HUGOTON ROYALTY TRUST - Quarter Report: 2015 June (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

For the quarterly period ended June 30, 2015

OR

Commission File Number: 1-10476

Hugoton Royalty Trust

(Exact name of registrant as specified in its charter)

(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 July 1, 2015

40,000,000

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HUGOTON ROYALTY TRUST

FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2015

TABLE OF CONTENTS

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HUGOTON ROYALTY TRUST

GLOSSARY OF TERMS

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

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HUGOTON ROYALTY TRUST

PART I - FINANCIAL INFORMATION

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 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 June 30, 2015 and the distributable income and changes in trust corpus for the three- and six-month periods ended June 30, 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 June 30, 2015, and for the three-month and six-month periods ended June 30, 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.

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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 June 30, 2015, and the related condensed statements of distributable income and changes in trust corpus for the three-month and six-month periods ended June 30, 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

Dallas, TX

August 7, 2015

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HUGOTON ROYALTY TRUST

Condensed Statements of Assets, Liabilities and Trust Corpus

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

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HUGOTON ROYALTY TRUST

Condensed Statements of Distributable Income (Unaudited)

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

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HUGOTON ROYALTY TRUST

Condensed Statements of Changes in Trust Corpus (Unaudited)

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

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HUGOTON ROYALTY TRUST

Notes to Condensed Financial Statements (Unaudited)

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”):

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.

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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 $159,129,188 as of June 30, 2015 and $157,470,123 as of December 31, 2014.

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:

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 June 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.

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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.

XTO Energy settled the Fankhouser v. XTO Energy, Inc. royalty class action lawsuit for $37 million, which included $1.4 million attributable to Kansas claims which predated the Trust. The settlement was given final approval by the court on October 10, 2012. The settlement also included a new royalty calculation for future royalty payments.

Whether the settlement and future reductions in net profits were to be charged to the Trust was decided by an arbitration tribunal on April 21, 2014. Based on that ruling, the settlement (including the new royalty calculation for future royalty payments), now or in the future cannot be charged to the Trust. Additionally, XTO Energy had to reimburse $4,386,396 which represents amounts withheld from the September and October 2012 distributions and $1,985,438 which represents attorney fees, arbitration expenses and interest.

The arbitration award was entered into as a final judgment on December 12, 2014.

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 was previously stayed pending a final decision from the Kansas Supreme Court on the Fawcett v. OPIK appeal. Following the release of the Fawcett opinion, the Judge in Roderick has ordered new briefing on the pending motions. In its pleadings, the plaintiff has alleged damages in excess of $42.5 million.

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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 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 Energy 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

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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. After dismissal as non-arbitrable, Goebel 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. 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. On November 13, 2014, the court of appeals granted Defendants’ motion seeking mandamus regarding jurisdiction and special exceptions, 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. The court of appeals conditionally granted the petition for writ of mandamus on July 27, 2015. The appellate court ordered the trial court to dismiss Goebel’s suit against XTO Energy and Timberland. The court also ordered the trial court to dismiss Goebel’s derivative claims against Bank of America. The appellate court will allow Goebel’s individual claims against Bank of America to proceed if she can plead facts to support a cause of action. The appellate court noted that the facts currently pleaded and alleged by Goebel would not support a claim against Bank of America under the terms of the Indenture. If Goebel attempts to assert individual claims against Bank of America, it has informed the Trustee that it will vigorously defend those claims. The parties have 15 days in which to request a rehearing from the court of appeals, which deadline may be subject to extension. 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. 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 $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 Harold Lamb v. Bank of America and XTO Energy Inc., which was dismissed, 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.

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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.

XTO Energy advised the trustee that decreased gas production and lower gas prices caused costs to exceed revenues by a total of $367,814 ($294,251 net to the Trust) on properties underlying the Kansas net profits interest for the quarter ended June 30, 2015. However, these excess costs did not reduce net proceeds from the remaining conveyance. XTO Energy advised the trustee that increased costs, decreased gas production and lower gas prices caused costs to exceed revenues by a total of $338,668 ($270,934 net to the Trust) on properties underlying the Kansas net profits interest for the quarter ended March 31, 2015. However, these excess costs did not reduce net proceeds from the remaining conveyances.

XTO Energy advised the trustee that lower gas prices caused costs to exceed revenues by a total of $169,990 ($135,992 net to the Trust) on properties underlying the Wyoming net profits interest for the quarter ended June 30, 2015. However, these excess costs did not reduce net proceeds from the remaining conveyance. XTO Energy advised the trustee that increased gas production and decreased costs led to the partial recovery of excess costs, plus accrued interest, of $44,158 ($35,326 net to the Trust) on properties underlying the Wyoming net profits interest for the quarter ended June 30, 2015. 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) on properties underlying the Wyoming net profits interest for the quarter ended March 31, 2015. 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 June 30, 2015 totaled $1,002,279 ($801,823 net to the Trust).

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.

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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

Quarter

For the quarter ended June 30, 2015, net profits income was $1,463,774, as compared to $16,484,703 for second quarter 2014. This 91% decrease in net profits income is primarily the result of lower oil and gas prices ($11.4 million), the arbitration reimbursement included in 2014 ($4.4 million) and decreased gas production ($1.0 million), partially offset by decreased taxes, transportation and other costs ($0.9 million), decreased development costs ($0.6 million) and excess costs on the Kansas and Wyoming net profits interests in 2015 ($0.4 million). See “Net Profits Income” on the following page.

After adding interest income of $51 and deducting administration expense of $278,105, distributable income for the quarter ended June 30, 2015 was $1,185,720, or $0.029643 per unit of beneficial interest. Administration expense for the quarter increased $1,125,049 as compared to the prior year quarter. Administration expense for the second quarter of 2015 included $100,000, which the trustee reserved for administrative expenses, and administration expense for second quarter 2014 included a reimbursement of $1,470,618 related to the Fankhouser arbitration, partially offset by $400,000 reserved by the trustee for legal expenses regarding the Lamb lawsuit, which is now part of the reserve for the Goebel lawsuit. Interest income for second quarter 2014 included $514,820 related to the arbitration reimbursement. Additional changes in interest income are attributable to fluctuations in net profits income and interest rates.

For second quarter 2014, distributable income was $17,846,840, or $0.446171 per unit. Distributions to unitholders for the quarter ended June 30, 2015 were:

Six Months

For the six months ended June 30, 2015, net profits income was $5,600,616 compared with $25,775,173 for the same 2014 period. This 78% decrease in net profits income is primarily the result of lower oil and gas prices ($16.1 million), the arbitration reimbursement included in 2014 ($4.4 million) and decreased oil and gas production ($3.4 million), partially offset by decreased development costs ($1.5 million), decreased taxes, transportation and other costs ($1.5 million) and excess costs on the Kansas and Wyoming net profits interests in 2015 ($0.7 million). See “Net Profits Income” on following page.

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After adding interest income of $120 and deducting administration expense of $649,016, distributable income for the six months ended June 30, 2015 was $4,951,720, or $0.123793 per unit of beneficial interest. Administration expense for the six months ended June 30, 2015 decreased $144,282 as compared with the same 2014 period. Administration expense for the six months ended June 30, 2015 included $200,000, which the trustee reserved for administrative expenses, and administration expense for the same 2014 period included $1,600,000, which the trustee reserved for legal expenses regarding the Lamb lawsuit, which is now part of the reserve for the Goebel lawsuit, partially offset by reimbursement of $1,470,618 related to the Fankhouser arbitration. Interest income for the six months ended June 30, 2014 included $514,820 related to the arbitration reimbursement. Additional changes in interest income are attributable to fluctuations in net profits income and interest rates. For the six months ended June 30, 2014, distributable income was $25,497,160, or $0.637429 per unit.

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:

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

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The following are explanations of significant variances on the underlying properties from second quarter 2014 to second quarter 2015 and from the first six months of 2014 to the comparable period in 2015:

Sales Volumes

Gas

Gas sales volumes decreased 12% for second quarter and 14% for the six-month period as compared with the same 2014 periods primarily due to repairs and maintenance at a third party gas processing system in the Hugoton area following a force majeure incident and natural production decline.

XTO Energy advised the trustee that repairs and maintenance in first half of 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. XTO Energy was advised by the third party that the repairs and maintenance were completed. However, XTO Energy has received notice that the force majeure is being extended to the processing portion of the third party plant due to an equipment malfunction. The third party was recently able to bypass the plant and take gas; however, the plant is not expected to be able to process gas for NGLs or Helium until at least August 18, 2015. XTO Energy will continue to monitor the situation and assess its options.

XTO Energy currently sells all gas production from its wells attached to the Timberland Gathering System (“TGPC”) in Seward County, Kansas and in Texas and Beaver Counties, Oklahoma to DCP Midstream, L.P. XTO Energy receives 100% of the net value for residue gas based upon the price per MMBtu for the Panhandle Easter Pipe Line Company index. XTO Energy has exercised its contractual right to take in kind and sell its NGLs and helium when the DCP plant is able to process again. Under this contract DCP is entitled to charge a processing fee of $0.25 and a helium processing fee of $0.10 per Delivery Point MMBtu in addition to other deductions such as for fuel and transportation. XTO Energy will sell 100% of the net value for any recovered NGLs to Oneok at Conway pricing as posted by Oil Price Information Services minus an adjusted base differential. XTO Energy will sell the helium to Air Products and Chemicals, Inc. and Air Products Helium, Inc. under a pricing formula based upon the open market crude helium sales price established by the U. S. Bureau of Land Management. TGPC, an affiliate of XTO Energy, provides gathering from the wellhead to DCP’s gathering system for a fee of seventy-five cents $0.75 per Mcf of gas delivered by XTO Energy.

The sales contract with DCP Midstream, L.P. is in force from May 1, 2014 until March 31, 2019, and from year to year thereafter until canceled by either party upon 180 days written notice.

Oil

Oil sales volumes decreased 7% for second quarter and 8% for the six-month period as compared with the same 2014 periods primarily because natural production decline and the timing of cash receipts.

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 second quarter 2015 average gas price was $2.50 per Mcf, a 52% decrease from the second quarter 2014 average gas price of $5.25 per Mcf. For the six-month period, the average gas price

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decreased 37% to $2.99 per Mcf in 2015 from $4.78 per Mcf in 2014. 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 second quarter 2015 gas price is primarily related to production from February through April 2015, when the average NYMEX price was $2.78 per MMBtu. The average NYMEX price for May and June 2015 was $2.67 per MMBtu. On July 20, 2015, the average NYMEX futures price for the following twelve months was $3.05 per MMBtu.

Oil

The second quarter 2015 average oil price was $46.84 per Bbl, a 53% decrease from the second quarter 2014 average oil price of $98.87 per Bbl. The year-to-date average oil price decreased 45% to $52.46 per Bbl in 2015 from $95.45 per Bbl in 2014. Oil prices are expected to remain volatile. The second quarter 2015 oil price is primarily related to production from February through April 2015, when the average NYMEX price was $50.92 per Bbl. The average NYMEX price for May and June 2015 was $59.71 per Bbl. On July 20, 2015, the average NYMEX futures price for the following twelve months was $52.50 per Bbl.

Costs

Taxes, Transportation and Other

Taxes, transportation and other costs decreased 43% for the second quarter primarily because of decreased oil and gas production taxes related to lower oil and gas revenues, partially offset by increased other deductions as a percent of oil and gas revenues. Taxes, transportation and other costs decreased 34% for the six-month period primarily because of decreased oil and gas production taxes related to lower oil and gas revenues, partially offset by increased property taxes related to increased valuations and increased other deductions as a percent of oil and gas revenues.

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. These development costs decreased 57% for the second quarter and 61% for the six-month period.

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 June 30, 2015, XTO Energy deducted budgeted development costs of $0.6 million for the quarter and $1.2 million for the six-month period. After considering actual development costs of $1.0 million for the quarter and $2.4 million for the six-month period, cumulative budgeted costs deducted exceeded actual costs deducted by approximately $70,761 at June 30, 2015.

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.

Overhead

Overhead increased 4% for the quarter and 2% for the six-month period primarily because of the annual rate adjustment based on an industry index.

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Legal Expense

As a result of the arbitration ruling, legal expense for the quarter and six-month period ended June 30, 2014 included reimbursement for the amounts withheld from trust proceeds in September and October 2012. See Note 4 to Condensed Financial Statements.

Excess Costs

XTO Energy advised the trustee that decreased gas production and lower gas prices caused costs to exceed revenues by a total of $367,814 ($294,251 net to the Trust) on properties underlying the Kansas net profits interest for the quarter ended June 30, 2015. However, these excess costs did not reduce net proceeds from the remaining conveyance. XTO Energy advised the trustee that increased costs, decreased gas production and lower gas prices caused costs to exceed revenues by a total of $338,668 ($270,934 net to the Trust) on properties underlying the Kansas net profits interest for the quarter ended March 31, 2015. However, these excess costs did not reduce net proceeds from the remaining conveyances.

XTO Energy advised the trustee that lower gas prices caused costs to exceed revenues by a total of $169,990 ($135,992 net to the Trust) on properties underlying the Wyoming net profits interest for the quarter ended June 30, 2015. However, these excess costs did not reduce net proceeds from the remaining conveyance. XTO Energy advised the trustee that increased gas production and decreased costs led to the partial recovery of excess costs, plus accrued interest, of $44,158 ($35,326 net to the Trust) on properties underlying the Wyoming net profits interest for the quarter ended June 30, 2015. 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) on properties underlying the Wyoming net profits interest for the quarter ended March 31, 2015. 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 June 30, 2015 totaled $1,002,279 ($801,823 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.

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.

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.

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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, 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, 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.

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PART II - OTHER INFORMATION

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

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.

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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.

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