e10vq
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-Q
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þ
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Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
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For the Quarterly Period Ended
September 30,
2009
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or
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o
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Transition Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
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For the transition period
from to
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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
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(State or other jurisdiction
of incorporation or organization)
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(I.R.S. Employer
Identification No.)
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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 has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such
files). o Yes o No
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer (see definition of accelerated filer and large
accelerated filer in
Rule 12b-2
of the Act).
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Large accelerated
filer þ
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Accelerated
filer o
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Non-accelerated
filer o
(Do not check if
a smaller reporting company)
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Smaller reporting
company o
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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
November 9, 2009: 46,608,796
TABLE OF CONTENTS
SAN JUAN
BASIN ROYALTY TRUST
PART I
FINANCIAL
INFORMATION
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Item 1.
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Financial
Statements.
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The condensed financial statements included herein have been
prepared without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission. The financial statements
of the San Juan Basin Royalty Trust (the Trust)
continue to be prepared in a manner that differs from generally
accepted accounting principles 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 the rules and
regulations of the Securities and Exchange Commission.
Nonetheless, 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, 2008. In the opinion of the
Trustee, all adjustments, consisting only of normal recurring
adjustments, have been included that are necessary to fairly
present the assets, liabilities and trust corpus of the Trust at
September 30, 2009 and the distributable income and changes
in trust corpus for the three-month periods and nine-month
periods ended September 30, 2009 and 2008. 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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September 30,
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December 31,
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2009
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2008
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(Unaudited)
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ASSETS
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Cash and short-term investments
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$
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2,632,743
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$
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7,449,767
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Net overriding royalty interest in producing oil and gas
properties (net of accumulated amortization of $115,997,319 and
$115,348,030 at September 30, 2009 and December 31,
2008, respectively)
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17,278,209
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17,927,498
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$
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19,910,952
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$
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25,377,265
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LIABILITIES AND TRUST CORPUS
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Distribution payable to Unit Holders
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$
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2,476,954
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$
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7,293,978
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Cash reserves
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155,789
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155,789
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Trust corpus 46,608,796 Units of beneficial interest
authorized and outstanding
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17,278,209
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17,927,498
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$
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19,910,952
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$
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25,377,265
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CONDENSED
STATEMENTS OF DISTRIBUTABLE INCOME (UNAUDITED)
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Three Months Ended
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Nine Months Ended
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September 30,
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September 30,
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2009
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2008
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2009
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2008
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Royalty income
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$
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7,232,890
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$
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52,541,763
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$
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19,257,575
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$
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113,730,327
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Interest income
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194,481
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32,508
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197,892
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216,621
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Total Revenue
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7,427,371
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52,574,271
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19,455,467
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113,946,948
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General and administrative expenditures
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435,690
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351,221
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1,706,123
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1,554,074
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Distributable income
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$
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6,991,681
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$
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52,223,050
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$
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17,749,344
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$
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112,392,874
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Distributable income per Unit (46,608,796 Units)
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$
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0.150007
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$
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1.120455
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$
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0.380814
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$
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2.411409
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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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Nine Months Ended
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September 30,
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September 30,
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2009
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2008
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2009
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2008
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Trust corpus, beginning of period
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$
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17,572,134
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$
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18,975,921
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$
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17,927,498
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$
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19,880,888
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Amortization of net overriding royalty interest
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(293,925
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(543,459
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(649,289
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(1,448,426
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Distributable income
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6,991,681
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52,223,050
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17,749,344
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112,392,874
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Distributions declared
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(6,991,681
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(52,223,050
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(17,749,344
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(112,392,874
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Trust corpus, end of period
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$
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17,278,209
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$
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18,432,462
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$
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17,278,209
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$
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18,432,462
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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)
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 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 development and 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 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 the Trust corpus instead of as an
expense. The basis of accounting used by the Trust is widely
used by royalty trusts for financial reporting purposes.
In preparing the condensed interim financial statements, the
Trust has evaluated, for potential recognition or disclosure,
events or transactions subsequent to the end of the most recent
quarterly period through November 9, 2009, the issuance
date of these condensed interim financial statements. No such
transactions or events resulted in additional recognition or
disclosure.
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.
Additionally, the Trust is a widely held fixed investment trust
(WHFIT) classified as a non-mortgage widely held
fixed investment trust (NMWHFIT) for federal income
tax purposes. The Trustee is the representative of the Trust
that will provide tax information in accordance with the
applicable U.S. Treasury Regulations governing the
information reporting requirements of the Trust as a WHFIT and a
NMWHFIT.
The Royalty constitutes an economic interest in oil
and gas properties for federal income tax purposes. Unit Holders
must report their share of the production 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.
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
5
SAN JUAN
BASIN ROYALTY TRUST
NOTES TO
CONDENSED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
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 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. For
example, in February 2009, new energy tax legislation was
enacted which, among other things, modified the Section 45
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.
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 that may not be offset or reduced by passive
losses.
See Part II, Item 1 Legal Proceedings,
concerning the status of litigation matters.
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4.
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SETTLEMENTS
AND LITIGATION
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On March 14, 2008, BROG notified the Trust that the
distribution for March would be reduced by $4,921,578. BROG
described this amount as the Trusts portion of what BROG
had paid to settle claims for the underpayment of royalties in
the case styled United States of America ex rel. Harrold E.
(Gene) Wright v. AGIP Petroleum Co. et al.,
Civil Action No. 5:03CV264 (formerly 9:98-CV-30) (E.D.
Tex.). The Trusts consultants continue to analyze this
settlement as it may apply to the Trust.
On April 28, 2008, the Trust filed a suit against BROG
relating to the Arbitration Award in its favor issued in
November 2005, in the amount of $7,683,699. The litigation is
styled San Juan Basin Royalty Trust vs. Burlington
Resources Oil & Gas Company, L.P., No.
D1329-CV-08-751, in the District Court of Sandoval County, New
Mexico, 13th Judicial District. The Trust alleges breach of
contract and breach of the covenant of good faith and fair
dealing and seeks a judgment for damages in the amount of
$5,025,000, plus interest and punitive damages. The purpose of
the arbitration was to resolve certain compliance audit issues.
The arbitrator ruled in favor of the Trust on all five of the
issues submitted to arbitration. BROG filed suit in Harris
County, Texas alleging that the award should be modified or
vacated, and seeking to recover its attorneys fees. The
trial court denied BROGs motion to vacate, granted the
Trusts application to confirm and rendered a final
judgment in favor of the Trust. BROG paid the award as it
related to four of the five issues and appealed the award as to
the fifth. In August 2007, the appellate court reversed the
judgment of the trial court and vacated the award as it related
to the fifth issue and the unpaid balance of the award.
With respect to that fifth issue which was the subject of the
appeal, the Trust had asked for damages based on either of two
alternative claims. The appellate court ruled that the
alternative claim selected by the arbitrator in awarding the
Trust approximately $5,000,000 was not technically included
within the scope of what the parties intended to submit to
arbitration. The appellate court did not rule on whether or not
the arbitrator properly decided the fifth issue in favor of the
Trust. The litigation filed in New Mexico seeks recovery on the
claim which had been resolved in favor of the Trust by the
arbitrator.
The appellate court also remanded the case to the District
Court, where BROG pursued its claim for attorneys fees and
costs in the amount of approximately $200,000. Following a trial
on the merits of BROGs claims conducted on June 3,
2009, the District Court ruled in favor of the Trust and ordered
that BROG should take nothing in its claims against the Trust.
BROG has filed a Notice of Appeal as regards that ruling.
Certain motions for summary judgment filed by BROG and the Trust
are to be heard on January 5, 2010. The trial on the merits
has been set for the week of May 24, 2011.
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Item 2.
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Trustees
Discussion and Analysis of Financial Condition and Results of
Operations.
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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 (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. 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 the
current view of BROG, the working interest owner, with respect
to future events; are based on an assessment of, and are subject
to, a variety of factors deemed relevant by the Trustee 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 First Restated
Indenture) and, effective as of December 12, 2007 the
First Restated Indenture was amended and restated (the First
Restated 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.
As a result of a merger on March 24, 2006, Compass Bank
succeeded TexasBank as Trustee of the Trust. On
September 7, 2007, Compass Banks parent company,
Compass Bancshares, Inc., was acquired by and is now a
wholly-owned subsidiary of Banco Bilbao Vizcaya Argentaria, S.A.
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 net proceeds
attributable to the Royalty (Royalty Income), to pay
all expenses and charges of the Trust and distribute the
remaining available income to the Unit Holders. The Trust does
not operate the Underlying Properties and, in fact, is not
empowered to carry on any business activity. The Trust has no
employees, officers or directors. All administrative functions
of the Trust are performed by the Trustee.
7
BROG is the principal operator of the Underlying Properties. A
very high percentage of the Royalty Income is attributable to
the production and sale by BROG of natural gas from the
Underlying Properties. Accordingly, the market price for natural
gas produced and sold from the San Juan Basin heavily
influences the amount of Royalty Income distributed by the Trust
and, by extension, the price of the Units.
Three
Months Ended September 30, 2009 and 2008
The Trust received Royalty income of $7,232,890 and interest
income of $194,481 during the third quarter of 2009. There was
no change in cash reserves. After deducting administrative
expenses of $435,690, distributable income for the quarter was
$6,991,681 ($0.150007 per Unit). In the third quarter of 2008,
Royalty income was $52,541,763, interest income was $32,508,
administrative expenses were $351,221 and distributable income
was $52,223,050 ($1.120455 per Unit). In August 2008, the Trust
recovered $40,930 previously escheated to the State of Texas in
the name of the Trust, and those funds were temporarily added to
cash reserves pending further research as to the origin of the
funds. Based on 46,608,796 Units outstanding, the
per-Unit
distributions during the third quarter of 2009 were as follows:
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July
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$
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.035394
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August
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.061470
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September
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.053143
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Quarter Total
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$
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.150007
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The Royalty income distributed in the third quarter of 2009 was
lower than that distributed in the third quarter of 2008,
primarily due to a decrease in the average gas price from $10.62
per Mcf for the third quarter of 2008 to $2.98 per Mcf for the
third quarter of 2009. Gas volumes, however, increased in the
quarter ended September 30, 2009 as compared to the quarter
ended September 30, 2008. Interest income was higher for
the quarter ended September 30, 2009 as compared to the
quarter ended September 30, 2008, due to interest BROG paid
to the Trust in August 2009 as a result of the granting of
certain audit exceptions. Administrative expenses were higher in
2009 primarily as a result of differences in timing in the
receipt and payment of these expenses and also due to increased
costs associated with the litigation described below.
The capital costs attributable to the Underlying Properties for
the third quarter of 2009 and deducted by BROG in calculating
Royalty income were approximately $7.4 million. BROG has
informed the Trust that the 2009 budget for capital expenditures
for the Underlying Properties is $25.2 million. In
addition, BROG estimates that during 2009 it will incur capital
expenses in the amount of approximately $12.1 million
attributable to the capital budgets for 2008 and prior years.
Approximately 12% of the planned expenditures attributable to
the 2009 budget will be on Fruitland Coal formation projects
with the remainder to be spent on conventional projects. BROG
reports that based on its actual capital requirements, the pace
of regulatory approvals, the mix of projects and swings in the
price of natural gas, the actual capital expenditures for 2009
could range from $10 million to $45 million.
BROG anticipates 431 projects in 2009 at an estimated cost of
$25.2 million. Approximately $6 million of that budget
is allocable to 49 new wells, including 39 wells scheduled
to be dually completed in the Mesaverde and Dakota formations
and four wells projected to be drilled to formations producing
coal seam gas. Approximately $7.1 million will be spent on
workovers and facilities projects. Of the $12.1 million
attributable to the budgets for prior years, approximately
$6.9 million is allocable to new wells, and the
$5.2 million balance will be applied to miscellaneous
capital projects such as workovers and operated facility
projects. BROG also anticipates that the possible implementation
of new rules minimizing surface disturbances, requiring the
implementation of closed-loop systems for the disposal of
drilling fluids and cuttings, and restricting the use of open
reserve pits could reduce the number of projects due to
increased compliance costs.
BROG has informed the Trust that lease operating expenses and
property taxes were $7,756,942 and $213,289, respectively, for
the third quarter of 2009, as compared to $7,947,438 and
$276,732, respectively, for the third quarter of 2008. BROG
reports that lease operating expenses were lower in the third
quarter of 2009 compared to the third quarter of 2008 primarily
because of lower contract services and maintenance costs.
Furthermore, BROG reports that the decrease in costs related to
the property taxes are due to the fact that property tax amounts
are accrued based on the prior years actual costs. In
2009, $71,096 per month in property taxes is accrued, based on
the
8
amount of the actual property tax bill paid in early 2009, as
compared with $92,244 per month accrued in 2008, based on the
amount of the actual property tax bill paid in early 2008.
BROG has reported to the Trustee that during the third quarter
of 2009, 22 gross (4.58 net) conventional wells, two gross
(0.84 net) recompletions, 16 gross (8.23 net) coal seam
wells and one gross (.85 net) coal seam recompletion were
completed on the Underlying Properties. Seven gross (2.20 net)
conventional wells were in progress at September 30, 2009.
There were, based on revised information from BROG, seven gross
(2.22 net) coal seam wells and 33 gross (4.24 net)
conventional wells completed on the Underlying Properties as of
September 30, 2008. Five gross (0.92 net) coal seam wells
and seven gross (1.42 net) conventional wells were in progress
at September 30, 2008.
There were 3,903 gross (1,137 net) producing wells being
operated subject to the Royalty as of December 31, 2008,
calculated on a well bore basis and not including multiple
completions as separate wells.
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 September 30, 2009 is
associated with actual gas and oil production during May 2009
through July 2009 from the Underlying Properties. Gas and oil
sales from the Underlying Properties for the three months ended
September 30, 2009 and 2008 were as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
September 30,
|
|
|
2009
|
|
2008
|
|
Gas:
|
|
|
|
|
|
|
|
|
Total sales (Mcf)
|
|
|
8,916,522
|
|
|
|
8,737,027
|
|
Mcf per day
|
|
|
96,919
|
|
|
|
94,968
|
|
Average price (per Mcf)
|
|
$
|
2.98
|
|
|
$
|
10.62
|
|
Oil:
|
|
|
|
|
|
|
|
|
Total sales (Bbls)
|
|
|
17,414
|
|
|
|
12,793
|
|
Bbls per day
|
|
|
189
|
|
|
|
139
|
|
Average price (per Bbl)
|
|
$
|
56.08
|
|
|
$
|
120.99
|
|
Gas and oil sales attributable to the Royalty for the quarters
ended September 30, 2009 and 2008 were as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
September 30,
|
|
|
2009
|
|
2008
|
|
Gas sales (Mcf)
|
|
|
2,563,130
|
|
|
|
5,326,507
|
|
Oil sales (Bbls)
|
|
|
5,004
|
|
|
|
7,724
|
|
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 third quarter of 2009, average gas prices were $7.64
per Mcf lower than the average prices reported during the third
quarter of 2008 due in part to the global economic contraction
which has depressed energy demand and contributed to lower
natural gas wellhead prices, including the posted index prices
applicable to gas sold from the San Juan Basin. In
addition, many experts attribute the decline in gas prices to
record or near record inventories in storage and increased
domestic production from the various shale formations. The
average price per barrel of oil during the third quarter of 2009
was $64.91 per barrel lower than that received for the third
quarter of 2008.
9
BROG previously entered into three contracts for the sale of all
volumes of gas produced from the Underlying Properties to
ChevronTexaco Natural Gas, a division of Chevron U.S.A. Inc.
(ChevronTexaco), Coral Energy Resources, L.P.
(Coral), and PNM Gas Services (PNM),
respectively. In March 2008, both ChevronTexaco and Coral
notified BROG of their election to terminate their respective
contracts effective March 31, 2009. Requests for proposal
were circulated to potential purchasers of the packages of gas
covered by the expiring contracts. Neither BROG nor PNM gave
notice of termination with respect to the PNM contract and, by
agreement of the parties, the term of that contract has been
extended through at least March 31, 2011. On
December 11, 2008, the New Mexico Public Regulatory
Commission approved the sale of the gas utility assets of PNM to
New Mexico Gas Company, Inc. (NMGC) and, effective
as of January 30, 2009, the PNM contract was assigned to
and assumed by NMGC.
BROG entered into four new contracts effective April 1,
2009, for the sale of all gas produced from the Underlying
Properties other than the gas covered by the NMGC contract. The
new purchasers are Chevron Natural Gas, a division of Chevron
USA, Inc., Pacific Gas and Electric Company, BP Energy Company
and Macquarie Cook Energy LLC. All four of the new contracts and
the pre-existing NMGC contract provide for (i) the delivery
of such gas at various delivery points through March 31,
2011 and from
year-to-year
thereafter, until terminated by either party on
12 months notice; and (ii) the sale of such gas
at prices which fluctuate in accordance with the published
indices for gas sold in the San Juan Basin of northwestern
New Mexico. Although the primary term of the Chevron contract
continues until March 31, 2011, a portion of that contract
will be remarketed for sale after March 2010.
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.
Nine
Months Ended September 30, 2009 and 2008
For the nine months ended September 30, 2009, the Trust
received Royalty income of $19,257,575 and interest income of
$197,892. After deducting administrative expenses of $1,706,123,
distributable income was $17,749,344 ($0.380814 per Unit) for
the nine months ended September 30, 2009. There was no
change in cash reserves. For the nine months ended
September 30, 2008, the Trust received Royalty income of
$113,730,327 and interest income of $216,621. Cash reserves
increased in August 2008 by $40,930, the amount recovered from
the State of Texas. After deducting administrative expenses of
$1,554,074, distributable income was $112,392,874 ($2.411409 per
Unit) for the nine months ended September 30, 2008.
The decrease in distributable income from 2008 to 2009 resulted
primarily from lower gas prices during the first nine months of
2009. However, gas volumes were higher in the nine months ended
September 30, 2009, in part, due to unplanned down-time at
a facility operated by a third party in the second quarter of
2008. Interest earnings were lower for the nine months ended
September 30, 2009 as compared to the nine months ended
September 30, 2008, primarily due to a decrease in funds
available for investment and to lower interest rates. General
and administrative expenses were higher for the nine months
ended September 30, 2009, as compared to the same period in
2008, primarily as a result of differences in timing in the
receipt and payment of the expenses, but also due to an increase
in legal expenses incurred in the litigation between BROG and
the Trust described in Part II, Item I, below.
Capital expenditures incurred by BROG, attributable to the
Underlying Properties, for the first nine months of 2009
amounted to approximately $28.3 million. Capital
expenditures were approximately $19.9 million for the first
nine months of 2008. Lease operating expenses and property taxes
first nine months of 2009 totaled $24,563,067 and $703,310,
respectively, as compared to $23,767,528 and $798,760,
respectively, for 2008.
BROG has reported to the Trustee that during the nine months
ended September 30, 2009, 68 gross (13.28 net)
conventional wells, two gross (0.84 net) recompletions,
36 gross (19.55 net) coal seam wells and one gross (0.85
net) coal seam recompletion were completed on the Underlying
Properties. There were 33 gross (13.25 net) coal seam wells
and 108 gross (11.69 net) conventional wells completed on
the Underlying Properties during the nine months ended
September 30, 2008.
10
Royalty income for the nine months ended September 30, 2009
is associated with actual gas and oil production during November
2008 through July 2009 from the Underlying Properties. Gas and
oil sales from the Underlying Properties for the nine months
ended September 30, 2009 and 2008 were as follows:
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
September 30,
|
|
|
2009
|
|
2008
|
|
Gas:
|
|
|
|
|
|
|
|
|
Total sales (Mcf)
|
|
|
25,986,144
|
|
|
|
25,133,676
|
|
Mcf per day
|
|
|
95,187
|
|
|
|
91,729
|
|
Average price (per Mcf)
|
|
$
|
3.28
|
|
|
$
|
8.72
|
|
Oil:
|
|
|
|
|
|
|
|
|
Total Sales (Bbls)
|
|
|
43,689
|
|
|
|
36,168
|
|
Bbls per day
|
|
|
160
|
|
|
|
132
|
|
Average price (per Bbl)
|
|
$
|
45.34
|
|
|
$
|
101.88
|
|
Gas and oil sales attributable to the Royalty for the nine
months ended September 30, 2009 and 2008 were as follows:
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
September 30,
|
|
|
2009
|
|
2008
|
|
Gas sales (Mcf)
|
|
|
6,034,462
|
|
|
|
14,579,826
|
|
Oil sales (Bbls)
|
|
|
9,820
|
|
|
|
20,787
|
|
During the first nine months of 2009 gas and oil prices were
lower than during the first nine months of 2008. 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.
11
Calculation
of Royalty Income
Royalty Income received by the Trust for the three months and
nine months ended September 30, 2009 and 2008,
respectively, was computed as shown in the following table:
CALCULATION
OF ROYALTY INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
Gross proceeds of sales from the Underlying Properties:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gas proceeds
|
|
$
|
26,539,822
|
(1)
|
|
$
|
92,813,502
|
|
|
$
|
85,149,264
|
|
|
$
|
212,607,028
|
(2)
|
Oil proceeds
|
|
|
976,542
|
|
|
|
1,547,800
|
|
|
|
1,980,659
|
|
|
|
3,684,910
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
27,516,364
|
|
|
|
94,361,302
|
|
|
|
87,129,923
|
|
|
|
216,291,938
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less production costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance tax gas
|
|
|
2,381,417
|
|
|
|
8,391,694
|
|
|
|
7,685,851
|
|
|
|
19,856,326
|
|
Severance tax oil
|
|
|
94,969
|
|
|
|
152,033
|
|
|
|
193,945
|
|
|
|
369,512
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
1,020
|
(3)
|
|
|
|
|
Lease operating expense and property tax
|
|
|
7,970,231
|
|
|
|
8,224,170
|
|
|
|
25,266,377
|
|
|
|
24,566,288
|
|
Capital expenditures
|
|
|
7,425,894
|
|
|
|
7,537,721
|
|
|
|
28,305,963
|
|
|
|
19,859,376
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
17,872,511
|
|
|
|
24,305,618
|
|
|
|
61,453,156
|
|
|
|
64,651,502
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net profits
|
|
|
9,643,853
|
|
|
|
70,055,684
|
|
|
|
25,676,767
|
|
|
|
151,640,436
|
|
Net overriding royalty interest
|
|
|
75
|
%
|
|
|
75
|
%
|
|
|
75
|
%
|
|
|
75
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Royalty Income
|
|
$
|
7,232,890
|
|
|
$
|
52,541,763
|
|
|
$
|
19,257,575
|
|
|
$
|
113,730,327
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
In August 2009, gas proceeds included $540,069 resulting from
granted audit exceptions. |
|
(2) |
|
In March 2008, gas proceeds were reduced by $6,562,104 as the
amount BROG determined to be the Trusts portion of
BROGs settlement of a legal matter with the Minerals
Management Service and the Bureau of Indian Affairs. |
|
(3) |
|
Reflects the fee for BROG volume exchanges during the production
month of April 2009. |
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
12
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
presently 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.
Critical
Accounting Policies
In accordance with the Commissions rules and regulations
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 pursuant to the Conveyance 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 development and 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.
|
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 the 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 a
trade or business, including borrowing transactions, other than
as periodically 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 is also permitted to hold
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 is not
permitted to engage in transactions in foreign currencies which
could expose the Trust or Unit Holders to any foreign currency
related market risk. The Trust is not permitted to market the
gas, oil 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. 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. Consequently, the Trusts ability to timely
disclose relevant
13
information in its periodic reports is dependent upon
BROGs delivery of such information. Accordingly, the Trust
maintains disclosure controls and procedures designed to ensure
that BROG accurately and timely accumulates and delivers such
relevant information to the Trustee and those who participate in
the preparation of the Trusts periodic reports to allow
for the preparation of such periodic reports and any decisions
regarding disclosure.
The Indenture does not require BROG to update or provide
information to the Trust. However, the Conveyance transferring
the Royalty to the Trust obligates BROG to provide the Trust
with certain information, including information concerning
calculations of net proceeds owed to the Trust. Pursuant to the
settlement of litigation in 1996 between the Trust and BROG,
BROG agreed to newer, more formal financial reporting and audit
procedures as compared to those provided in the Conveyance.
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 September 30, 2009 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 has considered
the Trusts dependence on BROG to deliver timely and
accurate information to the Trust. Additionally, during the
quarter ended September 30, 2009 there were no changes in
the Trusts internal control over financial reporting that
materially affected, or are reasonably likely to materially
affect, the Trusts internal control over financial
reporting. The Trustee has reviewed neither the Trusts
disclosure controls and procedures nor 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.
14
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 March 14, 2008, BROG notified the Trust that the
distribution for March would be reduced by $4,921,578. BROG
described this amount as the Trusts portion of what BROG
had paid to settle claims for the underpayment of royalties in
the case styled United States of America ex rel. Harrold E.
(Gene) Wright v. AGIP Petroleum Co. et al.,
Civil Action No. 5:03CV264 (formerly 9:98-CV-30) (E.D.
Tex.). The Trusts consultants continue to analyze this
settlement as it may apply to the Trust.
On April 28, 2008, the Trust filed a suit against BROG
relating to the Arbitration Award in its favor issued in
November 2005, in the amount of $7,683,699. The litigation is
styled San Juan Basin Royalty Trust vs. Burlington
Resources Oil & Gas Company, L.P.,
No. D1329-CV-08-751,
in the District Court of Sandoval County, New Mexico,
13th Judicial District. The Trust alleges breach of
contract and breach of the covenant of good faith and fair
dealing and seeks a judgment for damages in the amount of
$5,025,000, plus interest and punitive damages. The purpose of
the arbitration was to resolve certain compliance audit issues.
The arbitrator ruled in favor of the Trust on all five of the
issues submitted to arbitration. BROG filed suit in Harris
County, Texas alleging that the award should be modified or
vacated, and seeking to recover its attorneys fees. The
trial court denied BROGs motion to vacate, granted the
Trusts application to confirm and rendered a final
judgment in favor of the Trust. BROG paid the award as it
related to four of the five issues and appealed the award as to
the fifth. In August 2007, the appellate court reversed the
judgment of the trial court and vacated the award as it related
to the fifth issue and the unpaid balance of the award.
With respect to that fifth issue which was the subject of the
appeal, the Trust had asked for damages based on either of two
alternative claims. The appellate court ruled that the
alternative claim selected by the arbitrator in awarding the
Trust approximately $5,000,000 was not technically included
within the scope of what the parties intended to submit to
arbitration. The appellate court did not rule on whether or not
the arbitrator properly decided the fifth issue in favor of the
Trust. The litigation filed in New Mexico seeks recovery on the
claim which had been resolved in favor of the Trust by the
arbitrator.
The appellate court also remanded the case to the District
Court, where BROG pursued its claim for attorneys fees and
costs in the amount of approximately $200,000. Following a trial
on the merits of BROGs claims conducted on June 3,
2009, the District Court ruled in favor of the Trust and ordered
that BROG should take nothing in its claims against the Trust.
BROG has filed a Notice of Appeal as regards that ruling.
Certain motions for summary judgment filed by BROG and the Trust
are to be heard on January 5, 2010. The trial on the merits
has been set for the week of May 24, 2011.
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.
15
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(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 to 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, 2007, 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 November 9, 2009, 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 November 9, 2009, 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.
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16
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
Lee Ann Anderson
Vice President and Senior Trust Officer
Date: November 9, 2009
(The Trust
has no directors or executive officers.)
17
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 to 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, 2007, 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 November 9, 2009, 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 November 9, 2009, 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.
|
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***
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Furnished herewith.
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18