e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
þ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Quarterly Period Ended March 31, 2006
or
o Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from _____ to _____
Commission File 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)
| |
|
|
Texas
(State or other jurisdiction
of incorporation or organization)
|
|
75-6279898
(I.R.S. Employer
Identification No.) |
Compass Bank, Trust Department
2525 Ridgmar Boulevard, Suite 100
Fort Worth, Texas 76116
(Address of principal executive offices)
(Zip Code)
(866) 809-4553
(Registrant’s 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 4, 2006: 46,608,796
TABLE OF CONTENTS
SAN JUAN BASIN ROYALTY TRUST
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements.
The condensed financial statements included herein have been prepared without audit, pursuant
to the rules and regulations of the Securities and Exchange Commission. In accordance with
Securities and Exchange Commission Staff Accounting Bulletin No. 47, released September 16, 1982,
the financial statements of the San Juan Basin Royalty Trust (the “Trust”) continue to be prepared
in a manner that differs from accounting principles generally accepted in the United States of
America (“GAAP”); this form of presentation is customary to other royalty trusts. Certain
information and footnote disclosures normally included in annual financial statements have been
condensed or omitted pursuant to Rule 10-01 of Regulation S-X promulgated under the Securities
Exchange Act of 1934, although Compass Bank, the Trustee of the Trust, believes that the
disclosures are adequate to make the information presented not misleading. These condensed
financial statements should be read in conjunction with the financial statements and the notes
thereto included in the Trust’s Annual Report on Form 10-K for the year ended December 31, 2005.
In the opinion of the Trustee, all adjustments, consisting only of normal recurring adjustments,
have been included that are necessary to present fairly the assets, liabilities and trust corpus of
the San Juan Basin Royalty Trust at March 31, 2006, and the distributable income and changes in
trust corpus for the three-month periods ended March 31, 2006 and 2005. The distributable income
for such interim periods is not necessarily indicative of the distributable income for the full
year.
2
SAN JUAN BASIN ROYALTY TRUST
CONDENSED STATEMENTS OF ASSETS, LIABILITIES AND TRUST CORPUS
| |
|
|
|
|
|
|
|
|
| |
|
March 31, |
|
|
December 31, |
|
| |
|
2006 |
|
|
2005 |
|
| |
|
(Unaudited) |
ASSETS |
|
|
|
|
|
|
| |
|
Cash and short-term investments |
|
$ |
15,551,034 |
|
|
$ |
19,173,162 |
|
Net overriding royalty interest in producing
oil and gas properties (net of accumulated
amortization of $109,997,591 and $109,394,034
at March 31, 2006 and December 31, 2005, respectively) |
|
|
23,277,937 |
|
|
|
23,881,494 |
|
|
|
|
|
|
|
|
|
|
$ |
38,828,971 |
|
|
$ |
43,054,656 |
|
|
|
|
|
|
|
|
LIABILITIES AND TRUST CORPUS |
|
|
|
|
|
|
|
|
| |
|
Distribution payable to Unit Holders |
|
$ |
15,436,176 |
|
|
$ |
19,058,304 |
|
Cash reserves |
|
|
114,858 |
|
|
|
114,858 |
|
Trust corpus - 46,608,796 Units of beneficial
interest authorized and outstanding |
|
|
23,277,937 |
|
|
|
23,881,494 |
|
|
|
|
|
|
|
|
|
|
$ |
38,828,971 |
|
|
$ |
43,054,656 |
|
|
|
|
|
|
|
|
CONDENSED STATEMENTS OF DISTRIBUTABLE INCOME (UNAUDITED)
| |
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
| |
|
March 31, |
| |
|
2006 |
|
|
2005 |
|
Royalty income |
|
$ |
50,875,009 |
|
|
$ |
39,242,287 |
|
Interest income |
|
|
97,737 |
|
|
|
28,437 |
|
|
|
|
|
|
|
|
|
|
|
50,972,746 |
|
|
|
39,270,724 |
|
General and administrative expenditures |
|
|
482,550 |
|
|
|
534,508 |
|
|
|
|
|
|
|
|
Distributable income |
|
$ |
50,490,196 |
|
|
$ |
38,736,216 |
|
|
|
|
|
|
|
|
Distributable income per Unit (46,608,796 Units) |
|
$ |
1.083276 |
|
|
$ |
0.831092 |
|
|
|
|
|
|
|
|
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)
| |
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
| |
|
March 31, |
| |
|
2006 |
|
|
2005 |
|
Trust corpus, beginning of period |
|
$ |
23,881,494 |
|
|
$ |
26,674,821 |
|
Amortization of net overriding royalty interest |
|
|
(603,557 |
) |
|
|
(761,913 |
) |
Distributable income |
|
|
50,490,196 |
|
|
|
38,736,216 |
|
Distributions declared |
|
|
(50,490,196 |
) |
|
|
(38,736,216 |
) |
|
|
|
|
|
|
|
Total corpus, end of period |
|
$ |
23,277,937 |
|
|
$ |
25,912,908 |
|
|
|
|
|
|
|
|
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. BASIS OF ACCOUNTING
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:
| |
• |
|
Royalty income recorded for a month is the amount computed and paid with respect to
the Trust’s 75% net overriding royalty interest (the “Royalty”) in certain oil and gas
leasehold and royalty interests (the “Underlying Properties”) by Burlington Resources
Oil & Gas Company LP (“BROG”), the present owner of the Underlying Properties, to the
Trustee for the Trust. Royalty income consists of the net proceeds received by BROG
from the sale of production from the Underlying Properties less accrued production
costs, development and drilling costs, applicable taxes, operating charges, and other
costs and deductions, multiplied by 75%. Any adjustments to the Royalty income
received from BROG are recorded by the Trust when received and impact the distribution
to Unit Holders for that month. |
| |
| |
• |
|
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 over gross proceeds 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 United States generally accepted accounting principles (“GAAP”) because
revenues are not accrued in the month of production; certain cash reserves may be
established for contingencies which would not be accrued in financial statements prepared in
accordance with GAAP; expenses are recorded when paid instead of when incurred; and
amortization of the Royalty calculated on a unit-of-production basis is charged directly to
trust corpus instead of an expense. The basis of accounting used by the Trust is widely
used by royalty trusts for financial reporting purposes.
2. FEDERAL INCOME TAXES
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 Trust’s 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.
The Royalty constitutes an “economic interest” in oil and gas properties for federal income
tax purposes. Unit Holders must report their share of the revenues of the Trust as ordinary
income from oil and gas royalties and are entitled to claim depletion with respect to such
income. The Royalty is treated as a single property for depletion purposes. The Trust has
on file technical advice memoranda confirming such tax treatment.
5
Sales of production from coal seam wells drilled prior to January 1, 1993, qualified for
federal income tax credits through 2002 but not thereafter. Accordingly, under present law,
the Trust’s production of gas from coal seam wells does not qualify for tax credit under Section 45
(formerly Section 29) of the Internal Revenue Code of 1986, as amended (the “Section 45 Tax Credit”).
Congress has at various times since 2002 considered energy legislation, including provisions
to reinstate the Section 45 Tax Credit in various ways and to various extents but no
legislation that would qualify the Trust’s current production for such credit has been
enacted. Most recently, for example, on August 8, 2005, new energy tax legislation was
enacted which, among other things, modifies the Section 45 Tax Credit on several respects,
but does not extend the credit for production from coal seam wells. No prediction can be
made as to what future tax legislation affecting Section 45 of the Internal Revenue Code of
1986, as amended, may be proposed or enacted or, if enacted, its impact, if any, on the
Trust and the Unit Holders.
The classification of the Trust’s income for purposes of the passive loss rules may be
important to a Unit Holder. As a result of the Tax Reform Act of 1986, Royalty income such
as that derived through the Trust will generally be treated as portfolio income and will not
reduce passive losses.
3. CONTINGENCIES
See Part II — Item 1, “Legal Proceedings” concerning the status of litigation matters.
4. SETTLEMENTS AND LITIGATION
During 2004, an aggregate of $3,314,808 was included in calculating net proceeds paid to the
Trust by BROG as part of the ongoing negotiation of joint interest audit exceptions,
interest for resolved audit exceptions, and insurance proceeds for a business interruption
claim.
In 2005, as part of the ongoing negotiations between the Trust and BROG concerning a number
of revenue and expense audit issues, an aggregate of $2,405,486 was included in calculating
net proceeds BROG paid to the Trust in settlement of certain of those audit issues.
In February 2006, as part of the ongoing negotiations between the Trust and BROG, $393,923 was included in
BROG’s distribution to the Trust in payment of interest due on late payment of gross
proceeds.
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 arbitrator’s award be confirmed. At the conclusion of a
hearing conducted on April 20, 2006, the Court entered an Order denying BROG’s motion to
vacate and granting the Trust’s application to confirm the Arbitration Award.
The Order and the anticipated final judgment on the Arbitration
Award are subject to appeal.
6
Item 2. Trustee’s 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
Trust’s 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 BROG’s 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
company’s 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 company’s 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.
The Royalty constitutes the principal asset of the Trust and the beneficial interests in the
Trust are divided into that number of Units of Beneficial Interest (the “Units”) of the Trust equal
to the number of shares of the common stock of Southland Royalty outstanding as of the close of
business on November 3, 1980. Holders of Units are referred to herein as “Unit Holders.”
Subsequent to the Conveyance of the Royalty, through a series of assignments and mergers, Southland
Royalty’s successor became BROG. On March 31, 2006, a subsidiary of ConocoPhillips completed its acquisition of
Burlington Resources, Inc., BROG’s parent
7
and the
name of that acquiring subsidiary was changed to Burlington
Resources, Inc. 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, 2006 and 2005
The Trust received Royalty income of $50,875,009 and interest income of $97,737 during the
first quarter of 2006. There was no change in cash reserves. After deducting administrative
expenses of $482,550, distributable income for the quarter was $50,490,196 ($1.083276 per Unit).
In the first quarter of 2005, Royalty income was $39,242,287, interest income was $28,437, there
was no change in cash reserves, administrative expenses were $534,508 and distributable income was
$38,736,216 ($.831092 per Unit). Based on 46,608,796 Units outstanding, the per-Unit distributions
during the first quarter of 2006 were as follows:
| |
|
|
|
|
January.
|
|
$ |
.414455 |
|
February.
|
|
|
.337635 |
|
March.
|
|
|
.331186 |
|
|
|
|
|
|
Quarter Total
|
|
$ |
1.083276 |
|
|
|
|
|
|
The Royalty income distributed in the first quarter of 2006 was higher than that distributed
in the first quarter of 2005 primarily due to an increase in the average gas price from $6.01 per
Mcf for the first quarter of 2005 to $8.44 per Mcf for the first quarter of 2006. In March 2005,
BROG included an aggregate of $833,851 in calculating the Trust’s March 2005 Royalty payment. This
represented the Trust’s 75% interest on late payment of gross proceeds and settlement of certain
other audit exceptions. Interest earnings for the quarter ended March 31, 2006, as compared to the
quarter ended March 31, 2005, were higher, primarily due to an increase in funds available for
investment pending distribution as well as an increase in interest rates. Administrative expenses
were lower primarily as a result of differences in timing in the receipt and payment of these
expenses.
BROG has informed the Trustee that the New Mexico Oil and Gas Proceeds Withholding Tax Act
(the “Withholding Tax Act”) requires remitters who pay certain oil and gas proceeds from production
on New Mexico properties on or after October 1, 2003, to withhold income taxes from such proceeds
in the case of certain nonresident recipients. The Trustee, on advice of New Mexico counsel, has
observed that “net profits interests,” such as the Royalty, and other types of interests, the
extent of which cannot be determined with respect to a specific share of the oil and gas
production, are excluded from the withholding requirements of the Withholding Tax Act. Unit
Holders are reminded to consult with their tax advisors regarding the applicability of New Mexico
income tax to distributions received from the Trust by a Unit Holder.
The capital costs attributable to the Underlying Properties for the first quarter of 2006 and
deducted by BROG in calculating Royalty income were approximately $11.2 million. BROG’s capital
expenditure budget for the Underlying Properties for 2006 is estimated at $37.6 million of which
approximately $1.17 million has been spent as of March 31, 2006; however, BROG reports that based
on its actual capital requirements, the pace of regulatory approvals, and the mix of projects and
swings in the price of natural gas, the actual capital expenditures for 2006 could range from $20
million to $45 million. Capital expenditures were approximately $5.94 million for the first
quarter of 2005. In 2005,
8
approximately $19.1 million in capital expenditures were deducted in calculating Royalty
income. In February 2006, BROG informed the Trustee that the 2006 budget for the Underlying
Properties anticipates 451 projects, including the drilling of 103 new wells to be operated by BROG
and 50 wells to be operated by third parties. Of the new BROG operated wells, 52 are projected to
be conventional wells completed in the Pictured Cliffs, Mesaverde and/or Dakota formations, and the
remaining 51 are projected as coal seam wells to be completed in the Fruitland Coal formation. A
total of 40 of the wells operated by third parties are projected to be conventional wells and the
remaining ten are projected to be coal seam wells. BROG projects approximately $33 million will be
spent on the new wells, and $4.6 million will be expended in working over existing wells and in the
maintenance and improvement of production facilities. BROG has announced that the budget for 2006
reflects the continuation of a shift toward increased development of conventional gas.
BROG has informed the Trustee that lease operating expenses and property taxes were $4,960,655
and $196,866, respectively, for the first quarter of 2006, as compared to $4,676,449 and $156,178,
respectively, for the first quarter of 2005.
BROG has reported to the Trustee that during the first quarter of 2006, one gross (0.04 net)
miscellaneous coal seam project, three gross (0.23 net) coal seam wells, 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 were completed on the Underlying Properties.
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 three gross (0.12 net) coal seam miscellaneous projects, one gross (0.87 net) coal
seam well and one gross (0.002 net) payadd completed on the Underlying Properties as of March 31,
2005. Two gross (0.08 net) coal seam miscellaneous projects, 38 gross (5.19 net) coal seam wells,
three gross (1.03 net) coal seam recompletions, 65 gross (6.42 net) conventional wells, 11 gross
(1.74 net) payadds, one gross (0.75 net) recompletion, and four gross (2.24 net) restimulations
were in progress at March 31, 2005.
“Gross” acres or wells, for purposes of this discussion, means the entire ownership interest
of all parties in such properties, and BROG’s 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.
9
Royalty income for the quarter ended March 31, 2006 is associated with actual gas and oil
production during November 2005 through January 2006 from the Underlying Properties. Gas and oil
sales from the Underlying Properties for the three months ended March 31, 2006 and 2005 were as
follows:
| |
|
|
|
|
|
|
|
|
| |
|
2006 |
|
|
2005 |
|
Gas: |
|
|
|
|
|
|
|
|
Total sales (Mcf) |
|
|
10,830,512 |
|
|
|
11,362,316 |
|
Mcf per day |
|
|
117,723 |
|
|
|
123,503 |
|
Average price (per Mcf) |
|
$ |
8.44 |
|
|
$ |
6.01 |
|
| |
Oil: |
|
|
|
|
|
|
|
|
Total sales (Bbls) |
|
|
18,598 |
|
|
|
18,589 |
|
| |
|
|
|
|
|
|
|
|
| |
|
2006 |
|
|
2005 |
|
Bbls per day |
|
|
202 |
|
|
|
202 |
|
Average price (per Bbl) |
|
$ |
56.54 |
|
|
$ |
42.89 |
|
Gas and oil sales attributable to the Royalty for the quarters ended March 31, 2006 and 2005 were
as follows:
| |
|
|
|
|
|
|
|
|
| |
|
2006 |
|
|
2005 |
|
Gas sales (Mcf) |
|
|
6,532,486 |
|
|
|
7,033,761 |
|
Oil sales
(Bbls) |
|
|
11,153 |
|
|
|
11,541 |
|
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 2006, average gas prices were $2.43 higher than the average prices
reported during the first quarter of 2005. The average price per barrel of oil during the first
quarter of 2006 was $13.65 per barrel higher than that received for the first quarter of 2005 due
to increases in oil prices in world markets generally, including the posted prices applicable to
oil sales attributable to the Royalty.
BROG previously entered into two contracts for the sale of all volumes of gas produced from
the Underlying Properties. These contracts provided for (i) the sale of such gas to Duke Energy
and Marketing, L.L.C. and PNM Gas Services (“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 BROG’s election to terminate such contract as of March 31,
2005. BROG then prepared a form of request for proposal and circulated it to a number of potential
purchasers, including ConocoPhillips, inviting them to bid for the purchase of the gas currently
sold under the contract expiring March 31, 2005. Effective as of April 1, 2005, BROG entered into
two new contracts for the sale of all volumes of gas produced from the Underlying Properties and
formerly sold to ConocoPhillips. These new contracts provide for (i) the sale of such gas to
ChevronTexaco Natural Gas, a division of Chevron U.S.A. Inc. (“ChevronTexaco”), and Coral Energy
Resources, L.P. (“Coral”), respectively, (ii) the delivery of such gas at various delivery points
through March 31, 2007, and from year-to-year thereafter until terminated by either party on twelve
months notice, and (iii) the sale of such gas at prices which fluctuate in accordance with the
published indices for gas sold in the San Juan Basin of New Mexico. With respect to BROG’s
contract with PNM, BROG and PNM entered into a letter agreement dated January 31, 2005, pursuant to
which the parties waived the right to terminate the underlying contract as of March 31, 2006, so
that the term of that contract will continue until at least March 31, 2007, and from
10
year-to-year thereafter until terminated by either party upon twelve months notice to the
other. Neither BROG nor any of ChevronTexaco, Coral nor PNM gave notice to terminate the three
contracts described above for the sale of all volumes of gas produced from the Underlying
Properties and, accordingly, the terms of those contracts have been extended through March 31,
2008.
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.
11
Calculation of Royalty Income
Royalty income received by the Trust for the three months ended March 31, 2006 and 2005,
respectively, was computed as shown in the following table:
| |
|
|
|
|
|
|
|
|
| |
|
2006 |
|
|
2005 |
|
Gross proceeds of sales from the Underlying Properties: |
|
|
|
|
|
|
|
|
Gas proceeds |
|
$ |
91,455,578 |
|
|
$ |
68,336,883 |
|
Oil proceeds |
|
|
1,051,494 |
|
|
|
797,200 |
|
|
|
|
|
|
|
|
|
|
|
92,507,072 |
|
|
|
69,134,083 |
|
Other |
|
|
525,230 |
(1) |
|
|
1,096,102 |
(2) |
|
|
|
|
|
|
|
Total |
|
|
93,032,302 |
|
|
|
70,230,185 |
|
|
|
|
|
|
|
|
| |
Less production costs: |
|
|
|
|
|
|
|
|
Severance tax — Gas |
|
|
8,778,228 |
|
|
|
7,050,782 |
|
Severance tax — Oil |
|
|
104,921 |
|
|
|
86,061 |
|
Lease operating expense and property tax |
|
|
5,157,521 |
|
|
|
4,832,627 |
(2) |
Other |
|
|
— |
|
|
|
— |
|
Capital expenditures |
|
|
11,158,287 |
|
|
|
5,937,666 |
|
|
|
|
|
|
|
|
Total |
|
|
25,198,957 |
|
|
|
17,907,136 |
|
|
|
|
|
|
|
|
Less excess production and interest from prior year |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
Net profits |
|
|
67,833,345 |
|
|
|
52,323,049 |
|
Net overriding royalty interest |
|
|
75 |
% |
|
|
75 |
% |
|
|
|
|
|
|
|
Royalty income |
|
$ |
50,875,009 |
|
|
$ |
39,242,287 |
|
|
|
|
|
|
|
|
|
|
|
| (1) |
|
In February 2006, as part of the ongoing negotiations between the Trust and BROG, $393,923 was
included in BROG’s distribution to the Trust in payment of interest due on late payment of gross
proceeds. |
| |
| (2) |
|
In March, 2005, as part of the ongoing negotiations between the Trust and BROG concerning a
number of revenue and expense audit issues, $833,851 was included in BROG’s distribution to the
Trust in payment of interest on late payments of gross proceeds and in settlement of certain other
audit issues. Of that amount, $822,077 was allocated to the Trust as additional revenue and
$11,774 was deducted from lease operating expenses allocated to the Trust . |
Contractual Obligations
Under the Indenture governing the Trust, the Trustee is entitled to an administrative fee for
its administrative services and the preparation of quarterly and annual statements of: (i) 1/20 of
1% of the first $100 million of the annual gross revenue of the Trust, and 1/30 of 1% of the annual
gross revenue of the Trust in excess of $100 million and (ii) the Trustee’s 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).
12
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 Trustee’s intention to
follow the Commission’s and NYSE’s rulemaking closely, attempt to comply with such rules and
regulations and, where appropriate, request relief from these rules and regulations. However, if
the Trust is unable to comply with such rules and regulations or to obtain appropriate relief, the
Trust may be required to expend as yet unknown but potentially material costs to amend the
Indenture that governs the Trust to allow for compliance with such rules and regulations. To date,
the rules implementing the Sarbanes-Oxley Act of 2002 have generally made appropriate accommodation
for passive entities such as the Trust.
Critical Accounting Policies
In accordance with the Commission’s 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 Trust’s ability to borrow money periodically as necessary to
pay expenses,
13
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 Trust’s filings under the Securities Exchange Act
of 1934 is recorded, processed, summarized and reported, within the time periods specified in the
Commission’s 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
Trust’s 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 Trust’s ability to timely report certain information required to be disclosed in
the Trust’s periodic reports is dependent on BROG’s 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 Trust’s 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 Trust’s disclosure controls and procedures as of March 31, 2006,
and has concluded that such disclosure controls and procedures are effective at the “reasonable
assurance” level to ensure that material information related to the Trust is gathered on a timely
basis to be included in the Trust’s periodic reports. In reaching its conclusion, the Trustee
considered the Trust’s dependence on BROG to deliver timely and accurate information to the Trust.
The Trustee has not reviewed the Trust’s 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, 2006, there were no changes in the Trust’s 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 Trust’s internal control
over financial reporting. The Trustee has not evaluated the Trust’s internal control over
financial reporting in concert
14
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 Trust’s ability
to timely report certain information required to be disclosed in the Trust’s periodic reports is
dependent on BROG’s timely delivery of the information to the Trust.
On November 11, 2005, an Arbitration Award was issued in favor of the Trust in the aggregate
amount of $7,683,699 in arbitration styled San Juan Basin Royalty Trust vs. Burlington Resources
Oil & Gas Company LP. The purpose of the arbitration was to resolve certain joint interest audit
issues as 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 arbitrator’s award be confirmed. At the
conclusion of a hearing conducted on April 20, 2006, the Court entered an Order denying BROG’s
motion to vacate and granting the Trust’s application to confirm
the Arbitration Award. The Order and the anticipated final judgment
on the Arbitration Award are subject to appeal.
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 Trust’s 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 Trust’s Annual Report on Form 10-K filed with the Commission for
the fiscal year ended December 31, 1980, is incorporated herein by reference.* |
15
| |
|
|
|
|
|
|
|
|
|
(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
Trust’s 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 5, 2006, by Lee Ann
Anderson, Vice President and Trust Officer of Compass Bank, the Trustee for the
Trust.** |
|
|
|
32 |
|
|
Certification required by Rule 13a-14(b), dated May 5, 2006, by Lee Ann
Anderson, Vice President and 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. |
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 FOR
THE SAN JUAN BASIN ROYALTY TRUST
|
|
| |
By: |
/s/ Lee Ann Anderson
|
|
| |
|
Lee Ann Anderson |
|
| |
|
Vice President and Trust Officer |
|
| |
Date: May 5, 2006
(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 Trust’s 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
Trust’s Annual Report on Form 10-K filed with the Commission for
the fiscal year ended December 31, 1980, is incorporated herein by
reference.* |
(4)(c)
|
|
Assignment of Net Overriding Interest (San Juan Basin Royalty
Trust), dated September 30, 2002, between Bank One, N.A. and
TexasBank, heretofore filed as Exhibit 4(c) to the Trust’s
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 5, 2006, by
Lee Ann Anderson, Vice President and Trust Officer of Compass
Bank, the Trustee for the Trust.** |
32
|
|
Certification required by Rule 13a-14(b), dated May 5, 2006, by
Lee Ann Anderson, Vice President and 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. |