements reflect, in the opinion of the
trustee, all adjustments, consisting only of normal and recurring adjustments,
necessary to fairly state the trust's financial position as of, and results of
operations for, the periods presented. These financial statements have been
prepared in accordance with the instructions to Form 10-Q and, therefore, do not
include all disclosures required for financial statements prepared in conformity
with generally accepted accounting principles.
Interim period results are not necessarily indicative of results for a full
year.
These financial statements and notes should be read in conjunction with the
trust's audited financial statements and the notes thereto for the year ended
December 31, 2005 included in the trust's annual report on Form 10-K.
2. FEDERAL INCOME TAX
Under current law, the trust is taxable as a grantor trust and not as a
business entity, although there is a remote possibility that the Internal
Revenue Service would attempt to treat the trust as a business entity. A grantor
trust is not subject to tax at the trust level. For tax purposes, trust
unitholders are considered to own the trust's income and principal as though no
trust were in existence.
3
ITEM 2. TRUSTEE'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
CREATION AND PURPOSE OF THE TRUST. Treasure Island Royalty Trust was
established in connection with Newfield Exploration Company's November 2002
acquisition of EEX Corporation to provide the shareholders of EEX with the
option to receive an interest in an exploration concept being pursued by EEX
prior to the acquisition. The concept, referred to as "Treasure Island," targets
"ultra deep" prospects in the shallow waters of the Gulf of Mexico. The trust
owns, or has the right to receive, overriding royalty interests to be paid from
Newfield's (or its transferees') interest in any future production that may be
achieved from horizons below specified depths in the Treasure Island area.
Treasure Island remains an exploration concept and there are no proved reserves
or production currently associated with the royalty interests.
The sole purpose of the trust is to hold non-expense bearing overriding
royalty interests in any future production from a specified area. The royalty
interests are passive in nature. The trustee of the trust and the trust's
unitholders have no control over, or responsibility for any costs related to,
drilling, development or operations. Neither Newfield nor any other operator of
Treasure Island properties has any contractual commitment to the trust to
conduct drilling on the properties or to maintain its ownership interest in any
of the properties. The beneficial interest in the trust is divided into
42,574,298 trust units, each of which represents an equal undivided portion of
the trust.
Wachovia Bank, National Association is the current trustee of the trust.
The trustee's parent company, Wachovia Corporation, has agreed to sell its
corporate trust business to U.S. Bank National Association, the lead bank of
U.S. Bancorp. As a result of this sale, U.S. Bank National Association will
become the successor trustee of the trust effective September 2, 2006.
TREASURE ISLAND. "Treasure Island" refers to a concept developed to explore
for oil and gas in "ultra deep" horizons below a salt weld typically found at
18,000, but sometimes as deep as 22,200, feet true vertical depth in the federal
Outer Continental Shelf of the Gulf of Mexico. The Treasure Island area covers
horizons below specified depths in 116 lease blocks located offshore Louisiana
in the South Timbalier, Ship Shoal, South Marsh Island and Eugene Island areas.
The specified depth or depths for each of the blocks vary and were agreed upon
by EEX and Newfield prior to Newfield's acquisition of EEX. The depths do not
correspond exactly to the location of the base of the salt weld in all cases.
Treasure Island exploratory wells require significant lead time to plan and
drill and are very expensive and technically challenging because of the depth of
the targeted horizons and expected harsh conditions such as high temperature and
pressure. Dry hole costs may be as much as $150 million or more per well.
The trust currently holds an interest in 17 lease blocks within the
Treasure Island area. Six of these leases are scheduled to expire in April, May
or June 2007 and one is scheduled to expire in April 2009. The remaining ten
leases (all of which are beyond their initial terms) are being protected from
expiration by currently ongoing or planned activities. Five of the ten remaining
leases are associated with the Blackbeard West Prospect discussed below.
Newfield is working on plans to retain these leases, but its success is
uncertain. An overriding royalty interest with respect to a particular lease
block will terminate if the lease expires.
Newfield has discussed potential transactions with respect to several other
prospects with third parties. However, Newfield may be unable to timely reach
agreement with any of these parties.
RECENT EVENTS
On August 16, 2006, Newfield announced results from the Blackbeard West #1
exploration test that was spud in early February 2005. The well was drilled to
a total depth of 30,067 feet and encountered a thin gas bearing sand below
30,000 feet. The well failed to reach its primary targets because of higher
than expected pressure. The operator, ExxonMobil Corporation, is preparing to
temporarily abandon the well. Newfield has informed the trustee of the trust
that it intends to use the information gathered from the well to investigate
whether an economically feasible well can be designed to safely test the
prospect. Newfield also informed the trustee that it anticipates it will
4
be at least two years before drilling of a redesigned well could commence. The
Blackbeard West Prospect is subject to a 1.25% overriding royalty interest held
by the trust.
RESULTS OF OPERATIONS
The trust has had no revenue. The trust incurred $28,335 and $27,627 of
administrative and interest expenses for the second quarter of 2006 and 2005,
respectively, and $58,204 and $43,111 of administrative and interest expenses
for the first six months of 2006 and 2005, respectively. Administrative expense
consists primarily of legal, accounting and trustee fees and printing and
mailing costs.
LIQUIDITY AND CAPITAL RESOURCES
The trust's only sources of income are revenues, if any, attributable to
the overriding royalty interests, income from the investment of cash on hand and
net proceeds from the disposition of royalty interests. Because none of the
properties underlying the royalty interests are at present producing any oil or
gas and the trust has only a very small amount of cash on hand, the trust has no
source of revenue. Therefore, it must rely on Newfield for the funding of its
administrative expenses. Any material adverse change in Newfield's financial
condition or results of operations could materially and adversely affect the
trust and the trust unitholders.
Until the royalty interests begin generating cash proceeds, Newfield has
agreed to make loans from time to time to fund the routine administration of the
trust. In addition, if after such time as the royalty interests begin generating
cash proceeds, 8% of the cash held by the trust at the end of a calendar quarter
is insufficient to cover the administrative expenses of the trust, Newfield will
lend the difference to the trust. Loans from Newfield will bear interest at an
annual rate of 8% and will be senior unsecured obligations of the trust. The
loans (including accrued interest) will be repaid in quarterly installments only
to the extent that 8% of the cash received by the trust in a given quarter
exceeds the administrative expenses of the trust for that quarter. As of June
30, 2006, the trust had borrowed $294,545 since inception to pay administrative
expenses and had incurred interest of $42,780, none of which had been repaid.
FORWARD LOOKING INFORMATION
This report contains information that is forward-looking or relates to
anticipated future events or results such as drilling and operating plans.
Although Newfield and the trustee believe that the expectations reflected in
this information are reasonable, this information is based upon assumptions and
anticipated results that are subject to numerous uncertainties. Please read the
discussions under the captions "Treasure Island" in Item 1 of Part I and "Risk
Factors" in Item 1A of Part I of the trust's annual report on Form 10-K for the
year ended December 31, 2005.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
None.
ITEM 4. CONTROLS AND PROCEDURES
As of the end of the period covered by this report, the trustee carried out
an evaluation of the effectiveness of the design and operation of the trust's
disclosure controls and procedures pursuant to Exchange Act Rule 15d-15(b).
Based upon that evaluation, the trustee concluded that the trust's disclosure
controls and procedures are effective in timely alerting the trustee to material
information relating to the trust required to be included in the trust's
periodic filings with the Securities and Exchange Commission. In its evaluation
of disclosure controls and procedures, the trustee has relied, to the extent
considered reasonable, on information provided by Newfield Exploration Company.
There has not been any change in the trust's internal control over financial
reporting during the period covered by this report that has materially affected,
or is reasonably likely to materially affect, the trust's internal control over
financial reporting.
5
PART II
ITEM 6. EXHIBITS
Exhibit Number Description
- -------------- -----------
31.1 Certification of Vice President of Trustee of Treasure Island
Royalty Trust pursuant to 15 U.S.C. Section 7241, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification of Trustee of Treasure Island Royalty Trust
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
6
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) 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.
TREASURE ISLAND ROYALTY TRUST
Date: August 18, 2006 By: Wachovia Bank, National Association,
as trustee
By: /s/ STEVEN A. FINKLEA
------------------------------------
Steven A. Finklea
Vice President
Note: Because the registrant is a trust without officers or employees, only the
signature of an officer of the trustee of the registrant is available
and has been provided.
EXHIBIT INDEX
Exhibit Number Description
- -------------- -----------
31.1 Certification of Vice President of Trustee of Treasure Island
Royalty Trust pursuant to 15 U.S.C. Section 7241, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification of Trustee of Treasure Island Royalty Trust
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002