HUGOTON ROYALTY TRUST - FORM 10-Q

Attached files

Attached files

Stock widget

Investing forum

HUGOTON ROYALTY TRUST Reports

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

file	filename
EX-32 - EX-32 - HUGOTON ROYALTY TRUST	d918200dex32.htm
EX-31 - EX-31 - HUGOTON ROYALTY TRUST	d918200dex31.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2015

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 1-10476

Hugoton Royalty Trust

(Exact name of registrant as specified in its charter)


Texas		58-6379215
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

Southwest Bank
Trustee
P.O. Box 962020, Fort Worth, Texas		76162-2020
(Address of principal executive offices)		(Zip Code)

(855) 588-7839

(Registrant’s telephone number, including area code)

NONE

(Former name, former address and former fiscal year, if change 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 x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (check one):

Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2). Yes ¨ No x

Indicate the number of units of beneficial interest outstanding, as of the latest practicable date:

Outstanding as of April 1, 2015

40,000,000

HUGOTON ROYALTY TRUST

FORM 10-Q FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2015


	TABLE OF CONTENTS

		Page
	Glossary of Terms		3

PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements		4

	Report of Independent Registered Public Accounting Firm		5

	Condensed Statements of Assets, Liabilities and Trust Corpus at March 31, 2015 and December 31, 2014		6

	Condensed Statements of Distributable Income for the Three Months Ended March 31, 2015 and 2014		7

	Condensed Statements of Changes in Trust Corpus for the Three Months Ended March 31, 2015 and 2014		8

	Notes to Condensed Financial Statements		9

Item 2.	Trustee’s Discussion and Analysis		14

Item 3.	Quantitative and Qualitative Disclosures about Market Risk		19

Item 4.	Controls and Procedures		19

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings		20

Item 1A.	Risk Factors		20

Item 6.	Exhibits		20

	Signatures		21

HUGOTON ROYALTY TRUST

GLOSSARY OF TERMS

The following are definitions of significant terms used in this Form 10-Q:


Bbl		Barrel (of oil)

Mcf		Thousand cubic feet (of natural gas)

MMBtu		One million British Thermal Units, a common energy measurement

net proceeds		Gross proceeds received by XTO Energy from sale of production from the underlying properties, less applicable costs, as defined in the net profits interest conveyances.

net profits income		Net proceeds multiplied by the net profits percentage of 80%, which is paid to the trust by XTO Energy. “Net profits income” is referred to as “royalty income” for tax reporting purposes.

net profits interest		An interest in an oil and gas property measured by net profits from the sale of production, rather than a specific portion of production. The following defined net profits interests were conveyed to the trust from the underlying properties:

		80% net profits interests - interests that entitle the trust to receive 80% of the net proceeds from the underlying properties.

underlying properties		XTO Energy’s interest in certain oil and gas properties from which the net profits interests were conveyed. The underlying properties include working interests in predominantly gas-producing properties located in Kansas, Oklahoma and Wyoming.

working interest		An operating interest in an oil and gas property that provides the owner a specified share of production that is subject to all production expense and development costs.

HUGOTON ROYALTY TRUST

PART I - FINANCIAL INFORMATION

Item 1.

Financial Statements.

The condensed financial statements included herein are presented, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in annual financial statements have been condensed or omitted pursuant to such rules and regulations, although the trustee believes that the disclosures are adequate to make the information presented not misleading. These condensed financial statements should be read in conjunction with the trust’s financial statements and the notes thereto included in the trust’s latest Annual Report on Form 10-K. In the opinion of the trustee, all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the assets, liabilities and trust corpus of the Hugoton Royalty Trust at March 31, 2015 and the distributable income and changes in trust corpus for the three-month periods ended March 31, 2015 and 2014 have been included. Distributable income for such interim periods is not necessarily indicative of the distributable income for the full year. The condensed financial statements as of March 31, 2015, and for the three-month periods ended March 31, 2015 and 2014 have been subjected to a review by PricewaterhouseCoopers LLP, the trust’s independent registered public accounting firm, whose report is included herein.

Report of Independent Registered Public Accounting Firm

To the Unitholders of Hugoton Royalty Trust and

Southwest Bank, Trustee:

We have reviewed the accompanying condensed statement of assets, liabilities and trust corpus of Hugoton Royalty Trust (the “Trust”) as of March 31, 2015, and the related condensed statements of distributable income and changes in trust corpus for the three-month periods ended March 31, 2015 and 2014. These interim financial statements are the responsibility of the Trustee.

We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

As described in Note 1, these financial statements were prepared on the modified cash basis of accounting, which is a comprehensive basis of accounting other than accounting principles generally accepted in the United States of America.

Based on our review, we are not aware of any material modifications that should be made to the accompanying condensed interim financial statements for them to be in conformity with the basis of accounting described in Note 1.

We previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the statement of assets, liabilities and trust corpus as of December 31, 2014, and the related statements of distributable income and changes in trust corpus for the year then ended (not presented herein), and in our report dated March 6, 2015, we expressed an unqualified opinion on those financial statements. In our opinion, the information set forth in the accompanying condensed statement of assets, liabilities and trust corpus as of December 31, 2014 is fairly stated in all material respects in relation to the statement of assets, liabilities and trust corpus from which it has been derived.

/s/ PricewaterhouseCoopers LLP

Houston, TX

May 5, 2015

HUGOTON ROYALTY TRUST

Condensed Statements of Assets, Liabilities and Trust Corpus


	March 31,		December 31,
	2015		2014
	(Unaudited)
ASSETS
Cash and short-term investments	$	2,454,287	$	4,324,131
Net profits interests in oil and gas properties - net (Note 1)		88,475,434		89,596,828

	$	90,929,721	$	93,920,959

LIABILITIES AND TRUST CORPUS
Distribution payable to unitholders	$	735,200	$	2,540,320
Legal reserve		1,619,087		1,783,811
Expense reserve		100,000		—
Trust corpus (40,000,000 units of beneficial interest authorized and outstanding)		88,475,434		89,596,828

	$	90,929,721	$	93,920,959

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

HUGOTON ROYALTY TRUST

Condensed Statements of Distributable Income (Unaudited)


	Three Months Ended March 31
	2015		2014
Net profits income	$	4,136,842	$	9,290,470
Interest income		69		92

Total income		4,136,911		9,290,562
Administration expense		370,911		1,640,242

Distributable income	$	3,766,000	$	7,650,320

Distributable income per unit (40,000,000 units)	$	0.094150	$	0.191258

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

HUGOTON ROYALTY TRUST

Condensed Statements of Changes in Trust Corpus (Unaudited)


	Three Months Ended March 31
	2015			2014
Trust corpus, beginning of period	$	89,596,828		$	98,854,558
Amortization of net profits interests		(1,121,394	)		(2,005,956	)
Distributable income		3,766,000			7,650,320
Distributions declared		(3,766,000	)		(7,650,320	)

Trust corpus, end of period	$	88,475,434		$	96,848,602

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

HUGOTON ROYALTY TRUST

Notes to Condensed Financial Statements (Unaudited)

1.	Basis of Accounting

The financial statements of Hugoton Royalty Trust are prepared on the following basis and are not intended to present financial position and results of operations in conformity with U.S. generally accepted accounting principles (“GAAP”):

•

Net profits income recorded for a month is the amount computed and paid by XTO Energy Inc., the owner of the underlying properties, to Southwest Bank, as trustee for the trust. XTO Energy is a wholly owned subsidiary of Exxon Mobil Corporation. Net profits income consists of net proceeds received by XTO Energy from the underlying properties in the prior month, multiplied by a net profits percentage of 80%.

•

Costs deducted in the calculation of net proceeds for the 80% net profits interests generally include applicable taxes, transportation, marketing and legal costs, production expense, development costs, operating charges and other costs.

•

Net profits income is computed separately for each of three conveyances under which the net profits interests were conveyed to the trust. If monthly costs exceed revenues for any conveyance, such excess costs must be recovered, with accrued interest, from future net proceeds of that conveyance and cannot reduce net proceeds from the other conveyances.

•

Interest income and distribution payable to unitholders include interest earned on the previous month’s investment.

•

Trust expenses are recorded based on liabilities paid and cash reserves established by the trustee for liabilities and contingencies.

•

Distributions to unitholders are recorded when declared by the trustee.

•

The trust may dispose of all or part of the net profits interests if approved by a vote of holders of 80% or more of the outstanding trust units, or upon trust termination. Otherwise, the trust is required to sell up to 1% of the value of the net profits interests in any calendar year, pursuant to notice from XTO Energy of its desire to sell the related underlying properties. Any sale must be for cash with 80% of the proceeds distributed to the unitholders on the next declared distribution.

•

The trustee routinely reviews the Trust’s net profits interests in oil and gas properties for impairment whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. If an impairment event occurs and it is determined that the carrying value of the Trust’s net profits interests may not be recoverable, an impairment will be recognized as measured by the amount by which the carrying amount of the net profits interests exceeds the fair value of these assets, which would likely be measured by discounting projected cash flows. There is no impairment of the assets as of March 31, 2015.

The trust’s financial statements differ from those prepared in conformity with U.S. GAAP because revenues are recognized when received rather than accrued in the month of production, expenses are recognized when paid rather than when incurred and certain cash reserves may be established by the trustee for contingencies which would not be recorded under U.S. GAAP. This comprehensive basis

of accounting other than U.S. GAAP corresponds to the accounting permitted for royalty trusts by the U.S. Securities and Exchange Commission, as specified by Staff Accounting Bulletin Topic 12:E, Financial Statements of Royalty Trusts.

Most accounting pronouncements apply to entities whose financial statements are prepared in accordance with U.S. GAAP, directing such entities to accrue or defer revenues and expenses in a period other than when such revenues were received or expenses were paid. Because the trust’s financial statements are prepared on the modified cash basis, as described above, most accounting pronouncements are not applicable to the trust’s financial statements.

The initial carrying value of the net profits interests of $247,066,951 represents XTO Energy’s historical net book value for the interests on December 1, 1998, the date of the transfer to the trust. Amortization of the net profits interests is calculated on a unit-of-production basis and charged directly to trust corpus. Accumulated amortization was $158,591,517 as of March 31, 2015 and $157,470,123 as of December 31, 2014.

2.	Development Costs

The following summarizes actual development costs, budgeted development costs deducted in the calculation of net profits income, and the cumulative actual costs compared to the amount deducted:


	Three Months Ended March 31
	2015			2014
Cumulative actual costs under (over) the amount deducted - beginning of period	$	1,242,998		$	588,742
Actual costs		(1,389,875	)		(1,651,365	)
Budgeted costs deducted		600,000			1,700,000

Cumulative actual costs under (over) the amount deducted - end of period	$	453,123		$	637,377

The monthly development cost deduction was $600,000 from the January 2014 distribution through the February 2014 distribution. Due to lower than anticipated actual costs as a result of the timing of cash expenditures, the development cost deduction was decreased to $500,000 beginning with the March 2014 distribution and to $400,000 beginning with the June 2014 distribution and was maintained at that level through the November 2014 distribution. Due to lower than anticipated actual costs as a result of reduced activity and revisions to the 2014 development budget, the development cost deduction was decreased to $200,000 beginning with the December 2014 distribution and was maintained at that level through the March 2015 distribution. XTO Energy has advised the trustee that total 2015 budgeted development costs for the underlying properties are between $4 million and $6 million. The monthly deduction is based on the current level of development expenditures, budgeted future development costs and the cumulative actual costs under (over) previous deductions. XTO Energy has advised the trustee that this monthly deduction will continue to be evaluated and revised as necessary.

3.	Income Taxes

For federal income tax purposes, the trust constitutes a fixed investment trust that is taxed as a grantor trust. A grantor trust is not subject to tax at the trust level. Accordingly, no provision for income taxes has been made in the financial statements. The unitholders 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 unitholder at the time such income is received or accrued by the trust and not when distributed by the trust.

All revenues from the trust are from sources within Kansas, Oklahoma or Wyoming. Because it distributes all of its net income to unitholders, the trust has not been taxed at the trust level in Kansas or Oklahoma. While the trust has not owed tax, the trustee is required to file a return with Kansas and Oklahoma reflecting the income and deductions of the trust attributable to properties located in each state, along with a schedule that includes information regarding distributions to unitholders.

Wyoming does not have a state income tax.

Each unitholder should consult his or her own tax advisor regarding income tax requirements, if any, applicable to such person’s ownership of trust units.

Unitholders should consult the trust’s latest annual report on Form 10-K for a complete discussion of federal and state tax matters.

4.	Contingencies

In September 2008, a royalty class action lawsuit was filed against XTO Energy styled Wallace B. Roderick Revocable Living Trust, et al. v. XTO Energy Inc. in the District Court of Kearny County, Kansas. The case was removed to federal court in Wichita, Kansas. The plaintiffs allege that XTO Energy has improperly taken post production costs from royalties paid to the plaintiffs from wells located in Kansas, Oklahoma, and Colorado; later reduced to Kansas. The case was certified as a class action in March 2012. XTO Energy filed an appeal of the class certification to the 10th Circuit Court of Appeals on April 11, 2012 which was granted on June 26, 2012. The court reversed the certification of the class and remanded the case back to the trial court for further proceedings. The case has been stayed pending a decision from the Kansas Supreme Court on the Fawcett v. OPIK appeal. In its pleadings, the plaintiff has alleged damages in excess of $42.5 million.

In December 2010, a royalty class action lawsuit was filed against XTO Energy styled Chieftain Royalty Company v. XTO Energy Inc. in Coal County District Court, Oklahoma. XTO Energy removed the case to federal court in the Eastern District of Oklahoma. The plaintiffs allege that XTO Energy wrongfully deducted fees from royalty payments on Oklahoma wells, failed to make diligent efforts to secure the best terms available for the sale of gas and its constituents, and demand an accounting to determine whether they have been fully and fairly paid gas royalty interests. The case was certified as a class action in April 2012. XTO Energy filed an appeal of the class certification to the 10th Circuit Court of Appeals on April 26, 2012 which was granted on June 26, 2012. The court reversed the certification of the class and remanded the case back to the trial court for further proceedings.

XTO Energy has informed the trustee that it believes that XTO Energy has strong defenses to these lawsuits and intends to vigorously defend its position. However, XTO Energy has informed the Trustee that it is cognizant of other, similar litigation, such as Fankhouser, which is discussed in the trust’s most recent Form 10-K, and other, unrelated cases against other, unrelated entities. As these cases develop, XTO Energy will assess its legal position accordingly. If XTO Energy ultimately makes any settlement payments or receives a judgment against it in Chieftain or Roderick, XTO Energy has advised the trustee that it believes that the terms of the conveyances covering the trust’s net profits interests require the trust to bear its 80% share of such settlement or judgment related to production from the underlying properties. Additionally, if the judgment or settlement increases the amount of future payments to royalty owners, XTO Energy has informed the trustee that the trust would bear its proportionate share of the increased payments through reduced net proceeds. In the event of any such settlement or judgment, the trustee intends to review any claimed reductions in payment to the trust based on the facts and circumstances of such settlement or judgment. In light of the arbitration tribunal’s decision on the treatment of the Fankhouser settlement, to the extent that the claims in

Chieftain or Roderick are similar to those in Fankhouser, the trustee would likely object to such claimed reductions. XTO Energy has informed the trustee that, although the amount of any reduction in net proceeds is not presently determinable, in its management’s opinion, the amount is not currently expected to be material to the trust’s financial position or liquidity though it could be material to the trust’s annual distributable income. Additionally, XTO Energy has advised the trustee that any reductions would result in costs exceeding revenues on the properties underlying the net profit interests of the cases named above, as applicable, for several monthly distributions, depending on the size of the judgment or settlement, if any, and the net proceeds being paid at that time, which would result in the net profits interest being limited until such time that the revenues exceed the costs for those net profit interests. If there is a settlement or judgment and should XTO Energy and the trustee disagree concerning the amount of the settlement or judgment to be charged, if any, against the trust’s net profits interests, the matter will be resolved by binding arbitration through the American Arbitration Association under the terms of the Indenture creating the trust.

On September 12, 2012, a lawsuit was filed against Bank of America as trustee and XTO Energy styled Harold Lamb v. Bank of America and XTO Energy Inc., in the U.S. District Court — Western District of Oklahoma. The plaintiff, Harold Lamb, is a unitholder in the trust and alleged that XTO Energy failed to properly pay and account to the trust under the terms of the net overriding royalty conveyances on certain Kansas and Oklahoma properties and that Bank of America, N.A., as the previous trustee, failed to properly oversee such payment and accounting by XTO Energy. Additionally, the plaintiff alleged that Bank of America, N.A. and XTO Energy breached a fiduciary duty to the trust based on the allegations found in the Fankhouser class action discussed in the most recent Form 10-K. The plaintiff sought unspecified amounts for actual/compensatory damages, punitive damages, disgorgement and injunctive relief. On September 5, 2014, Lamb filed a Motion to Voluntarily Dismiss his claims. On September 29, 2014, the Lamb case was dismissed without prejudice to refile in state court. Lamb’s counsel has been added as counsel of record for Goebel in Sandra G. Goebel vs. XTO Energy, Inc., Timberland Gathering & Processing Company, Inc. and Bank of America, N.A.

On August 12, 2013, a demand for arbitration styled Sandra G. Goebel vs. XTO Energy, Inc., Timberland Gathering & Processing Company, Inc. and Bank of America, N.A. was filed with the American Arbitration Association (“AAA”). The claimant, Sandra Goebel, is a unitholder in the trust and alleged that XTO Energy breached the conveyances by misappropriating funds from the trust by failing to modify its existing sales contracts with its affiliate Timberland Gathering & Processing Company, Inc. (“Timberland”). Goebel alleged that these contracts did not currently reflect “market rate” terms, and that XTO had a duty to renegotiate the contracts to obtain more favorable terms. The claimant further alleged that Bank of America, N.A. (the previous trustee) breached its fiduciary duty by acquiescing to and facilitating XTO Energy’s alleged self-dealing and concealing information from unitholders that would have revealed XTO Energy’s breaches. The claim also alleged aiding and abetting breach of fiduciary duty by XTO Energy, and disgorgement and unjust enrichment by Timberland. The claimant sought from the respondents damages of an estimated $59.6 million for alleged royalty underpayments, exemplary damages, an accounting by XTO Energy, a declaration, costs, reasonable attorneys’ fees, and pre-judgment and post-judgment interest. Goebel purported to sue on behalf of and for the benefit of the Hugoton Royalty Trust. Bank of America, N.A. filed a response to the arbitration demand denying any liability arising out of the claimant’s allegations and objecting to the arbitrability of Goebel’s claims against Bank of America, N.A. The arbitration panel ruled that Goebel’s claims are not arbitrable and dismissed the claims in their entirety without prejudice. Goebel has refiled the matter as a lawsuit styled Sandra G. Goebel vs. XTO Energy, Inc., Timberland Gathering and Processing Company, Inc. and Bank of America, N.A. in Dallas County District Court. The allegations are the same as those contained in the previous arbitration demand. Defendants answered with general denials and additionally filed pleas to the jurisdiction, special exceptions, and a plea in abatement challenging, among other things, Goebel’s putative authority to bring claims on behalf of the trust over the trustee’s objection. The Defendants also filed a joint

motion to stay the Goebel case in favor of the first filed Lamb case discussed above. The court denied Defendants’ pleas to the jurisdiction and special exceptions, although it did not rule on the plea in abatement. Simultaneously, the judge conditionally stayed the case pending a ruling on Goebel’s Motion to Intervene in the Lamb case. On September 5, 2014, however, Goebel withdrew her Motion to Intervene. That same day, Lamb filed a Motion to Voluntarily Dismiss his federal district court lawsuit (see discussion above). Goebel filed a motion to lift the stay in the state district court; while XTO Energy, Timberland and Bank of America (individually and now as former trustee) filed a motion to stay the case pending a mandamus appeal of the district court’s denial of their pleas to the jurisdiction and special exceptions. On October 30, 2014, the district court granted Plaintiff’s motion to lift stay. On October 31, 2014, the district court denied Defendants’ motion to stay pending mandamus. On November 7, 2014, the Defendants filed their petition for writ of mandamus with the Dallas Court of Appeals. Defendants also filed a motion seeking a stay from the court of appeals, along with the petition for writ of mandamus. On November 13, 2014, the court of appeals granted Defendants’ motion and stayed the lawsuit, including all associated discovery, until the court opines on the petition for writ of mandamus. Goebel filed a response to the petition for the writ of mandamus on December 16, 2014 and the Defendants replied on January 13, 2015. Accordingly, the petition has been fully briefed and is awaiting a decision from the court of appeals. Southwest Bank, the current trustee, has not yet been named a party in the case. The trustee will vigorously defend any claims that may be asserted against it. XTO Energy has informed the trustee that it believes that XTO Energy and Timberland have strong defenses to this lawsuit and intend to vigorously defend their positions. Bank of America has informed the trustee that it believes it has strong defenses to the lawsuit and will vigorously defend its position. The terms of the trust indenture provide that Bank of America and/or the trustee shall be indemnified by the trust and shall have no liability, other than for fraud, gross negligence or acts or omissions in bad faith as adjudicated by final non-appealable judgment of a court of competent jurisdiction.

The trustee anticipates that the trust will incur additional legal and other expenses in connection with the Goebel lawsuit. As a result, the trustee reserved an additional $1.6 million from trust distributions for the Goebel litigation, beginning with the September 2013 distribution. The September 2013 through December 2013 distributions each reflected a deduction of $400,000 in connection with such reserve. Additionally, the trustee previously reserved an additional $1.6 million from trust distributions for the Lamb litigation but that is now a part of the reserve for the Goebel lawsuit. The January 2014 through April 2014 distributions each reflected a deduction of $400,000 in connection with such reserve. As the Goebel lawsuit progresses, the trustee may need to revise the reserve.

Certain of the underlying properties are involved in various other lawsuits and governmental proceedings arising in the ordinary course of business. XTO Energy has advised the trustee that it does not believe that the ultimate resolution of these claims will have a material effect on the financial position or liquidity of the trust, but may have an effect on annual distributable income.

Other

Several states have enacted legislation requiring state income tax withholding from nonresident recipients of oil and gas proceeds. After consultation with its tax counsel, the trustee believes that it is not required to withhold on payments made to the unitholders. However, regulations are subject to change by the various states, which could change this conclusion. Should amounts be withheld on payments made to the trust or the unitholders, distributions to the unitholders would be reduced by the required amount, subject to the filing of a claim for refund by the trust or unitholders for such amount.

5.	Excess Costs

XTO Energy advised the trustee that increased costs, decreased gas production and lower gas prices caused costs to exceed revenues by a total of $22,501 ($18,001 net to the trust) in January 2015 and decreased gas production and lower gas prices caused costs to exceed revenues by a total of $316,167 ($252,934 net to the trust) in February and March 2015 on properties underlying the Kansas net profits interest. However, these excess costs did not reduce net proceeds from the remaining conveyances.

XTO Energy advised the trustee that lower gas prices and increased costs caused costs to exceed revenues by a total of $87,082 ($69,666 net to the trust) in March 2015 on properties underlying the Wyoming net profits interest. However, these excess costs did not reduce net proceeds from the remaining conveyance.

Cumulative excess costs for the Kansas and Wyoming conveyances remaining as of March 31, 2015 totaled $508,633 ($406,906 net to the trust).

Other

XTO Energy advised the trustee that the February 2015 distribution included a one-time prior period adjustment for the recoupment of natural gas liquids revenue from the trust in the amount of $353,069 ($282,455 net to the trust) which was deducted from net proceeds for the first quarter of 2015.

Item 2.

Trustee’s Discussion and Analysis.

The following discussion should be read in conjunction with the trustee’s discussion and analysis contained in the trust’s 2014 Annual Report on Form 10-K, as well as the condensed financial statements and notes thereto included in this Quarterly Report on Form 10-Q. The trust’s Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports are available on the trust’s web site at www.hgt-hugoton.com.

Distributable Income

For the quarter ended March 31, 2015, net profits income was $4,136,842, as compared to $9,290,470 for first quarter 2014. The 55% decrease in net profits income is primarily the result of lower oil and gas prices ($4.2 million), decreased oil and gas production ($2.4 million) and the recoupment of natural gas liquids revenue in February 2015 ($0.3 million), partially offset by lower development costs ($0.9 million), decreased taxes, transportation and other costs ($0.5 million) and excess costs on the Kansas and Wyoming underlying properties in 2015 ($0.3 million). See “Net Profits Income” on following page.

After adding interest income of $69 and deducting administration expense of $370,911, distributable income for the quarter ended March 31, 2015 was $3,766,000, or $0.094150 per unit of beneficial interest. Administration expense for the quarter decreased $1,269,331 from the prior year quarter. Administration expense for the first quarter of 2015 included $100,000 which the trustee reserved for administrative expenses and administration expense for first quarter 2014 included $1,200,000 which the trustee reserved for legal expenses regarding the Lamb lawsuit which is now part of the reserve for the Goebel lawsuit. Changes in interest income are attributable to fluctuations in net profits income and interest rates. For first quarter 2014, distributable income was $7,650,320 or $0.191258 per unit.

Distributions to unitholders for the quarter ended March 31, 2015 were:


Record Date	Payment Date	Distribution per Unit
January 30, 2015	February 13, 2015	$	0.039683
February 27, 2015	March 13, 2015		0.036087
March 31, 2015	April 14, 2015		0.018380

		$	0.094150

Net Profits Income

Net profits income is recorded when received by the trust, which is the month following receipt by XTO Energy, and generally two months after oil and gas production. Net profits income is generally affected by three major factors:

•

oil and gas sales volumes,

•

oil and gas sales prices, and

•

costs deducted in the calculation of net profits income.

The following is a summary of the calculation of net profits income received by the trust:


	Three Months
	Ended March 31 *(a)*						Increase
	2015			2014			(Decrease)
Sales Volumes
Gas (Mcf) (b)
Underlying properties		3,714,450			4,449,201			(17	%)
Average per day		40,374			48,361			(17	%)
Net profits interests		953,182			1,734,374			(45	%)

Oil (Bbls) (b)
Underlying properties		49,386			54,745			(10	%)
Average per day		537			595			(10	%)
Net profits interests		16,562			26,096			(37	%)

Average Sales Prices
Gas (per Mcf)	$	3.48		$	4.35			(20	%)
Oil (per Bbl)	$	58.00		$	92.18			(37	%)

Revenues
Gas sales	$	12,908,609		$	19,339,408			(33	%)
Oil sales		2,864,366			5,046,572			(43	%)

Total Revenues		15,772,975			24,385,980			(35	%)


Costs
Taxes, transportation and other		1,950,142			2,603,689			(25	%)
Production expense		5,415,493			5,414,648			—
Development costs (c)		600,000			1,700,000			(65	%)
Overhead		3,062,037			3,054,555			—
Excess costs (d)		(425,750	)		—			—

Total Costs		10,601,922			12,772,892			(17	%)


Net Proceeds		5,171,053			11,613,088			(55	%)

Net Profits Percentage		80	%		80	%


Net Profits Income	$	4,136,842		$	9,290,470			(55	%)

(a)

Because of the two-month interval between time of production and receipt of net profits income by the trust, oil and gas sales for the quarter ended March 31 generally represent production for the period November through January.

(b)

Oil and gas sales volumes are allocated to the net profits interests based upon a formula that considers oil and gas prices and the total amount of production expense and development costs. As product prices change, the trust’s share of the production volumes is impacted as the quantity of production to cover expenses in reaching the net profits break-even level changes inversely with price. As such, the underlying property production volume changes may not correlate with the trust’s net profit share of those volumes in any given period. Therefore, comparative discussion of oil and gas sales volumes is based on the underlying properties.

(c)

See Note 2 to Condensed Financial Statements.

(d)

See Note 5 to Condensed Financial Statements.

The following are explanations of significant variances on the underlying properties from first quarter 2014 to first quarter 2015:

Sales Volumes

Gas sales volumes decreased 17% and oil sales volumes decreased 10% from first quarter 2014 to first quarter 2015. Decreased gas sales volumes are primarily due to repairs and maintenance in first quarter 2015 at a third party gas processing system in the Hugoton area following a force majeure incident and natural production decline. Decreased oil sales volumes are primarily due to the timing of cash receipts and natural production decline.

XTO Energy advised the trustee that repairs and maintenance in first quarter 2015 at a third party gas processing system in the Hugoton area following a force majeure incident resulted in decreased underlying gas volumes of approximately 5,000 Mcf per day. The third party has advised XTO Energy that it expects the repairs and maintenance to be completed by the middle of May 2015. However, XTO Energy has received notice that the force majeure notice is being extended to the processing portion of the third party plant due to an equipment malfunction. The third party will be able to bypass the plant and take gas, but, the plant is not expected to be able to process gas for NGLs or Helium until July 1, 2015. XTO Energy will continue to monitor the situation and assess its options.

The estimated rate of natural production decline on the underlying oil and gas properties is approximately 6% to 8% a year.

Sales Prices

Gas

The first quarter 2015 average gas price was $3.48 per Mcf, a 20% decrease from the first quarter 2014 average gas price of $4.35 per Mcf. Excluding the effects of the natural gas liquids recoupment in February 2015, the average gas price was $3.59 per Mcf in the first quarter of 2015. For more information on the recoupment see “Other” on the following page. Natural gas prices are affected by the level of North American production, weather, crude oil and natural gas liquids prices, the U.S. economy, storage levels and import levels of liquefied natural gas. Natural gas prices are expected to remain volatile. The first quarter 2015 gas price is primarily related to production from November 2014 through January 2015, when the average NYMEX price was $3.73 per MMBtu. The average NYMEX price for February and March 2015 was $2.88 per MMBtu. At April 28, 2015, the average NYMEX futures price for the following twelve months was $2.79 per MMBtu.

Oil

The first quarter 2015 average oil price was $58.00 per Bbl, a 37% decrease from the first quarter 2014 average oil price of $92.18 per Bbl. Oil prices are expected to remain volatile. The first quarter 2014 oil price is primarily related to production from November 2014 through January 2015, when the average NYMEX price was $60.89 per Bbl. The average NYMEX price for February and March 2015 was $48.41 per Bbl. At April 28, 2015, the average NYMEX futures price for the following twelve months was $60.84 per Bbl.

Costs

Taxes, Transportation and Other

Taxes, transportation and other decreased 25% for the first quarter primarily because of decreased oil and gas production taxes and other deductions related to lower oil and gas revenues, partially offset by increased property taxes related to higher valuations.

Development Costs

Development costs deducted in the calculation of net profits income are based primarily on the current level of development expenditures and the development budget. Development costs for first quarter 2015 decreased 65% from the prior year quarter.

At December 31, 2014, cumulative budgeted costs deducted exceeded cumulative actual costs by approximately $1.2 million. In calculating net profits income for the quarter ended March 31, 2015, XTO Energy deducted budgeted development costs of $600,000. After considering actual development costs of $1.4 million for the quarter, budgeted costs deducted exceeded cumulative actual costs by $0.5 million. First quarter actual development costs primarily relate to disbursements for development activity in fourth quarter 2014.

XTO Energy has advised the trustee that total 2015 budgeted development costs for the underlying properties are between $4 million and $6 million. The 2015 budget year generally coincides with the trust distribution months from April 2015 through March 2016. The monthly development cost deduction will be reevaluated by XTO Energy and revised as necessary, based on the 2015 budget and the timing and amount of actual expenditures. See Note 2 to Condensed Financial Statements.

Excess Costs

Cumulative excess costs for the Kansas and Wyoming conveyances remaining as of March 31, 2015 totaled $508,633 ($406,906 net to the trust).

Other

Contingencies

XTO Energy is a party to certain litigation affecting the underlying properties and XTO Energy and the trustee are parties to other litigation relating to the trust. See Note 4 to Condensed Financial Statements.

Forward-Looking Statements

Statements in this report relating to future plans, predictions, events or conditions are forward-looking statements. All statements other than statements of historical fact included in this Form 10-Q, including, without limitation, statements regarding the net profits interests, underlying properties, development activities, annual and monthly development, production and other costs and expenses, monthly development cost deductions, oil and gas prices and differentials to NYMEX prices, supply levels, future drilling, workover and restimulation plans, the outcome of litigation and impact on trust proceeds, distributions to unitholders, industry and market conditions and the satisfaction or waiver of conditions to the trustee’s resignation, are forward-looking statements that are subject to risks and uncertainties which are detailed in Part I, Item 1A of the trust’s Annual Report on Form 10-K for the year ended December 31, 2014, which is incorporated by this reference as though fully set forth herein. XTO Energy and the trustee assume no duty to update these statements as of any future date.

Item 3.

Quantitative and Qualitative Disclosures about Market Risk.

There have been no material changes in the trust’s market risks from the information disclosed in Part II, Item 7A of the trust’s Annual Report on Form 10-K for the year ended December 31, 2014.

Item 4.

Controls and Procedures.

As of the end of the period covered by this report, the trustee carried out an evaluation of the effectiveness of the trust’s disclosure controls and procedures pursuant to Exchange Act Rules 13a-15 and 15d-15. Based upon that evaluation, the trustee concluded that the trust’s disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the trust in the reports that it files or submits under the Securities Exchange Act of 1934 and are effective in ensuring that information required to be disclosed by the trust in the reports that it files or submits under the Securities Exchange Act of 1934 is accumulated and communicated to the trustee to allow timely decisions regarding required disclosure. In its evaluation of disclosure controls and procedures, the trustee has relied, to the extent considered reasonable, on information provided by XTO Energy. There has not been any change in the trust’s internal control over financial reporting during the period covered by this report that has materially affected, or is reasonably likely to materially affect, the trust’s internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1.

Legal Proceedings.

Refer to Note 4 of this Quarterly Report on Form 10-Q for information on legal proceedings.

Item 1A.

Risk Factors.

There have been no material changes in the risk factors disclosed under Part I, Item 1A of the trust’s Annual Report on Form 10-K for the year ended December 31, 2014.

Items 2 through 5.

Not applicable.

Item 6.

Exhibits.

(a)

Exhibits.


Exhibit Number and Description

(31)	Rule 13a-14(a)/15d-14(a) Certification

(32)	Section 1350 Certification

(99)	Items 1A, 7 and 7A to the Annual Report on Form 10-K for Hugoton Royalty Trust filed with the Securities and Exchange Commission on March 6, 2015 (incorporated herein by reference)

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.


	HUGOTON ROYALTY TRUST By SOUTHWEST BANK, TRUSTEE

	By	/s/ NANCY G. WILLIS
		Nancy G. Willis
		Vice President

	EXXON MOBIL CORPORATION

Date: May 5, 2015	By	/s/ BETH E. CASTEEL
		Beth E. Casteel
		Vice President - Upstream Business Services

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (Do not check if a smaller reporting company)

Smaller reporting company