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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, 2006
 or
 o
    
    Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the transition period from  to
 Commission File No. 1-8032
 SAN JUAN BASIN ROYALTY TRUST
   Texas
(State or other jurisdiction
of incorporation or organization)
    
    75-6279898
(I.R.S. Employer
Identification No.)
 
 
 
 þ o
  Large Accelerated Filer þ
    
    Accelerated filer o
    
    Non-accelerated filer o
 o þ




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TABLE OF CONTENTS  PART IItem 1. Financial StatementsItem 2. Trustees Discussion and Analysis of Financial Condition and Results of OperationsItem 3. Quantitative and Qualitative Disclosures About Market RiskItem 4. Controls and ProceduresPART IIItem 1. Legal ProceedingsItem 2. ExhibitsSIGNATURESINDEX TO EXHIBITSCertification Pursuant to Rule 13a-14(a)Certification Pursuant to Rule 13a-14(b)    Table of Contents  SAN JUAN BASIN ROYALTY TRUST
 
 PART I
 FINANCIAL INFORMATION
 
 Item 1. Financial Statements.
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SAN JUAN ROYALTY TRUST
 CONDENSED STATEMENTS OF ASSETS, LIABILITIES AND TRUST CORPUS
 June 30,
    
    
    December 31,2006
    
    
    2005(Unaudited)ASSETSCash and short-term investments
    
    $
    8,736,380
    
    
    $
    19,173,162Net overriding royalty interest in
producing oil and gas properties
(net of accumulated amortization of
$110,472,041 and $109,394,034 at
June 30, 2006 and December 31,
2005, respectively)
    
    
    22,803,487
    
    
    
    23,881,494$
    31,539,867
    
    
    $
    43,054,656LIABILITIES AND TRUST CORPUSDistribution payable to Unit Holders
    
    $
    8,621,522
    
    
    $
    19,058,304Cash reserves
    
    
    114,858
    
    
    
    114,858Trust corpus  46,608,796 Units of
beneficial interest authorized and
outstanding
    
    
    22,803,487
    
    
    
    23,881,494$
    31,539,867
    
    
    $
    43,054,656
 CONDENSED STATEMENTS OF DISTRIBUTABLE INCOME (UNAUDITED)
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Royalty income
    
    $
    28,532,236
    
    
    $
    35,295,797
    
    
    $
    79,013,322
    
    
    $
    74,538,084Interest income
    
    
    43,023
    
    
    
    36,920
    
    
    
    534,683
    
    
    
    65,35728,575,259
    
    
    
    35,332,717
    
    
    
    79,548,005
    
    
    
    74,603,441General and
administrative
expenditures
    
    
    642,612
    
    
    
    813,658
    
    
    
    1,125,162
    
    
    
    1,348,166Distributable income
    
    $
    27,932,647
    
    
    $
    34,519,059
    
    
    $
    78,422,843
    
    
    $
    73,255,275Distributable
income per Unit
(46,608,796 Units)
    
    $
    .599299
    
    
    $
    .740612
    
    
    $
    1.682576
    
    
    $
    1.571704
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SAN JUAN BASIN ROYALTY TRUST
 CONDENSED STATEMENTS OF CHANGES IN TRUST CORPUS (UNAUDITED)
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Trust corpus, beginning of period
    
    $
    23,277,937
    
    
    $
    25,912,908
    
    
    $
    23,881,494
    
    
    $
    26,674,821Amortization of net overriding
royalty interest
    
    
    (474,450
    )
    
    
    (715,005
    )
    
    
    (1,078,007
    )
    
    
    (1,476,918
    )Distributable income
    
    
    27,932,647
    
    
    
    34,519,059
    
    
    
    78,422,843
    
    
    
    73,255,275Distributions declared
    
    
    (27,932,647
    )
    
    
    (34,519,059
    )
    
    
    (78,422,843
    )
    
    
    (73,255,275
    )Trust corpus, end of period
    
    
    22,803,487
    
    
    
    25,197,903
    
    
    
    22,803,487
    
    
    
    25,197,903
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SAN JUAN BASIN ROYALTY TRUST
 NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
 1.
    
    BASIS OF ACCOUNTINGThe San Juan Basin Royalty Trust (the Trust) was established as of November 1, 1980. The
financial statements of the Trust are prepared on the following basis:
 
    
    Royalty income recorded for a month is the amount computed and paid with respect to
the Trusts 75% net overriding royalty interest (the Royalty) in certain oil and gas
leasehold and royalty interests (the Underlying Properties) by Burlington Resources
Oil & Gas Company LP (BROG), the present owner of the Underlying Properties, to the
Trustee for the Trust. Royalty income consists of the net proceeds received by BROG
from the sale of production from the Underlying Properties less accrued production
costs, development and drilling costs, applicable taxes, operating charges, and other
costs and deductions, multiplied by 75%. Any adjustments to the Royalty income
received from BROG are recorded by the Trust when received and impact the distribution
to Unit Holders for that month.
    
    Trust expenses recorded are based on liabilities paid and cash reserves established
from Royalty income for liabilities and contingencies.
    
    Distributions to Unit Holders are recorded when declared by the Trustee.
    
    The conveyance which transferred the Royalty to the Trust provides that any excess
of production costs applicable to the Underlying Properties over gross proceeds from
such properties must be recovered from future net profits before Royalty income is
again paid to the Trust.
 The Trusts financial statements for the quarterly
period ended June 30, 2006 reflect the reclassification of
$393,923 reported for the quarterly period ended March 31, 2006
as Royalty income to interest income.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 TAXESFor 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.
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Sales of production from coal seam wells drilled prior to January 1, 1993, qualified for
federal income tax credits through 2002 but not thereafter. Accordingly, under present law,
the Trusts production of gas from coal seam wells does not qualify for tax credit under
Section 45 (formerly Section 29) of the Internal Revenue Code of 1986, as amended (the
Section 45 Tax Credit). Congress has at various times since 2002 considered energy
legislation, including provisions to reinstate the Section 45 Tax Credit in various ways and
to various extents but no legislation that would qualify the Trusts current production for
such credit has been enacted. Most recently, for example, on August 8, 2005, new energy tax
legislation was enacted which, among other things, modifies the Section 45 Tax Credit on
several respects, but does not extend the credit for production from coal seam wells. No
prediction can be made as to what future tax legislation affecting Section 45 of the
Internal Revenue Code of 1986, as amended, may be proposed or enacted or, if enacted, its
impact, if any, on the Trust and the Unit Holders.The classification of the Trusts income for purposes of the passive loss rules may be
important to a Unit Holder. As a result of the Tax Reform Act of 1986, royalty income such
as that derived through the Trust will generally be treated as portfolio income and will not
reduce passive losses.3.
    
    CONTINGENCIESSee Part II  Item 1, Legal Proceedings concerning the status of litigation matters.4.
    
    SETTLEMENTS AND LITIGATIONIn 2005, as part of the ongoing negotiations between the Trust and BROG concerning a number
of revenue and expense audit issues, an aggregate of $2,405,486 was included in calculating
net proceeds paid to the Trust in settlement of certain of those audit issues.In February 2006, as part of the ongoing negotiations
between the Trust and BROG, $393,923
was included in BROGs distribution to the Trust in payment of interest due on late payment
of gross proceeds.On November 11, 2005, an Arbitration Award was issued in favor of the Trust in the aggregate
amount of $7,683,699 in arbitration styled San Juan Basin Royalty Trust vs. Burlington
Resources Oil & Gas Company LP.The purpose of the arbitration was to resolve certain joint
interest audit issues as between the parties to the arbitration. On November 21, 2005, BROG
filed its Original Petition to Vacate or to Modify or Correct Arbitration Award in the case
styled Burlington Resources Oil & Gas Company LP vs. San Juan Basin Royalty Trust,No.
2005-74370, in the District Court of Harris County, Texas, 281st Judicial
District. In this litigation, BROG alleged that the award in favor of the Trust should be
vacated or modified because one of the issues decided was beyond the scope of the matters
agreed to be arbitrated, the award was issued in manifest disregard of applicable law, and a
portion of the award is barred by limitations. BROG also sought to recover its attorneys
fees. The Trust filed an answer and counterclaim in the litigation filed by BROG denying
those allegations and asking that the arbitrators award be confirmed. At the conclusion of
a hearing conducted on April 20, 2006, the Court entered an Order denying BROGs motion to
vacate and granting the Trusts application to confirm the Arbitration Award and on June 6,
2006, rendered a final judgment in favor of the Trust. However, on May 24, 2006, BROG filed
a Notice of Appeal indicating its desire to appeal from the Order and any final judgment
confirming the Arbitration Award and on or about June 5, 2006, filed a Motion for New Trial
in the District Court of Harris County urging substantially similar arguments made at the
hearing. The Trust has responded to the Motion for New Trial and has served BROG with
post-judgment discovery requests.
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5.
    
    SUBSEQUENT EVENTSBROGs distribution to the Trust for July 2006 included an aggregate of $1,534,182
representing a portion of the Arbitration Award referred to in Note 4, plus accrued interest. The balance of the
Arbitration Award is pending the appeal process.
 
 Item 2. Trustees Discussion and Analysis of Financial Condition and Results of Operations.
 Forward-Looking Information
  Business Overview
    7




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Three Months Ended June 30, 2006 and 2005
  April
    
    $
    .181302May
    
    
    .233021June
    
    
    .184976Quarter Total
    
    $
    .599299
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Three Months EndedJune 30,2006
    
    2005Gas:Total sales (Mcf)
    
    
    9,972,654
    
    
    
    10,789,471Mcf per day
    
    
    112,052
    
    
    
    121,230Average price (per Mcf)
    
    $
    5.97
    
    
    $
    5.43Oil:Total sales (Bbls)
    
    
    20,213
    
    
    
    17,472Bbls per day
    
    
    227
    
    
    
    196Average price (per Bbl)
    
    $
    60.57
    
    
    $
    47.79
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Three Months EndedJune 30,2006
    
    2005Gas sales (Mcf)
    
    
    5,200,329
    
    
    
    6,887,037Oil sales (Bbls)
    
    
    10,549
    
    
    
    11,155
    10




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Six Months Ended June 30, 2006 and 2005
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Six Months EndedJune 30,2006
    
    2005Gas:Total sales (Mcf)
    
    
    20,803,166
    
    
    
    22,151,787Mcf per day
    
    
    114,935
    
    
    
    122,386Average price (per Mcf)
    
    $
    7.26
    
    
    $
    5.73Oil:Total Sales (Bbls)
    
    
    38,811
    
    
    
    36,061Bbls per day
    
    
    214
    
    
    
    199Average price (per Bbl)
    
    $
    58.64
    
    
    $
    45.26
  Three Months EndedJune 30,2006
    
    2005Gas sales (Mcf).
    
    
    11,732,815
    
    
    
    13,920,798Oil sales (Bbls)
    
    
    21,702
    
    
    
    22,696
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Calculation of Royalty Income
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Gross proceeds of sales from
the Underlying Properties:Gas proceeds
    
    $
    59,545,094
    
    
    $
    58,627,002
    
    
    $
    151,000,672
    
    
    $
    126,963,885Oil proceeds
    
    
    1,224,315
    
    
    
    834,924
    
    
    
    2,275,810
    
    
    
    1,632,125Other
    
    
    
    
    
    
    1,309,384
    (1)
    
    
    
    
    
    
    2,405,486
    (1)(2)Total
    
    
    60,769,409
    
    
    
    60,771,310
    
    
    
    153,276,482
    
    
    
    131,001,496Less production costs:Severance tax  gas
    
    
    5,751,215
    
    
    
    5,616,749
    
    
    
    14,529,443
    
    
    
    12,667,531Severance tax  oil
    
    
    121,625
    
    
    
    80,824
    
    
    
    226,546
    
    
    
    166,885Lease operating expense and
property tax
    
    
    5,857,482
    
    
    
    5,176,367
    (1)
    
    
    11,015,004
    
    
    
    10,008,993
    (1)(2)Other
    
    
    42,968
    
    
    
    42,505
    
    
    
    42,968
    
    
    
    42,505Capital expenditures
    
    
    10,953,138
    
    
    
    2,793,802
    
    
    
    22,111,424
    
    
    
    8,731,469Total
    
    
    22,726,428
    
    
    
    13,710,247
    
    
    
    47,925,385
    
    
    
    31,617,383Less excess production costs
and interest from prior year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net profits
    
    
    38,042,981
    
    
    
    47,061,063
    
    
    
    105,351,097
    
    
    
    99,384,113Net overriding royalty interest
    
    
    75
    %
    
    
    75
    %
    
    
    75
    %
    
    
    75
    %Royalty income
    
    $
    28,532,236
    
    
    $
    35,295,797
    
    
    $
    79,013,322
    
    
    $
    74,538,084
 
 (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 BROGs distribution to the
Trust in settlement of certain of those audit issues. Of that amount, $982,038 was allocated to
the Trust as additional revenue and $6,354 was deducted from lease operating expenses allocated to
the Trust.(2)
    
    In March 2005, as part of the ongoing negotiations between the Trust and BROG concerning a
number of revenue and expense audit issues, $833,851 was included in BROGs distribution to the
Trust in payment of interest on late payments of gross proceeds and in settlement of certain other
audit issues. Of that amount, $822,077 was allocated to the Trust as additional revenue and
$11,774 was deducted from lease operating expenses allocated to the Trust. Contractual Obligations
  Effects of Securities Regulation
  13




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Critical Accounting Policies
  
    
    Royalty income recorded for a month is the amount computed and paid by BROG to the
Trustee for the Trust. Royalty income consists of the net proceeds received by BROG
from the sale of production from the Underlying Properties less accrued production
costs, development and drilling costs, applicable taxes, operating charges, and other
costs and deductions, multiplied by 75%. The calculation of net proceeds by BROG for
any month includes adjustments to proceeds and costs for prior months and impacts the
Royalty income paid to the Trust and the distribution to Unit Holders for that month.
    
    Trust expenses recorded are based on liabilities paid and cash reserves established
from Royalty income for liabilities and contingencies.
    
    Distributions to Unit Holders are recorded when declared by the Trustee.
    
    The Conveyance which transferred the Royalty to the Trust provides that any excess
of production costs applicable to the Underlying Properties over gross proceeds from
such properties must be recovered from future net profits before Royalty income is
again paid to the Trust.
   
 Item 3. Quantitative and Qualitative Disclosures About Market Risk.
  
 Item 4. Controls and Procedures.
  14




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PART II
 OTHER INFORMATION
 
 Item 1. Legal Proceedings.
  San Juan Basin Royalty Trust vs. Burlington Resources
Oil & Gas Company LP.
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Burlington
Resources Oil & Gas Company LP vs. San Juan Basin Royalty Trust, st
  
 Item 2. Exhibits.
 (4)(a)
    
    Amended and Restated Royalty Trust Indenture, dated September 30, 2002 (the original
Royalty Trust Indenture, dated November 1, 1980 having been entered into between
Southland Royalty Company and The Fort Worth National Bank, as Trustee), heretofore
filed as Exhibit 99.2 of the Trusts Current Report on Form 8-K filed with the
Commission on October 1, 2002, is incorporated herein by reference.*(4)(b)
    
    Net Overriding Royalty Conveyance from Southland Royalty Company to The Fort Worth
National Bank, as Trustee, dated November 3, 1980 (without Schedules), heretofore filed
as Exhibit 4(b) to the Trusts Annual Report on Form 10-K filed with the Commission for
the fiscal year ended December 31, 1980, is incorporated herein by reference.*(4)(c)
    
    Assignment of Net Overriding Interest (San Juan Basin Royalty Trust), dated September
30, 2002, between Bank One, N.A. and Compass Bank, 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, 2006, by Lee Ann
Anderson, Vice President and Senior Trust Officer of Compass Bank, the Trustee of the
Trust.**32
    
    Certification required by Rule 13a-14(b), dated August 9, 2006, by Lee Ann
Anderson, Vice President and Senior Trust Officer of Compass Bank, on behalf of Compass
Bank, the Trustee of the Trust.***
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*
    
    A copy of this exhibit is available to any Unit Holder (free of charge) upon written request
to the Trustee, Compass Bank, 2525 Ridgmar Boulevard, Suite 100, Fort Worth, Texas 76116.**
    
    Filed herewith.***
    
    Furnished herewith. 17




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SIGNATURES
  COMPASS BANK, AS TRUSTEE FOR
THE SAN JUAN BASIN ROYALTY TRUSTBy:
    /s/ Lee Ann AndersonLee Ann AndersonVice President and Senior Trust Officer




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INDEX TO EXHIBITS
 ExhibitNumber
    
    Description(4)(a)
    
    Amended and Restated Royalty Trust Indenture, dated September 30,
2002 (the original Royalty Trust Indenture, dated November 1, 1980
having been entered into between Southland Royalty Company and The
Fort Worth National Bank, as Trustee), heretofore filed as Exhibit
99.2 of the Trusts Current Report on Form 8-K filed with the
Commission on October 1, 2002, is incorporated herein by
reference.*(4)(b)
    
    Net Overriding Royalty Conveyance from Southland Royalty Company
to The Fort Worth National Bank, as Trustee, dated November 3,
1980 (without Schedules), heretofore filed as Exhibit 4(b) to the
Trusts Annual Report on Form 10-K filed with the Commission for
the fiscal year ended December 31, 1980, is incorporated herein by
reference.*(4)(c)
    
    Assignment of Net Overriding Interest (San Juan Basin Royalty
Trust), dated September 30, 2002, between Bank One, N.A. and
TexasBank, heretofore filed as Exhibit 4(c) to the Trusts
Quarterly Report on Form 10-Q 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, 2006, by
Lee Ann Anderson, Vice President and Senior Trust Officer of
Compass Bank, the Trustee of the Trust.**32
    
    Certification required by Rule 13a-14(b), dated August 9, 2006, by
Lee Ann Anderson, Vice President and Senior Trust Officer of
Compass Bank, on behalf of Compass Bank, the Trustee of the
Trust.***
 
 *
    
    A copy of this exhibit is available to any Unit Holder (free of charge) upon written request
to the Trustee, Compass Bank, 2525 Ridgmar Boulevard, Suite 100, Fort Worth, Texas 76116.**
    
    Filed herewith.***
    
    Furnished herewith.