HUGOTON ROYALTY TRUST - Quarter Report: 2010 March (Form 10-Q)
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,
2010
OR
¨ 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.)
|
|
U.S.
Trust, Bank of America
|
||
|
Private
Wealth Management
|
||
|
P.O. Box 830650, Dallas,
Texas
|
75283-0650
|
|
|
(Address
of principal executive offices)
|
|
(Zip
Code)
|
(877) 228-5083
(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 þ 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):
|
Large accelerated filer þ
|
Accelerated filer ¨
|
|
Non-accelerated filer ¨ (Do not check if a smaller reporting company)
|
Smaller reporting company ¨
|
Indicate
by check mark whether the registrant is a shell company (as defined in Exchange
Act Rule 12b-2). Yes o No þ
Indicate
the number of units of beneficial interest outstanding, as of the latest
practicable date:
Outstanding as of April 1,
2010
40,000,000
HUGOTON
ROYALTY TRUST
FORM 10-Q FOR THE QUARTERLY
PERIOD ENDED MARCH 31, 2010
| TABLE OF CONTENTS | ||
|
Page
|
||
|
3
|
||
|
4
|
||
|
5
|
||
|
6
|
||
|
7
|
||
|
8
|
||
|
9
|
||
|
12
|
||
|
16
|
||
|
16
|
||
|
17
|
||
|
17
|
||
|
18
|
||
|
19
|
2
HUGOTON
ROYALTY TRUST
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
|
3
HUGOTON
ROYALTY TRUST
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 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, 2010 and the distributable income and changes
in trust corpus for the three-month periods ended March 31, 2010 and 2009 have
been included. Distributable income for such interim periods is not
necessarily indicative of the distributable income for the full
year.
4
Bank of
America, N.A., as Trustee
for
the Hugoton Royalty Trust:
We have
reviewed the accompanying condensed statement of assets, liabilities and trust
corpus of the Hugoton Royalty Trust as of March 31, 2010 and the related
condensed statements of distributable income and changes in trust corpus for the
three-month periods ended March 31, 2010 and 2009. These condensed
financial statements are the responsibility of the trustee.
We
conducted our review in accordance with standards established by the Public
Company Accounting Oversight Board (United States). A review of
interim financial information consists principally of applying analytical
procedures to financial data 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.
The
accompanying condensed financial statements are prepared on a modified cash
basis as described in Note 1 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 condensed financial statements referred to above for them to be in
conformity with the basis of accounting described in Note 1.
We have
previously audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the statement of assets, liabilities
and trust corpus of the Hugoton Royalty Trust as of December 31, 2009, and the
related statements of distributable income and changes in trust corpus for the
year then ended (not presented herein), included in the trust’s 2009 Annual
Report on Form 10-K, and in our report dated February 22, 2010, 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, 2009 is fairly stated, in
all material respects, in relation to the statement of assets, liabilities and
trust corpus included in the trust’s 2009 Annual Report on Form 10-K from which
it has been derived.
KPMG
LLP
Fort
Worth, Texas
April 26,
2010
5
Condensed
Statements of Assets, Liabilities and Trust Corpus
|
March
31,
|
December
31,
|
|||||||
|
2010
|
2009
|
|||||||
|
(Unaudited)
|
||||||||
|
ASSETS
|
||||||||
|
Cash
and short-term investments
|
$ | 5,653,480 | $ | 4,284,800 | ||||
|
Net
profits interests in oil and gas properties - net (Note 1)
|
136,036,821 | 139,877,580 | ||||||
| $ | 141,690,301 | $ | 144,162,380 | |||||
|
LIABILITIES
AND TRUST CORPUS
|
||||||||
|
Distribution
payable to unitholders
|
$ | 5,653,480 | $ | 4,284,800 | ||||
|
Trust
corpus (40,000,000 units of beneficial interest authorized and
outstanding)
|
136,036,821 | 139,877,580 | ||||||
| $ | 141,690,301 | $ | 144,162,380 | |||||
The
accompanying notes to condensed financial statements are an integral part of
these statements.
6
Condensed Statements of Distributable
Income (Unaudited)
|
Three
Months Ended
|
||||||||
|
March 31
|
||||||||
|
2010
|
2009
|
|||||||
|
Net
profits income
|
$ | 16,899,222 | $ | 5,777,425 | ||||
|
Interest
income
|
102 | 132 | ||||||
|
Total
income
|
16,899,324 | 5,777,557 | ||||||
|
Administration
expense
|
334,204 | 312,197 | ||||||
|
Distributable
income
|
$ | 16,565,120 | $ | 5,465,360 | ||||
|
Distributable
income per unit (40,000,000 units)
|
$ | 0.414128 | $ | 0.136634 | ||||
The
accompanying notes to condensed financial statements are an integral part of
these statements.
7
Condensed Statements of Changes in
Trust Corpus (Unaudited)
|
Three
Months Ended
|
||||||||
|
March 31
|
||||||||
|
2010
|
2009
|
|||||||
|
Trust
corpus, beginning of period
|
$ | 139,877,580 | $ | 146,722,015 | ||||
|
Amortization
of net profits interests
|
(3,840,759 | ) | (1,195,051 | ) | ||||
|
Distributable
income
|
16,565,120 | 5,465,360 | ||||||
|
Distributions
declared
|
(16,565,120 | ) | (5,465,360 | ) | ||||
|
Trust
corpus, end of period
|
$ | 136,036,821 | $ | 145,526,964 | ||||
The
accompanying notes to condensed financial statements are an integral part of
these statements.
8
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 Bank of America,
N.A., as trustee for the trust. 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.
|
|
|
-
|
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’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 $111,030,130
as of March 31, 2010 and $107,189,371 as of December 31,
2009.
9
|
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
|
||||||||
|
2010
|
2009
|
|||||||
|
Cumulative
actual costs under (over) the amount deducted - beginning of
period
|
$ | 909,477 | $ | (7,314,084 | ) | |||
|
Actual
costs
|
(1,420,113 | ) | (8,280,561 | ) | ||||
|
Budgeted
costs deducted
|
1,500,000 | 12,000,000 | ||||||
|
Cumulative
actual costs under (over) the amount deducted - end of
period
|
$ | 989,364 | $ | (3,594,645 | ) | |||
The
monthly development cost deduction was $4.0 million from the January 2009
distribution through the March 2009 distribution. As a
result of decreased development activity and revisions to the 2009 development
budget, the development cost deduction was decreased to $2.0 million beginning
with the April 2009 distribution, to $1.0 million beginning with the June 2009
distribution and to $500,000 beginning with the September 2009 distribution and
was maintained at that level through the March 2010 distribution. XTO
Energy has advised the trustee that revised total 2010 budgeted development
costs for the underlying properties are between $8 million and $10
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.
|
Contingencies
|
An
amended petition for a class action lawsuit, Beer, et al. v. XTO Energy
Inc., was filed in January 2006 in the District Court of Texas County,
Oklahoma by certain royalty owners of natural gas wells in Oklahoma and Kansas.
The plaintiffs allege that XTO Energy has not properly accounted to the
plaintiffs for the royalties to which they are entitled and seek an accounting
regarding the natural gas and other products produced from their wells and the
prices paid for the natural gas and other products produced, and for payment of
the monies allegedly owed since June 2002, with a certain limited number of
plaintiffs claiming monies owed for additional time. XTO Energy removed the case
to federal district court in Oklahoma City. A hearing on the class certification
was conducted in October 2008. At the class certification hearing, the
plaintiffs sought to certify a class of royalty owners whose wells were
connected to a processing plant owned by a subsidiary of XTO Energy in the
Hugoton Field, with two sub-classes consisting of owners in Oklahoma and
Kansas. In March 2009, the court granted the motion to certify the
class. The plaintiffs filed a motion for summary judgment for only
the two named plaintiffs. The court granted the motion in the amount
of $12,779. A motion for summary judgment related to the remainder of
the class was denied. Trial was scheduled for April 2010; however,
the court vacated the trial date. At a hearing in April 2010, the
court ruled that the class representatives were no longer proper representatives
and stated that it is considering whether to dismiss class counsel or decertify
the class in whole or in part. In a subsequent ruling in April 2010,
the court decertified the class. XTO Energy has informed the trustee
that it believes that it has strong defenses to this lawsuit and intends to
vigorously defend its position. However, if XTO Energy ultimately makes any
settlement payments or receives a judgment against it, the trust will bear its
80% share of such settlement or judgment related to production from the
underlying properties. Additionally, if a judgment or settlement increases the
amount of future payments to royalty owners, the trust would bear its
proportionate share of the increased payments through reduced net proceeds. XTO
Energy has informed the trustee that, although the amount of any reduction
in net proceeds
10
is not
presently determinable, in its management’s opinion, the amount is not currently
expected to be material to the trust’s annual distributable income, financial
position or liquidity. It could, however, result in costs exceeding
revenues on the properties underlying the Oklahoma and Kansas net profit
interests for one or more monthly distributions, depending on the size of the
judgment or settlement, if any, and the net proceeds being paid at that
time.
In
September 2008, a 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. XTO Energy removed the case 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. The plaintiffs also seek to represent all royalty owners in these
three states as a class. The plaintiffs’ claims overlap the claims made by the
plaintiffs in the Beer
case as to certain properties. XTO Energy has answered, denying all claims, and
has filed motions to dismiss a portion of the claims. The federal
court recently granted XTO Energy’s motion for summary judgment concerning prior
settled class actions that overlap plaintiffs’ proposed class
action. The court also granted XTO Energy’s motion to dismiss those
portions of plaintiffs’ class that are currently being prosecuted in the Beer class action discussed
above. XTO Energy has informed the trustee that it believes that XTO
Energy has strong defenses to this lawsuit and intends to vigorously defend its
position. However, if XTO Energy ultimately makes any settlement payments or
receives a judgment against it, the trust will 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, the trust would bear its proportionate share of the
increased payments through reduced net proceeds. 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 annual distributable income, financial
position or liquidity. It could, however, result in costs exceeding
revenues on the properties underlying the Oklahoma and Kansas net profit
interests for one or more monthly distributions, depending on the size of the
judgment or settlement, if any, and the net proceeds being paid at that
time.
Certain
of the underlying properties are involved in various other lawsuits and certain
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 trust annual distributable income,
financial position or liquidity.
|
4.
|
Excess
Costs
|
Costs
exceeded revenues by $513,475 ($410,780 to the trust) on properties underlying
the Kansas net profits interests in October and November 2009. Lower
gas prices due to reduced demand as a result of the U.S. recession and excess
supply caused costs to exceed revenues on properties underlying the Kansas net
profits interests. However, these excess costs did not reduce net proceeds from
the remaining conveyances. XTO Energy advised the trustee that increased gas
prices led to the partial recovery of excess costs of $410,957 ($328,766 net to
the trust), plus accrued interest of $1,958 ($1,566 net to the trust) in
December 2009 and the full recovery of excess costs of $102,518 ($82,014 net to
the trust), plus accrued interest of $282 ($226 net to the trust) in January
2010.
11
|
5.
|
XTO
Energy Inc.
|
On
December 13, 2009, XTO Energy entered into a definitive merger agreement with
Exxon Mobil Corporation under which XTO Energy would become a wholly owned
subsidiary of ExxonMobil. The completion of this merger is subject to
certain conditions, including approval of the merger agreement by XTO Energy
stockholders and certain government and regulatory approvals. The
merger is not expected to have a material effect on trust annual distributable
income, financial position or liquidity. The merger is expected to
close in the second quarter of 2010.
The
following discussion should be read in conjunction with the trustee’s discussion
and analysis contained in the trust’s 2009 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.hugotontrust.com.
Distributable
Income
For the
quarter ended March 31, 2010, net profits income was $16,899,222, as compared to
$5,777,425 for first quarter 2009. Increased net profits income is
primarily the result of lower development costs and increased oil and gas
prices, partially offset by decreased gas production. See “Net
Profits Income” below.
After
adding interest income of $102 and deducting administration expense of $334,204,
distributable income for the quarter ended March 31, 2010 was $16,565,120, or
$0.414128 per unit of beneficial interest. Changes in interest income are
attributable to fluctuations in net profits income and interest
rates. Administration expense for the quarter increased from the
prior year quarter primarily because of costs related to the transfer agent
change in 2009. For first quarter 2009, distributable income was
$5,465,360 or $0.136634 per unit.
Distributions
to unitholders for the quarter ended March 31, 2010 were:
|
Distribution
|
||||||
|
Record Date
|
Payment Date
|
per Unit
|
||||
|
January
29, 2010
|
February
12, 2010
|
$ | 0.134756 | |||
|
February
26, 2010
|
March
12, 2010
|
0.138035 | ||||
|
March
31, 2010
|
April
15, 2010
|
0.141337 | ||||
| $ | 0.414128 | |||||
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.
|
12
The
following is a summary of the calculation of net profits income received by the
trust:
|
Three
Months
|
||||||||||||
|
Ended March 31 (a)
|
Increase
|
|||||||||||
|
2010
|
2009
|
(Decrease)
|
||||||||||
|
Sales
Volumes
|
||||||||||||
|
Gas
(Mcf) (b)
|
||||||||||||
|
Underlying
properties
|
5,930,951 | 7,110,265 | (17 | )% | ||||||||
|
Average
per day
|
64,467 | 77,285 | (17 | )% | ||||||||
|
Net
profits interests
|
3,214,078 | 1,453,926 | 121 | % | ||||||||
|
Oil
(Bbls) (b)
|
||||||||||||
|
Underlying
properties
|
63,224 | 64,618 | (2 | )% | ||||||||
|
Average
per day
|
687 | 702 | (2 | )% | ||||||||
|
Net
profits interests
|
34,326 | 14,489 | 137 | % | ||||||||
|
Average
Sales Prices
|
||||||||||||
|
Gas
(per Mcf)
|
$ | 5.12 | $ | 3.97 | 29 | % | ||||||
|
Oil
(per Bbl)
|
$ | 71.94 | $ | 44.95 | 60 | % | ||||||
|
Revenues
|
||||||||||||
|
Gas
sales
|
$ | 30,395,168 | $ | 28,196,191 | 8 | % | ||||||
|
Oil
sales
|
4,548,370 | 2,904,317 | 57 | % | ||||||||
|
Total
Revenues
|
34,943,538 | 31,100,508 | 12 | % | ||||||||
|
Costs
|
||||||||||||
|
Taxes,
transportation and other
|
4,190,371 | 3,785,880 | 11 | % | ||||||||
|
Production
expense
|
5,306,891 | 5,527,988 | (4 | )% | ||||||||
|
Development
costs (c)
|
1,500,000 | 12,000,000 | (88 | )% | ||||||||
|
Overhead
|
2,719,449 | 2,564,859 | 6 | % | ||||||||
|
Excess
costs (d)
|
102,800 | - | - | |||||||||
|
Total
Costs
|
13,819,511 | 23,878,727 | (42 | )% | ||||||||
|
Net
Proceeds
|
21,124,027 | 7,221,781 | 193 | % | ||||||||
|
Net
Profits Percentage
|
80 | % | 80 | % | ||||||||
|
Net
Profits Income
|
$ | 16,899,222 | $ | 5,777,425 | 193 | % | ||||||
|
(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. Changes in any of these factors may result
in
disproportionate fluctuations in volumes allocated to the net profits
interests. 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 4 to Condensed Financial
Statements.
|
13
The following are explanations of
significant variances on the underlying properties from first quarter 2009 to
first quarter 2010:
Sales
Volumes
Gas sales
volumes decreased 17% and oil sales volumes decreased 2% from first quarter 2009
to first quarter 2010. Decreased gas and oil sales volumes are
primarily because of the timing of cash receipts and natural production decline,
partially offset by increased production from new wells and
workovers.
Sales
Prices
Gas
The first
quarter 2010 average gas price was $5.12 per Mcf, a 29% increase from the first
quarter 2009 average gas price of $3.97 per Mcf. Natural gas prices
are affected by the level of North American production, weather, crude oil
prices, the U.S. economy, storage levels and import levels of liquefied natural
gas. Due to concerns of oversupply from shale gas development,
declining demand due to the U.S. recession, falling oil prices and increased gas
storage, gas prices declined during the first nine months of
2009. However, signs of possible economic improvement, higher oil
prices and a relatively cold winter led to increased gas prices in late 2009 and
early 2010. Gas prices have weakened substantially in February and
March 2010 due to renewed concerns of oversupply. Natural gas prices
are expected to remain volatile. The first quarter 2010 gas price is
primarily related to production from November 2009 through January 2010, when
the average NYMEX price was $4.86 per MMBtu. The average NYMEX price
for February and March 2010 was $5.05 per MMBtu. At April 16, 2010,
the average NYMEX futures price for the following twelve months was $4.76 per
MMBtu. Recent trust gas prices have averaged approximately 8% higher
than the NYMEX price.
Oil
The first
quarter 2010 average oil price was $71.94 per Bbl, a 60% increase from the first
quarter 2009 average oil price of $44.95 per Bbl. Lower demand as a
result of the U.S. recession and slowing global economy, the tightened credit
markets and rising crude oil supplies caused oil prices to decline sharply in
2008. However, signs of possible economic improvement have resulted
in steadily higher oil prices during 2009 and early 2010. Oil prices
are expected to remain volatile. The first quarter 2009 oil price is
primarily related to production from November 2009 through January 2010, when
the average NYMEX price was $76.81 per Bbl. The average NYMEX price
for February and March 2010 was $78.74 per Bbl. At April 16, 2010,
the average NYMEX futures price for the following twelve months was $87.61 per
Bbl. Recent trust oil prices have averaged approximately 5% lower
than the NYMEX price.
Costs
Taxes,
Transportation and Other
Taxes,
transportation and other increased 11% for the first quarter primarily because
of increased production taxes related to higher oil and gas revenues and
increased property taxes related to the timing of cash
disbursements.
Production
Production
expense decreased 4% for the first quarter primarily because of decreased
compressor, water disposal and labor costs, partially offset by mechanical and
marketing rebates included in 2009 and increased fuel, facilities and repairs
and maintenance costs.
14
Development
Development
costs deducted in the calculation of net profits income are based on the
development budget. These development costs for first quarter 2010
decreased 88% from the prior year quarter primarily because of decreased
development activity. During the first three months of 2010, no wells
were completed on the underlying properties and two wells were pending
completion at March 31.
As of
December 31, 2009, cumulative budgeted costs exceeded cumulative actual costs by
approximately $0.9 million. In calculating net profits income for the
quarter ended March 31, 2010, XTO Energy deducted budgeted development costs of
$1.5 million. After considering actual development costs of $1.4
million for the quarter, cumulative budgeted costs deducted exceeded actual
costs by $1.0 million. First quarter actual development costs
primarily relate to disbursements for development activity in fourth quarter
2009.
XTO
Energy has advised the trustee that revised total 2010 budgeted development
costs for the underlying properties are between $8 million and $10
million. The 2010 budget year generally coincides with the trust
distribution months from April 2010 through March 2011. The monthly
development cost deduction will be reevaluated by XTO Energy and revised as
necessary, based on the 2010 budget and the timing and amount of actual
expenditures. See Note 2 to Condensed Financial
Statements.
Overhead
Overhead
increased 6% primarily because of the annual rate adjustment based on an
industry index.
Excess Costs
Costs
exceeded revenues by $513,475 ($410,780 to the trust) on properties underlying
the Kansas net profits interests in October and November 2009. Lower
gas prices due to reduced demand as a result of the U.S. recession and excess
supply caused costs to exceed revenues on properties underlying the Kansas net
profits interests. However, these excess costs did not reduce net proceeds from
the remaining conveyances. XTO Energy advised the trustee that
increased gas prices led to the partial recovery of excess costs of $410,957
($328,766 net to the trust), plus accrued interest of $1,958 ($1,566 net to the
trust) in December 2009 and the full recovery of excess costs of $102,518
($82,014 net to the trust), plus accrued interest of $282 ($226 net to the
trust) in January 2010.
Other
On
December 13, 2009, XTO Energy entered into a definitive merger agreement with
Exxon Mobil Corporation under which XTO Energy would become a wholly owned
subsidiary of ExxonMobil. The completion of this merger is subject to
certain conditions, including approval of the merger agreement by XTO Energy
stockholders and certain government and regulatory approvals. The
merger is not expected to have a material effect on trust annual distributable
income, financial position or liquidity. The merger is expected to
close in the second quarter of 2010.
15
Forward-Looking
Statements
This Form
10-Q includes “forward-looking statements” within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. 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, distributions to unitholders and industry and
market conditions, 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, 2009, which is incorporated by
this reference as though fully set forth herein. Although XTO Energy
and the trustee believe that the expectations reflected in such forward-looking
statements are reasonable, neither XTO Energy nor the trustee can give any
assurance that such expectations will prove to be correct.
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, 2009.
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
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.
16
An
amended petition for a class action lawsuit, Beer, et al. v. XTO Energy
Inc., was filed in January 2006 in the District Court of Texas County,
Oklahoma by certain royalty owners of natural gas wells in Oklahoma and Kansas.
The plaintiffs allege that XTO Energy has not properly accounted to the
plaintiffs for the royalties to which they are entitled and seek an accounting
regarding the natural gas and other products produced from their wells and the
prices paid for the natural gas and other products produced, and for payment of
the monies allegedly owed since June 2002, with a certain limited number of
plaintiffs claiming monies owed for additional time. XTO Energy removed the case
to federal district court in Oklahoma City. A hearing on the class certification
was conducted in October 2008. At the class certification hearing, the
plaintiffs sought to certify a class of royalty owners whose wells were
connected to a processing plant owned by a subsidiary of XTO Energy in the
Hugoton Field, with two sub-classes consisting of owners in Oklahoma and
Kansas. In March 2009, the court granted the motion to certify the
class. The plaintiffs filed a motion for summary judgment for only
the two named plaintiffs. The court granted the motion in the amount
of $12,779. A motion for summary judgment related to the remainder of
the class was denied. Trial was scheduled for April 2010; however,
the court vacated the trial date. At a hearing in April 2010, the
court ruled that the class representatives were no longer proper representatives
and stated that it is considering whether to dismiss class counsel or decertify
the class in whole or in part. In a subsequent ruling in April 2010,
the court decertified the class. XTO Energy has informed the trustee
that it believes that it has strong defenses to this lawsuit and intends to
vigorously defend its position. However, if XTO Energy ultimately makes any
settlement payments or receives a judgment against it, the trust will bear its
80% share of such settlement or judgment related to production from the
underlying properties. Additionally, if a judgment or settlement increases the
amount of future payments to royalty owners, the trust would bear its
proportionate share of the increased payments through reduced net proceeds. 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 annual
distributable income, financial position or liquidity. It could,
however, result in costs exceeding revenues on the properties underlying the
Oklahoma and Kansas net profit interests for one or more monthly distributions,
depending on the size of the judgment or settlement, if any, and the net
proceeds being paid at that time.
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,
2009.
Items
2 through 5.
Not
applicable.
17
|
Exhibits.
|
|
|
(a)
|
Exhibits.
|
|
Exhibit
Number
|
|
|
and Description
|
|
|
(15)
|
Awareness
letter of KPMG LLP
|
|
(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 February 23, 2010
(incorporated herein by
reference)
|
18
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
BANK OF AMERICA, N.A., TRUSTEE
|
||
|
By
|
/s/ Nancy G. Willis
|
|
|
Nancy
G. Willis
|
||
|
Vice
President
|
||
|
XTO
ENERGY INC.
|
||
|
Date:
April 26, 2010
|
By
|
/s/ Louis G. Baldwin
|
|
Louis
G. Baldwin
|
||
|
Executive
Vice President
|
||
|
and
Chief Financial
Officer
|
||
19