e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
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For the Quarterly Period Ended March 31, 2009
or
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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
Commission File No. 1-8032
San Juan Basin Royalty Trust
(Exact name of registrant as specified in the Amended and Restated San Juan Basin Royalty Trust Indenture)
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| Texas
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75-6279898 |
| (State or other jurisdiction of
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(I.R.S. Employer |
| incorporation or organization)
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Identification No.) |
Compass Bank
2525 Ridgmar Boulevard, Suite 100
Fort Worth, Texas 76116
(Address of principal executive offices)
(Zip Code)
(866) 809-4553
(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 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).
Yes o No o
Indicate
by check mark whether the registrant is a large accelerated filer,
an accelerated filer, or a non-accelerated filer,
or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated
filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer þ |
Accelerated filer o |
Non-accelerated filer o
(Do not check if a smaller reporting company) |
Smaller reporting company 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 11, 2009: 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 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 Rule 10-01 of Regulation S-X promulgated under the Securities
Exchange Act of 1934. 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 Trust’s 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 March 31, 2009 and the distributable income and changes in trust corpus for the
three-month periods ended March 31, 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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March 31, |
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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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$ |
2,584,262 |
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$ |
7,449,767 |
|
Net overriding royalty interest in producing
oil and gas properties (net of accumulated
amortization of $115,594,539 and $115,348,030
at March 31, 2009 and December 31, 2008, respectively) |
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17,680,989 |
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17,927,498 |
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$ |
20,265,251 |
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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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$ |
2,428,473 |
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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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17,680,989 |
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17,927,498 |
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$ |
20,265,251 |
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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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March 31, |
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2009 |
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2008 |
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Royalty income |
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$ |
9,550,576 |
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$ |
25,576,418 |
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Interest income |
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2,605 |
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164,379 |
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Total Revenue |
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9,553,181 |
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25,740,797 |
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General and administrative expenditures |
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(583,745 |
) |
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(610,074 |
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Distributable income |
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$ |
8,969,436 |
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$ |
25,130,723 |
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Distributable income per Unit (46,608,796 Units) |
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$ |
0.192440 |
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$ |
0.539184 |
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The accompanying notes to condensed financial statements are an integral part of these statements.
3
SAN JUAN BASIN ROYALTY TRUST
CONDENSED STATEMENTS OF CHANGES IN TRUST CORPUS (UNAUDITED)
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Three Months Ended |
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March 31, |
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2009 |
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2008 |
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Trust corpus, beginning of period |
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$ |
17,927,498 |
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$ |
19,880,888 |
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Amortization of net overriding royalty interest |
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(246,509 |
) |
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(442,826 |
) |
Distributable income |
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8,969,436 |
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25,130,723 |
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Distributions declared |
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(8,969,436 |
) |
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(25,130,723 |
) |
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Total corpus, end of period |
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$ |
17,680,989 |
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$ |
19,438,062 |
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The accompanying notes to condensed financial statements are an integral part of these statements.
4
SAN JUAN BASIN ROYALTY TRUST
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
1. 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:
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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 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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| • |
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Distributions to Unit Holders are recorded when declared by the Trustee. |
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| • |
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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. |
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.
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.
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.
5
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 “Code”), through 2002 but not thereafter.
Accordingly, under present law, the Trust’s 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 Trust’s 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 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 that may not
be offset or reduced by passive losses.
3. CONTINGENCIES
See Part II, Item 1 — Legal Proceedings, concerning the status of litigation matters.
4. SETTLEMENTS AND LITIGATION
During the first quarter of 2009, $180,750 was included in calculating net proceeds paid to
the Trust as a result of the ongoing compliance audit process. During the first quarter of
2008, as part of the negotiations between the Trust and BROG concerning a number of revenue
and expense items, an aggregate of $128,827 was included in calculating net proceeds paid 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 Trust’s 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 Trust’s 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 joint interest
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
BROG’s motion to vacate, granted the Trust’s application to confirm and rendered a final
judgment
6
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 unpaid balance. The
appellate court also remanded the case to the District Court, where BROG is pursuing its
claim for attorneys’ fees and costs in the amount of approximately $200,000. On September
8, 2008, Burlington filed a motion for summary judgment. The Trust has filed its response
opposing that motion and its own cross-motion for summary judgment. On December 15, 2008,
BROG’s motion for summary judgment was denied. The Trust’s motion remains pending. 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.
On February 11, 2009, the Trust filed its First Amended Complaint for Breach of Contract and
the Covenant of Good Faith and Fair Dealing whereby, among other things, the Trust pointed
out the existence of a tolling agreement as applicable to BROG’s allegation that the Trust’s
claim is barred by the passage of time. In March, BROG filed two motions for summary
judgment, one alleging the Trust’s claim is time-barred and the second alleging that the
decision of the Texas appellate court bars prosecution of the claim in the pending New
Mexico suit. On April 7, 2009, the Trust filed its responses to those motions for summary
judgment. Discovery is under way. The hearing on BROG’s motions for summary judgment has
been set for June 15, 2009. The trial on the merits is currently scheduled for April 2010.
7
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 (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 the current view of Burlington Resources Oil & Gas Company LP
(“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
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, the prior trustee of the
Trust. On that same date, TexasBank merged with Compass Bank, and as a result, Compass Bank
succeeded TexasBank as Trustee under the terms of the Indenture. On September 7, 2007, Compass
Bancshares, Inc. was acquired by Banco Bilbao Vizcaya Argentaria, S.A. (“BBVA”) and is now a
wholly-owned subsidiary of BBVA.
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 tradeable Unit for each share of the common stock
of Southland Royalty then held.
8
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. 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.
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 March 31, 2009 and 2008
The Trust received Royalty income of $9,550,576 and interest income of $2,605 during the first
quarter of 2009. There was no change in cash reserves. After deducting administrative expenses of
$583,745, distributable income for the quarter was $8,969,436 ($0.192440 per Unit). In the first
quarter of 2008, Royalty income was $25,576,418, interest income was $164,379, there was no change
in cash reserves, administrative expenses were $610,074 and distributable income was $25,130,723
($0.539184 per Unit). Based on 46,608,796 Units outstanding, the per-Unit distributions during the
first quarter of 2009 were as follows:
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January |
|
$ |
.041447 |
|
February |
|
|
.098890 |
|
March |
|
|
.052103 |
|
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Quarter Total |
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$ |
.192440 |
|
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|
The Royalty income distributed in the first quarter of 2009 was lower than that distributed in
the first quarter of 2008. The average gas price decreased from $6.97 per Mcf for the first
quarter of 2008 to $4.04 per Mcf for the first quarter of 2009. Gas volumes decreased slightly in
the quarter ended March 31, 2009 as compared to the quarter ended March 31, 2008. BROG has
informed the Trust that the decrease in reported volumes was due primarily to the natural
production decline curve. Interest income was lower for the quarter ended March 31, 2009 as
compared to the quarter ended March 31, 2008, primarily due to additional interest BROG paid to the
Trust in the first quarter of 2008 as a result of the granting of certain audit exceptions, and
also due to higher interest rates in the first quarter of 2008. Administrative expenses were lower
in 2009 primarily as a result of differences in timing in the receipt and payment of these
expenses.
The capital costs attributable to the Underlying Properties for the first quarter of 2009 and
deducted by BROG in calculating Royalty income were approximately $9.9 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.
9
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 $8,992,827
and $276,732, respectively, for the first quarter of 2009, as compared to $8,083,988 and $245,295,
respectively, for the first quarter of 2008. BROG reports that lease operating expenses were
higher in the first quarter of 2009 compared to the first quarter of 2008 primarily because
demand-related increases in the cost of contract services and materials have not yet been mitigated
by the decline in natural gas sales prices. New drilling results in increases in salt water
disposal and compression costs. Additionally, the overhead rate determined by the Council of
Petroleum Accountants Societies was adjusted in April 2008 to 7.7%, from the previous rate of 6.4%.
BROG has reported to the Trustee that during the first quarter of 2009, 11 gross (5.18 net)
coal seam wells and 27 gross (3.77 net) conventional wells were completed on the Underlying
Properties. Seven gross (3.48 net) coal seam wells and 20 gross (2.58 net) conventional wells were
in progress at March 31, 2009.
There
were three gross (2.56 net) coal seam wells and 23 gross (0.41 net) conventional wells completed on the Underlying Properties as of March 31, 2008. Four gross (1.44 net) coal seam
wells and 21 gross (1.42 net) conventional wells were in progress at March 31, 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 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.
10
Royalty income for the quarter ended March 31, 2009 is associated with actual gas and oil
production during November 2008 through January 2009 from the Underlying Properties. Gas and oil
sales from the Underlying Properties for the three months ended March 31, 2009 and 2008 were as
follows:
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Three Months Ended |
| |
|
March 31, |
| |
|
2009 |
|
2008 |
Gas: |
|
|
|
|
|
|
|
|
Total sales (Mcf) |
|
|
8,558,550 |
|
|
|
8,559,117 |
|
Mcf per day |
|
|
93,028 |
|
|
|
93,033 |
|
Average price (per Mcf) |
|
$ |
4.04 |
|
|
$ |
6.97 |
|
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|
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|
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|
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Oil: |
|
|
|
|
|
|
|
|
Total sales (Bbls) |
|
|
10,982 |
|
|
|
12,698 |
|
Bbls per day |
|
|
119 |
|
|
|
138 |
|
Average price (per Bbl) |
|
$ |
40.50 |
|
|
$ |
88.58 |
|
Gas and oil sales attributable to the Royalty for the quarters ended March 31, 2009 and 2008
were as follows:
| |
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
| |
|
March 31, |
| |
|
2009 |
|
2008 |
|
|
|
|
|
|
|
|
|
Gas sales (Mcf) |
|
|
2,522,083 |
|
|
|
4,723,823 |
|
Oil sales (Bbls) |
|
|
3,302 |
|
|
|
6,922 |
|
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 2009, average gas prices were $2.93 per Mcf lower than the average
prices reported during the first quarter of 2008 due to decreases in gas prices in domestic markets
generally, including the posted index prices applicable to gas sold from the San Juan Basin. The
average price per barrel of oil during the first quarter of 2009 was $48.08 per barrel lower than
that received for the first quarter of 2008.
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.
11
BROG has now 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 the gas covered by 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.
Calculation of Royalty Income
Royalty income received by the Trust for the three months ended March 31, 2009 and 2008,
respectively, was computed as shown in the following table:
CALCULATION OF ROYALTY INCOME
| |
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
| |
|
March 31, |
|
| |
|
2009 |
|
|
2008 |
|
Gross proceeds of sales from the Underlying Properties: |
|
|
|
|
|
|
|
|
Gas proceeds |
|
$ |
34,594,861 |
|
|
$ |
53,108,214 |
|
Oil proceeds |
|
|
444,735 |
|
|
|
1,124,793 |
|
|
|
|
|
|
|
|
Total |
|
|
35,039,596 |
|
|
|
54,233,007 |
|
|
|
|
|
|
|
|
|
|
Less production costs: |
|
|
|
|
|
|
|
|
Severance tax — Gas |
|
|
3,126,253 |
|
|
|
5,436,476 |
|
Severance tax — Oil |
|
|
42,796 |
|
|
|
117,911 |
|
Lease operating expense and property tax |
|
|
9,269,559 |
|
|
|
8,329,283 |
|
Capital expenditures |
|
|
9,866,887 |
|
|
|
6,247,446 |
|
|
|
|
|
|
|
|
Total |
|
|
22,305,495 |
|
|
|
20,131,116 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net profits |
|
|
12,734,101 |
|
|
|
34,101,891 |
|
Net overriding royalty interest |
|
|
75 |
% |
|
|
75 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Royalty income |
|
$ |
9,550,576 |
|
|
$ |
25,576,418 |
|
|
|
|
|
|
|
|
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, since December 31, 2003).
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 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 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 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
13
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 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. 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 Trust’s ability to timely disclose relevant information in its
periodic reports is dependent upon BROG’s 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 Trust’s 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 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, 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 Trust’s periodic reports. In reaching its conclusion, the Trustee has
considered the Trust’s dependence on BROG to deliver timely and accurate information to the Trust.
Additionally, during the quarter ended March 31, 2009 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 reviewed neither the Trust’s disclosure controls
and procedures nor the Trust’s 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 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 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 Trust’s 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 Trust’s 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 joint interest 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 BROG’s motion to vacate, granted the Trust’s 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 unpaid balance.
The appellate court also remanded the case to the District Court, where BROG is pursuing its claim
for attorneys’ fees and costs in the amount of approximately $200,000. On September 8, 2008,
Burlington filed a motion for summary judgment. The Trust has filed its response opposing that
motion and its own cross-motion for summary judgment. On December 15, 2008, BROG’s motion for
summary judgment was denied. The Trust’s motion remains pending. 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.
On February 11, 2009, the Trust filed its First Amended Complaint for Breach of Contract and
the Covenant of Good Faith and Fair Dealing whereby, among other things, the Trust pointed out the
existence of a tolling agreement as applicable to BROG’s allegation that the Trust’s claim is
barred by the passage of time. In March, BROG filed two motions for summary judgment, one alleging
the Trust’s claim is time-barred and the second alleging that the decision of the Texas appellate
court bars prosecution of the claim in the pending New Mexico suit. On April 7, 2009, the Trust
filed its responses to those motions for summary judgment. Discovery is under way. The hearing on
BROG’s motions for summary judgment has been set for June 15, 2009. The trial on the merits is
currently scheduled for April 2010.
15
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 to 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, 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
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 11, 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 May 11, 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. |
| |
| *** |
|
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 OF THE
SAN JUAN BASIN ROYALTY TRUST
|
|
| |
By: |
/s/ Lee Ann Anderson
|
|
| |
|
Lee Ann Anderson |
|
| |
|
Vice President and Senior Trust Officer |
|
Date: May 11, 2009
(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 to 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, 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 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 11, 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 May 11, 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. |
| |
| *** |
|
Furnished herewith. |