-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Evrzg8I4zkXEeOrYcd3AdTRVg8MPKjTjLnkBCeroDrbkMf0DRehcw3VOX4u3uY57 y0zWo3/pODQ76vE+ktWaJw== 0000919297-95-000013.txt : 19951119 0000919297-95-000013.hdr.sgml : 19951119 ACCESSION NUMBER: 0000919297-95-000013 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19950930 FILED AS OF DATE: 19951114 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SAN JUAN BASIN ROYALTY TRUST CENTRAL INDEX KEY: 0000319655 STANDARD INDUSTRIAL CLASSIFICATION: OIL ROYALTY TRADERS [6792] IRS NUMBER: 756279898 STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-08032 FILM NUMBER: 95592986 BUSINESS ADDRESS: STREET 1: BANK ONE TEXAS N A TRUST CITY: FT WORTH STATE: TX ZIP: 76113 BUSINESS PHONE: 8178844630 MAIL ADDRESS: STREET 1: 1600 BANK ONE TOWER STREET 2: 500 THROCKMORTON CITY: FORT WORTH STATE: TX ZIP: 76102-3899 10-Q 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, 1995 Commission File No. 1-8032 SAN JUAN BASIN ROYALTY TRUST Texas I.R.S. No. 75-6279898 Bank One, Texas, NA, 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 14, 1995: 46,608,796 - ---------- Page 1 of 18 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, NA as Trustee for the San Juan Basin Royalty 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 such rules and regulations, although the Trustee believes that the disclosures are adequate to make the information presented not misleading. It is suggested that these condensed financial statements be read in conjunction with the financial statements and the notes thereto included in the Trust's latest annual report on Form 10-K. 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, 1995, and the distributable income and changes in trust corpus for the three-month and nine-month periods ended September 30, 1995 and 1994 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 made a limited review of the condensed financial statements as of September 30, 1995 and for the three-month and nine-month periods ended September 30, 1995 and 1994 included herein. -2- INDEPENDENT ACCOUNTANTS' REPORT Bank One, Texas, NA as Trustee for the San Juan Basin Royalty Trust: We have made a review of the condensed statement of assets, liabilities and trust corpus of the San Juan Basin Royalty Trust as of September 30, 1995 and the related condensed statements of distributable income and changes in trust corpus for the three-month and nine-month periods ended September 30, 1995 and 1994. 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, 1994, 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 20, 1995, 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, 1994 is fairly stated in all material respects in relation to the statement of assets, liabilities and trust corpus from which it has been derived. /s/ Deloitte & Touche LLP - -------------------------------------- DELOITTE & TOUCHE LLP November 8, 1995 -3-
SAN JUAN BASIN ROYALTY TRUST CONDENSED STATEMENTS OF ASSETS, LIABILITIES AND TRUST CORPUS - ------------------------------------------------------------------------------------------------------------- SEPTEMBER 30, DECEMBER 31, ASSETS 1995 1994 (UNAUDITED) Cash and short-term investments $ 1,047,906 $ 589,365 Net overriding royalty interests in producing oil and gas properties (net of accumulated amortization of $62,448,198 and $58,333,488 at September 30, 1995 and December 31, 1994, 70,827,330 74,942,040 respectively) ---------- ---------- $71,875,236 $75,531,405 ========== ========== LIABILITIES AND TRUST CORPUS Distribution payable to Unit holders (Note 3) $ 1,047,906 $ 589,365 Commitments and contingencies (Note 3) Trust corpus - 46,608,796 Units of beneficial interest authorized and outstanding 70,827,330 74,942,040 ---------- ---------- $71,875,236 $75,531,405 ========== ==========
CONDENSED STATEMENTS OF DISTRIBUTABLE INCOME (UNAUDITED) - ------------------------------------------------------------------------------------------------------------- THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ---------------------------- ---------------------------- 1995 1994 1995 1994 Royalty income (Note 3) $3,542,265 $3,923,746 $13,476,447 $19,918,042 Interest income 9,400 8,561 28,432 30,012 --------- --------- ---------- ---------- 3,551,665 3,932,307 13,504,879 19,948,054 General and administrative costs 219,876 142,087 896,817 578,275 --------- --------- ---------- ---------- Distributable income $3,331,789 $3,790,220 $12,608,062 $19,369,779 ========= ========= ========== ========== Distributable income per Unit (46,608,796 Units) $ 0.071482 $ 0.081320 $ 0.270507 $ 0.415582 ======== ======== ======== ======== The accompanying notes to condensed financial statements are an integral part of these statements.
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SAN JUAN BASIN ROYALTY TRUST CONDENSED STATEMENTS OF CHANGES IN TRUST CORPUS (UNAUDITED) - ------------------------------------------------------------------------------------------------ THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, -------------------------- -------------------------- 1995 1994 1995 1994 Trust corpus, beginning of period $72,169,081 $76,792,668 $74,942,040 $79,898,032 Amortization of net overriding royalty interest (1,341,751) (945,089) (4,114,710) (4,050,453) Distributable income 3,331,789 3,790,220 12,608,062 19,369,779 Distributions declared (3,331,789) (3,790,220) (12,608,062) (19,369,779) --------- --------- --------- ---------- Trust corpus, end of period $70,827,330 $75,847,579 $70,827,330 $75,847,579 ========== ========== ========== ========== The accompanying notes to condensed financial statements are an integral part of these statements.
-5- SAN JUAN BASIN ROYALTY TRUST NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF ACCOUNTING The San Juan Basin Royalty Trust ("Trust") was established as of November 1, 1980. The financial statements of the Trust are prepared on the following basis: - Royalty income recorded for a month is the amount computed and paid by the interest owner, Southland Royalty Company ("Southland"), 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%. - 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 overriding royalty interests 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 and certain cash reserves may be established for contingencies which would not be accrued in financial statements prepared in accordance with GAAP. 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 wells beginning in 1989. Under Section 29 of the Internal Revenue Code, production from coal seam gas wells drilled prior to January 1, 1993, qualifies for the federal income tax credit for producing non-conventional fuels. This tax credit was approximately $1.01 per MMBtu for the year 1994 and is adjusted for inflation annually. The credit currently applies to production through the year 2002. 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 income tax liability, but such credit may not reduce his regular tax liability (after the foreign tax credit -6- 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 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. COMMITMENTS AND CONTINGENCIES On June 4, 1992, the Trustee filed suit against Meridian Oil Inc. ("MOI") and Southland in state district court in Rio Arriba County, New Mexico. MOI and Southland are the operators of certain of the Trust properties. The claims asserted on behalf of the Trust in this lawsuit include breach of contract, violation of the operator's duties and breach of fiduciary duty. The relief sought includes compensatory and punitive damages as well as the equitable remedy of removal of Southland and MOI from certain positions including that of marketer of the Trust's gas. In response, Southland filed suit on August 7, 1992, against the Trustee in probate court in Tarrant County, Texas. The lawsuit seeks declaratory relief that: (I) the rights and duties of the Trustee be governed in accordance with and by the terms and provisions of the trust instruments which established the Trust as well as the Texas Trust Code, (II) the Trustee cannot object to Southland's reports or audits after 180 days, (III) the interests held by the Trust are not subject to partition, and (IV) the Trust is without standing to remove Southland as operator of the Trust properties. The lawsuit also seeks to remove Bank One, Texas, NA as Trustee. In a decision filed August 8, 1994, the Supreme Court of New Mexico ruled in the lawsuit in the state district court in Rio Arriba County, New Mexico, that venue was not proper and remanded the case for dismissal without prejudice to its refiling. In its ruling, the Supreme Court of New Mexico also ruled that venue is proper in Santa Fe County, New Mexico. The August 8, 1994 decision does not relate to the merits of the Trust's claims. The Trustee refiled the lawsuit in Santa Fe County, New Mexico on August 31, 1994. The claims asserted and the relief sought on behalf of the Trust in the suit filed in Santa Fe County include breach of contract, breach of fiduciary duty and breach of the covenant of good faith and fair dealing. The relief sought includes compensatory and punitive damages, an accounting and a permanent injunction relating to the operation of the Trust properties. On October 3, 1994, MOI and Southland filed a motion seeking to dismiss the newly filed lawsuit on grounds of forum non conveniens. MOI and Southland also filed two additional motions seeking the dismissal of the Trust's claims of breach of fiduciary duty and breach of the covenant of good faith and fair dealing. The Trustee responded to these motions. The Trustee filed a motion to amend the complaint of August 1994 in order to allege that MOI and Southland have failed to account to the Trustee for the volumes and revenues for a large number of wells and to drop claims relating to the amendment by Southland of old pipeline gas purchase contracts which occurred prior to the Burlington Resources Inc. acquisition of Southland. On May 25, 1995, the court denied the motion filed by MOI and Southland to dismiss the lawsuit on the basis of forum non conveniens. The court also denied MOI and Southland's motion to dismiss the Trustee's claims relating to the breach of the covenant of good faith and fair dealing. On June 5, 1995, the court granted the Defendants' motion to dismiss the Trustee's claims of breach of fiduciary duties by the Defendants. On June 5, 1995, the Trustee announced that non-binding mediation, which had been ongoing with regard to this lawsuit filed in Santa Fe County, was not successful in resolving the claims asserted by the Trust. -7- On July 5, 1995, Southland filed a counterclaim in the Santa Fe County lawsuit. The counterclaim seeks declaratory relief as follows: A. That Southland's policy and practice of remitting payment to the Trustee for the net overriding royalty interest ("NORI") based on the proceeds actually received by Southland at prevailing prices in the area of production constitutes good faith compliance with its duties and obligations under the Net Overriding Royalty Conveyance filed of record in San Juan County, New Mexico on November 21, 1980 ("Conveyance"); B. That the revenues or profits realized by Meridian Oil Trading Inc. ("MOTI") and Meridian Oil Hydrocarbons Inc. ("MOHI") on subsequent downstream resale or treatment of the gas is immaterial to the calculation and payment of the NORI. C. That Meridian Oil Gathering Inc. ("MOGI") is not compelled or required to grant the Trustee a discounted fee or rate (different and less than that charged by MOGI to the owners of other interests) for gathering and processing services provided by MOGI; D. That the Trustee has no power or authority under the Conveyance or the San Juan Basin Royalty Trust Indenture dated November 3, 1980 ("Indenture") to take exception to the quarterly and annual reports and audits by Southland relating to the NORI that were not timely excepted to in writing by the Trustee as required by Section 2.04 of the Conveyance, and that the reports and audits are deemed to be correct as rendered. E. That the Trustee is precluded under the Conveyance and Indenture from seeking partition of the Trust and that its attempt to do so in the complaint filed by the Trustee on June 4, 1992, in Rio Arriba County, New Mexico ("First Complaint") was wrongful. F. That the Trustee is precluded under the Conveyance and Indenture from seeking removal of Southland from the position of operator of the subject properties, and that its attempts to do so in the First Complaint and in the amended complaint filed on October 29, 1992 in Rio Arriba County, New Mexico ("Second Complaint") were wrongful. G. That the Trustee is precluded under the Conveyance and Indenture from demanding or requiring that Southland abandon or relinquish its role in the management and administration of sales, accounting and other non-field related business pertaining to the Trust. H. That Southland's future marketing plans for oil and gas produced from the properties subject to the Conveyance are in accordance and conformity with its duties and obligations under the Conveyance. I. That Southland is entitled to its costs, attorneys' fees and for such other relief as the court deems just and proper. On August 4, 1995, the Trustee filed a motion to dismiss such counterclaim. This motion was heard by the court on October 20, 1995, and the court granted the motion in part dismissing Claims E. through I., leaving only those counterclaims defensive to the Trustee's claims. In September 1995, the Trustee filed a motion for leave to file its Second Amended Complaint in order to more fully particularize the pleadings, the nature of claims of liability in the case, and facts supporting alter ego and single business enterprise liability and fraudulent concealment as it pertains to the Defendants' statute of limitations defense and to assert the following additional claims for relief: breach of express good faith duty, constructive fraud, unjust enrichment and prima facie tort and to add claims in the alternative of intentional interference with contract and of conspiracy. The hearing on such motion as well as other matters is scheduled for November 17, 1995. Trial is currently set in the Santa Fe County lawsuit for February 1996. -8- A resolution of the Santa Fe County lawsuit favorable to the Trust could possibly have a material effect on distributable income depending on the nature and terms of the resolution. 4. CONTRACTS In connection with a settlement agreement entered into effective March 1, 1990, between Southland, Gas Company of New Mexico (a division of Public Service Company of New Mexico) ("Gas Company") and Sunterra Gas Gathering Company (a subsidiary of Public Service Company of New Mexico) ("Sunterra"), Southland entered into five year gas purchase agreements replacing intrastate and interstate gas purchase agreements in effect at that time at prices favorable under market conditions at the time of the settlement. In addition, new gas gathering, transportation and processing agreements were executed in connection with the settlement. While it is impossible to determine the exact value to be derived under these agreements, Southland has advised the Trustee that it considers the terms of the agreements to be favorable and of substantial additional value. Unit holders should refer to Note 6 of Notes to Financial Statements in the Trust's 1994 Annual Report for further discussion of these contracts and their impact upon the Trust. Southland informed the Trust that an amendment was entered into for the 1994-1995 winter heating season. Gas Company and Sunterra were required to purchase, at the wellhead, an average volume of 10,529 MMBtu per day at $2.884 per MMBtu for the period beginning November 1, 1994 and ending March 31, 1995 and an additional 14,900 MMBtu per day at $3.146 per MMBtu for the period beginning December 1, 1994 and ending February 28, 1995. Gas Company and Sunterra were granted a make-up period of four months beginning April 1, 1995 to fulfill this purchase obligation. Gas Company and Sunterra were granted recall rights on volumes up to 15,000 MMBtu per day at the tailgate of the Kutz and Lybrook plants, provided they have nominated the full contract volume specified above. The price for recall gas will be the average of the first and second issues of the Inside FERC EPNG SJ Index. Southland has also advised the Trust that, effective July 1, 1995, Williams Field Service ("Williams") purchased the Kutz and Lybrook processing plants and the gathering systems behind these plants which were owned by Sunterra, Gas Company and Sunterra Gas Processing Company ("SGPC") and that new gathering and processing agreements with Williams have been entered into which contain acceptable rates, terms and conditions. The new agreements replaced the gathering and processing agreements with Gas Company, Sunterra and SGPC effective on the closing date of the sale of these facilities to Williams. The Trust has further been advised by Southland that MOTI negotiated an agreement with Gas Company providing for transportation on Gas Company's Albuquerque mainline. This agreement was effective on the closing date of the sale of such gathering and processing facilities to Williams. This transportation agreement is necessary to deliver volumes of gas behind the Lybrook processing plant to mainline delivery points. Southland has further advised the Trust that on September 13, 1994, MOTI, the marketing affiliate of Southland entered into a gas sales agreement with Gas Company covering gas production from the Trust properties for the five winter periods beginning November 1, 1995 and ending March 31, 2000. Sales will be based on a monthly published index as opposed to the previous fixed price agreement. Valid delivery points under the agreement will be the tailgate of the Lybrook plant, the tailgate of the Kutz plant, the Blanco Hub, or Rio Puerco. It is the understanding of the Trustee that Gas Company is now known as PNM Gas Services. ****** -9- Item 2. Trustee's Discussion and Analysis THREE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994 The San Juan Basin Royalty Trust received royalty income of $3,542,265 and interest income of $9,400 during the third quarter of 1995. After deducting administrative expenses of $219,876, distributable income for the quarter was $3,331,789, or $.071482 per Unit. During the third quarter of 1995, the tax credit relating to production from coal seam wells totaled approximately $.03 per Unit. In the third quarter of 1994, royalty income was $3,923,746, interest income was $8,561, administrative expenses were $142,087 and distributable income was $3,790,220, or $.081320 per Unit. In the third quarter of 1994, the tax credit relating to production from coal seam wells was approximately $.03 per Unit. Based on 46,608,796 Units outstanding, the per Unit distributions for the third quarter of 1995 were as follows: July $.016857 August .032143 September .022482 -------- Quarter Total $.071482 ======== Royalty income for the third quarter of 1995 was lower than that in the third quarter of 1994 due primarily to lower gas prices in 1995. Interest income was higher in the third quarter of 1995 as compared to the third quarter of 1994 primarily due to increased interest rates. Administrative expenses were higher in the third quarter of 1995, as compared to the third quarter of 1994 primarily due to increased expenses relating to litigation involving Bank One, NA, as Trustee, and Meridian Oil Inc. ("MOI") and Southland Royalty Company ("Southland"). Trial is currently set for February 1996. Capital costs incurred by Southland for the third quarter of 1995 amounted to $1,116,789 versus $2,817,626 for the third quarter of 1994. The decreased capital costs in 1995 were primarily attributable to a decrease in the number of net well recompletions. Lease operating expenses and property taxes attributable to the properties from which the Royalty was carved were $2,937,729 for the third quarter of 1995 compared with $2,268,403 for the third quarter of 1994. In the third quarter of 1995, Southland advised the Trustee that 11 gross (.68 net) conventional wells and 8 gross (2.59 net) coal seam wells were recompleted through September 30, 1995. Three gross (.67 net) conventional gas wells were completed on the properties from which the Royalty was carved during the third quarter of 1994. There were 4 gross (2.39 net) coal seam wells and 7 gross (2.24 net) conventional wells in progress on September 30, 1995. In the third quarter of 1994, three gross (1.10 net) conventional wells were drilled on the Trust Properties. Four gross (3.50 net) coal seam wells and thirteen gross (4.63 net) conventional wells were recompleted in the third quarter of 1994. Four gross (2.55 net) coal seam and 22 gross (7.14 net) conventional wells were in progress on September 30, 1994. Unit holders are referred to "Description of the Properties" in the Trust's Annual Report for 1994 for further information concerning Southland's coal seam well drilling program in the San Juan Basin. This program includes properties in which the Trust owns an interest. -10- Gas and oil sales for the quarters ended September 30, 1995 and 1994 were as follows:
1995 1994 PROPERTIES FROM WHICH THE ROYALTIES WERE CARVED: Gas: Total sales (Mcf) 8,905,543 7,821,361 Mcf per day 96,799 85,015 Average price (per Mcf) $1.08 $1.43 Oil: Total sales (Bbls) 22,314 29,025 Bbls per day 243 315 Average price (per Bbl) $13.82 $14.82 ATTRIBUTABLE TO THE ROYALTIES: Gas sales (Mcf) 3,605,926 2,934,702 Oil sales (Bbls) 8,819 10,717 The third quarter production figures are associated with actual oil and gas production during May through July. In the third quarter of 1995, gas sales from the properties from which the Royalty was carved were higher primarily due to higher production from conventional gas wells. Gas prices were lower during the third quarter of 1995 due to lower prices being paid by Meridian Oil Trading, Inc., a subsidiary of MOI that markets a substantial portion of the Trust's gas. Production from coal seam wells totaled 3,423,885 Mcf during the third quarter of 1995, compared to 3,315,952 Mcf during the third quarter of 1994. The average oil price for the third quarter of 1995 was lower than that for the third quarter of 1994 primarily as a result of decreases in the posted prices. Since the oil and gas sales attributable to the Royalty is based on an allocation formula that is dependent upon such factors as price and costs (including capital expenditures), the production amounts do not provide a meaningful comparison. NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994 For the nine months ended September 30, 1995, distributable income was $12,608,062 ($.270507 per Unit) which was less than the $19,369,779 ($.415582 per Unit) of income distributed during the same period in 1994. Royalty income decreased from $19,918,042 in the first nine months of 1994 as compared to $13,476,447 in the first nine months of 1995 primarily as a result of decreases in the average price of gas. For the nine month period ended September 30, 1995, the tax credit relating to production from coal seam wells totalled approximately $.09 per Unit in comparison to $.12 per Unit for the same period in 1994. Interest income for the nine months ended September 30, 1995 was $28,432 compared to $30,012 during the first nine months of 1994. The decrease in interest income due to the decrease in funds available for investment was offset by an increase in interest rates during this period of 1995. Capital costs incurred for the nine month period ending September 30, 1995 were $4,146,532. For the first nine months of 1994, capital expenditures totaled $6,167,131. The decrease was due primarily to decreased drilling activity. Southland advised that during the nine months ended September 30, 1995, 4 gross (1.54 net) coal seam and 24 gross (6.36 net) conventional productive wells were completed on Trust Properties. Thirteen gross (7.59 net) coal seam wells and 33 gross (8.21 net) conventional wells were recompleted through September 30, 1995. There were 4 gross (2.39 net) coal seam wells and 7 gross (2.24 net) conventional wells in progress at September 30, 1995. For the corresponding 1994 period, 8 gross (4.80 net) coal seam and 12 gross (1.46 net) conventional productive wells were drilled on the Trust Properties. Sixteen gross (9.57 net) coal seam wells and 40 gross (10.66 net) conventional wells were recompleted through September 30, 1994. There were 4 gross (2.55 net) coal seam wells and 22 gross (7.14 net) conventional wells in progress at September 30, 1994. -11- Lease operating expenses and property taxes totaled approximately $7,682,175 for the first nine months of 1995 compared to $6,903,106 for the first nine months of 1994. For the nine months ended September 30, 1995 and 1994, gas and oil sales compared as follows:
1995 1994 PROPERTIES FROM WHICH THE ROYALTIES WERE CARVED: Gas: Total sales (Mcf) 25,457,338 25,731,954 Mcf per day 93,250 94,256 Average price (per Mcf) $1.29 $1.69 Oil: Total sales (Bbls) 57,333 64,418 Bbls per day 210 236 Average price (per Bbl) $14.37 $13.17 ATTRIBUTABLE TO THE ROYALTIES: Gas sales (Mcf) 11,467,199 12,647,649 Oil sales (Bbls) 25,761 30,226
The first nine months production figures are associated with actual oil and gas production during November 1994 through July 1995. The average price of gas sold from the properties from which the Royalty was carved decreased from $1.69 per Mcf to $1.29 per Mcf primarily as a result of lower spot market prices in 1995. The average price per barrel of oil increased due to higher posted prices. Since the oil and gas sales attributable to the Royalty is based on an allocation formula that is dependent upon such factors as price and costs (including capital expenditures), the production amounts do not provide a meaningful comparison. -12- ROYALTY CALCULATION: Royalty income received by the Trust for the three months and nine months ended September 30, 1995 and 1994, respectively, was computed as shown in the following table:
Three Months Ended Six Months Ended September 30, September 30, -------------------------- --------------------------- 1995 1994 1995 1994 Gross proceeds of sales from the properties from which the net overriding royalty was carved: Gas proceeds $9,621,865 $11,158,865 $ 32,726,022 $43,544,751 Oil proceeds 308,458 430,006 823,952 848,217 Other proceeds 2,592 2,592 ----------- ---------- ---------- ---------- Total 9,932,915 11,588,871 33,552,566 44,392,968 ---------- ---------- ---------- ---------- Less production costs: Severance tax - Gas 1,120,850 1,226,386 3,670,520 4,676,979 Severance tax - Oil 34,527 44,795 84,743 88,363 Lease operating expenses and property tax 2,937,729 2,268,403 7,682,175 6,903,106 Capital expenditures 1,116,789 2,817,626 4,146,532 6,167,131 --------- ---------- ---------- ---------- Total 5,209,895 6,357,210 15,583,970 17,835,579 --------- ---------- ---------- ---------- Net profits 4,723,020 5,231,661 17,968,596 26,557,389 --------- ---------- ---------- ---------- Net overriding royalty interest 75% 75% 75% 75% --------- --------- ---------- ---------- Royalty income $ 3,542,265 $ 3,923,746 $13,476,447 $19,918,042 ========= ========= ========= ==========
-13- PART II - OTHER INFORMATION Item 1. Legal Proceedings The Trustee of the San Juan Basin Royalty Trust (the "Trust"), has filed suit against Meridian Oil Inc. ("MOI") and Southland Royalty Company ("Southland") in state district court in Rio Arriba County, New Mexico, Cause No. RA 92-1211(C). The principal asset of the Trust consists of a seventy-five percent (75%) net overriding royalty interest carved out of certain of Southland's oil and gas leasehold and royalty interests in the San Juan Basin located in San Juan, Rio Arriba and Sandoval counties of northwestern New Mexico (the "Trust Properties"). MOI and Southland are the operators of the Trust Properties. The claims asserted on behalf of the Trust in the lawsuit include breach of contract, violation of the operator's duties and breach of fiduciary duty. The relief sought includes compensatory and punitive damages as well as the equitable remedies of removal of Southland and MOI from certain positions including that of marketer of the Trust's gas. In response, Southland filed suit on August 7, 1992 against the Trustee in probate court in Tarrant County, Texas, Cause No. 92- 1927-2. The lawsuit seeks declaratory relief that: (i) the rights and duties of the Trustee be governed in accordance with and by the terms and provisions of the trust instruments which established the Trust as well as the Texas Trust Code, (ii) the Trustee cannot object to Southland's reports or audits after 180 days, (iii) the interests held by the Trust are not subject to partition, and (iv) the Trust is without standing to remove Southland as operator of the Trust properties. The lawsuit also seeks to remove Bank One, Texas, N.A. as Trustee. In a decision filed August 8, 1994, the Supreme Court of New Mexico ruled in the lawsuit filed by the Trustee against MOI and Southland in state district court in Rio Arriba County, New Mexico in June 1992, that venue was not proper in Rio Arriba County and remanded the case for dismissal without prejudice to its refiling. In its ruling, the Supreme Court of New Mexico also ruled that venue was proper in Santa Fe County, New Mexico. The August 8, 1994 decision does not relate to the merits of the Trust's claims. The Trustee refiled the lawsuit in Santa Fe County, New Mexico on August 31, 1994. The claims asserted and the relief sought on behalf of the Trust in the suit filed in Santa Fe County include breach of contract, breach of fiduciary duty and breach of the covenant of good faith and fair dealing. The relief sought includes compensatory and punitive damages, an accounting and a permanent injunction relating to the operation of the Trust properties. On October 3, 1994, MOI and Southland filed a motion seeking to dismiss the newly filed lawsuit on the grounds of forum non conveniens. MOI and Southland also filed two additional motions seeking the dismissal of the Trust's claims of breach of fiduciary duty and breach of the covenant of good faith and fair dealing. The Trustee responded to these motions. The Trustee filed a motion to amend the complaint of August 1994 in order to allege that MOI and Southland have failed to account to the Trustee for the volumes and revenues for a large number of wells and to drop claims relating to the amendment by Southland of old pipeline gas purchase contracts which occurred prior to the Burlington Resources Inc. acquisition of Southland. On May 25, 1995, the court denied the motion filed by the Defendants to dismiss the lawsuit on the basis of forum non conveniens. The court also denied the Defendants' motion to dismiss the Trustee's claims relating to breach of the covenant of good faith and fair dealing. On June 5, 1995, the court granted the Defendants' motion to dismiss the Trustee's claims of breach of fiduciary duties by the Defendants. On June 5, 1995, the Trustee announced that non-binding mediation, which had been ongoing with regard to this lawsuit filed in Santa Fe County, was not successful in resolving the claims asserted by the Trust. -14- On July 5, 1995, Southland filed a counterclaim in the Santa Fe County lawsuit. The counterclaim seeks declaratory relief as follows: A. That Southland's policy and practice of remitting payment to the Trustee for the net overriding royalty interest ("NORI") based on the proceeds actually received by Southland at prevailing prices in the area of production constitutes good faith compliance with its duties and obligations under the Net Overriding Royalty Conveyance filed of record in San Juan County, New Mexico on November 21, 1980 ("Conveyance"); B. That the revenues or profits realized by Meridian Oil Trading Inc. ("MOTI") and Meridian Oil Hydrocarbons Inc. ("MOHI") on subsequent downstream resale or treatment of the gas is immaterial to the calculation and payment of the NORI. C. That Meridian Oil Gathering Inc. ("MOGI") is not compelled or required to grant the Trustee a discounted fee or rate (different and less than that charged by MOGI to the owners of other interests) for gathering and processing services provided by MOGI; D. That the Trustee has no power or authority under the Conveyance or the San Juan Basin Royalty Trust Indenture dated November 3, 1980 ("Indenture") to take exception to the quarterly and annual reports and audits by Southland relating to the NORI that were not timely excepted to in writing by the Trustee as required by Section 2.04 of the Conveyance, and that the reports and audits are deemed to be correct as rendered. E. That the Trustee is precluded under the Conveyance and Indenture from seeking partition of the Trust and that its attempt to do so in the complaint filed by the Trustee on June 4, 1992, in Rio Arriba County, New Mexico ("First Complaint") was wrongful. F. That the Trustee is precluded under the Conveyance and Indenture from seeking removal of Southland from the position of operator of the subject properties, and that its attempts to do so in the First Complaint and in the amended complaint filed on October 29, 1992 in Rio Arriba County, New Mexico ("Second Complaint") were wrongful. G. That the Trustee is precluded under the Conveyance and Indenture from demanding or requiring that Southland abandon or relinquish its role in the management and administration of sales, accounting and other non-field related business pertaining to the Trust. H. That Southland's future marketing plans for oil and gas produced from the properties subject to the Conveyance are in accordance and conformity with its duties and obligations under the Conveyance. I. That Southland is entitled to its costs, attorneys' fees and for such other relief as the court deems just and proper. On August 4, 1995, the Trustee filed a motion to dismiss such counterclaim. This motion was heard by the court on October 20, 1995, and the court granted the motion in part dismissing Claims E. through I., leaving only those counterclaims defensive to the Trustee's claims. In September 1995, the Trustee filed a motion for leave to file its Second Amended Complaint in order to more fully particularize the pleadings, the nature of claims of liability in the case, and facts supporting alter ego and single business enterprise liability and fradulent concealment as it pertains to the Defendants' statute of limitations defense and to assert the following additional -15- claims for relief: breach of express good faith duty, constructive fraud, unjust enrichment and prima facie tort and to add claims in the alternative of intentional interference with contract and of conspiracy. The hearing on such motion as well as other matters is scheduled for November 17, 1995. Trial is currently set in the Santa Fe County lawsuit for February 1996. A resolution of the Santa Fe County lawsuit favorable to the Trust could possibly have a material effect on distributable income depending on the nature and terms of the resolution. -16- Items 2-5 Not Applicable 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 and The Fort Worth National Bank (now Bank One, Texas, NA), 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 to The Fort Worth National Bank (now Bank One, Texas, NA), 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 in Form 8-K There were no reports on Form 8-K filed during the quarter ended September 30, 1995. -17- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized. BANK ONE, TEXAS, NA, AS TRUSTEE FOR THE SAN JUAN BASIN ROYALTY TRUST By /s/ LEE ANN ANDERSON ----------------------------------- Lee Ann Anderson Vice President Dated as of November 14, 1995 (The Trust has no directors or executive officers.) -18- INDEX TO EXHIBITS Sequentially Exhibit Numbered Number Exhibit Page (4)(a) San Juan Basin Royalty Trust Indenture dated November 3, 1980, between Southland Royalty Company and The Fort Worth National Bank (now Bank One, Texas, NA), 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 to The Fort Worth National Bank (now Bank One, Texas, NA), 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 ** * 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. EX-27 2
5 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, 1995, and the related condensed statements of distributable income and changes in trust corpus for the three-month period ended September 30, 1995. 1 9-MOS DEC-31-1995 SEP-30-1995 1,047,906 0 0 0 0 1,047,906 133,275,528 62,448,198 71,875,236 1,047,906 0 0 0 0 70,827,330 71,875,236 0 3,551,665 0 0 219,876 0 0 3,331,789 0 3,331,789 0 0 0 3,331,789 0 0
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