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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 September 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
    
    75-6279898(State or other jurisdiction
    
    (I.R.S. Employerof incorporation or organization)
    
    Identification No.)
 
 
 
 þ o
  þ o o
 o þ




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TABLE OF CONTENTS  PART 1Item 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 6. ExhibitsSIGNATURESINDEX TO EXHIBITSCertification Required by Rule 13a-14(a) - Lee Ann AndersonCertification Required by Rule 13a-14(b) - Lee Ann Anderson    Table of Contents  SAN JUAN BASIN ROYALTY TRUST
 
 PART 1
 FINANCIAL INFORMATION
 
 Item 1. Financial Statements.




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SAN JUAN BASIN ROYALTY TRUST
 CONDENSED STATEMENTS OF ASSETS, LIABILITIES AND TRUST CORPUS
 September 30,
    
    
    December 31,2006
    
    
    2005(Unaudited)ASSETSCash and short-term investments
    
    $
    10,656,319
    
    
    $
    19,173,162Net overriding royalty interest in producing
oil and gas properties (net of accumulated
amortization of $110,981,666 and
$109,394,034 at September 30, 2006 and
December 31, 2005, respectively)
    
    
    22,293,862
    
    
    
    23,881,494$
    32,950,181
    
    
    $
    43,054,656LIABILITIES AND TRUST CORPUSDistribution payable to Unit Holders
    
    $
    10,541,461
    
    
    $
    19,058,304Cash reserves
    
    
    114,858
    
    
    
    114,858Trust corpus  46,608,796 Units of beneficial
interest authorized and outstanding
    
    
    22,293,862
    
    
    
    23,881,494$
    32,950,181
    
    
    $
    43,054,656
 CONDENSED STATEMENTS OF DISTRIBUTABLE INCOME (UNAUDITED)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Royalty income
    
    $
    30,779,508
    
    
    $
    32,832,885
    
    
    $
    109,792,831
    
    
    $
    107,370,970Interest income
    
    
    601,349
    
    
    
    44,893
    
    
    
    1,136,032
    
    
    
    110,24931,380,857
    
    
    
    32,877,778
    
    
    
    110,928,863
    
    
    
    107,481,219General and administrative
expenditures
    
    
    293,291
    
    
    
    585,828
    
    
    
    1,418,453
    
    
    
    1,933,994Distributable income
    
    $
    31,087,566
    
    
    $
    32,291,950
    
    
    $
    109,510,410
    
    
    $
    105,547,225Distributable income per Unit
(46,608,796 Units)
    
    $
    .666989
    
    
    $
    .692829
    
    
    $
    2.349564
    
    
    $
    2.264533
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SAN JUAN BASIN ROYALTY TRUST
 CONDENSED STATEMENTS OF CHANGES IN TRUST CORPUS (UNAUDITED)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Trust corpus, beginning of period
    
    $
    22,803,487
    
    
    $
    25,197,903
    
    
    $
    23,881,494
    
    
    $
    26,674,821Amortization of net overriding
royalty interest
    
    
    (509,625
    )
    
    
    (639,915
    )
    
    
    (1,587,632
    )
    
    
    (2,116,833
    )Distributable income
    
    
    31,087,566
    
    
    
    32,291,950
    
    
    
    109,510,410
    
    
    
    105,547,225Distributions declared
    
    
    (31,087,566
    )
    
    
    (32,291,950
    )
    
    
    (109,510,410
    )
    
    
    (105,547,225
    )Trust corpus, end of period
    
    $
    22,293,862
    
    
    $
    24,557,988
    
    
    $
    22,293,862
    
    
    $
    24,557,988
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##### Table of Contents



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 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 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
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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. 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, modified the Section 45 Tax Credit in
several respects, but did not extend the credit for production from coal seam wells. No
prediction can be made as to what future tax legislation affecting Section 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
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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 22, 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 July 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 responded to the Motion for New Trial and served
BROG with post-judgment discovery requests. BROGs Motion for New Trial was overruled on
August 4, 2006. BROGs distribution to the Trust for July 2006 included $1,534,182
representing a portion of the Arbitration Award, plus accrued interest. Of this amount,
$1,325,826 (the equivalent of $994,370 grossed up to account for the Trusts 75% net
overriding royalty interest) was included in calculating the net proceeds paid to the Trust,
and the accrued interest thereon was $539,812. The balance of the Arbitration Award is
pending BROGs appeal, which has been assigned No. 01-06-00485-CV in the First Court of
Appeals in Houston, Texas. On August 24, 2006, BROG filed its Supersedeas Bond to secure
payment of the balance of the Arbitration Award, plus interest, if the appeal is dismissed
or BROG does not perform the adverse judgment which becomes final on appeal. BROGs brief
in the Court of Appeals is due November 29, 2006. It is anticipated that the Trusts brief
will be due January 29, 2007 and BROGs reply brief will be due February 19, 2007.
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Item 2. Trustees Discussion and Analysis of Financial Condition and Results of Operations.
 Forward-Looking Information
  Business Overview
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Three Months Ended September 30, 2006 and 2005
  July
    
    $
    .222023August
    
    
    .218797September
    
    
    .226169Quarter Total
    
    $
    .666989
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Three Months EndedSeptember 30,2006
    
    2005Gas:Total sales (Mcf)
    
    
    10,314,842
    
    
    
    10,466,804Mcf per day
    
    
    112,118
    
    
    
    113,770Average price (per Mcf)
    
    $
    5.79
    
    
    $
    5.85Oil:Total sales (Bbls)
    
    
    20,635
    
    
    
    17,020Bbls per day
    
    
    224
    
    
    
    185Average price (per Bbl)
    
    $
    66.65
    
    
    $
    49.70
  Three Months EndedSeptember 30,2006
    
    2005Gas sales (Mcf)
    
    
    5,585,866
    
    
    
    6,163,750Oil sales
(Bbls)
    
    
    11,206
    
    
    
    10,017
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Nine Months Ended September 30, 2006 and 2005
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13




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Nine Months EndedSeptember 30,2006
    
    2005Gas:Total sales (Mcf)
    
    
    31,118,008
    
    
    
    32,618,591Mcf per day
    
    
    113,985
    
    
    
    119,482Average price (per Mcf)
    
    $
    6.77
    
    
    $
    5.77Oil:Total Sales (Bbls)
    
    
    59,446
    
    
    
    53,081Bbls per day
    
    
    218
    
    
    
    194Average price (per Bbl)
    
    $
    61.42
    
    
    $
    46.68
  Nine Months EndedSeptember 30,2006
    
    2005Gas sales (Mcf)
    
    
    17,318,681
    
    
    
    20,084,548Oil sales (Bbls)
    
    
    32,908
    
    
    
    32,713
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Calculation of Royalty Income
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Gross proceeds of sales from
the Underlying Properties:Gas proceeds
    
    $
    59,729,249
    
    
    $
    61,276,528
    
    
    $
    210,729,922
    
    
    $
    188,240,413Oil proceeds
    
    
    1,375,288
    
    
    
    845,878
    
    
    
    3,651,097
    
    
    
    2,478,003Other
    
    
    1,325,826
    (1)
    
    
    
    
    
    
    1,325,826
    (1)
    
    
    2,405,486
    (2)(3)Total
    
    
    62,430,363
    
    
    
    62,122,406
    
    
    
    215,706,845
    
    
    
    193,123,902Less production costs:Severance tax  gas
    
    
    5,803,814
    
    
    
    6,296,781
    
    
    
    20,333,258
    
    
    
    18,964,311Severance tax  oil
    
    
    139,490
    
    
    
    87,509
    
    
    
    366,035
    
    
    
    254,395Lease operating expense and
property tax
    
    
    6,800,398
    
    
    
    6,299,573
    
    
    
    17,815,402
    
    
    
    16,308,566
    (2)(3)Other
    
    
    
    
    
    
    
    
    
    
    42,968
    
    
    
    42,505Capital expenditures
    
    
    8,647,317
    
    
    
    5,661,363
    
    
    
    30,758,741
    
    
    
    14,392,832Total
    
    
    21,391,019
    
    
    
    18,345,226
    
    
    
    69,316,404
    
    
    
    49,962,609Less excess production costs
and interest from prior year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net profits
    
    
    41,039,344
    
    
    
    43,777,180
    
    
    
    146,390,441
    
    
    
    143,161,293Net overriding royalty interest
    
    
    75
    %
    
    
    75
    %
    
    
    75
    %
    
    
    75
    %Royalty income
    
    $
    30,779,508
    
    
    $
    32,832,885
    
    
    $
    109,792,831
    
    
    $
    107,370,970
 
 (1)
    
    BROGs distribution to the Trust for July 2006 included $1,534,182 representing a portion of
the Arbitration Award referred to in Note 4 of the Notes to Condensed Financial Statements,
plus accrued interest. Of this amount, $1,325,826 (the equivalent of $994,370 grossed up to
account for the Trusts 75% net overriding royalty interest) was included in calculating the
net proceeds paid to the Trust, and the accrued interest thereon was $539,812.(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 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 15




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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. Contractual Obligations
  Effects of Securities Regulation
  Critical Accounting Policies
  
    
    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
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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.
  
 Item 3. Quantitative and Qualitative Disclosures About Market Risk.
  
 Item 4. Controls and Procedures.
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PART II
 OTHER INFORMATION
 
 Item 1. Legal Proceedings
  18




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San Juan Basin Royalty Trust vs. Burlington Resources
Oil & Gas Company LP. Burlington
Resources Oil & Gas Company LP vs. San Juan Basin Royalty Trust, st
  
 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.*
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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 November 8, 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 November 8, 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. 20




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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
    
    Description4(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 November 8,
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 November 8,
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.