e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the Quarterly Period Ended June 30, 2006
or
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Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from to
Commission File No. 1-8032
SAN JUAN BASIN ROYALTY TRUST
(Exact name of registrant as specified in the
Amended and Restated San Juan Basin Royalty Trust Indenture)
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Texas
(State or other jurisdiction
of incorporation or organization)
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75-6279898
(I.R.S. Employer
Identification No.) |
Compass Bank, Trust Department
2525 Ridgmar Boulevard, Suite 100
Fort Worth, Texas 76116
(Address of principal executive offices)
(Zip Code)
(866) 809-4553
(Registrants telephone number, including area code)
N/A
(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 Act).
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Large Accelerated Filer þ
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Accelerated filer o
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Non-accelerated filer o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act). Yes o No þ
Number of Units of beneficial interest outstanding at August 9, 2006: 46,608,796
TABLE OF CONTENTS
SAN JUAN BASIN ROYALTY TRUST
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements.
The condensed financial statements included herein have been prepared without audit, pursuant
to the rules and regulations of the Securities and Exchange Commission. In accordance with
Securities and Exchange Commission Staff Accounting Bulletin No. 47, released September 16, 1982,
the financial statements of the San Juan Basin Royalty Trust (the Trust) continue to be prepared
in a manner that differs from accounting principles generally accepted in the United States of
America (GAAP); this form of presentation is customary to other royalty trusts. Certain
information and footnote disclosures normally included in annual financial statements have been
condensed or omitted pursuant to Rule 10-01 of Regulation S-X promulgated under the Securities
Exchange Act of 1934, although Compass Bank, the Trustee of the Trust, believes that the
disclosures are adequate to make the information presented not misleading. These condensed
financial statements should be read in conjunction with the financial statements and the notes
thereto included in the Trusts Annual Report on Form 10-K for the year ended December 31, 2005.
In the opinion of the Trustee, all adjustments, consisting only of normal recurring adjustments,
have been included that are necessary to present fairly the assets, liabilities and trust corpus of
the San Juan Basin Royalty Trust at June 30, 2006, and the distributable income and changes in
trust corpus for the three-month periods and six-month periods ended June 30, 2006 and 2005. The
distributable income for such interim periods is not necessarily indicative of the distributable
income for the full year.
2
SAN JUAN ROYALTY TRUST
CONDENSED STATEMENTS OF ASSETS, LIABILITIES AND TRUST CORPUS
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June 30, |
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December 31, |
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2006 |
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2005 |
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(Unaudited) |
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ASSETS |
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Cash and short-term investments |
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$ |
8,736,380 |
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$ |
19,173,162 |
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Net overriding royalty interest in
producing oil and gas properties
(net of accumulated amortization of
$110,472,041 and $109,394,034 at
June 30, 2006 and December 31,
2005, respectively) |
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22,803,487 |
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23,881,494 |
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$ |
31,539,867 |
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$ |
43,054,656 |
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LIABILITIES AND TRUST CORPUS |
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Distribution payable to Unit Holders |
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$ |
8,621,522 |
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$ |
19,058,304 |
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Cash reserves |
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114,858 |
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114,858 |
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Trust corpus 46,608,796 Units of
beneficial interest authorized and
outstanding |
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22,803,487 |
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23,881,494 |
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$ |
31,539,867 |
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$ |
43,054,656 |
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CONDENSED STATEMENTS OF DISTRIBUTABLE INCOME (UNAUDITED)
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Three Months Ended |
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Six Months Ended |
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June 30, |
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June 30, |
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2006 |
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2005 |
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2006 |
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2005 |
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Royalty income |
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$ |
28,532,236 |
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$ |
35,295,797 |
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$ |
79,013,322 |
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$ |
74,538,084 |
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Interest income |
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43,023 |
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36,920 |
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534,683 |
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65,357 |
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28,575,259 |
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35,332,717 |
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79,548,005 |
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74,603,441 |
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General and
administrative
expenditures |
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642,612 |
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813,658 |
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1,125,162 |
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1,348,166 |
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Distributable income |
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$ |
27,932,647 |
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$ |
34,519,059 |
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$ |
78,422,843 |
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$ |
73,255,275 |
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Distributable
income per Unit
(46,608,796 Units) |
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$ |
.599299 |
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$ |
.740612 |
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$ |
1.682576 |
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$ |
1.571704 |
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The accompanying notes to condensed financial statements are an integral part of these statements.
3
SAN JUAN BASIN ROYALTY TRUST
CONDENSED STATEMENTS OF CHANGES IN TRUST CORPUS (UNAUDITED)
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Three Months Ended |
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Six Months Ended |
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June 30, |
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June 30, |
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2006 |
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2005 |
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2006 |
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2005 |
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Trust corpus, beginning of period |
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$ |
23,277,937 |
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$ |
25,912,908 |
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$ |
23,881,494 |
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$ |
26,674,821 |
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Amortization of net overriding
royalty interest |
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(474,450 |
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(715,005 |
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(1,078,007 |
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(1,476,918 |
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Distributable income |
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27,932,647 |
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34,519,059 |
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78,422,843 |
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73,255,275 |
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Distributions declared |
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(27,932,647 |
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(34,519,059 |
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(78,422,843 |
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(73,255,275 |
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Trust corpus, end of period |
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22,803,487 |
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25,197,903 |
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22,803,487 |
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25,197,903 |
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The accompanying notes to condensed financial statements are an integral part of these
statements.
4
SAN JUAN BASIN ROYALTY TRUST
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
1. |
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BASIS OF ACCOUNTING |
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The San Juan Basin Royalty Trust (the Trust) was established as of November 1, 1980. The
financial statements of the Trust are prepared on the following basis: |
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Royalty income recorded for a month is the amount computed and paid with respect to
the Trusts 75% net overriding royalty interest (the Royalty) in certain oil and gas
leasehold and royalty interests (the Underlying Properties) by Burlington Resources
Oil & Gas Company LP (BROG), the present owner of the Underlying Properties, to the
Trustee for the Trust. Royalty income consists of the net proceeds received by BROG
from the sale of production from the Underlying Properties less accrued production
costs, development and drilling costs, applicable taxes, operating charges, and other
costs and deductions, multiplied by 75%. Any adjustments to the Royalty income
received from BROG are recorded by the Trust when received and impact the distribution
to Unit Holders for that month. |
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Trust expenses recorded are based on liabilities paid and cash reserves established
from Royalty income for liabilities and contingencies. |
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Distributions to Unit Holders are recorded when declared by the Trustee. |
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The conveyance which transferred the Royalty to the Trust provides that any excess
of production costs applicable to the Underlying Properties over gross proceeds from
such properties must be recovered from future net profits before Royalty income is
again paid to the Trust. |
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The Trusts financial statements for the quarterly
period ended June 30, 2006 reflect the reclassification of
$393,923 reported for the quarterly period ended March 31, 2006
as Royalty income to interest income. |
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The financial statements of the Trust differ from financial statements prepared in
accordance with United States generally accepted accounting principles (GAAP) because
revenues are not accrued in the month of production; certain cash reserves may be
established for contingencies which would not be accrued in financial statements prepared in
accordance with GAAP; expenses are recorded when paid instead of when incurred; and
amortization of the Royalty calculated on a unit-of-production basis is charged directly to
trust corpus instead of an expense. The basis of accounting used by the Trust is widely
used by royalty trusts for financial reporting purposes. |
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2. |
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FEDERAL INCOME TAXES |
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For federal income tax purposes, the Trust constitutes a fixed investment trust which is
taxed as a grantor trust. A grantor trust is not subject to tax at the trust level. The
Unit Holders are considered to own the Trusts income and principal as though no trust were
in existence. The income of the Trust is deemed to have been received or accrued by each
Unit Holder at the time such income is received or accrued by the Trust rather than when
distributed by the Trust. |
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The Royalty constitutes an economic interest in oil and gas properties for federal income
tax purposes. Unit Holders must report their share of the revenues of the Trust as ordinary
income from oil and gas royalties and are entitled to claim depletion with respect to such
income. The Royalty is treated as a single property for depletion purposes. The Trust has
on file technical advice memoranda confirming such tax treatment. |
5
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Sales of production from coal seam wells drilled prior to January 1, 1993, qualified for
federal income tax credits through 2002 but not thereafter. Accordingly, under present law,
the Trusts production of gas from coal seam wells does not qualify for tax credit under
Section 45 (formerly Section 29) of the Internal Revenue Code of 1986, as amended (the
Section 45 Tax Credit). Congress has at various times since 2002 considered energy
legislation, including provisions to reinstate the Section 45 Tax Credit in various ways and
to various extents but no legislation that would qualify the Trusts current production for
such credit has been enacted. Most recently, for example, on August 8, 2005, new energy tax
legislation was enacted which, among other things, modifies the Section 45 Tax Credit on
several respects, but does not extend the credit for production from coal seam wells. No
prediction can be made as to what future tax legislation affecting Section 45 of the
Internal Revenue Code of 1986, as amended, may be proposed or enacted or, if enacted, its
impact, if any, on the Trust and the Unit Holders. |
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The classification of the Trusts income for purposes of the passive loss rules may be
important to a Unit Holder. As a result of the Tax Reform Act of 1986, royalty income such
as that derived through the Trust will generally be treated as portfolio income and will not
reduce passive losses. |
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CONTINGENCIES |
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See Part II Item 1, Legal Proceedings concerning the status of litigation matters. |
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SETTLEMENTS AND LITIGATION |
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In 2005, as part of the ongoing negotiations between the Trust and BROG concerning a number
of revenue and expense audit issues, an aggregate of $2,405,486 was included in calculating
net proceeds paid to the Trust in settlement of certain of those audit issues. |
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In February 2006, as part of the ongoing negotiations
between the Trust and BROG, $393,923
was included in BROGs distribution to the Trust in payment of interest due on late payment
of gross proceeds. |
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On November 11, 2005, an Arbitration Award was issued in favor of the Trust in the aggregate
amount of $7,683,699 in arbitration styled San Juan Basin Royalty Trust vs. Burlington
Resources Oil & Gas Company LP. The purpose of the arbitration was to resolve certain joint
interest audit issues as between the parties to the arbitration. On November 21, 2005, BROG
filed its Original Petition to Vacate or to Modify or Correct Arbitration Award in the case
styled Burlington Resources Oil & Gas Company LP vs. San Juan Basin Royalty Trust, No.
2005-74370, in the District Court of Harris County, Texas, 281st Judicial
District. In this litigation, BROG alleged that the award in favor of the Trust should be
vacated or modified because one of the issues decided was beyond the scope of the matters
agreed to be arbitrated, the award was issued in manifest disregard of applicable law, and a
portion of the award is barred by limitations. BROG also sought to recover its attorneys
fees. The Trust filed an answer and counterclaim in the litigation filed by BROG denying
those allegations and asking that the arbitrators award be confirmed. At the conclusion of
a hearing conducted on April 20, 2006, the Court entered an Order denying BROGs motion to
vacate and granting the Trusts application to confirm the Arbitration Award and on June 6,
2006, rendered a final judgment in favor of the Trust. However, on May 24, 2006, BROG filed
a Notice of Appeal indicating its desire to appeal from the Order and any final judgment
confirming the Arbitration Award and on or about June 5, 2006, filed a Motion for New Trial
in the District Court of Harris County urging substantially similar arguments made at the
hearing. The Trust has responded to the Motion for New Trial and has served BROG with
post-judgment discovery requests. |
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5. |
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SUBSEQUENT EVENTS |
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BROGs distribution to the Trust for July 2006 included an aggregate of $1,534,182
representing a portion of the Arbitration Award referred to in Note 4, plus accrued interest. The balance of the
Arbitration Award is pending the appeal process. |
Item 2. Trustees Discussion and Analysis of Financial Condition and Results of Operations.
Forward-Looking Information
Certain information included in this Quarterly Report on Form 10-Q contains, and other
materials filed or to be filed by the Trust with the Securities and Exchange Commission (the
Commission) (as well as information included in oral statements or other written statements made
or to be made by the Trust) may contain or include, forward-looking statements within the meaning
of Section 21E of the Securities Exchange Act of 1934, and Section 27A of the Securities Act of
1933. Such forward-looking statements may be or may concern, among other things, capital
expenditures, drilling activity, development activities, production efforts and volumes,
hydrocarbon prices, estimated future net revenues, estimates of reserves, the results of the
Trusts activities, and regulatory matters. Such forward-looking statements generally are
accompanied by words such as may, will, estimate, expect, predict, project,
anticipate, goal, should, assume, believe, plan, intend, or other words that convey
the uncertainty of future events or outcomes. Such statements reflect BROGs current view with
respect to future events; are based on an assessment of, and are subject to, a variety of factors
deemed relevant by Compass Bank, the Trustee of the Trust, and BROG and involve risks and
uncertainties. These risks and uncertainties include volatility of oil and gas prices, product
supply and demand, competition, regulation or government action, litigation and uncertainties about
estimates of reserves. Should one or more of these risks or uncertainties occur, actual results
may vary materially and adversely from those anticipated.
Business Overview
The Trust is an express trust created under the laws of the state of Texas by the San Juan
Basin Royalty Trust Indenture (the Original Indenture) entered into on November 3, 1980, between
Southland Royalty Company (Southland Royalty) and The Fort Worth National Bank. Effective as of
September 30, 2002, the Original Indenture was amended and restated (the Original Indenture, as
amended and restated, the Indenture). The Trustee of the Trust is Compass Bank (as a result of
the merger discussed below).
On October 23, 1980, the stockholders of Southland Royalty approved and authorized that
companys conveyance of a 75% net overriding royalty interest (equivalent to a net profits
interest) to the Trust for the benefit of the stockholders of Southland Royalty of record at the
close of business on the date of the conveyance (the Royalty) carved out of that companys oil
and gas leasehold and royalty interests (the Underlying Properties) in properties located in the
San Juan Basin of northwestern New Mexico. Pursuant to the Net Overriding Royalty Conveyance (the
Conveyance) the Royalty was transferred to the Trust on November 3, 1980, effective as to
production from and after November 1, 1980 at 7:00 A.M.
On March 24, 2006 Compass Bancshares Inc., the parent company of Compass Bank, completed its
acquisition of TexasBanc Holding Co., the parent company of TexasBank. On that same date,
TexasBank merged with Compass Bank, and as a result, Compass Bank succeeded TexasBank as Trustee
under the terms of the Indenture.
7
The Royalty constitutes the principal asset of the Trust and the beneficial interests in the
Trust are divided into that number of Units of Beneficial Interest (the Units) of the Trust equal
to the number of shares of the common stock of Southland Royalty outstanding as of the close of
business on November 3, 1980. Holders of Units are referred to herein as Unit Holders.
Subsequent to the Conveyance of the Royalty, through a series of assignments and mergers, Southland
Royaltys successor became BROG. On March 31, 2006, a subsidiary of ConocoPhillips completed its
acquisition of Burlington Resources, Inc., BROGs parent. As a result, ConocoPhillips became the
parent of Burlington Resources, Inc., which in turn, is the parent of BROG.
The function of the Trustee is to collect the income attributable to the Royalty, to pay all
expenses and charges of the Trust, and then distribute the remaining available income to the Unit
Holders. The Trust is not empowered to carry on any business activity and has no employees, all
administrative functions being performed by the Trustee.
Three Months Ended June 30, 2006 and 2005
The Trust received Royalty income of $28,532,236 and interest income of $43,023 during the
second quarter of 2006. There was no change in cash reserves. After deducting administrative
expenses of $642,612, distributable income for the quarter was $27,932,647 ($.599299 per Unit). In
the second quarter of 2005, royalty income was $35,295,797, interest income was $36,920, there was
no change in cash reserves, administrative expenses were $813,658 and distributable income was
$34,519,059 ($.740612 per Unit). Based on 46,608,796 Units outstanding, the per Unit distributions
during the second quarter of 2006 were as follows:
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April |
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$ |
.181302 |
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May |
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.233021 |
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June |
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.184976 |
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Quarter Total |
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$ |
.599299 |
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The Royalty income distributed in the second quarter of 2006 was lower than that distributed
in the second quarter of 2005. Although the average gas price increased from $5.43 per Mcf for the
second quarter of 2005 to $5.97 per Mcf for the second quarter of 2006, gas production decreased in
the quarter ended June 30, 2006 as compared to the quarter ended June 30, 2005. Production and
development costs for the second quarter of 2006 were approximately $9 million higher than
production costs for the second quarter of 2005 primarily as a result of the implementation of
projects included in the increased capital budget announced by BROG for 2006 and resulting
increases in capital expenditures. Interest earnings for the quarter ended June 30, 2006, as
compared to the quarter ended June 30, 2005, were higher, primarily due to an increase in interest
rates. Administrative expenses were higher in 2005 primarily as a result of differences in timing
in the receipt and payment of these expenses and costs relating to the arbitration proceeding
described below.
The capital costs attributable to the Underlying Properties for the second quarter of 2006 and
deducted by BROG in calculating Royalty income were approximately $11 million. BROGs capital
expenditure budget for the Underlying Properties for 2006 is estimated at $37.6 million of which
approximately $8.7 million had been spent as of June 30, 2006; however, BROG reports that based on
its actual capital requirements, the pace of regulatory approvals, and the mix of projects and
swings in the price of natural gas, the actual capital expenditures for 2006 could range from $20
million to $45 million. Capital expenditures were approximately $2.8 million for the second
quarter of 2005. In 2005, approximately $19.1 million in capital expenditures were deducted in
calculating Royalty income. In
8
February 2006, BROG informed the Trustee that the 2006 budget for the Underlying Properties
anticipates 451 projects, including the drilling of 103 new wells to be operated by BROG and 50
wells to be operated by third parties. Of the new BROG-operated wells, 52 are projected to be
conventional wells completed in the Pictured Cliffs, Mesaverde and/or Dakota formations, and the
remaining 51 are projected as coal seam wells completed in the Fruitland Coal formation. A total
of 40 of the wells operated by third parties are projected to be conventional wells and the
remaining ten are projected to be coal seam wells. BROG projects approximately $33 million will be
spent on the new wells, and $4.6 million will be expended in working over existing wells and in the
maintenance and improvement of production facilities. BROG has announced that the budget for 2006
reflects the continuation of a shift toward increased development of conventional gas.
BROG has informed the Trustee that lease operating expenses and property taxes were $5,656,464
and $201,018, respectively, for the second quarter of 2006, as compared to $5,017,103 and $159,264,
respectively, for the second quarter of 2005.
BROG has reported to the Trustee that during the second quarter of 2006, nine gross (2.44 net)
coal seam wells, one gross (0.45 net) coal seam recompletion, 41 gross (7.94 net) conventional
wells, one gross (0.002 net) payadd, and one gross (0.84 net) restimulation were completed on the
Underlying Properties.
One gross (0.04 net) miscellaneous coal seam project, 51 gross (19.87 net) coal seam wells, six
gross (0.25 net) coal seam payadds, six gross (3.60 net) coal seam recompletions, two gross (0.004
net) coal seam restimulations, four gross (0.02 net) miscellaneous conventional projects, 143
(36.57 net) conventional wells, 11 gross (0.25 net) payadds, seven gross (3.49 net) recompletions,
and six gross (4.20 net) restimulations were in progress at June 30, 2006.
There
were four gross (0.54 net) coal seam wells, two gross (0.08 net) miscellaneous coal seam
projects, 11 gross (0.90 net) conventional wells, and one gross (0.002 net) payadd completed on the
Underlying Properties as of June 30, 2005. Fifty-five gross (7.91 net) coal seam wells, one gross
(0.875 net) recavitation, four gross (1.47 net) coal seam recompletions, 63 gross (10.07 net)
conventional wells, 11 gross (1.74 net) payadds, two gross (0.75 net) conventional recompletions,
and five gross (3.11 net) restimulations were in progress at June 30, 2005.
Gross acres or wells, for purposes of this discussion, means the entire ownership interest
of all parties in such properties, and BROGs interest therein is referred to as the net acres or
wells. A payadd is the completion of an additional productive interval in an existing completed
zone in a well.
Royalty income for the quarter ended June 30, 2006 is associated with actual gas and oil
production during February 2006 through April 2006 from the Underlying Properties. Gas and oil
sales from the Underlying Properties for the three months ended June 30, 2006 and 2005 were as
follows:
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Three Months Ended |
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June 30, |
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2006 |
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2005 |
Gas: |
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Total sales (Mcf) |
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9,972,654 |
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10,789,471 |
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Mcf per day |
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112,052 |
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121,230 |
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Average price (per Mcf) |
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$ |
5.97 |
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$ |
5.43 |
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Oil: |
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|
|
Total sales (Bbls) |
|
|
20,213 |
|
|
|
17,472 |
|
Bbls per day |
|
|
227 |
|
|
|
196 |
|
Average price (per Bbl) |
|
$ |
60.57 |
|
|
$ |
47.79 |
|
9
Gas and oil sales attributable to the Royalty for the quarters ended June 30, 2006 and 2005 were as
follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
June 30, |
|
|
2006 |
|
2005 |
Gas sales (Mcf) |
|
|
5,200,329 |
|
|
|
6,887,037 |
|
Oil sales (Bbls) |
|
|
10,549 |
|
|
|
11,155 |
|
Sales volumes attributable to the Royalty are determined by dividing the net profits received
by the Trust and attributable to oil and gas, respectively, by the prices received for sales
volumes from the Underlying Properties, taking into consideration production taxes attributable to
the Underlying Properties. Since the oil and gas sales attributable to the Royalty are based on an
allocation formula that is dependent on such factors as price and cost, including capital
expenditures, the aggregate production volumes from the Underlying Properties may not provide a
meaningful comparison to volumes attributable to the Royalty.
During the second quarter of 2006, average gas prices were $0.54 higher than the average
prices reported during the second quarter of 2005. The average price per barrel of oil during the
second quarter of 2006 was $12.78 per barrel higher than that received for the second quarter of
2005 due to increases in oil prices in world markets generally, including the posted prices
applicable to oil sales attributable to the Royalty.
BROG previously entered into two contracts for the sale of all volumes of gas produced from
the Underlying Properties. These contracts provided for (i) the sale of such gas to Duke Energy
and Marketing, L.L.C. and PNM Gas Services, respectively, (ii) the delivery of such gas at various
delivery points through March 31, 2005, and from year-to-year thereafter until terminated by either
party on twelve months notice, and (iii) the sale of such gas at prices which fluctuate in
accordance with published indices for gas sold in the San Juan Basin of New Mexico. Effective
January 1, 2004, the rights and obligations of Duke Energy and Marketing, L.L.C. were assumed by
ConocoPhillips pursuant to an Assignment and Novation Agreement. By correspondence dated March 25,
2004, BROG notified ConocoPhillips of BROGs election to terminate such contract as of March 31,
2005. BROG then prepared a form of request for proposal and circulated it to a number of potential
purchasers, including ConocoPhillips, inviting them to bid for the purchase of the gas currently
sold under the contract expiring March 31, 2005. Effective as of April 1, 2005, BROG entered into
two new contracts for the sale of all volumes of gas produced from the Underlying Properties and
formerly sold to ConocoPhillips. These new contracts provide for (i) the sale of such gas to
ChevronTexaco Natural Gas, a division of Chevron U.S.A. Inc. (ChevronTexaco), and Coral Energy
Resources, L.P. (Coral), respectively, (ii) the delivery of such gas at various delivery points
through March 31, 2007, and from year-to-year thereafter until terminated by either party on twelve
months notice, and (iii) the sale of such gas at prices which fluctuate in accordance with the
published indices for gas sold in the San Juan Basin of New Mexico. With respect to BROGs
contract with PNM Gas Services, BROG and PNM Gas Services entered into a letter agreement dated
January 31, 2005, pursuant to which the parties waived the right to terminate the underlying
contract as of March 31, 2006, so that the term of that contract will continue until at least March
31, 2007, and from year-to-year thereafter until terminated by either party upon twelve months
notice to the other. Neither BROG nor any of ChevronTexaco, Coral nor PNM gave notice to terminate
10
the three contracts described above for the sale of all volumes of gas produced from the
Underlying Properties and, accordingly, the terms of those contracts have been extended through
March 31, 2008. Unit Holders are referred to Note 5 of the Notes to Financial Statements in the
Trusts 2005 Annual Report for further information concerning the marketing of gas produced from
the Underlying Properties.
Confidentiality agreements with purchasers of gas produced from the Underlying Properties
prohibit public disclosure of certain terms and conditions of gas sales contracts with those
entities, including specific pricing terms and gas receipt points. Such disclosure could compromise
the ability to compete effectively in the marketplace for the sale of gas produced from the
Underlying Properties.
Six Months Ended June 30, 2006 and 2005
For
the six months ended June 30, 2006, the Trust received Royalty
income of $79,013,322 and
interest income of $534,683. There was no change in cash reserves. After deducting administrative
expenses of $1,125,162, distributable income was $78,422,843 ($1.682576 per Unit) for the six
months ended June 30, 2006. For the six months ended June 30, 2005, the Trust received Royalty
income of $74,538,084 and interest income of $65,357. There was no change in cash reserves. After
deducting administrative expenses of $1,348,166, distributable income was $73,255,275 ($1.571704
per Unit) for the six months ended June 30, 2005.
The increase in distributable income from 2005 to 2006 resulted primarily from higher gas
prices during the first half of 2006. Interest earnings for the six months ended June 30, 2006, as
compared to the six months ended June 30, 2005 were higher
primarily due to interest paid to the Trust in February 2006 in
settlement of audit issues relating to the late payment of gross
proceeds, but also due to an increase in funds
available for investment pending distribution as well as an increase in interest rates. General
and administrative expenses were higher for the six months ended June 30, 2005, as compared to the
same period in 2006 primarily as a result of differences in timing in the receipt and payment of
these expenses, but also as a result of expenses incurred in 2005 in the resolution of certain
revenue and expense audit issues.
Capital expenditures incurred by BROG, attributable to the Underlying Properties, for the
first six months of 2006 amounted to approximately $22.1 million. Capital expenditures were
approximately $8.7 million for the first six months of 2005. Lease operating expenses and property
taxes totaled $10,617,120 and $397,884, respectively, for the first six months of 2006 as compared
to $9,693,551 and $315,442, respectively, for the first six months of 2005.
BROG has reported to the Trustee that during the six months ended June 30, 2006, one gross
(0.04 net) miscellaneous coal seam project, 12 gross (2.67 net) coal seam wells, two gross (0.08
net) coal seam payadds, one gross (0.45 net) coal seam recompletion, 45 gross (7.97 net)
conventional wells, two gross (0.003 net) payadds, and two gross (1.68 net) restimulations were
completed on the Underlying Properties.
There were 11 gross (.90 net) conventional wells, two gross (.004 net) payadds, five gross
(1.41 net) coal seam wells, and five gross (.20 net) miscellaneous coal seam capital projects
completed on the Underlying Properties during the six months ended June 30, 2005.
Royalty income for the six months ended June 30, 2006 is associated with actual gas and oil
production during November 2005 through April 2006 from the Underlying Properties. Gas and oil
sales from the Underlying Properties for the six months ended June 30, 2006 and 2005 were as
follows:
11
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
June 30, |
|
|
2006 |
|
2005 |
Gas: |
|
|
|
|
|
|
|
|
Total sales (Mcf) |
|
|
20,803,166 |
|
|
|
22,151,787 |
|
Mcf per day |
|
|
114,935 |
|
|
|
122,386 |
|
Average price (per Mcf) |
|
$ |
7.26 |
|
|
$ |
5.73 |
|
|
|
|
|
|
|
|
|
|
Oil: |
|
|
|
|
|
|
|
|
Total Sales (Bbls) |
|
|
38,811 |
|
|
|
36,061 |
|
Bbls per day |
|
|
214 |
|
|
|
199 |
|
Average price (per Bbl) |
|
$ |
58.64 |
|
|
$ |
45.26 |
|
Gas and oil sales attributable to the Royalty for the six months ended June 30, 2006 and 2005 were
as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
June 30, |
|
|
2006 |
|
2005 |
Gas sales (Mcf). |
|
|
11,732,815 |
|
|
|
13,920,798 |
|
Oil sales (Bbls) |
|
|
21,702 |
|
|
|
22,696 |
|
During the first six months of 2006, gas and oil prices were higher than during the first six
months of 2005. Since the oil and gas sales attributable to the Royalty are based on an allocation
formula that is dependant on such factors as price and cost, including capital expenditures, the
aggregate sales amounts from the Underlying Properties may not provide a meaningful comparison to
sales attributable to the Royalty.
12
Calculation of Royalty Income
Royalty income received by the Trust for the three months and six months ended June 30, 2006
and 2005, respectively, was computed as shown in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Gross proceeds of sales from
the Underlying Properties: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gas proceeds |
|
$ |
59,545,094 |
|
|
$ |
58,627,002 |
|
|
$ |
151,000,672 |
|
|
$ |
126,963,885 |
|
Oil proceeds |
|
|
1,224,315 |
|
|
|
834,924 |
|
|
|
2,275,810 |
|
|
|
1,632,125 |
|
Other |
|
|
|
|
|
|
1,309,384 |
(1) |
|
|
|
|
|
|
2,405,486 |
(1)(2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
60,769,409 |
|
|
|
60,771,310 |
|
|
|
153,276,482 |
|
|
|
131,001,496 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less production costs: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance tax gas |
|
|
5,751,215 |
|
|
|
5,616,749 |
|
|
|
14,529,443 |
|
|
|
12,667,531 |
|
Severance tax oil |
|
|
121,625 |
|
|
|
80,824 |
|
|
|
226,546 |
|
|
|
166,885 |
|
Lease operating expense and
property tax |
|
|
5,857,482 |
|
|
|
5,176,367 |
(1) |
|
|
11,015,004 |
|
|
|
10,008,993 |
(1)(2) |
Other |
|
|
42,968 |
|
|
|
42,505 |
|
|
|
42,968 |
|
|
|
42,505 |
|
Capital expenditures |
|
|
10,953,138 |
|
|
|
2,793,802 |
|
|
|
22,111,424 |
|
|
|
8,731,469 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
22,726,428 |
|
|
|
13,710,247 |
|
|
|
47,925,385 |
|
|
|
31,617,383 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less excess production costs
and interest from prior year |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net profits |
|
|
38,042,981 |
|
|
|
47,061,063 |
|
|
|
105,351,097 |
|
|
|
99,384,113 |
|
Net overriding royalty interest |
|
|
75 |
% |
|
|
75 |
% |
|
|
75 |
% |
|
|
75 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Royalty income |
|
$ |
28,532,236 |
|
|
$ |
35,295,797 |
|
|
$ |
79,013,322 |
|
|
$ |
74,538,084 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
In May 2005, as part of the ongoing negotiations between the Trust and BROG concerning a
number of revenue and expense audit issues, $988,392 was included in BROGs distribution to the
Trust in settlement of certain of those audit issues. Of that amount, $982,038 was allocated to
the Trust as additional revenue and $6,354 was deducted from lease operating expenses allocated to
the Trust. |
|
(2) |
|
In March 2005, as part of the ongoing negotiations between the Trust and BROG concerning a
number of revenue and expense audit issues, $833,851 was included in BROGs distribution to the
Trust in payment of interest on late payments of gross proceeds and in settlement of certain other
audit issues. Of that amount, $822,077 was allocated to the Trust as additional revenue and
$11,774 was deducted from lease operating expenses allocated to the Trust. |
Contractual Obligations
Under the Indenture governing the Trust, the Trustee is entitled to an administrative fee for
its administrative services and the preparation of quarterly and annual statements of: (i) 1/20 of
1% of the first $100 million of the annual gross revenue of the Trust, and 1/30 of 1% of the annual
gross revenue of the Trust in excess of $100 million and (ii) the Trustees standard hourly rates
for time in excess of 300 hours annually, provided that the administrative fee due under items (i)
and (ii) above will not be less than $36,000 per year (as adjusted annually after December 31, 2003
to reflect the increase (if any) in the Producers Price Index as published by the U.S. Department
of Labor, Bureau of Labor Statistics).
Effects of Securities Regulation
As a publicly-traded trust listed on the New York Stock Exchange (the NYSE), the Trust is
and will continue to be subject to extensive regulation under, among others, the Securities Act of
1933, the Securities Exchange Act of 1934 (which contains many of the provisions of the
Sarbanes-Oxley Act of 2002) and the rules and regulations of the NYSE. Issuers failing to comply
with such authorities risk serious consequences, including criminal as well as civil and
administrative penalties. In most instances, these laws, rules and regulations do not specifically
address their applicability to publicly-traded trusts, such as the Trust. In particular, the
Sarbanes-Oxley Act of 2002 provides for the adoption by the Securities and Exchange Commission (the
Commission) and NYSE of certain rules and regulations that may be impossible for the Trust to
literally satisfy because of its nature as a pass-through trust. It is the Trustees intention to
follow the Commissions and NYSEs rulemaking closely, attempt to comply with such rules and
regulations and, where appropriate, request relief from these rules and regulations. However, if
the Trust is unable to comply with such rules and regulations or to obtain appropriate relief, the
Trust may be required to expend as yet unknown but potentially material costs to amend the
Indenture that governs the Trust to allow for compliance with such rules and regulations. To date,
the rules implementing the Sarbanes-Oxley Act of 2002 have generally made appropriate accommodation for
passive entities such as the Trust.
13
Critical Accounting Policies
In accordance with the Commissions staff accounting bulletins and consistent with other
royalty trusts, the financial statements of the Trust are prepared on the following basis:
|
|
|
Royalty income recorded for a month is the amount computed and paid by BROG to the
Trustee for the Trust. Royalty income consists of the net proceeds received by BROG
from the sale of production from the Underlying Properties less accrued production
costs, development and drilling costs, applicable taxes, operating charges, and other
costs and deductions, multiplied by 75%. The calculation of net proceeds by BROG for
any month includes adjustments to proceeds and costs for prior months and impacts the
Royalty income paid to the Trust and the distribution to Unit Holders for that month. |
|
|
|
|
Trust expenses recorded are based on liabilities paid and cash reserves established
from Royalty income for liabilities and contingencies. |
|
|
|
|
Distributions to Unit Holders are recorded when declared by the Trustee. |
|
|
|
|
The Conveyance which transferred the Royalty to the Trust provides that any excess
of production costs applicable to the Underlying Properties over gross proceeds from
such properties must be recovered from future net profits before Royalty income is
again paid to the Trust. |
The financial statements of the Trust differ from financial statements prepared in accordance
with GAAP because revenues are not accrued in the month of production; certain cash reserves may be
established for contingencies which would not be accrued in financial statements prepared in
accordance with GAAP; expenses are recorded when paid instead of when incurred; and amortization of
the Royalty calculated on a unit-of-production basis is charged directly to trust corpus instead of
an expense.
The
Trusts financial statements for the quarterly period ended
June 30, 2006 reflect the reclassification of $393,923 reported
for the quarterly period ended March 31, 2006 as Royalty income
to interest income.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The Trust invests in no derivative financial instruments, and has no foreign operations or
long-term debt instruments. The Trust is a passive entity and is prohibited from engaging in
borrowing transactions, other than the Trusts ability to borrow money periodically as necessary to
pay expenses, liabilities and obligations of the Trust that cannot be paid out of cash held by the
Trust. The amount of any such borrowings is unlikely to be material to the Trust. The Trust
periodically holds short-term investments acquired with funds held by the Trust pending
distribution to Unit Holders and funds held in reserve for the payment of Trust expenses and
liabilities. Because of the short-term nature of these borrowings and investments and certain
limitations upon the types of such investments which may be held by the Trust, the Trustee believes
that the Trust is not subject to any material interest rate risk. The Trust does not engage in
transactions in foreign currencies which could expose the Trust or Unit Holders to any foreign
currency related market risk. The Trust does not market the gas, oil and/or natural gas liquids
from the Underlying Properties. BROG is responsible for such marketing.
Item 4. Controls and Procedures.
The Trust maintains a system of disclosure controls and procedures that is designed to ensure
that information required to be disclosed in the Trusts filings under the Securities Exchange Act
of 1934 is recorded, processed, summarized and reported, within the time periods specified in the
Commissions rules and forms. Disclosure controls and procedures include controls and procedures
designed to ensure that information required to be disclosed by the Trust is accumulated and
communicated by BROG to the
14
Trustee and its employees who participate in the preparation of the
Trusts periodic reports to allow timely decisions regarding disclosure. Due to the pass-through
nature of the Trust, BROG provides much of the information disclosed in this Form 10-Q and the
other periodic reports filed by the Trust with the Commission.
The Indenture does not require BROG to update or provide information to the Trust. Under the
Conveyance transferring the Royalty to the Trust, BROG is obligated to provide the Trust with
certain information concerning calculations of net proceeds owed to the Trust, among other
information. Pursuant to the settlement of litigation in 1996 between the Trust and BROG, BROG
agreed to new, more formal financial reporting and audit procedures as compared to those provided
in the Conveyance.
The Trustee receives periodic updates from BROG regarding activities related to the Trust.
Accordingly, the Trusts ability to timely report certain information required to be disclosed in
the Trusts periodic reports is dependent on BROGs timely delivery of such information to the
Trust. In order to help ensure the accuracy and completeness of the information required to be
disclosed in the Trusts periodic reports, the Trust employs independent public accountants, joint
interest auditors, marketing consultants, attorneys and petroleum engineers. These outside
professionals advise the Trustee in its review and compilation of this information for inclusion in
this Form 10-Q and the other periodic reports provided by the Trust to the Commission.
The Trustee has evaluated the Trusts disclosure controls and procedures as of June 30, 2006,
and has concluded that such disclosure controls and procedures are effective at the reasonable
assurance level to ensure that material information related to the Trust is gathered on a timely
basis to be included in the Trusts periodic reports. In reaching its conclusion, the Trustee
considered the Trusts dependence on BROG to deliver timely and accurate information to the Trust.
The Trustee has not reviewed the Trusts disclosure controls and procedures in concert with
management, a board of directors or an independent audit committee. The Trust does not have, nor
does the Indenture provide for, officers, a board of directors or an independent audit committee.
During the quarter ended June 30, 2006, there were no changes in the Trusts internal control
over financial reporting (as defined in Rule 13a-15(f) of the Securities Exchange Act of 1934) that
materially affected, or are reasonably likely to materially affect, the Trusts internal control
over financial reporting. The Trustee has not evaluated the Trusts internal control over
financial reporting in concert with management, a board of directors or an independent audit
committee. The Trust does not have, nor does the Indenture provide for, officers, a board of
directors or an independent audit committee.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings.
As discussed above under Part I Item 4 Controls and Procedures, due to the pass-through
nature of the Trust, BROG provides much of the information disclosed in this Form 10-Q and the
other periodic reports filed by the Trust with the Commission. Although the Trustee receives
periodic updates from BROG regarding activities which may relate to the Trust, the Trusts ability
to timely report certain information required to be disclosed in the Trusts periodic reports is
dependent on BROGs timely delivery of the information to the Trust.
On November 11, 2005, an Arbitration Award was issued in favor of the Trust in the aggregate
amount of $7,683,699 in arbitration styled San Juan Basin Royalty Trust vs. Burlington Resources
Oil & Gas Company LP. The purpose of the arbitration was to resolve certain joint interest audit
issues as
15
between the parties to the arbitration. On November 21, 2005, BROG filed its Original
Petition to Vacate or to Modify or Correct Arbitration Award in the case styled Burlington
Resources Oil & Gas Company LP vs. San Juan Basin Royalty Trust, No. 2005-74370, in the District
Court of Harris County, Texas, 281st Judicial District. In this litigation, BROG
alleged that the award in favor of the Trust should be vacated or modified because one of the
issues decided was beyond the scope of the matters agreed to be arbitrated, the award was issued in
manifest disregard of applicable law, and a portion of the award is barred by limitations. BROG
also sought to recover its attorneys fees. The Trust filed an answer and counterclaim in the
litigation filed by BROG denying those allegations and asking that the arbitrators award be
confirmed. At the conclusion of a hearing conducted on April 20, 2006, the Court entered an Order
denying BROGs motion to vacate and granting the Trusts application to confirm the Arbitration
Award and on June 6, 2006, rendered a final judgment in favor of the Trust. However, on May 24,
2006, BROG filed a Notice of Appeal indicating its desire to appeal from the Order and any final
judgment confirming the Arbitration Award and on or about June 5, 2006, filed a Motion for New
Trial in the District Court of Harris County urging substantially similar arguments made at the
hearing. The Trust has responded to the Motion for New Trial and has served BROG with
post-judgment discovery requests.
In addition to the litigation described above, BROG is involved in various legal proceedings,
the outcome of which may impact the Trust. Should certain legal proceedings to which BROG is a
party be decided in a manner adverse to BROG, the amount of Royalty income received by the Trust
could materially decrease. The Trust has not received from BROG any estimate of the amount of any
potential loss in such proceedings, or the portion of any such potential loss that might be
allocated to the Royalty.
Item 2. Exhibits.
|
(4)(a) |
|
Amended and Restated Royalty Trust Indenture, dated September 30, 2002 (the original
Royalty Trust Indenture, dated November 1, 1980 having been entered into between
Southland Royalty Company and The Fort Worth National Bank, as Trustee), heretofore
filed as Exhibit 99.2 of the Trusts Current Report on Form 8-K filed with the
Commission on October 1, 2002, is incorporated herein by reference.* |
|
|
(4)(b) |
|
Net Overriding Royalty Conveyance from Southland Royalty Company to The Fort Worth
National Bank, as Trustee, dated November 3, 1980 (without Schedules), heretofore filed
as Exhibit 4(b) to the Trusts Annual Report on Form 10-K filed with the Commission for
the fiscal year ended December 31, 1980, is incorporated herein by reference.* |
|
|
(4)(c) |
|
Assignment of Net Overriding Interest (San Juan Basin Royalty Trust), dated September
30, 2002, between Bank One, N.A. and Compass Bank, heretofore filed as Exhibit 4(c) to
the Trusts Quarterly Report on Form 10-Q filed with the Commission for the quarter
ended September 30, 2002, is incorporated herein by reference.* |
|
|
31 |
|
Certification required by Rule 13a-14(a), dated August 9, 2006, by Lee Ann
Anderson, Vice President and Senior Trust Officer of Compass Bank, the Trustee of the
Trust.** |
|
|
32 |
|
Certification required by Rule 13a-14(b), dated August 9, 2006, by Lee Ann
Anderson, Vice President and Senior Trust Officer of Compass Bank, on behalf of Compass
Bank, the Trustee of the Trust.*** |
16
|
|
|
* |
|
A copy of this exhibit is available to any Unit Holder (free of charge) upon written request
to the Trustee, Compass Bank, 2525 Ridgmar Boulevard, Suite 100, Fort Worth, Texas 76116. |
|
** |
|
Filed herewith. |
|
*** |
|
Furnished herewith. |
17
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.
|
|
|
|
|
|
COMPASS BANK, AS TRUSTEE FOR
THE SAN JUAN BASIN ROYALTY TRUST
|
|
|
By: |
/s/ Lee Ann Anderson
|
|
|
|
Lee Ann Anderson |
|
|
|
Vice President and Senior Trust Officer |
|
|
Date: August 9, 2006
(The Trust has no directors or executive officers.)
INDEX TO EXHIBITS
|
|
|
Exhibit |
|
|
Number |
|
Description |
|
|
|
(4)(a)
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Amended and Restated Royalty Trust Indenture, dated September 30,
2002 (the original Royalty Trust Indenture, dated November 1, 1980
having been entered into between Southland Royalty Company and The
Fort Worth National Bank, as Trustee), heretofore filed as Exhibit
99.2 of the Trusts Current Report on Form 8-K filed with the
Commission on October 1, 2002, is incorporated herein by
reference.* |
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(4)(b)
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Net Overriding Royalty Conveyance from Southland Royalty Company
to The Fort Worth National Bank, as Trustee, dated November 3,
1980 (without Schedules), heretofore filed as Exhibit 4(b) to the
Trusts Annual Report on Form 10-K filed with the Commission for
the fiscal year ended December 31, 1980, is incorporated herein by
reference.* |
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(4)(c)
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Assignment of Net Overriding Interest (San Juan Basin Royalty
Trust), dated September 30, 2002, between Bank One, N.A. and
TexasBank, heretofore filed as Exhibit 4(c) to the Trusts
Quarterly Report on Form 10-Q filed with the Commission for the
quarter ended September 30, 2002, is incorporated herein by
reference.* |
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31
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Certification required by Rule 13a-14(a), dated August 9, 2006, by
Lee Ann Anderson, Vice President and Senior Trust Officer of
Compass Bank, the Trustee of the Trust.** |
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32
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Certification required by Rule 13a-14(b), dated August 9, 2006, by
Lee Ann Anderson, Vice President and Senior Trust Officer of
Compass Bank, on behalf of Compass Bank, the Trustee of the
Trust.*** |
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* |
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A copy of this exhibit is available to any Unit Holder (free of charge) upon written request
to the Trustee, Compass Bank, 2525 Ridgmar Boulevard, Suite 100, Fort Worth, Texas 76116. |
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** |
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Filed herewith. |
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*** |
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Furnished herewith. |