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Hugoton Royalty: Form 10-Q For The Quarterly Period Ended September 30, 2015 TABLE OF CONTENTS

The following excerpt is from the company's SEC filing.

Glossary of Terms

PART I.

FINANCIAL INFORMATION

Item 1.

Financial Statements

Report of Independent Registered Public Accounting Firm

Condensed Statements of Assets, Liabilities and Trust Corpus at September 30, 2015 and December 31, 2014

Condensed Statements of Distributable Income for the Three and Nine Months Ended September 30, 2015 and 2014

Condensed Statements of Changes in Trust Corpus for the Three and Nine Months Ended September 30, 2015 and 2014

Notes to Condensed Financial Statements

Item 2.

Trustees Discussion and Analy sis

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

Item 4.

Controls and Procedures

PART II.

OTHER INFORMATION

Legal Proceedings

Item 1A.

Risk Factors

Item 6.

Exhibits

Signatures

Table of Contents

HUGOTON ROYALTY TRUST

GLOSSARY OF TERMS

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

Barrel (of oil)

Thousand cubic feet (of natural gas)

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.

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.

XTO Energys 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.

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

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 financial statements and the notes thereto included in the Trusts 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 September 30, 2015 and the distributable income and changes in trust corpus for the three- and nine-month periods ended September 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 September 30, 2015, and for the three-month and nine-month periods ended September 30, 2015 and 2014 have been subjected to a review by PricewaterhouseCoopers LLP, the Trusts 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 September 30, 2015, and the related condensed statements of distributable income and changes in trust corpus for the three-month and nine-month periods ended September 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

November 6, 2015

Condensed Statements of Assets, Liabilities and Trust Corpus

(Unaudited)

ASSETS

Cash and short-term investments

1,925,610

4,324,131

Net profits interests in oil and gas properties - net (Note 1)

87,322,770

89,596,828

89,248,380

93,920,959

LIABILITIES AND TRUST CORPUS

Distribution payable to unitholders

309,160

2,540,320

Legal Reserve

1,366,450

1,783,811

Expense reserve

250,000

Trust corpus (40,000,000 units of beneficial interest authorized and outstanding)

Expense reserve allows trustee to maintain an estimated three months of administrative expenses on hand should it be unable to pay them out of the net profits income.

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

(Unaudited)

Three Months Ended

1,584,694

10,323,706

7,185,310

36,098,879

Interest income

517,038

Total income

1,584,740

10,325,459

7,185,476

36,615,917

Administration expense

237,500

183,619

886,516

976,917

1,347,240

10,141,840

6,298,960

35,639,000

Distributable income per unit (40,000,000 units)

0.033681

0.253546

0.157474

0.890975

Interest income and administration expense for the nine months ended September 30, 2014, includes a refund of $514,820 and $1,470,618, respectively, related to the arbitration reimbursement. For further information see Note 4 to Condensed Financial Statements.

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

Condensed Statements of Changes in Trust Corpus

Trust corpus, beginning of period

87,937,763

93,769,084

98,854,558

Amortization of net profits interests

(614,993

(2,201,887

(2,274,058

(7,287,361

Distributions declared

(1,347,240

(10,141,840

(6,298,960

(35,639,000

Trust corpus, end of period

91,567,197

Notes to Condensed Financial Statements

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 the 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 months 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 Trusts 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 Trusts 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. In general, the trustee does not view temporarily low prices or margins as a trigger event for conducting the impairment tests. The markets for crude oil and natural gas have a history of significant price volatility. Although prices will occasionally drop significantly, industry prices over the long term will continue to be driven by market supply and demand. There is no impairment of the assets as of September 30, 2015.

The Trusts 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 Trusts financial statements are prepared on the modified cash basis, as described above, most accounting pronouncements are not applicable to the Trusts financial statements.

The initial carrying value of the net profits interests of $247,066,951 represents XTO Energys 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 $159,744,181 as of September 30, 2015 and $157,470,123 as of December 31, 2014.

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:

Cumulative actual costs under (over) the amount deducted - beginning of period

70,761

770,023

1,242,998

588,742

Actual costs

(805,965

(973,150

(3,178,202

(3,891,869

Budgeted costs deducted

700,000

1,200,000

1,900,000

4,300,000

Cumulative actual costs under (over) the amount deducted - end of period

(35,204

996,873

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 August 2015 distribution. Due to the anticipated level of actual costs and the 2015 development budget, the development cost deduction was increased to $300,000 beginning with the September 2015 distribution and is expected to be maintained at that level through the end of 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 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.

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...


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