<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarterly Period Ended September 30, 1999
Commission File No. 1-8032
SAN JUAN BASIN ROYALTY TRUST
Texas I.R.S. No. 75-6279898
Bank One, Texas, N.A., Trust Department
P. O. Box 2604
Fort Worth, Texas 76113
Telephone Number 817/884-4630
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 and (2) has been subject to such filing requirements for
the past 90 days. Yes X No
--- ---
Number of units of beneficial interest outstanding at November 12, 1999:
46,608,796
<PAGE> 2
SAN JUAN BASIN ROYALTY TRUST
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
The condensed financial statements included herein have been prepared by Bank
One, Texas, N.A. as Trustee for the San Juan Basin Royalty Trust (the "Trust"),
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission. 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 and Exchange
Act of 1934, although the Trustee 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, 1998. In the opinion of the Trustee, all adjustments,
consisting only of normal recurring adjustments, necessary to present fairly the
assets, liabilities and trust corpus of the San Juan Basin Royalty Trust at
September 30, 1999, and the distributable income and changes in trust corpus for
the three-month and nine-month periods ended September 30, 1999 and 1998 have
been included. The distributable income for such interim periods is not
necessarily indicative of the distributable income for the full year.
Deloitte & Touche LLP, independent certified public accountants, has conducted a
limited review of the condensed financial statements as of September 30, 1999
and for the three-month and nine-month periods ended September 30, 1999 and 1998
included herein.
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<PAGE> 3
INDEPENDENT ACCOUNTANTS' REPORT
Bank One, Texas, N.A. as Trustee
for the San Juan Basin Royalty Trust:
We have reviewed the accompanying condensed statement of assets, liabilities and
trust corpus of the San Juan Basin Royalty Trust as of September 30, 1999 and
the related condensed statements of distributable income and changes in trust
corpus for the three-month and nine-month periods ended September 30, 1999 and
1998. These financial statements are the responsibility of the Trustee.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
The accompanying condensed financial statements are prepared on a modified cash
basis as described in Note 1, which is a comprehensive basis of accounting other
than generally accepted accounting principles.
Based on our reviews, we are not aware of any material modifications that should
be made to such condensed financial statements for them to be in conformity with
the basis of accounting described in Note 1.
We have previously audited, in accordance with generally accepted auditing
standards, the statement of assets, liabilities and trust corpus of the San Juan
Basin Royalty Trust as of December 31, 1998, and the related statements of
distributable income and changes in trust corpus for the year then ended (not
presented herein); and in our report dated March 22, 1999, we expressed an
unqualified opinion on those financial statements. In our opinion, the
information set forth in the accompanying condensed statement of assets,
liabilities and trust corpus as of December 31, 1998 is fairly stated, in all
material respects, in relation to the statement of assets, liabilities and trust
corpus from which it has been derived.
DELOITTE & TOUCHE LLP
November 11, 1999
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<PAGE> 4
SAN JUAN BASIN ROYALTY TRUST
CONDENSED STATEMENTS OF ASSETS, LIABILITIES AND TRUST CORPUS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
(UNAUDITED)
<S> <C> <C>
ASSETS
Cash and short-term investments $ 2,622,256 $ 2,665,562
Net overriding royalty interest in producing
oil and gas properties (net of accumulated
amortization of $86,409,491 and $82,187,508
at September 30, 1999 and December 31, 1998, respectively) 46,866,037 51,088,020
-------------- --------------
$ 49,488,293 $ 53,753,582
============== ==============
LIABILITIES AND TRUST CORPUS
Distribution payable to Unit holders $ 2,622,256 $ 2,665,562
Commitments and contingencies
Trust corpus - 46,608,796 Units of beneficial
interest authorized and outstanding 46,866,037 51,088,020
-------------- --------------
$ 49,488,293 $ 53,753,582
============== ==============
</TABLE>
CONDENSED STATEMENTS OF DISTRIBUTABLE INCOME (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- -----------------------------
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Royalty income $ 7,908,631 $ 6,276,679 $ 20,313,662 $ 24,618,472
Interest income 13,147 12,749 42,876 57,951
Other -- -- 892,496 --
------------- ------------- ------------- -------------
7,921,778 6,289,428 21,249,034 24,676,423
General and administrative
expenditures 156,248 125,509 747,712 663,603
------------- ------------- ------------- -------------
Distributable income $ 7,765,530 $ 6,163,919 $ 20,501,322 $ 24,012,820
============= ============= ============= =============
Distributable income per Unit
(46,608,796 Units) $ .166611 $ .132248 $ .439860 $ .515199
============= ============= ============= =============
</TABLE>
The accompanying notes to condensed financial statements are an integral part of
these statements.
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<PAGE> 5
SAN JUAN BASIN ROYALTY TRUST
CONDENSED STATEMENTS OF CHANGES IN TRUST CORPUS (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------------- --------------------------------
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Trust corpus, beginning of period $ 48,340,628 $ 53,419,624 $ 51,088,020 $ 56,119,448
Amortization of net overriding
royalty interest (1,474,591) (1,177,023) (4,221,983) (3,876,847)
Distributable income 7,765,530 9,604,967 20,501,322 24,012,820
Distributions declared (7,765,530) (9,604,967) (20,501,322) (24,012,820)
-------------- -------------- -------------- --------------
Trust corpus, end of period $ 46,866,037 $ 52,242,601 $ 46,866,037 $ 52,242,601
============== ============== ============== ==============
</TABLE>
The accompanying notes to condensed financial statements are an integral part of
these statements.
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<PAGE> 6
SAN JUAN BASIN ROYALTY TRUST
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
1. BASIS OF ACCOUNTING
The San Juan Basin Royalty Trust was established as of November 1, 1980.
The financial statements of the Trust are prepared on the following basis:
o Royalty income recorded for a month is the amount computed and paid by
the working interest owner, Burlington Resources Oil & Gas Company
("BROG"), to the Trustee for the Trust. Royalty income consists of the
amounts received by the owner of the interest burdened by the net
overriding royalty interest ("Royalty") from the sale of production
less accrued production costs, development and drilling costs,
applicable taxes, operating charges, and other costs and deductions,
multiplied by 75%. The Royalty income amount of $20,313,662 for the
nine months ended September 30, 1999, does not include the $892,496
paid to the Trust for a one-time business interruption insurance
claim.
o Trust expenses recorded are based on liabilities paid and cash
reserves established from Royalty income for liabilities and
contingencies.
o Distributions to Unit holders are recorded when declared by the
Trustee.
o The conveyance which transferred the overriding royalty interest to
the Trust provides that any excess of production costs over gross
proceeds must be recovered from future net profits.
The financial statements of the Trust differ from financial statements
prepared in accordance with 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; and
amortization of the Royalty calculated on a unit-of-production basis is
charged directly to trust corpus.
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 the tax
treatment described above.
The Trust began receiving royalty income from coal seam gas wells
beginning in 1989. Under Section 29 of the Internal Revenue Code, coal
seam gas production from wells drilled prior to January 1, 1993 (including
certain wells recompleted in coal seams formations thereafter), generally
qualifies for the federal income tax credit for producing non-conventional
fuels if such production and the sale thereof occurs before January 1,
2003. For 1998, this tax credit was $1.06 per MMBtu. For qualifying
production of the Trust, each Unit holder must determine his pro rata
share of such production based upon the number of Units owned during each
month of the year and apply the tax credit against his own
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<PAGE> 7
income tax liability, but such credit may not reduce his regular tax
liability (after the foreign tax credit and certain other nonrefundable
credits) below his tentative minimum tax. Section 29 also provides that
any amount of Section 29 credit disallowed for the tax year solely because
of this limitation will increase his credit for prior year minimum tax
liability, which may be carried forward indefinitely as a credit against
the taxpayer's regular tax liability, subject, however, to the limitations
described in the preceding sentence. There is no provision for the
carryback or carryforward of the Section 29 credit in any other
circumstances.
The Trustee is provided summary Section 29 tax credit information related
to Trust properties by BROG, which information is then passed along to the
Unit holders. In Nielson-True Partnership, et al, v. Commissioner, a 1997
Tax Court decision, the court ruled that nonconventional fuel (such as
coal seam gas) produced from a well drilled and completed in an otherwise
qualifying formation prior to December 31, 1992, is not eligible for the
Section 29 credit unless the producer has received an appropriate well
category determination from the Federal Energy Regulatory Commission
("FERC"). On March 23, 1999, the U. S. Court of Appeals for the 10th
Circuit affirmed that decision. Dictum (i.e., language in the appeals
court's decision which is not binding as precedent) even suggests that,
contrary to the clear implications of a 1993 Internal Revenue Service
ruling, lack of such a well category determination may render the Section
29 credit unavailable in respect of production from wells recompleted in a
qualified formation after January 1, 1993, the date that FERC's authority
to render well category determinations ended (so that obtaining the
requisite determination for any such well was impossible). Many producers
assert that wells meeting the definitional requirements applied by FERC in
rendering well category determinations are eligible for the Section 29
credit regardless of whether a well category determination is actually
applied for or received, particularly for wells recompleted in qualifying
formations after January 1, 1993, and additional litigation (and perhaps a
legislative initiative) on this issue is to be expected.
In some cases the extent to which production from the various coal seam
gas wells in which the Trust holds an interest would qualify for the
Section 29 credit under the standards applied in the Nielson-True case is
unclear, and the Trustee has requested that BROG provide clarification and
an assessment of the effects of the foregoing, if any, on the Trust and
its Unit holders. Pending such clarification and assessment, or further
developments, or both, however, the availability of Section 29 credits to
Unit holders in respect of some portion of the Trust's coal seam gas
production could be subject to debate and challenge.
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 will generally be treated as portfolio income and
will not reduce passive losses.
3. CONTINGENCIES
See Item 1 Legal Proceedings concerning the status of litigation matters.
******
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<PAGE> 8
ITEM 2. TRUSTEE'S DISCUSSION AND ANALYSIS
FORWARD-LOOKING INFORMATION
Certain information included in this report 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 and
the results thereof, and regulatory matters. Such forward looking statements
generally are accompanied by words such as "may," "will," "estimate," "expect,"
"predict," "anticipate," "goal," "should," "assume," "believe," "plan,"
"intend," or other words that convey the uncertainty of future events or
outcomes. Such statements reflect our current view with respect to future
events; are based on our assessment of, and are subject to, a variety of factors
deemed relevant by the Trustee and involve risks and uncertainties. Should one
or more of these risks or uncertainties occur, actual results may vary
materially and adversely from those anticipated.
YEAR 2000 ISSUE
Many existing computer programs use only two digits to identify a year in the
date field. These programs were designed and developed without considering the
impact of the upcoming change in the century. If not corrected, many computer
applications could fail or create erroneous results by or at January 1, 2000.
The Year 2000 issue affects virtually all companies and organizations. If a
company or organization does not successfully address its Year 2000 issues, it
may face material adverse consequences.
As the Trust does not directly maintain any systems, the Trust will not incur
any direct costs related to the Year 2000 issue. However, the Trust relies on
the performance of third parties, including the Trustee, BROG and third-party
vendors (collectively, the "suppliers") for such things as the calculation and
receipt of Royalty income, payment of expenses and disbursement of distributable
income. The Trustee has adopted an extensive and comprehensive testing plan to
help ensure that its systems will function properly before, during and after the
year 2000. The Trust has made formal inquiries of BROG and significant third
party vendors, including Harris Trust and Savings Bank, the transfer agent for
the Trust, to determine the extent to which the Trust is vulnerable to failure
by BROG or such other third parties to remediate their own Year 2000 issues.
BROG has informed the Trust that it has assessed its information technology for
Year 2000 issues. BROG's Year 2000 readiness plan involves four phases:
assessment, remediation, testing and implementation. BROG has completed all four
phases for all of its significant information technology. BROG has reported that
its assessment has confirmed that assets used in producing, gathering and
transporting hydrocarbons may be at risk of encountering Year 2000 problems, but
that information technology exposures were not material,. BROG further reports
that it has completed the remediation, testing and implementation phase for such
operation equipment with the goal of ensuring that all critical operating
equipment under its control remains operational. BROG has contacted all of its
third-party vendors that it considers material to its operations. All such
vendors have responded that they believe that Year 2000 issues will not have a
material adverse effect on their operations. BROG has surveyed the operators of
its three primary gathering and pipeline systems in the San Juan Basin,
including the operators that transport the gas gathered from the Underlying
Properties. BROG and other major producers in the San Juan Basin have developed
contingency plans to deal with unforeseen failures to information technology
with respect to these gathering and pipeline systems.
-8-
<PAGE> 9
The Trust can provide no assurance as to whether BROG and third party vendors
will successfully address the Year 2000 issue. Failing to successfully address
the Year 2000 issue by BROG and third party vendors could have a material
adverse impact on the Trust and its Unit holders. At this time, the Trust
believes the most adverse impact that could result from the suppliers' failure
to successfully address the Year 2000 issue is the possibility that the Trust
would not receive, and in turn would not be able to distribute, Royalty income
to the Unit holders.
THREE MONTHS ENDED SEPTEMBER 30, 1999 AND SEPTEMBER 30, 1998:
The Trust received royalty income of $7,908,631 and interest income of $13,147
during the third quarter of 1999. After deducting administrative expenses of
$156,248 distributable income for the quarter was $7,765,530 ($.166611 per
Unit). In the third quarter of 1998, royalty income was $6,276,679, interest
income was $12,749, administrative expenses were $125,509 and distributable
income was $6,163,919 ($.132248 per Unit). The tax credit relating to production
from coal seam wells totaled approximately $.04 per Unit for the third quarter
of 1999 and $.04 per Unit for the third quarter of 1998. For further information
concerning this tax credit, Unit holders should refer to the Trust's Annual
Report for 1998. Based on 46,608,796 Units outstanding, the per Unit
distributions during the third quarter of 1999 were as follows:
<TABLE>
<S> <C>
July $ .067887
August .042463
September .056261
---------
Quarter Total $ .166611
=========
</TABLE>
The royalty income distributed in the third quarter of 1999 was higher than that
distributed in the third quarter of 1998, primarily due to an increase in the
average gas price from $1.62 per Mcf for the third quarter of 1998 to $1.84 per
Mcf for the third quarter of 1999. Interest earnings for the quarter ended
September 30, 1999, as compared to the quarter ended September 30, 1998, were
higher, primarily due to an increase in funds available for investment.
Administrative expenses were higher, primarily as a result of differences in
timing of the receipt and payment of these expenses.
The capital costs attributable to the properties from which the Trust's 75% net
overriding royalty ("Royalty") was carved (the "Underlying Properties") for the
third quarter of 1999 were reported by BROG as $2,720,024 versus $3,745,082 for
the third quarter of 1998. BROG indicates that the majority of the decrease in
capital expenditures is attributable to the timing of payment of invoices
related to the 1999 infill program and a greater cost bearing interest
associated with 1998 capital workovers compared to 1999. BROG has recently
informed the Trustee that its estimated capital budget for 1999 has been
increased from $9.5 million to $11 million due to the reclassification of
charges for facility tubing change outs from an operating to a capital expense.
Lease operating expenses and property taxes decreased to $2,243,776 for the
third quarter of 1999 as compared to $2,786,500 for the third quarter of 1998.
BROG accrued $493,473 for January 1999 lease operating charges thought not to
have been processed. This accrual was reversed in August when it was determined
that the majority of such charges had in fact been processed. This reversal of
charges has caused lease operating expenses for the third quarter of 1999 to
appear lower than for the same period of 1998.
BROG has informed the Trustee that one gross (0.05 net) coal seam well was
completed as of September 30, 1999. One gross (0.88) net coal seam well, 19
gross (0.28 net) coal seam well recavitations, five gross (1.22 net) coal seam
recompletions, and 49 gross (11.81 net) conventional wells were in progress as
of September 30, 1999. By comparison, one gross (.04 net) conventional well was
completed on the Underlying Properties during the third quarter of 1998. There
were 36 gross (7.70 net) conventional wells in
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<PAGE> 10
progress at September 30, 1998. Two gross (1.47 net) conventional wells were
recompleted and five gross (.21 net) coal seam well recavitations were completed
on the Underlying Properties in the third quarter of 1998. Two gross (.07 net)
conventional well recompletions, one gross (.045 net) coal seam recompletion and
five gross (.16 net) coal seam recavitations were in progress at September 30,
1998. "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.
Royalty income for the quarter ended September 30, 1999 is associated with
actual gas and oil production during May 1999 through July 1999 from the
Underlying Properties. Gas and oil sales from the Underlying Properties for the
quarters ended September 30, 1999 and 1998 were as follows:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Gas:
Total sales (Mcf) 9,253,207 10,135,621
Mcf per day 100,578 110,170
Average price (per Mcf) $ 1.84 $ 1.62
Oil:
Total sales (Bbls) 18,837 18,478
Bbls per day 205 201
Average price (per Bbl) $ 15.69 $ 12.03
</TABLE>
Gas and oil sales attributable to the Royalty for the quarters ended September
30, 1999 and 1998 were as follows:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Gas sales (Mcf) 4,717,239 4,264,729
Oil sales (Bbls) 9,480 7,771
</TABLE>
Although gas sales attributable to the Royalty increased in the third quarter of
1999, as compared to the same period in 1998, interim reports received from BROG
indicated lower production for the months of June and July 1999, as compared to
the prior year. Upon inquiry from the Trust, BROG responded that the apparent
declines in gas production for those months did not reflect actual declines in
gas productivity, but rather, were the result of prior period adjustments. BROG
indicated that deficiencies in its new internal accounting system precluded it
from generating actual production reports for the months of January through
August, and it instead relied upon estimates based on historical production,
which estimates proved high. The prior period adjustments were employed by BROG
to reconcile the difference between its estimates and the actual production for
the subject months. The Trust's consultants have reviewed data supplied by BROG
in support of the prior period adjustments and have preliminarily approved them,
subject to final audit.
Since the oil and gas sales attributable to the Royalty are based on an
allocation formula that is dependent on such factors as price and cost,
including capital expenditures, the aggregate production volumes from the
Underlying Properties may not provide a meaningful comparison to volumes
attributable to the Royalty.
During the third quarter of 1999, gas prices were higher than during the third
quarter of 1998. Gas sales attributable to the Royalty increased slightly in
1999 as compared to 1998. The price per barrel of oil during the third quarter
of 1999 was $3.66 per bbl higher than that received for the third quarter of
1998 due to increases in oil prices in world markets generally including the
posted prices applicable to oil sales attributable to the Royalty.
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<PAGE> 11
Effective January 1, 1998, all volumes of gas which are subject to the Royalty
(the "Trust gas") became subject to the terms of a Natural Gas Sales and
Purchase Contract between BROG and El Paso Energy Marketing Company ("El Paso").
That contract is for a term of two years through and including December 31,
1999, and provides for the sale of Trust gas at prices which will fluctuate in
accordance with published indices for gas sold in the San Juan Basin of New
Mexico. BROG entered into the contract with El Paso after soliciting and
receiving competitive bids in late 1997 from six major gas marketing firms to
market and/or purchase the Trust gas. In August 1999 BROG distributed requests
for proposals to 19 gas marketing firms. Responses have been received and are
being reviewed and negotiated as part of the process of putting a successor
contract in place for marketing the Trust gas commencing January 1, 2000. Unit
holders are referred to Note 6 of the Notes to Financial Statements in the
Trust's 1998 Annual Report for further information concerning the marketing of
gas produced from the Underlying Properties.
In February 1999, the Trust's auditors notified the Trust of an apparent gas
imbalance. A gas imbalance occurs where more than one party is entitled to the
economic benefit of the production of natural gas, but the gas is sold for the
account of less than all of the parties. The resulting imbalance may be
corrected by various means including a cash settlement and/or a volume
adjustment whereby an increased percentage of future production is sold for the
account of the underproduced party or parties. The Trust's auditors suggested
that the subject imbalance might relate to the acquisition by BROG's
predecessor, Southland Royalty Company ("Southland Royalty"), of mineral
properties which had been operated under a Joint Operating Agreement between
Southland Royalty and Unicon, the seller of the properties. The Trust made
inquiry of BROG concerning the imbalance and BROG agreed to investigate the
records. The Trustee met with BROG representatives in June 1999 to discuss the
investigation and by correspondence of September 24, 1999, BROG reported that
the imbalance probably related to problems experienced in the 1980's and early
1990's by Southland Royalty and Unicon in their dealings with Public Service
Company of New Mexico. BROG reported that Unicon was flowing gas to its account
while Southland Royalty was not producing and that this created a gas imbalance.
The imbalance was addressed, as between Southland Royalty and Unicon, by a
reduction in the total purchase price for Unicon assets acquired by Southland
Royalty in June 1990. However, there was no payment made to the Trust at the
time of that acquisition.
BROG proposes to address the imbalance with the Trust based upon the terms of a
Gas Balancing Agreement it indicates was in place between Southland Royalty and
Unicon, in connection with the Joint Operating Agreement applicable to the
subject properties. BROG has offered $2,395,202.49 as a cash settlement. The
Trust is considering the appropriateness of this proposed resolution and this
offer and is consulting with its advisors. No assurance can be given as to when
and how this issue will be resolved or that the gas imbalance issue will be
resolved in favor of the Trust.
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998:
For the nine months ended September 30, 1999 distributable income was
$20,501,322 ($.439860 per Unit) which was less than the $24,012,820 ($.515199
per Unit) of income distributed during the same period in 1998. The Trust
received $892,496 as proceeds of a one-time business interruption insurance
claim as reported in the Trust's report on Form 10-Q for the quarter ended June
30, 1999. The decrease in distributable income resulted primarily from decreases
in gas and oil prices, partially offset by the one-time distribution of
insurance proceeds. Interest income for the nine months ended September 30, 1999
was $42,876 compared to $57,951 during the first nine months of 1998. This
decrease is due to a decrease in funds available for investment. General and
administrative expenses increased to $747,712 from $663,603 during the 1998
period primarily due to differences in timing of the receipt and payment of
these expenses.
Capital expenditures incurred by BROG, attributable to the Underlying
Properties, for the first nine months of 1999 amounted to $7,991,065. Capital
expenditures were $10,048,169 for the first nine months of 1998.
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<PAGE> 12
Lease operating expenses and property taxes totaled $7,888,702 for the first
nine months of 1999 compared to $8,590,061 for the first nine months of 1998.
BROG advised the Trustee that during the nine months ended September 30, 1999,
22 gross (.401 net) conventional wells were completed on the Underlying
Properties. One gross (.05 net) coal seam well was completed. Twelve gross (.144
net) coal seam wells were recavitated during the first six months of 1999.
During the nine months ended September 30, 1998, ten gross (5.13 net)
conventional gas wells were completed on the Underlying Properties and 21 gross
(10.74 net) conventional wells were recompleted. Twenty-nine gross (2.01 net)
coal seam wells were recavitated during the first nine months of 1998.
Royalty income for the nine months ended September 30, 1999 is associated with
actual gas and oil production during November 1998 through July 1999 from the
Underlying Properties. Gas and oil sales from the Underlying Properties for the
nine months ended September 30, 1999 and 1998 were as follows:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Gas:
Total sales (Mcf) 30,124,323 31,263,993
Mcf per day 110,346 114,520
Average price (per Mcf) $ 1.56 $ 1.81
Oil:
Total sales (Bbls) 55,357 63,694
Bbls per day 203 233
Average price (per Bbl) $ 12.69 $ 13.80
</TABLE>
Gas and oil sales attributable to the Royalty for the nine months ended
September 30, 1999 and 1998 were as follows:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Gas sales (Mcf) 14,153,839 14,721,489
Oil sales (Bbls) 26,096 29,706
</TABLE>
During the first nine months of 1999, gas and oil prices were lower than during
the first nine months of 1998. 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 sales amounts from
the Underlying Properties may not provide a meaningful comparison to sales
attributable to the Royalty.
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<PAGE> 13
CALCULATION OF ROYALTY INCOME:
Royalty income received by the Trust for the three months and nine months ended
September 30, 1999 and 1998, respectively, was computed as shown in the
following table:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- ----------------------------
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Gross proceeds of sales from
the Underlying Properties :
Gas proceeds $ 17,003,534 $ 16,436,207 $ 47,093,562 $ 56,513,251
Oil proceeds 296,092 222,230 702,209 879,060
------------ ------------ ------------ ------------
Total 17,299,626 16,658,437 47,795,771 57,392,311
------------ ------------ ------------ ------------
Less production costs:
Severance tax - Gas 1,756,659 1,735,847 4,853,720 5,832,736
Severance tax - Oil 34,325 22,103 72,846 96,716
Lease operating expenses
and property tax 2,243,776 2,786,500 7,888,702 8,590,061
Capital expenditures 2,720,024 3,745,082 7,991,065 10,048,169
Other (a) -- -- (95,445) --
------------ ------------ ------------ ------------
Total 6,754,784 8,289,532 20,710,888 24,567,682
------------ ------------ ------------ ------------
Net profits 10,544,842 8,368,905 27,084,883 32,824,629
------------ ------------ ------------ ------------
Net overriding royalty
interest 75% 75% 75% 75%
------------ ------------ ------------ ------------
Royalty income $ 7,908,632 $ 6,276,679 $ 20,313,662 $ 24,618,472
============ ============ ============ ============
</TABLE>
(a) represents the payment of interest for the late payment of gas revenue
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
The Trust has not entered into derivative financial instruments, derivative
commodity instruments or other similar instruments during the quarter ended
September 30, 1999. The Trust does not market the Trust gas, oil and/or natural
gas liquids. BROG is responsible for such marketing.
-13-
<PAGE> 14
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Trust is not a party to any litigation. However, the Trust
is aware that BROG is involved in litigation from time to time
that could affect the royalty income received by the Trust.
A lawsuit was commenced on September 1, 1995 against BROG by
certain royalty and overriding royalty owners on behalf of those
persons similarly situated. The suit involves properties that
are burdened by the Trust. This case is one of six virtually
identical class actions filed against New Mexico gas producers.
All such cases have been consolidated in the First Judicial
District of Santa Fe County, New Mexico where the case is styled
San Juan 1990-A, L.P., et al. v. El Paso Production Company and
Meridian Oil Inc. The plaintiffs allege that they and members of
the proposed class have been underpaid for royalties and
overriding royalties. The plaintiffs have sought to certify the
actions as class actions and seek monetary damages. The court
has denied class certification, but the plaintiffs have renewed
their request for class certification. Discovery in this matter
is said to be near conclusion, and BROG anticipates summary
judgment proceedings to occur in the fall of 1999. Because of
the pending nature of the litigation, exposure to the Trust from
this suit cannot be quantified. However, if the plaintiffs who
have interests in properties that are burdened by the Trust are
successful, royalty income received by the Trust could decrease.
In addition, an administrative claim was initiated on March 17,
1997 by the Mineral Management Service of the United States
Department of the Interior (the "MMS") against BROG regarding a
gas contract settlement dated March 1, 1990, between BROG and
certain other parties thereto. The claim alleges that additional
royalties are due on production from federal and Indian leases
in the State of New Mexico on properties that are burdened by
the Royalty. In June 1997 BROG filed its statement of reasons
thereby contesting whether the royalties are payable as claimed.
BROG has informed the Trust that the administrative claim is in
the appeal process. If the MMS claim is successful, royalty
income received by the Trust could decrease.
BROG is in negotiations with the State of New Mexico for a tax
refund based upon a claim for reimbursement of compression costs
used in calculating wellhead values. BROG has obtained the
approval of the Attorney General of New Mexico of a settlement
in the amount of $4,200,000, but no payment has yet been
received. BROG has not informed the Trust of the proportion of
the settlement proceeds, which will be attributable to the
Trust.
Item 5. Other
In February 1999, the Trust's auditors notified the Trust of an
apparent gas imbalance. A gas imbalance occurs where more than
one party is entitled to the economic benefit of the production
of natural gas, but the gas is sold for the account of less than
all of the parties. The resulting imbalance may be corrected by
various means including a cash settlement and/or a volume
adjustment whereby an increased percentage of future production
is sold for the account of the underproduced party or parties.
The Trust's auditors suggested that the subject imbalance might
relate to the acquisition by BROG's predecessor, Southland
Royalty Company ("Southland Royalty"), of mineral properties
which had been operated under a Joint Operating Agreement
between Southland Royalty and Unicon, the seller of the
properties. The Trust made inquiry of BROG concerning the
imbalance and BROG agreed to investigate the records. The
Trustee met with BROG representatives in June 1999 to discuss
the investigation, and by correspondence of September 24, 1999,
BROG reported that the imbalance probably related to
problems experienced in the 1980's
-14-
<PAGE> 15
and early 1990's by Southland Royalty and Unicon in their
dealings with Public Service Company of New Mexico. BROG
reported that Unicon was flowing gas to its account while
Southland Royalty was not producing and that this created a
gas imbalance. The imbalance was addressed, as between
Southland Royalty and Unicon, by a reduction in the total
purchase price for Unicon assets acquired by Southland Royalty
in June 1990. However, there was no payment made to the Trust
at the time of that acquisition.
BROG proposes to address the imbalance with the Trust based upon
the terms of a Gas Balancing Agreement it indicates was in place
between Southland Royalty and Unicon, in connection with the
Joint Operating Agreement applicable to the subject properties
and has offered $2,395,202.49 as a cash settlement. The Trust is
considering the appropriateness of this proposed means of
resolution and this offer and is consulting with its advisors.
No assurance can be given as to when and how this issue will be
resolved.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(4)(a) San Juan Basin Royalty Trust Indenture dated
November 3, 1980, between Southland Royalty Company
(now Burlington Resources Oil & Gas Company) and
The Fort Worth National Bank (now Bank One, Texas,
N.A.), as Trustee, heretofore filed as Exhibit
(4)(a) to the Trust's Annual Report on Form 10-K to
the Securities and Exchange Commission for the
fiscal year ended December 31, 1980 is incorporated
herein by reference.
(4)(b) Net Overriding Royalty Conveyance from Southland
Royalty Company (now Burlington Resources Oil & Gas
Company) to The Fort Worth National Bank (now Bank
One, Texas, N.A.), as Trustee, dated November 3,
1980 (without Schedules), heretofore filed as
Exhibit (4)(b) to the Trust's Annual Report on Form
10-K to the Securities and Exchange Commission for
the fiscal year ended December 31, 1980 is
incorporated herein by reference.
(27) Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended
September 30, 1999.
-15-
<PAGE> 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.
BANK ONE, TEXAS, N.A., AS TRUSTEE FOR
THE SAN JUAN BASIN ROYALTY TRUST
By /s/ LEE ANN ANDERSON
---------------------------
Lee Ann Anderson
Vice President
Date: November 12, 1999
(The Trust has no directors or executive officers.)
-16-
<PAGE> 17
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER EXHIBIT PAGE
<S> <C> <C>
(4)(a) San Juan Basin Royalty Trust Indenture dated November
3, 1980, between Southland Royalty Company (now
Burlington Resources Oil & Gas Company) and The Fort
Worth National Bank (now Bank One, Texas, N.A.), as
Trustee, heretofore filed as Exhibit (4)(a) to the
Trust's Annual Report on Form 10 K to the Securities
and Exchange Commission for the fiscal year ended
December 31, 1980 is incorporated herein by
reference.*
(4)(b) Net Overriding Royalty Conveyance from Southland
Royalty Company (now Burlington Resources Oil & Gas
Company) to The Fort Worth National Bank (now Bank
One, Texas, N.A.), as Trustee, dated November 3, 1980
(without Schedules), heretofore filed as Exhibit
(4)(b) to the Trust's Annual Report on Form 10-K to
the Securities and Exchange Commission for the fiscal
year ended December 31, 1980 is incorporated herein by
reference.*
(27) Financial Data Schedule **
</TABLE>
* A copy of this Exhibit is available to any Unit holder, at the actual cost
of reproduction, upon written request to the Trustee, Bank One, Texas,
N.A., P.O. Box 2604, Fort Worth, Texas 76113.
** Filed herewith.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED CONDENSED STATEMENTS OF ASSETS, LIABILITIES AND TRUST CORPUS OF SAN
JUAN BASIN ROYALTY TRUST AS OF SEPTEMBER 30, 1999, AND THE RELATED CONDENSED
STATEMENTS OF DISTRIBUTABLE INCOME AND CHANGES IN TRUST CORPUS FOR THE
NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1999.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 2,662,256
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,662,256
<PP&E> 133,275,528
<DEPRECIATION> 86,409,491
<TOTAL-ASSETS> 49,488,293
<CURRENT-LIABILITIES> 2,662,256
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 46,866,037
<TOTAL-LIABILITY-AND-EQUITY> 49,488,293
<SALES> 0
<TOTAL-REVENUES> 21,249,034
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 747,712
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 20,501,322
<INCOME-TAX> 0
<INCOME-CONTINUING> 20,501,322
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 20,501,322
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
