SJT

Business Context and Reporting Period

Company: San Juan Basin Royalty Trust (a Texas express trust)

Reporting Period: Fiscal year ended December 31, 2002

Business Model: The Trust holds a 75% net overriding royalty interest in oil and gas properties located in the San Juan Basin, New Mexico. It is a passive entity with no employees; administrative functions are performed by the Trustee (TexasBank, effective September 30, 2002; previously Bank One, N.A.). The working interest owner and operator is Burlington Resources Oil & Gas Company LP (BROG). The Trust distributes net proceeds from production to Unit Holders after deducting production costs and Trust expenses.

Key Financial Metrics

Production Volumes (2002): 40,215 barrels of oil and 19,584,056 Mcf of gas.

Average Sales Prices (2002): $20.90 per barrel of oil and $2.32 per Mcf of gas.

Debt and Liquidity: The Trust has no long-term debt. It holds short-term investments in U.S. government obligations, repurchase agreements, or money market funds. Borrowing is limited to covering expenses pending distribution and is not expected to be material.

Material Changes Versus Prior Period

• Significant Revenue Decline: Royalty income dropped 53% from $81.4 million in 2001 to $38.1 million in 2002. Distributable income per Unit fell from $1.72 to $0.78.
• Price Volatility: Average gas prices declined from $4.61/Mcf in 2001 to $2.32/Mcf in 2002. Oil prices dropped from $24.99/bbl to $20.90/bbl.
• Production Costs: Capital expenditures deducted from net proceeds decreased from $33.0 million in 2001 to $21.5 million in 2002, partially offsetting the revenue decline.
• Settlement Deductions: In 2002, BROG deducted $3,624,117 from monthly net proceeds to settle prior claims with the Jicarilla Apache Nation and the MMS (Mineral Management Service).
• Loss of Val Verde Credit: Effective July 1, 2002, the Trust lost the "Val Verde Credit" (estimated at $2.0 million annually) following the sale of the Val Verde facility by BROG, resulting in higher allocated costs for coal seam gas.

Outlook, Risks, and Contingencies

Guidance and Outlook: BROG estimated a 2003 capital budget of $14.1 million, focusing on the Fruitland Coal formation and infill drilling in conventional formations. Natural gas production averaged 127 MMcf/day in 2002, an increase from 121 MMcf/day in 2001, indicating successful efforts to offset natural decline.

Regulatory and Tax Risks:

• Section 29 Tax Credit: The federal tax credit for coal seam gas production expired for production after December 31, 2002. Future credits are not available for 2003 production.
• Legal Proceedings: The Trust is exposed to potential losses from the In re Natural Gas Royalties Qui Tam Litigation and the Quinque Litigation, which allege underpayment of royalties to the government and producers. No estimate of potential loss has been made.
• MMS Proceedings: Several administrative appeals regarding royalty valuation and deductions remain pending, which could result in additional payments or reduced income.

Unusual Items: The Trust received a one-time payment of $3,490,000 in 2000 related to a gas imbalance settlement, with remaining adjustments ongoing. The 2002 financials reflect the full impact of the Jicarilla/MMS settlement deductions.

Investor Verification Checklist

• Price Sensitivity: Verify current natural gas and oil prices, as the Trust's income is highly sensitive to commodity price fluctuations.
• Capital Expenditure Timing: Confirm the timing of BROG's capital spending, as expenditures are deducted from net proceeds and directly reduce distributions.
• Legal Exposure: Monitor the status of the In re Natural Gas Royalties Qui Tam Litigation and MMS proceedings for potential future royalty deductions.
• Reserve Estimates: Review the standardized measure of discounted future net cash flows, noting that reserve quantities are estimates subject to change based on price and cost assumptions.
• Trustee Fees: Note the administrative fee structure (0.05% of first $100M gross revenue, 0.033% thereafter) and the minimum fee of $36,000 effective 2003.