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 March 31, 2007
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
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75-6279898 |
(State or other jurisdiction
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(I.R.S. Employer |
of incorporation or organization)
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Identification No.) |
Compass Bank
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).
Large Accelerated filer þ Accelerated filer o 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 May 10, 2007: 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, 2006.
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 March 31, 2007, and the distributable income and changes in
trust corpus for the three-month periods ended March 31, 2007 and 2006. The distributable income
for such interim periods is not necessarily indicative of the distributable income for the full
year.
2
SAN JUAN BASIN ROYALTY TRUST
CONDENSED STATEMENTS OF ASSETS, LIABILITIES AND TRUST CORPUS
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March 31, |
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December 31, |
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2007 |
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2006 |
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(Unaudited) |
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ASSETS |
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Cash and short-term investments |
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$ |
5,525,326 |
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$ |
4,657,886 |
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Net overriding royalty interest in producing
oil and gas properties (net of accumulated
amortization of $111,826,852 and $111,452,138
at March 31, 2007 and December 31, 2006, respectively) |
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21,448,676 |
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21,823,390 |
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$ |
26,974,002 |
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$ |
26,481,276 |
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LIABILITIES AND TRUST CORPUS |
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Distribution payable to Unit Holders |
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$ |
5,410,468 |
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$ |
4,543,028 |
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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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21,448,676 |
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21,823,390 |
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$ |
26,974,002 |
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$ |
26,481,276 |
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CONDENSED STATEMENTS OF DISTRIBUTABLE INCOME (UNAUDITED)
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Three Months Ended |
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March 31, |
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2007 |
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2006 |
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Royalty income |
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$ |
23,948,749 |
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$ |
50,481,086 |
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Interest income |
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624,781 |
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491,660 |
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24,573,530 |
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50,972,746 |
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General and administrative expenditures |
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565,648 |
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482,550 |
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Distributable income |
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$ |
24,007,882 |
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$ |
50,490,196 |
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Distributable income per Unit (46,608,796 Units) |
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$ |
0.515094 |
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$ |
1.083276 |
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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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March 31, |
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2007 |
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2006 |
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Trust corpus, beginning of period |
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$ |
21,823,390 |
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$ |
23,881,494 |
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Amortization of net overriding royalty interest |
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(374,714 |
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(603,557 |
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Distributable income |
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24,007,882 |
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50,490,196 |
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Distributions declared |
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(24,007,882 |
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(50,490,196 |
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Total corpus, end of period |
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$ |
21,448,676 |
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$ |
23,277,937 |
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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%. 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. |
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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 proceeds 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 to interest income of $393,923 previously reported
as Royalty income for the quarterly period ended March 31, 2006. |
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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 purposes. |
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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. |
5
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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 issued by the Internal Revenue Service confirming such
tax treatment. |
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Sales of gas production from certain coal seam wells drilled prior to January 1, 1993,
qualified for federal income tax credits under Section 29 (now Section 45K) of the Internal
Revenue Code of 1986, as amended (the Code), through 2002, but not thereafter.
Accordingly, under present law, the Trusts production and sale of gas from coal seam wells
does not qualify for tax credit under Section 45K of the Code (the Section 45K Tax
Credit). Congress has at various times since 2002 considered energy legislation, including
provisions to reinstate the Section 45K 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. For example, on August 8, 2005, new energy tax legislation was enacted which,
among other things, modified the Section 45K Tax Credit in several respects, but did not
extend the credit for production from coal seam wells. No prediction can be made as to what
future tax legislation affecting Section 45K of the Code 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
be subject to reduction by a Unit Holders passive losses. |
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3. |
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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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As part of a settlement between BROG and the Mineral Management Service of the United States
Department of the Interior, $901,776 was deducted from the Trusts April 2003 royalty
payment. This represents the Trusts 75% interest of the total settlement. The Trust
reviewed the propriety of this deduction with its consultants and it became one of the
issues submitted to the arbitration described below in this Note 4. |
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During 2006, as part of the ongoing negotiations between the Trust and BROG concerning a
number of revenue and expense audit issues, an aggregate of $1,981,933 was included in
calculating net proceeds paid to the Trust, together with interest of $1,124,063, in
settlement of certain of those audit issues. |
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During the first quarter of 2007, in connection with the resolution of certain audit
exceptions, $576,052 was paid to the Trust by BROG as interest on the 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 cause
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, |
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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. 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
22, 2006, BROG filed a Notice of Appeal indicating its desire to appeal the Order and any
final judgment confirming the Arbitration Award and on July 5, 2006, filed a Motion for New
Trial in the District Court of Harris County, Texas, urging substantially similar arguments
made at the hearing. The Trust responded to the Motion for New Trial and served BROG with
post-judgment discovery requests. BROGs Motion for New Trial was overruled on August 4,
2006. BROGs distribution to the Trust for July 2006 included $1,534,182 representing a
portion of the Arbitration Award, plus accrued interest. Of this amount, $1,325,826 (the
equivalent of $994,270 grossed up to account for the Trusts 75% net overriding royalty
interest) was included in calculating the net proceeds paid to the Trust, and the accrued
interest thereon was $539,812. The balance of the Arbitration Award is pending BROGs
appeal, which has been assigned No. 01-06-00485-CV in the First Court of Appeals in Houston,
Texas. On August 24, 2006, BROG filed its Supersedeas Bond to secure payment of the balance
of the Arbitration Award, plus interest, if the appeal is dismissed or BROG does not perform
the adverse judgment which becomes final on appeal. The briefs of the parties have been
filed in the First Court of Appeals and oral arguments were heard on April 24, 2007. The
parties will prepare and file letter briefs in support of the positions argued on April 24,
2007 and will then await a ruling on the merits of the appeal. No reliable estimate can be
given as to when the First Court of Appeals will act and it should be noted that the ruling
of the Court on the merits of the appeal will itself be subject to possible discretionary
review by the Texas Supreme Court. |
7
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.
On February 16, 2007, Compass Bancshares, Inc. announced the signing of a definitive agreement
to be acquired by Banco Bilbao Vizcaya Argentaria, S.A (BBVA). Under the terms of that
agreement, Compass Bancshares, Inc. would become a wholly-owned subsidiary of BBVA. The
transaction is expected to close in the second half of 2007 and is subject to the approval of
shareholders of BBVA and Compass Bancshares, Inc. as well as to regulatory approval and customary
closing conditions.
8
The Royalty constitutes the principal asset of the Trust. The beneficial interests in the
Royalty 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. Each stockholder of Southland Royalty of record at the close of
business on November 3, 1980 received one freely tradable Unit for each share of the common stock
of Southland Royalty then held. 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 March 31, 2007 and 2006
The Trust received Royalty income of $23,948,749 and interest income of $624,781 during the
first quarter of 2007. There was no change in cash reserves. After deducting administrative
expenses of $565,648, distributable income for the quarter was $24,007,882 ($.515094 per Unit). In
the first quarter of 2006, Royalty income was $50,481,086, interest income was $491,660, there was
no change in cash reserves, administrative expenses were $482,550 and distributable income was
$50,490,196 ($1.083276 per Unit). Based on 46,608,796 Units outstanding, the per-Unit
distributions during the first quarter of 2007 were as follows:
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January |
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$ |
.181827 |
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February |
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.217184 |
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March |
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.116083 |
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Quarter Total |
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$ |
.515094 |
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The Royalty income distributed in the first quarter of 2007 was lower than that distributed in
the first quarter of 2006. The average gas price decreased from $8.44 per Mcf for the first quarter
of 2006 to $6.04 per Mcf for the first quarter of 2007, and gas volumes decreased in the quarter
ended March 31, 2007 as compared to the quarter ended March 31, 2006. BROG has informed the Trust
that the decrease in reported volumes was due in part to the natural production decline curve and
in part to the correction in the first quarter of 2007 for overaccruals of gas production allocated
to the Trust in 2006. Production costs for the first quarter of 2007 were approximately $2.1
million lower than those for the first quarter of 2006, principally as a result of lower natural
gas severance taxes. Interest income for the quarter ended March 31, 2007, as compared to the
quarter ended March 31, 2006, was higher, primarily due to additional interest paid to the Trust by
BROG in January and February of 2007 as a result of the granting of certain audit exceptions.
Administrative expenses were higher in 2007 primarily as a result of differences in timing in the
receipt and payment of these expenses.
The capital costs attributable to the Underlying Properties for the first quarter of 2007 and
deducted by BROG in calculating Royalty income were approximately $10.9 million. BROG has informed
the Trust that its budget for capital expenditures for the Underlying Properties in 2007 is
estimated at $28.0 million. Approximately $24.0 million of that budget is allocable to 112 new
wells, including 33 wells scheduled to be dually completed in the Mesaverde and Dakota formations
and ten wells scheduled to be dually completed in the Fruitland Coal and Pictured Cliffs
formations. BROG
9
indicates that a total of 34 of the new wells, at an aggregate cost of approximately $11.4
million, are projected to be drilled to formations producing coal seam gas. 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 2007 could range from
$20.0 million to $50.0 million. BROG anticipates 416 projects, including the drilling of 67 new
wells to be operated by BROG and 45 wells to be operated by third parties. Of the new BROG operated
wells, 48 are projected to be conventional wells completed or dually completed to the Pictured
Cliffs, Mesaverde, and/or Dakota formations, seven are scheduled to be dually completed to both
conventional and coal seam formations, and the remaining 12 are projected to be completed in the
Fruitland Coal formation. A total of 30 of the wells operated by third parties are projected to be
conventional wells, and the remaining 15 are to be coal seam wells, with five of the 15 projected
coal seam wells to be dually completed in the Fruitland Coal and Pictured Cliffs formations. The
budget for 2007 reflects the continuation of a shift toward increased development of conventional
gas and a reduction of BROGs program for infill drilling in the Fruitland Coal formation.
BROG has informed the Trust that lease operating expenses and property taxes were $6,414,898
and $322,178, respectively, for the first quarter of 2007, as compared to $4,960,655 and $196,866,
respectively, for the first quarter of 2006. Lease operating expenses were higher in the first
quarter of 2007 primarily due to increased production activity as well as an increase in overhead
rates. Property taxes were higher in the first quarter of 2007 due to
an adjustment of $101,242 made in
January 2007 for the under accrual of property taxes during 2006, as well as an
increase in tax accruals for 2007 of approximately $8,000 per month.
BROG has reported to the Trust that during the first quarter of 2007, 15 gross (9.31 net) coal
seam wells and 10 gross (6.02 net) conventional wells were completed on the Underlying Properties.
Two gross (0.82 net) coal seam wells, one gross (.64 net) coal seam payadd, one gross (0.34
net) coal seam recompletion, 11 gross (5.83 net) conventional wells, 16 gross (10.20 net) payadds,
seven gross (1.15 net) recompletions, and 34 gross (21.55 net) restimulations were in progress at
March 31, 2007.
There were three gross (0.23 net) coal seam wells, one gross (0.04 net) miscellaneous coal
seam project, two gross (0.08 net) coal seam payadds, four gross (0.03 net) conventional wells, one
gross (0.0008 net) payadd, and one gross (0.84 net) restimulation completed on the Underlying
Properties as of March 31, 2006. Fifty-two gross (18.35 net) coal seam wells, eight gross (4.90
net) coal seam recompletions, two gross (0.004 net) coal seam restimulations, 139 gross (31.60 net)
conventional wells, three gross (0.23 net) payadds, nine gross (5.20 net) recompletions, and seven
gross (5.04 net) restimulations were in progress at March 31, 2006.
There were 4,616 gross (1,286 net) producing wells being operated subject to the Royalty as of
December 31, 2006. Unit Holders will be provided a copy of the list of those wells upon written
request to the Trustee.
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.
10
Royalty income for the quarter ended March 31, 2007 is associated with actual gas and oil
production during November 2006 through January 2007 from the Underlying Properties. Gas and oil
sales from the Underlying Properties for the three months ended March 31, 2007 and 2006 were as
follows:
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2007 |
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2006 |
Gas: |
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Total sales (Mcf) |
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8,943,584 |
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10,830,512 |
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Mcf per day |
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97,213 |
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117,723 |
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Average price (per Mcf) |
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$ |
6.04 |
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$ |
8.44 |
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|
|
|
Oil: |
|
|
|
|
|
|
|
|
Total sales (Bbls) |
|
|
18,382 |
|
|
|
18,598 |
|
Bbls per day |
|
|
200 |
|
|
|
202 |
|
Average price (per Bbl) |
|
$ |
54.76 |
|
|
$ |
56.54 |
|
Gas and oil sales attributable to the Royalty for the quarters ended March 31, 2007 and 2006 were
as follows:
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
2006 |
Gas sales (Mcf) |
|
|
4,278,905 |
|
|
|
6,532,486 |
|
Oil sales
(Bbls) |
|
|
8,908 |
|
|
|
11,153 |
|
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 first quarter of 2007, average gas prices were $2.40 per Mcf lower than the average
prices reported during the first quarter of 2006. The average price per barrel of oil during the
first quarter of 2007 was $1.78 per barrel lower than that received for the first quarter of 2006
due to decreases 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 (PNM), 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
11
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, BROG
and PNM entered into a letter agreement dated January 31, 2005, pursuant to which the term of that
contract was adjusted to coincide with the contracts with ChevronTexaco and Coral. Neither BROG
nor any of ChevronTexaco, Coral nor PNM gave notice by March 31, 2007 to terminate 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 at least through March
31, 2009.
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.
12
Calculation of Royalty Income
Royalty income received by the Trust for the three months ended March 31, 2007 and 2006,
respectively, was computed as shown in the following table:
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
2006 |
|
Gross proceeds of sales from the Underlying Properties: |
|
|
|
|
|
|
|
|
Gas proceeds |
|
$ |
53,976,801 |
|
|
$ |
91,455,578 |
|
Oil proceeds |
|
|
1,006,513 |
|
|
|
1,051,494 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
54,983,314 |
|
|
|
92,507,072 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less production costs: |
|
|
|
|
|
|
|
|
Severance tax Gas |
|
|
5,288,138 |
|
|
|
8,778,228 |
|
Severance tax Oil |
|
|
91,501 |
|
|
|
104,921 |
|
Lease operating expense and property tax |
|
|
6,737,076 |
|
|
|
5,157,521 |
|
Other |
|
|
|
|
|
|
|
|
Capital expenditures |
|
|
10,934,934 |
|
|
|
11,158,287 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
23,051,649 |
|
|
|
25,198,957 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less excess production and interest from prior year |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net profits |
|
|
31,931,665 |
|
|
|
67,308,115 |
|
|
|
|
|
|
|
|
|
Net overriding royalty interest |
|
|
75 |
% |
|
|
75 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Royalty income |
|
$ |
23,948,749 |
|
|
$ |
50,481,086 |
|
|
|
|
|
|
|
|
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 to reflect the increase
(if any) in the Producers Price Index as published by the U.S. Department of Labor, Bureau of Labor
Statistics, since December 31, 2003).
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
13
implementing the Sarbanes-Oxley Act of 2002 have generally made appropriate accommodation for
passive entities such as the Trust.
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 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.
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
14
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 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 March 31, 2007,
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 March 31, 2007, 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.
15
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 cause 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. 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 22, 2006, BROG filed a Notice of Appeal indicating its desire
to appeal the Order and any final judgment confirming the Arbitration Award and on July 5, 2006,
filed a Motion for New Trial in the District Court of Harris County, Texas, urging substantially
similar arguments made at the hearing. The Trust responded to the Motion for New Trial and served
BROG with post-judgment discovery requests. BROGs Motion for New Trial was overruled on August 4,
2006. BROGs distribution to the Trust for July 2006 included $1,534,182 representing a portion of
the Arbitration Award, plus accrued interest. Of this amount, $1,325,826 (the equivalent of
$994,270 grossed up to account for the Trusts 75% net overriding royalty interest) was included in
calculating the net proceeds paid to the Trust, and the accrued interest thereon was $539,812. The
balance of the Arbitration Award is pending BROGs appeal, which has been assigned No.
01-06-00485-CV in the First Court of Appeals in Houston, Texas. On August 24, 2006, BROG filed its
Supersedeas Bond to secure payment of the balance of the Arbitration Award, plus interest, if the
appeal is dismissed or BROG does not perform the adverse judgment which becomes final on appeal.
The briefs of the parties have been filed in the First Court of Appeals and oral arguments were
heard on April 24, 2007. The parties will prepare and file letter briefs in support of the
positions argued on April 24, 2007 and will then await a ruling on the merits of the appeal. No
reliable estimate can be given as to when the First Court of Appeals will act and it should be
noted that the ruling of the Court on the merits of the appeal will itself be subject to possible
discretionary review by the Texas Supreme Court.
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 6. 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, 2006, is incorporated herein by reference.* |
16
|
(4)(c) |
|
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.* |
|
|
31 |
|
Certification required by Rule 13a-14(a), dated May 10, 2007, 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 May 10, 2007 by Lee Ann
Anderson, Vice President and Senior Trust Officer of Compass Bank, on behalf of Compass
Bank, the Trustee of the Trust.*** |
|
|
|
* |
|
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 OF THE
SAN JUAN BASIN ROYALTY TRUST
|
|
|
By: |
/s/ Lee Ann Anderson
|
|
|
|
Lee Ann Anderson |
|
|
|
Vice President and Senior Trust Officer |
|
|
Date: May 10, 2007
(The Trust has no directors or executive officers.)
INDEX TO EXHIBITS
|
|
|
Exhibit |
|
|
Number |
|
Description |
|
|
|
(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, 2006, 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
TexasBank, heretofore filed as Exhibit 4(c) to the Trusts
Quarterly Report on Form 10-Q with the Commission for the quarter
ended September 30, 2002, is incorporated herein by reference.* |
|
|
|
31
|
|
Certification required by Rule 13a-14(a), dated May 10, 2007, 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 May 10, 2007 by
Lee Ann Anderson, Vice President and Senior Trust Officer of
Compass Bank, on behalf of Compass Bank, the Trustee of the
Trust.*** |
|
|
|
* |
|
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. |