e10vq

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

þ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Quarterly Period Ended June 30, 2005
or

o Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from to

Commission File No. 1-8032

SAN JUAN BASIN ROYALTY TRUST

(Exact name of registrant as specified in the Amended and Restated San Juan Basin Royalty Trust Indenture)


Texas		75-6279898
(State or other jurisdiction		(I.R.S. Employer
of incorporation or organization)		Identification No.)

TexasBank, Trust Department
2525 Ridgmar Boulevard, Suite 100
Fort Worth, Texas 76116
(Address of principal executive offices)
(Zip Code)

(866) 809-4553
(Registrant’s telephone number, including area code)

N/A
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes þ No o

Number of Units of beneficial interest outstanding at August 9, 2005: 46,608,796

TABLE OF CONTENTS


PART I
	Item 1. Financial Statements
	Item 2. Trustee’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3. Quantitative and Qualitative Disclosures About Market Risk
	Item 4. Controls and Procedures
PART II
	Item 1. Legal Proceedings
	Item 6. Exhibits
SIGNATURES
INDEX TO EXHIBITS
Certification Required by Rule 13a-14(a)
Certification Required by Rule 13a-14(b)

SAN JUAN BASIN ROYALTY TRUST

PART I

FINANCIAL INFORMATION

Item 1. Financial Statements.

The condensed financial statements included herein have been prepared without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. In accordance with Securities and Exchange Commission Staff Accounting Bulletin No. 47, released September 16, 1982, the financial statements of the San Juan Basin Royalty Trust (the “Trust”) continue to be prepared in a manner that differs from accounting principles generally accepted in the United States of America (“GAAP”); this form of presentation is customary to other royalty trusts. Certain information and footnote disclosures normally included in annual financial statements have been condensed or omitted pursuant to Rule 10-01 of Regulation S-X promulgated under the Securities Exchange Act of 1934, although TexasBank, 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, 2004. In the opinion of the Trustee, all adjustments, consisting only of normal recurring adjustments, have been included that are necessary to present fairly the assets, liabilities and trust corpus of the San Juan Basin Royalty Trust at June 30, 2005, and the distributable income and changes in trust corpus for the three-month periods and six-month periods ended June 30, 2005 and 2004. The distributable income for such interim periods is not necessarily indicative of the distributable income for the full year.

SAN JUAN BASIN ROYALTY TRUST

CONDENSED STATEMENTS OF ASSETS, LIABILITIES AND TRUST CORPUS


	June 30,		December 31,
	2005		2004
	(Unaudited)
ASSETS
Cash and short-term investments	$	12,334,766	$	10,140,045
Net overriding royalty interest in producing oil and gas properties (net of accumulated amortization of $108,077,625 and $106,600,707 at June 30, 2005 and December 31, 2004, respectively)		25,197,903		26,674,821


	$	37,532,669	$	36,814,866

LIABILITIES AND TRUST CORPUS

Distribution payable to Unit Holders	$	12,219,908	$	10,025,187
Cash reserves		114,858		114,858
Trust corpus — 46,608,796 Units of beneficial interest authorized and outstanding		25,197,903		26,674,821


	$	37,532,669	$	36,814,866

CONDENSED STATEMENTS OF DISTRIBUTABLE INCOME (UNAUDITED)


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2005		2004		2005		2004
Royalty income	$	35,295,797	$	25,509,188	$	74,538,084	$	46,705,539
Interest income		36,920		11,822		65,357		20,514

		35,332,717		25,521,010		74,603,441		46,726,053

General and administrative expenditures		813,658		529,205		1,348,166		1,042,368


Distributable income	$	34,519,059	$	24,991,805	$	73,255,275	$	45,683,685


Distributable income per Unit (46,608,796 Units)	$	.740612	$	.536204	$	1.571704	$	.980152

The accompanying notes to condensed financial statements are an integral part of these statements.

SAN JUAN BASIN ROYALTY TRUST

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

1.		BASIS OF ACCOUNTING

		The San Juan Basin Royalty Trust (the “Trust”) was established as of November 1, 1980. The financial statements of the Trust are prepared on the following basis:

	•		Royalty income recorded for a month is the amount computed and paid with respect to the Trust’s 75% net overriding royalty interest (the “Royalty”) in certain oil and gas leasehold and royalty interests (the “Underlying Properties”) by Burlington Resources Oil & Gas Company LP (“BROG”), the present owner of the Underlying Properties, to the Trustee for the Trust. Royalty income consists of the 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 United States generally accepted accounting principles (“GAAP”) because revenues are not accrued in the month of production; certain cash reserves may be established for contingencies which would not be accrued in financial statements prepared in accordance with GAAP; expenses are recorded when paid instead of when incurred; and amortization of the Royalty calculated on a unit-of-production basis is charged directly to trust corpus instead of an expense. The basis of accounting used by the Trust is widely used by royalty trusts for financial reporting purposes.

2.		FEDERAL INCOME TAXES

		For federal income tax purposes, the Trust constitutes a fixed investment trust which is taxed as a grantor trust. A grantor trust is not subject to tax at the trust level. The Unit Holders are considered to own the Trust’s income and principal as though no trust were in existence. The income of the Trust is deemed to have been received or accrued by each Unit Holder at the time such income is received or accrued by the Trust rather than when distributed by the Trust.

		The Royalty constitutes an “economic interest” in oil and gas properties for federal income tax purposes. Unit Holders must report their share of the revenues of the Trust as ordinary income from

		oil and gas royalties and are entitled to claim depletion with respect to such income. The Royalty is treated as a single property for depletion purposes. The Trust has on file technical advice memoranda confirming such tax treatment.

		Sales of production from coal seam wells drilled prior to January 1, 1993, qualified for federal income tax credits through 2002 but not thereafter. Congress has at various times since 2002 considered energy legislation, including provisions to reinstate the Section 29 credit in various ways and to various extents. On July 29, 2005, Congress approved new energy legislation which, among other things, modifies the Section 29 credit in several respects, but does not extend the credit for production from coal seam wells. Once this legislation is enacted into law, the application, if any, of the revised Section 29 credit to the Trust and its Unit Holders is unclear.

		The classification of the Trust’s income for purposes of the passive loss rules may be important to a Unit Holder. As a result of the Tax Reform Act of 1986, royalty income such as that derived through the Trust will generally be treated as portfolio income and will not reduce passive losses.

3.		CONTINGENCIES

		See Part II, Item 1, “Legal Proceedings” concerning the status of litigation matters.

4.		SETTLEMENTS

		In June 2000, the Trust and BROG entered into a partial settlement of claims relating to a gas imbalance with respect to production from mineral properties currently operated by BROG. Under the terms of the partial settlement BROG paid the Trust $3,490,000 to settle the imbalance insofar as it relates to some of the wells located on the Underlying Properties. The remainder of the imbalance has been addressed by a combination of volume adjustments and a $243,968 increase in revenue included in net proceeds paid to the Trust by BROG in July 2004.

		During 2004, commencing in July of that year, an aggregate of $3,314,808 was included in calculating net proceeds paid to the Trust by BROG as part of the ongoing negotiation of joint interest audit exceptions, interest for resolved audit exceptions, and insurance proceeds for a business interruption claim.

		In March 2005, as part of the ongoing negotiations between the Trust and BROG concerning a number of revenue and expense audit issues, $833,851 was included in calculating net proceeds paid to the Trust by BROG in settlement of claims for interest on late payments of net proceeds and in settlement of certain other audit issues. Of that amount, $822,077 was included in settlement of claims for additional revenue and $11,774 was included in settlement of claims concerning disputed lease operating expenses.

		In May 2005, as part of the ongoing negotiations between the Trust and BROG concerning a number of revenue and expense audit issues, $988,392 was included in calculating net proceeds paid to the Trust by BROG in settlement of certain of those issues. Of that amount, $982,038 was included in net proceeds paid to the Trust by BROG in settlement of claims for additional revenue and $6,354 was included in net proceeds in settlement of claims concerning disputed lease operating expenses.

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 BROG’s current view with respect to future events; are based on an assessment of, and are subject to, a variety of factors deemed relevant by TexasBank, the Trustee of the Trust, and BROG and involve risks and uncertainties. These risks and uncertainties include volatility of oil and gas prices, product supply and demand, competition, regulation or government action, litigation and uncertainties about estimates of reserves. Should one or more of these risks or uncertainties occur, actual results may vary materially and adversely from those anticipated.

Principal Trust Risk Factors

Although risk factors are described elsewhere in this Quarterly Report on Form 10-Q, the following is a summary of the principal risks associated with an investment in Units in the Trust.

Oil and gas prices fluctuate due to a number of factors, and lower prices will reduce net proceeds to the Trust and distributions to Unit Holders.

The Trust’s monthly distributions are highly dependent upon the prices realized from the sale of gas and, to a lesser extent, oil. Oil and gas prices can fluctuate widely on a month-to-month basis in response to a variety of factors that are beyond the control of the Trust and BROG. Factors that contribute to price fluctuation include, among others:

	•		political conditions worldwide, in particular political disruption, war or other armed conflicts in oil producing regions;

	•		worldwide economic conditions;

	•		weather conditions;

	•		the supply and price of foreign oil and gas;

	•		the level of consumer demand;

	•		the price and availability of alternative fuels;

	•		the proximity to, and capacity of, transportation facilities; and

	•		the effect of worldwide energy conservation measures.

Moreover, government regulations, such as regulation of natural gas transportation and price controls, can affect product prices in the long term.

Lower oil and gas prices may reduce the amount of oil and gas that is economic to produce and reduce royalty income paid to the Trust. The volatility of energy prices reduces the predictability of future cash distributions to Unit Holders.

Increased costs of production and development will result in decreased Trust distributions.

Production and development costs attributable to the Underlying Properties are deducted in the calculation of net proceeds. Accordingly, higher or lower production and development costs, without concurrent increases in revenues, directly decrease or increase the share of net proceeds paid to the Trust as Royalty income.

If development and production costs of the Underlying Properties exceed the proceeds of production from the Underlying Properties, such excess costs are carried forward and the Trust will not receive a share of net proceeds for the Underlying Properties until future net proceeds from production from such properties exceed the total of the excess costs. Development activities may not generate sufficient additional revenue to repay the costs; however, the Trust is not obligated to repay the excess costs except through future production.

Trust reserve estimates depend on many assumptions that may prove to be inaccurate, which could cause both estimated reserves and estimated future revenues to be too high.

The value of the Units of the Trust depends upon, among other things, the amount of reserves attributable to the Royalty and the estimated future value of the reserves. Estimating reserves is inherently uncertain. Ultimately, actual production, revenues and expenditures for the Underlying Properties will vary from estimates and those variations could be material. Petroleum engineers consider many factors and make assumptions in estimating reserves. Those factors and assumptions include:

	•		historical production from the area compared with production rates from similar producing areas;

	•		the assumed effect of governmental regulation; and

	•		assumptions about future commodity prices, production and development costs, severance and excise taxes, and capital expenditures.

Changes in these assumptions can materially change reserve estimates. The reserve data included herein are estimates only and are subject to many uncertainties. Actual quantities of oil and natural gas may differ considerably from the amounts set forth herein. In addition, different reserve engineers may make different estimates of reserve quantities and cash flows based upon the same available data.

The operators of the Underlying Properties are subject to extensive governmental regulation.

Oil and gas operations have been, and in the future will be, affected by federal, state and local laws and regulations and other political developments, such as price or gathering rate controls and environmental protection regulations.

Operating risks for BROG and other operators of the Underlying Properties can adversely affect Trust distributions.

Royalty income payable to the Trust is derived from the production and sale of oil and gas, which operations are subject to risk inherent in such activities, such as blowouts, cratering, explosions, uncontrollable flows of oil, gas or well fluids, fires, pollution and other environmental risks and litigation concerning routine and extraordinary business activities and events. These risks could result in substantial losses which are deducted in calculating the net proceeds and thus reduce Royalty income paid to the Trust due to injury and loss of life, severe damage to and destruction of property and equipment, pollution and other environmental damage and suspension of operations.

None of the Trustee, the Trust nor the Unit Holders control the operation or development of the Underlying Properties.

Neither the Trustee nor the Unit Holders can influence or control the operation or future development of the Underlying Properties. The Underlying Properties are owned by BROG and BROG operates the majority of such properties and handles the calculation of the net proceeds attributable to the Royalty and the payment of Royalty income to the Trust.

The Royalty can be sold and the Trust can be terminated in certain circumstances.

The Trust will be terminated and the Trustee must sell the Royalty if holders of at least 75% of the Units approve the sale or vote to terminate the Trust, or if the Trust’s gross revenue for each of two successive years is less than $1,000,000 per year. Following any such termination and liquidation, the net proceeds of any sale will be distributed to the Unit Holders and Unit Holders will receive no further distributions from the Trust. We cannot assure you that any such sale will be on terms acceptable to all Unit Holders.

Mineral properties, such as the Underlying Properties, are depleting assets and, if BROG or other operators of the Underlying Properties do not perform additional development projects, the Royalty may deplete faster than expected.

The Royalty income payable to the Trust is derived from the sale of production from depleting assets. Accordingly, the portion of the distributions to Unit Holders (to the extent of depletion taken) may be considered a return of capital. The reduction in proved reserve quantities is a common measure of depletion. Future maintenance and development projects on the Underlying Properties will affect the quantity of proved reserves. The timing and size of these projects will depend on the market prices of natural gas. If BROG does not implement additional maintenance and development projects, the future rate of production decline of proved reserves may be higher than the rate currently expected by the Trust.

Unit Holders have limited voting rights.

Voting rights as a Unit Holder are more limited than those of stockholders of most public corporations. For example, there is no requirement for annual meetings of Unit Holders or for an annual or other periodic re-election of the Trustee. Unlike corporations which are generally governed by boards of directors elected by their equity holders, the Trust is administered by a corporate Trustee in accordance with the Indenture and other organizational documents. The Trustee has extremely limited discretion in its administration of the Trust.

Business Overview

The Trust is an express trust created under the laws of the state of Texas by the San Juan Basin Royalty Trust Indenture (the “Original Indenture”) entered into on November 3, 1980, between Southland Royalty Company (“Southland Royalty”) and The Fort Worth National Bank. Effective as of September 30, 2002, the Original Indenture was amended and restated (the Original Indenture, as amended and restated, the “Indenture”). The Trustee of the Trust is TexasBank.

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.

The Royalty constitutes the principal asset of the Trust and the beneficial interests in the Trust are divided into that number of Units of Beneficial Interest (the “Units”) of the Trust equal to the number of shares of the common stock of Southland Royalty outstanding as of the close of business on November 3, 1980. Holders of Units are referred to herein as “Unit Holders.” Subsequent to the Conveyance of the Royalty, through a series of assignments and mergers, Southland Royalty’s successor became BROG.

The function of the Trustee is to collect the income attributable to the Royalty, to pay all expenses and charges of the Trust, and then distribute the remaining available income to the Unit Holders. The Trust is not empowered to carry on any business activity and has no employees, all administrative functions being performed by the Trustee.

Three Months Ended June 30, 2005 and 2004

The Trust received Royalty income of $35,295,797 and interest income of $36,920 during the second quarter of 2005. There was no change in cash reserves. After deducting administrative expenses of $813,658, distributable income for the quarter was $34,519,059 ($.740612 per Unit). In the second quarter of 2004, royalty income was $25,509,188, interest income was $11,822, there was no change in cash reserves, administrative expenses were $529,205 and distributable income was $24,991,805 ($.536204 per Unit). Based on 46,608,796 Units outstanding, the per Unit distributions during the second quarter of 2005 were as follows:


April	$	.214535
May		.263897
June		.262180


Quarter Total	$	.740612

The Royalty income distributed in the second quarter of 2005 was higher than that distributed in the second quarter of 2004 primarily due to an increase in the average gas price from $4.38 per Mcf for the second quarter of 2004 to $5.43 per Mcf for the second quarter of 2005. In addition, in May 2005, BROG included an aggregate of $988,392 in calculating the Trust’s May 2005 royalty payment. This represented the Trust’s 75% interest in settlement of certain audit exceptions. Interest earnings for the quarter ended June 30, 2005, as compared to the quarter ended June 30, 2004, were higher, primarily due to an increase in funds available for investment pending distribution as well as an increase in interest rates. Administrative expenses were higher primarily as a result of differences in timing in the receipt and payment of these

expenses, but also as a result of complying with the new internal control over financial reporting and other requirements of the Sarbanes-Oxley Act of 2002.

BROG has informed the Trustee that the New Mexico Oil and Gas Proceeds Withholding Tax Act (the “Withholding Tax Act”) requires remitters who pay certain oil and gas proceeds from production on New Mexico properties on or after October 1, 2003, to withhold income taxes from such proceeds in the case of certain nonresident recipients. The Trustee, on advice of counsel, has observed that “net profits interests,” such as the Royalty, and other types of interests, the extent of which cannot be determined with respect to a specific share of the oil and gas production, are excluded from the withholding requirements of the Withholding Tax Act. Unit Holders are reminded to consult with their tax advisors regarding the applicability of New Mexico income tax to distributions received from the Trust by a Unit Holder.

The capital costs attributable to the Underlying Properties for the second quarter of 2005 were reported by BROG as approximately $2.8 million. BROG’s capital expenditure budget for the Underlying Properties for 2005 is estimated at $17 million of which approximately $3.3 million has been spent as of June 30, 2005; however, BROG reports that based on its actual capital requirements, its mix of projects and swings in the price of natural gas, the actual capital expenditures for 2005 could range from $15 million to $25 million. Capital expenditures were approximately $4.6 million for the second quarter of 2004. In 2004, approximately $22.3 million in capital expenditures were deducted in calculating Royalty income. In February 2005, BROG informed the Trustee that for 2005 it anticipates 401 projects, including the drilling of 71 new wells to be operated by BROG and 31 wells to be operated by third parties. Of the new BROG operated wells, 19 are projected to be conventional wells completed in the Pictured Cliffs, Mesaverde and/or Dakota formations, and the remaining 52 are projected as coal seam wells completed in the Fruitland Coal formation. A total of 21 of the wells operated by third parties are projected to be conventional wells and the remaining ten are projected to be coal seam wells. BROG projects approximately $12 million to be spent on the new wells, and $5 million is to be expended in working over existing wells and in the maintenance and improvement of production facilities. BROG has announced that the budget for 2005 reflects the commencement of a shift toward increased development of conventional gas and a winding down of its program for infill drilling in the Fruitland Coal formation.

BROG indicates its budget for 2005 reflects continued, significant development of conventional formations, including infill drilling to the Mesaverde and Dakota formations, development of the Fruitland Coal formation and multiple formation completions. A majority of the new wells for 2005 are projected to be drilled on certain of the Underlying Properties in which the fractional working interest included in the Underlying Properties is relatively low, but many of the recompletions and restimulations are scheduled on other properties included in the Underlying Properties in which such working interest is relatively high.

BROG has informed the Trust that lease operating expenses and property taxes were $5,017,103 and $159,264, respectively, for the second quarter of 2005, as compared to $4,615,886 and $122,700, respectively, for the second quarter of 2004.

BROG has reported to the Trustee that during the second quarter of 2005 four gross (.54 net) coal seam wells, two gross (.08 net) miscellaneous coal seam projects, 11 gross (.90 net) conventional wells, and one gross (.002 net) payadd were completed on the Underlying Properties.

Fifty-five gross (7.91 net) coal seam wells, one gross (0.875 net) recavitation, four gross (1.47 net) coal seam recompletions, 63 gross (10.07 net) conventional wells, 11 gross (1.74 net) payadds, two gross (.75 net) conventional recompletions, and five gross (3.11 net) restimulations were in progress at June 30, 2005.

There were 21 gross (2.31 net) coal seam wells, one gross (.04 net) miscellaneous coal seam project, eight gross (0.05 net) conventional wells and four gross (1.70 net) restimulations completed on the Underlying Properties as of June 30, 2004. Sixty-three gross (8.89 net) coal seam wells, four gross (1.89 net) recompletions, two gross (.08 net) miscellaneous coal seam projects, 29 gross (5.40 net) conventional wells, four gross (1.72 net) payadds, 11 gross (6.96 net) recompletions and four gross (3.11 net) restimulations were in progress at June 30, 2004.

“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.

Royalty income for the quarter ended June 30, 2005 is associated with actual gas and oil production during February 2005 through April 2005 from the Underlying Properties. Gas and oil sales from the Underlying Properties for the three months ended June 30, 2005 and 2004 were as follows:


	Three Months Ended
	June 30,
	2005		2004
Gas:
Total sales (Mcf)		10,789,471		10,831,487
Mcf per day		121,230		120,350
Average price (per Mcf)	$	5.43	$	4.38

Oil:
Total sales (Bbls)		17,472		23,709
Bbls per day		196		263
Average price (per Bbl)	$	47.79	$	31.72

Gas and oil sales attributable to the Royalty for the quarters ended June 30, 2005 and 2004 were as follows:


	Three Months Ended
	June 30,
	2005		2004
Gas sales (Mcf)		6,887,037		6,392,963
Oil sales (Bbls)		11,155		13,986

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 second quarter of 2005, average gas prices were $1.05 higher than the average prices reported during the second quarter of 2004. The average price per barrel of oil during the second quarter of 2005 was $16.07 per barrel higher than that received for the second quarter of 2004 due to increases in oil prices in world markets generally, including the posted prices applicable to oil sales attributable to the Royalty.

BROG previously entered into two contracts for the sale of all volumes of gas produced from the Underlying Properties. These contracts provided for (i) the sale of such gas to Duke Energy and Marketing, L.L.C. and PNM Gas Services, respectively, (ii) the delivery of such gas at various delivery points through March 31, 2005, and from year-to-year thereafter until terminated by either party on twelve months notice, and (iii) the sale of such gas at prices which fluctuate in accordance with published indices for gas sold in the San Juan Basin of New Mexico. Effective January 1, 2004, the rights and obligations of Duke Energy and Marketing L.L.C. were assumed by ConocoPhillips Company (“ConocoPhillips”) pursuant to an Assignment and Novation Agreement. By correspondence dated March 25, 2004, BROG notified ConocoPhillips of BROG’s election to terminate such contract as of March 31, 2005. BROG then prepared a form of request for proposal and circulated it to a number of potential purchasers, including ConocoPhillips, inviting them to bid for the purchase of the gas currently sold under the contract expiring March 31, 2005. Effective as of April 1, 2005, BROG entered into two new contracts for the sale of all volumes of gas produced from the Underlying Properties and formerly sold to ConocoPhillips. These new contracts provide for (i) the sale of such gas to ChevronTexaco Natural Gas, a division of Chevron U.S.A. Inc., and Coral Energy Resources, L.P., respectively, (ii) the delivery of such gas at various delivery points through March 31, 2007, and from year-to-year thereafter until terminated by either party on twelve months notice, and (iii) the sale of such gas at prices which fluctuate in accordance with the published indices for gas sold in the San Juan Basin of New Mexico. With respect to BROG’s contract with PNM Gas Services, BROG and PNM Gas Services have entered into a letter agreement dated January 31, 2005, pursuant to which the parties waive the right to terminate the underlying contract as of March 31, 2006, so that the term of that contract will continue until at least March 31, 2007, and from year-to-year thereafter until terminated by either party upon twelve months notice to the other. Unit Holders are referred to Note 6 of the Notes to Financial Statements in the Trust’s 2004 Annual Report for further information concerning the marketing of gas produced from the Underlying Properties.

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.

Six Months Ended June 30, 2005 and 2004

For the six months ended June 30, 2005, the Trust received Royalty income of $74,538,084 and interest income of $65,357. There was no change in cash reserves. After deducting administrative expenses of $1,348,166, distributable income was $73,255,275 ($1.571704 per Unit) for the six months ended June 30, 2005. For the six months ended June 30, 2004, the Trust received Royalty income of $46,705,539 and interest income of $20,514. There was no change in cash reserves. After deducting administrative expenses of $1,042,368, distributable income was $45,683,685 ($.980152 per Unit) for the six months ended June 30, 2004.

The increase in distributable income from 2004 to 2005 resulted primarily from higher gas prices during the first half of 2005. Interest earnings for the six months ended June 30, 2005, as compared to the six months ended June 30, 2004 were higher primarily due to an increase in funds available for investment pending distribution as well as an increase in interest rates. General and administrative expenses were higher for the six months ended June 30, 2005, as compared to the same period in 2004 primarily as a result of differences in timing in the receipt and payment of these expenses, but also as a result of complying with the new internal control over financial reporting and other requirements of the Sarbanes-Oxley Act of 2002 and costs incurred in resolving certain outstanding joint interest audit issues.

Capital expenditures incurred by BROG, attributable to the Underlying Properties, for the first six months of 2005 amounted to approximately $8.7 million. Capital expenditures were approximately $14.0

million for the first six months of 2004. Lease operating expenses and property taxes totaled $9,693,551 and $315,442, respectively, for the first six months of 2005 as compared to $8,613,941 and $249,500, respectively, for the first six months of 2004.

BROG has reported to the Trustee that during the six months ended June 30, 2005, 11 gross (.90 net) conventional wells, two gross (.004 net) payadds, five gross (1.41 net) coal seam wells, and five gross (.20 net) miscellaneous coal seam capital projects were completed on the Underlying Properties.

There were 18 gross (6.38 net) conventional wells, three gross (0.007 net) payadds, one gross (0.44 net) recompletion, eight gross (5.07 net) restimulations, 26 gross (2.48 net) coal seam wells, one gross (0.82 net) coal seam recompletion and one gross (0.04 net) miscellaneous coal seam capital project completed on the Underlying Properties during the six months ended June 30, 2004.

Royalty income for the six months ended June 30, 2005 is associated with actual gas and oil production during November 2004 through April 2005 from the Underlying Properties. Gas and oil sales from the Underlying Properties for the six months ended June 30, 2005 and 2004 were as follows:


	Six Months Ended
	June 30,
	2005		2004
Gas:
Total sales (Mcf)		22,151,787		21,860,720
Mcf per day		122,386		120,114
Average price (per Mcf)	$	5.73	$	4.27

Oil:
Total Sales (Bbls)		36,061		38,564
Bbls per day		199		212
Average price (per Bbl)	$	45.26	$	30.31

Gas and oil sales attributable to the Royalty for the six months ended June 30, 2005 and 2004 were as follows:


	Six Months Ended
	June 30,
	2005		2004
Gas sales (Mcf)		13,920,798		11,898,659
Oil sales (Bbls)		22,696		21,313

During the first six months of 2005, gas and oil prices were higher than during the first six months of 2004. Since the oil and gas sales attributable to the Royalty are based on an allocation formula that is dependant on such factors as price and cost, including capital expenditures, the aggregate sales amounts from the Underlying Properties may not provide a meaningful comparison to sales attributable to the Royalty.

Calculation of Royalty Income

Royalty income received by the Trust for the three months and six months ended June 30, 2005 and 2004, respectively, was computed as shown in the following table:


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2005			2004			2005			2004
Gross proceeds of sales from the Underlying Properties:
Gas proceeds	$	58,627,002		$	47,418,520		$	126,963,885		$	93,439,283
Oil proceeds		834,924			752,081			1,632,125			1,168,844
Other		1,309,384	(1)		—			2,405,486	(1)(2)		—


Total		60,771,310			48,170,601			131,001,496			94,608,127


Less production costs:
Severance tax — gas		5,616,749			4,714,629			12,667,531			9,267,453
Severance tax — oil		80,824			76,676			166,885			120,936
Lease operating expense and property tax		5,176,367	(1)		4,738,586			10,008,993	(1)(2)		8,863,441
Other		42,505			42,763			42,505			42,763
Capital expenditures		2,793,802			4,585,697	(3)		8,731,469			14,039,482	(3)


Total		13,710,247			14,158,351			31,617,383			32,334,075


Less excess production costs and interest from prior year		—			—			—			—


Net profits		47,061,063			34,012,250			99,384,113			62,274,052
Net overriding royalty interest		75	%		75	%		75	%		75	%


Royalty income	$	35,295,797		$	25,509,188		$	74,538,084		$	46,705,539


(1)		In May 2005, as part of the ongoing negotiations between the Trust and BROG concerning a number of revenue and expense audit issues, $988,392 was included in calculating net proceeds paid to the Trust by BROG in settlement of certain of those audit issues. Of that amount, $982,038 was included in net proceeds paid to the Trust by BROG in settlement of claims for additional revenue and $6,354 was included in net proceeds in settlement of claims concerning disputed lease operating expenses.

(2)		In March 2005, as part of the ongoing negotiations between the Trust and BROG concerning a number of revenue and expense audit issues, $833,851 was included in calculating net proceeds paid to the Trust by BROG in settlement of claims for interest on late payments of net proceeds and in settlement of certain other audit issues. Of that amount, $822,077 was included in settlement of claims for additional revenue and $11,774 was included in settlement of claims concerning disputed lease operating expenses.

(3)		In July 2004, BROG reduced the capital expenditures accrued for the Underlying Properties for the month of July by approximately $1 million, resulting in a corresponding increase in the Royalty income received by the Trust in July 2004. Such adjustment is not reflected in this table as it occurred after June 30, 2004.

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. As of January 1, 2003, 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).

Effects of Securities Regulation

As a publicly-traded trust listed on the New York Stock Exchange (the “NYSE”), the Trust is and will continue to be subject to extensive regulation under, among others, the Securities Act of 1933, the Securities Exchange Act of 1934 (which contains many of the provisions of the Sarbanes-Oxley Act of 2002) and the rules and regulations of the NYSE. Issuers failing to comply with such authorities risk serious consequences, including criminal as well as civil and administrative penalties. In most instances, these laws, rules and regulations do not specifically address their applicability to publicly-traded trusts, such as the Trust. In particular, the Sarbanes-Oxley Act of 2002 provides for the adoption by the Securities and Exchange Commission (the “Commission”) and NYSE of certain rules and regulations that may be impossible for the Trust to literally satisfy because of its nature as a pass-through trust. It is the Trustee’s intention to follow the Commission’s and NYSE’s rulemaking closely, attempt to comply with such rules and regulations and, where appropriate, request relief from these rules and regulations. However, if the Trust is unable to comply with such rules and regulations or to obtain appropriate relief, the Trust may be required to expend as yet unknown but potentially material costs to amend the Indenture that governs the Trust to allow for compliance with such rules and regulations. To date, the rules implementing the Sarbanes-Oxley Act of 2002 have generally made appropriate accommodation for passive entities such as the Trust.

Critical Accounting Policies

In accordance with the Commission’s staff accounting bulletins and consistent with other royalty trusts, the financial statements of the Trust are prepared on the following basis:

	•		Royalty income recorded for a month is the amount computed and paid 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 trust corpus instead of an expense.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

The Trust invests in no derivative financial instruments, and has no foreign operations or long-term debt instruments. The Trust is a passive entity and is prohibited from engaging in borrowing transactions, other than the Trust’s ability to borrow money periodically as necessary to pay expenses, liabilities and obligations of the Trust that cannot be paid out of cash held by the Trust. The amount of any such borrowings is unlikely to be material to the Trust. The Trust periodically holds short-term investments acquired with funds held by the Trust pending distribution to Unit Holders and funds held in reserve for the payment of Trust expenses and liabilities. Because of the short-term nature of these borrowings and investments and certain limitations upon the types of such investments which may be held by the Trust, the Trustee believes that the Trust is not subject to any material interest rate risk. The Trust does not engage in transactions in foreign currencies which could expose the Trust or Unit Holders to any foreign currency related market risk. The Trust does not market the gas, oil and/or natural gas liquids from the Underlying Properties. BROG is responsible for such marketing.

Item 4. Controls and Procedures.

The Trust maintains a system of disclosure controls and procedures that is designed to ensure that information required to be disclosed in the Trust’s filings under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms. Disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed by the Trust is accumulated and communicated by BROG to the Trustee and its employees who participate in the preparation of the Trust’s periodic reports to allow timely decisions regarding disclosure. Due to the pass-through nature of the Trust, BROG provides much of the information disclosed in this Form 10-Q and the other periodic reports filed by the Trust with the Commission.

The Indenture does not require BROG to update or provide information to the Trust. Under the Conveyance transferring the Royalty to the Trust, BROG is obligated to provide the Trust with certain information concerning calculations of net proceeds owed to the Trust, among other information. Pursuant to the settlement of litigation in 1996 between the Trust and BROG, BROG agreed to new, more formal financial reporting and audit procedures as compared to those provided in the Conveyance.

The Trustee receives periodic updates from BROG regarding activities related to the Trust. Accordingly, the Trust’s ability to timely report certain information required to be disclosed in the Trust’s periodic reports is dependent on BROG’s timely delivery of such information to the Trust. In order to help ensure the accuracy and completeness of the information required to be disclosed in the Trust’s periodic reports, the Trust employs independent public accountants, joint interest auditors, marketing consultants, attorneys and petroleum engineers. These outside professionals advise the Trustee in its review and compilation of this information for inclusion in this Form 10-Q and the other periodic reports provided by the Trust to the Commission.

The Trustee has evaluated the Trust’s disclosure controls and procedures as of June 30, 2005, and has concluded that such disclosure controls and procedures are effective at the “reasonable assurance” level to ensure that material information related to the Trust is gathered on a timely basis to be included in the Trust’s periodic reports. In reaching its conclusion, the Trustee considered the Trust’s dependence on BROG

to deliver timely and accurate information to the Trust. The Trustee has not reviewed the Trust’s disclosure controls and procedures in concert with management, a board of directors or an independent audit committee. The Trust does not have, nor does the Indenture provide for, officers, a board of directors or an independent audit committee.

During the quarter ended June 30, 2005, there were no changes in the Trust’s internal control over financial reporting (as defined in Rule 13a-15(f) of the Securities Exchange Act of 1934) that materially affected, or are reasonably likely to materially affect, the Trust’s internal control over financial reporting. The Trustee has not evaluated the Trust’s internal control over financial reporting in concert with management, a board of directors or an independent audit committee. The Trust does not have, nor does the Indenture provide for, officers, a board of directors or an independent audit committee.

PART II

OTHER INFORMATION

Item 1. Legal Proceedings.

As discussed above under Part I, Item 4 “Controls and Procedures,” due to the pass-through nature of the Trust, BROG provides much of the information disclosed in this Form 10-Q and the other periodic reports filed by the Trust with the Commission. Although the Trustee receives periodic updates from BROG regarding activities which may relate to the Trust, the Trust’s ability to timely report certain information required to be disclosed in the Trust’s periodic reports is dependent on BROG’s timely delivery of the information to the Trust.

The Trust is not named as a party, nor are its assets subject, to any legal proceedings, however, 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, 1980, is incorporated herein by reference.*

4(c)		Assignment of Net Overriding Interest (San Juan Basin Royalty Trust), dated September 30, 2002, between Bank One, N.A. and TexasBank, heretofore filed as Exhibit 4(c) to the Trust’s Quarterly Report on Form 10-Q 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 August 9, 2005, by Lee Ann Anderson, Vice President and Trust Officer of TexasBank, the Trustee of the Trust.**

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, 1980, is incorporated herein by reference.*

4(c)		Assignment of Net Overriding Interest (San Juan Basin Royalty Trust), dated September 30, 2002, between Bank One, N.A. and TexasBank, heretofore filed as Exhibit 4(c) to the Trust’s Quarterly Report on Form 10-Q 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 August 9, 2005, by Lee Ann Anderson, Vice President and Trust Officer of TexasBank, the Trustee of the Trust.**

32		Certification required by Rule 13a-14(b), dated August 9, 2005, by Lee Ann Anderson, Vice President and Trust Officer of TexasBank, on behalf of TexasBank, 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, TexasBank, 2525 Ridgmar Boulevard, Suite 100, Fort Worth, Texas 76116.

**		Filed herewith.

***		Furnished herewith.


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2005			2004			2005			2004
Trust corpus, beginning of period	$	25,912,908		$	29,131,300		$	26,674,821		$	29,822,820
Amortization of net overriding royalty interest		(715,005	)		(792,390	)		(1,476,918	)		(1,483,910	)
Distributable income		34,519,059			24,991,805			73,255,275			45,683,685
Distributions declared		(34,519,059	)		(24,991,805	)		(73,255,275	)		(45,683,685	)


Trust corpus, end of period	$	25,197,903		$	28,338,910		$	25,197,903		$	28,338,910


	TEXASBANK, AS TRUSTEE FOR THE SAN JUAN BASIN ROYALTY TRUST
	By:	/s/ Lee Ann Anderson
		Lee Ann Anderson
		Vice President and Trust Officer

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