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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,June 30, 2001
---------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 1-10476
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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.)
Bank of America, N.A., P.O. Box 830650, Dallas, Texas 75283-0650
- ----------------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(877) 228-5083
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(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 the number of units of beneficial interest outstanding, as of the
latest practicable date:
Outstanding as of MayAugust 1, 2001
---------------------------------------------------------------
40,000,000
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HUGOTON ROYALTY TRUST
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED MARCH 31,JUNE 30, 2001
- -------------------------------------------------------
INDEX------------------------------------------------------
TABLE OF CONTENTS
Page
----
Glossary of Terms............................................GLOSSARY OF TERMS................................................ 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.........................................Statements............................................. 4
Report of Independent Public Accountants.....................Accountants......................... 5
Condensed Statements of Assets, Liabilities and Trust Corpus
at March 31,June 30, 2001 and December 31, 2000....................2000......................... 6
Condensed Statements of Distributable Income
for the Three and Six Months Ended March 31,June 30, 2001 and 2000.........2000...... 7
Condensed Statements of Changes in Trust Corpus
for the Three and Six Months Ended March 31,June 30, 2001 and 2000.........2000...... 8
Notes to Condensed Financial Statements......................Statements.......................... 9
Item 2. Trustee's Discussion and Analysis............................Analysis................................ 12
Item 3. Quantitative and Qualitative Disclosures about Market Risk... 15Risk....... 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................ 17
Item 5. Other Information................................................ 18
Item 6. Exhibits and Reports on Form 8-K............................. 16
Signatures................................................... 178-K................................. 18
Signatures....................................................... 19
2
HUGOTON ROYALTY TRUST
GLOSSARY OF TERMS
- -----------------
The following are definitions of significant terms used in this Form 10-Q:
Bbl Barrel (of oil)
Mcf Thousand cubic feet (of natural gas)
Mcfe Thousand cubic feet (of natural gas) equivalent,
computed with one barrel of oil as the energy
equivalent of six Mcf of natural gas
MMBtu One million British Thermal Units, a common energy
measurement
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
net proceeds Gross proceeds received by XTO Energy Inc. (f/k/a Cross
Timbers Oil Company) from sale of production from the
underlying properties, less applicable costs
royalty income Net proceeds multiplied by the net profits percentage
of 80% andthat is paid to the trust
underlying properties Cross Timbers'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 and development costs
3
HUGOTON ROYALTY TRUST
PART I - FINANCIAL INFORMATION
- ------------------------------
Item 1. Financial Statements.
The condensed financial statements included herein are presented, without audit,
pursuant to the rules and regulations of the Securities and Exchange Commission.
Certain information and footnote disclosures normally included in annual
financial statements have been condensed or omitted pursuant to such rules and
regulations, although the trustee believes that the disclosures are adequate to
make the information presented not misleading. These condensed financial
statements should be read in conjunction with the trust's financial statements
and the notes thereto included in the trust's 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,June 30, 2001, and the distributable
income and changes in trust corpus for the three-monththree- and six-month periods ended
March 31,June 30, 2001 and 2000, have been included. Distributable income for such
interim periods is not necessarily indicative of the distributable income for
the full year.
4
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
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,June 30, 2001 and the related
condensed statements of distributable income and changes in trust corpus for the
three-monththree- and six-month periods ended March 31,June 30, 2001 and 2000. These financial
statements are the responsibility of the trustee.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. 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 auditing standards generally accepted in the 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.
Based on our review, we are not aware of any material modifications that should
be made to the 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 auditing standards generally
accepted in the United States, the statement of assets, liabilities and trust
corpus of the Hugoton Royalty Trust as of December 31, 2000 included in the
trust's annual report on Form 10-K, and in our report dated March 22,19, 2001, we
expressed an unqualified opinion on that statement. In our opinion, the
information set forth in the accompanying condensed statement of assets,
liabilities and trust corpus as of December 31, 2000 is fairly stated in all
material respects in relation to the statement of assets, liabilities and trust
corpus included in the trust's financial statements from which they have been
derived.
ARTHUR ANDERSEN LLP
Fort Worth, Texas
May 2,July 6, 2001
5
HUGOTON ROYALTY TRUST
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Condensed Statements of Assets, Liabilities and Trust Corpus
March 31,
June 30, December 31,
2001 2000
------------ ------------
(Unaudited)
ASSETS
Cash and short-term investments........................investments............................... $ 16,831,2405,095,840 $ 5,976,160
Net profits interests in oil and gas properties - net.. 222,760,307net......... 220,183,204 226,081,443
------------ ------------
$239,591,547$225,279,044 $232,057,603
============ ============
LIABILITIES AND TRUST CORPUS
Distribution payable to unitholders....................unitholders........................... $ 16,831,2405,095,840 $ 5,976,160
Trust corpus (40,000,000 units of beneficial
interest authorized and outstanding)................. 222,760,307........................ 220,183,204 226,081,443
------------ ------------
$239,591,547$225,279,044 $232,057,603
============ ============
The accompanying notes to condensed financial statements are an integral part of
these statements.
6
HUGOTON ROYALTY TRUST
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Condensed Statements of Distributable Income (Unaudited)
Three Months Ended March 31
---------------------------
2001 2000
------------- ------------
Royalty income.................................... $ 33,683,872 $ 10,981,680
Interest income................................... 50,323 21,906
------------- ------------
Total income...................................... 33,734,195 11,003,586
Administration expense............................ 79,715 64,306
------------- ------------
Distributable income.............................. $ 33,654,480 $ 10,939,280
============= ============
Distributable income per unit (40,000,000 units).. $ 0.841362 $ 0.273482
============= ============
Three Months Ended Six Months Ended
June 30 June 30
-------------------------- --------------------------
2001 2000 2001 2000
----------- ----------- ----------- -----------
Royalty income................. $21,720,948 $11,288,646 $55,404,820 $22,270,326
Interest income................ 53,998 23,521 104,321 45,427
----------- ----------- ----------- -----------
Total income................... 21,774,946 11,312,167 55,509,141 22,315,753
Administration expense......... 43,306 47,687 123,021 111,993
----------- ----------- ----------- -----------
Distributable income........... $21,731,640 $11,264,480 $55,386,120 $22,203,760
=========== =========== =========== ===========
Distributable income per unit
(40,000,000 units)........... $ 0.543291 $ 0.281612 $ 1.384653 $ 0.555094
=========== =========== =========== ===========
The accompanying notes to condensed financial statements are an integral part of
these statements.
7
HUGOTON ROYALTY TRUST
- --------------------------------------------------------------------------------
Condensed Statements of Changes in Trust Corpus (Unaudited)
Three Months Ended March 31
---------------------------
2001 2000
------------ ------------
Trust corpus, beginning of period............... $226,081,443 $233,428,609
Amortization of net profits interests........... (3,321,136) (3,811,656)
Distributable income............................ 33,654,480 10,939,280
Distributions declared.......................... (33,654,480) (10,939,280)
------------ ------------
Trust corpus, end of period.....................
Three Months Ended Six Months Ended
June 30 June 30
---------------------------- ---------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
Trust corpus, beginning of period...... $222,760,307 $229,616,953 $226,081,443 $233,428,609
Amortization of net profits interests.. (2,577,103) (3,527,107) (5,898,239) (7,338,763)
Distributable income................... 21,731,640 11,264,480 55,386,120 22,203,760
Distributions declared................. (21,731,640) (11,264,480) (55,386,120) (22,203,760)
------------ ------------ ------------ ------------
Trust corpus, end of period............ $220,183,204 $226,089,846 $220,183,204 $226,089,846
============ ============ ============ ============
The accompanying notes to condensed financial statements are an integral part of
these statements.
8
HUGOTON ROYALTY TRUST
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Notes to Condensed Financial Statements (Unaudited)
1. Basis of Accounting
The financial statements of the trust are prepared on the following basis
and are not intended to present financial position and results of
operations in conformity with generally accepted accounting principles
("GAAP"):
- Royalty income recorded for a month is the amount computed and paid
by the interest owner, Cross Timbers Oil Company,XTO Energy Inc., to Bank of America, N.A., as
trustee for the trust. Royalty income consists of net proceeds
received by Cross TimbersXTO 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 expenses,
development costs, operating charges and other costs.
- For monthly trust distributions declared through March 2000, the
related royalty income was based on gross proceeds equal to the
greater of the actual amount received from sales of production, or
the imputed amount that would be received from sales of production
at a gas price of $2.00 per Mcf. Because gas prices exceeded the
$2.00 per Mcf minimum during first quarter 2000, there were no
imputed receipts during that period. Subsequent to March 2000, trust
royalty income is based on the actual gross proceeds received from
sale of production.
- Royalty 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
cannot reduce royalty income from other conveyances, but are carried
forward with accrued interest to be recovered from future net
proceeds of that conveyance.
- 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 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 certain contingencies which would not be recorded under GAAP.
The initial carrying value of the net profits interests of $247,066,951
represents Cross Timbers' historicalXTO Energy's 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 $24,306,644$26,883,747 as of
March 31,June 30, 2001 and $20,985,508 as of December 31, 2000.
2. Distributions to Unitholders
The trustee determines the amount to be distributed to unitholders each
month by totaling royalty income, interest income and other cash receipts,
and subtracting liabilities paid and adjustments in cash reserves
established by the trustee. The resulting amount is distributed to
unitholders of record generally within ten business days after the monthly
record date, the last business day of the month.
9
Royalty income received by the trustee is equal to the net proceeds
received in the prior month by Cross Timbers from the underlying
properties, multiplied by 80%. Net proceeds are the gross proceeds received
from the sale of production from the underlying properties, less applicable
costs. Such costs generally include applicable taxes, transportation, legal
and marketing charges, production expenses, development and drilling costs,
and overhead.
For monthly trust distributions declared through March 2000, the related
royalty income was based on gross proceeds equal to the greater of:
- the actual amount received from sales of production, or
- the imputed amount that would be received from sales of production at
a gas price of $2.00 per Mcf.
Because gas prices exceeded the $2.00 per Mcf minimum during first quarter
2000, there were no imputed receipts during that period. Subsequent to
March 2000, trust royalty income is based on the actual amount received
from sales of production.
Cross Timbers, as owner of the underlying properties, computes royalty
income separately for each of the three conveyances. If costs exceed gross
proceeds for any conveyance, such excess costs cannot be used to reduce the
amounts to be received under the other conveyances. The trust is not liable
for excess costs; however, future royalty income from the net profits
interests created by that conveyance will be reduced by such excess costs
plus accrued interest.
3.2. Litigation
Cross TimbersXTO Energy is a defendant in three separate lawsuits that could, if
adversely determined, decrease future trust distributable income. Any
damages relating to production prior to the formation of the trust will be
borne by Cross Timbers.XTO Energy.
On April 3, 1998, a class action lawsuit, Booth, et al. v. Cross Timbers
Oil Company, was filed in the District Court of Dewey County, Oklahoma by
royalty owners of natural gas wells in Oklahoma. The plaintiffs allege that
since 1991, Cross TimbersXTO Energy has underpaid royalty owners as a result of reducing
royalties for improper charges for production, marketing, gathering,
processing and transportation costs and selling natural gas through
affiliated companies at prices less favorable than those paid by third
parties. Cross TimbersXTO Energy believes that it has strong defenses to this lawsuit
and intends to vigorously defend its position. However, if Cross
TimbersXTO Energy
ultimately makes any settlement payments, the trust will bear its 80% share of such
settlementpayments related to production from the underlying properties for periods
since December 1, 1998. 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.
The amount of any potential settlement related to the trust and reduction
in net proceeds is not presently determinable, but, in Cross TimbersXTO Energy
management's opinion, is not currently expected to be material to the
trust's annual distributable income, financial position or liquidity.
A second lawsuit, United States of America ex rel. Grynberg v. Cross
Timbers Oil Company, et al., was filed in the United States District Court
for the Western District of Oklahoma. This action alleges that Cross
TimbersXTO Energy
underpaid royalties on natural gas produced from federal leases and lands
owned by Native Americans by at least 20% during the past ten years as a
result of mismeasuring the volume of natural gas and wrongfully analyzing
its heating content. The suit, which was brought under the qui tam
10
provisions of the U.S. False Claims Act, seeks treble damages for the
unpaid royalties (with interest), civil penalties between $5,000 and
$10,000 for each violation of the U.S. False Claims Act, and an order for
Cross TimbersXTO Energy to cease the allegedly improper measuring practices. The cases
against Cross TimbersXTO Energy and other defendants have been consolidated in the
United States District Court for Wyoming. Cross TimbersXTO Energy and other defendants have
filed a motion to dismiss the lawsuit. The motion to
dismiss has been heard by the Court and a decision is pending. Cross
Timberslawsuit, which was denied. XTO Energy
believes that the allegations of this lawsuit are without merit and intends
to vigorously defend the action. However, an order to change measuring
practices or a related settlement could adversely affect the trust by
reducing net proceeds in the future by an amount that is presently not
determinable, but, in Cross TimbersXTO Energy management's opinion, is not expected to
be material to the trust's annual distributable income, financial position
or liquidity.
AIn June 2001 XTO Energy was served with a third lawsuit styled Quinque
Operating Co., et al. v. Gas Pipelines, et al. The action was filed in the
District Court of Stevens County, Kansas, against XTO Energy and one of its
subsidiaries, along with over 200 natural gas transmission companies,
producers, gatherers, and processors of natural gas. Plaintiffs seek to
represent a class of plaintiffs consisting of all similarly situated gas
producers, overriding royalty owners, working interest owners and state
taxing authorities either from whom defendants had purchased natural gas or
who received economic benefit from the sale of such gas since January 1,
1974. No class has been certified. The allegations in the case are similar
to those in the Grynberg case; however, the Quinque case broadens the
claims to cover all oil and gas leases (other than the federal and Native
American leases that are the subject of the Grynberg case). The complaint
alleges that the defendants have mismeasured both the volume and heat
content of natural gas delivered into their pipelines resulting in
underpayments to plaintiffs. Plaintiffs assert a breach of contract claim,
negligent or intentional misrepresentation, civil conspiracy, common
carrier liability, conversion, violation of a variety of Kansas statutes
and other common law causes of action.
10
No amount of damages has been specified in the complaint. While XTO Energy
is unable to estimate any possible loss or predict the outcome of this
case, it believes these claims are without merit and intends to vigorously
defend this suit. However, an order to change measuring practices or a
related settlement could adversely affect the trust by reducing net
proceeds in the future by an amount that is presently not determinable,
but, in XTO Energy management's opinion, is not expected to be material to
the trust's annual distributable income, financial position or liquidity.
Another lawsuit, Bishop, et al. v. Amoco Production Co., et al., was filed
in May 2000 in the Third Judicial District Court in Lincoln County, Wyoming
by owners of royalty and overriding royalty interests in wells located in
Wyoming. The plaintiffs alleged that Cross TimbersXTO Energy and the other producer
defendants deducted impermissible costs of production from royalty payments
that were made to the plaintiffs and other similarly situated persons, and
failed to properly inform the plaintiffs and others of the deductions
taken. The action was brought as a class action on behalf of all persons
who own an interest in wells located in Wyoming as to which the defendants
pay royalties and overriding royalties. The plaintiffs sought a declaratory
judgment that the deductions made were impermissible and sought damages in
the amount of the deductions made together with interest and attorneys'
fees. Cross Timbers hasXTO Energy reached a settlement in this action, which is
subject towas approved by
the court approval. Cross Timbers will receivein June 2001. XTO Energy received a release of claims relating to
deductions taken, the statutory reporting of claims, and other
miscellaneous matters. Cross TimbersXTO Energy agreed not to take similar deductions in
the future and to itemize other deductions from future royalty
disbursements. In a hearing in April 2001, the court provisionally
certified the class and authorized notices to be mailed to potential class
members. Cross Timbers expects the court will give final approval in June
2001. The trust's portion of the settlement is expectedwill be $155,769
($124,615 net to the trust). XTO Energy expects that the settlement will be
less than
$200,000.deducted from the trust distribution declared for August 2001.
11
Item 2. Trustee's Discussion and Analysis.
The following discussion should be read in conjunction with the trustee's
discussion and analysis contained in the trust's 2000 annual report, as well as
the condensed financial statements and notes thereto included in this quarterly
report on Form 10-Q.
Distributable Income
Quarter
For the quarter ended March 31,June 30, 2001, royalty income was $33,683,872,$21,720,948, as compared
to $10,981,680$11,288,646 for the same prior year quarter. Increasedsecond quarter 2000. This 92% increase in royalty income is
the result of higher product prices.gas prices partially offset by higher development costs and
production expenses, and higher production taxes associated with the increased
revenue. See "Royalty Income" below.
After adding interest income of $50,323$53,998 and deducting administration expense of
$79,715,$43,306, distributable income for the quarter ended March 31,June 30, 2001 was
$33,654,480,$21,731,640, or $0.841362$0.543291 per unit of beneficial interest. For the quarter ended
March 31,June 30, 2000, distributable income was $10,939,280,$11,264,480, or $0.273482$0.281612 per unit.
Distributions to unitholders for the quarter ended March 31,June 30, 2001 were:
Distribution
Record Date Payment Date per Unit
---------------- ------------------------------- ------------ January 31,------------
April 30, 2001 FebruaryMay 14, 2001 $ 0.171467
February 28,0.214037
May 31, 2001 MarchJune 14, 2001 0.249114
March0.201858
June 29, 2001 July 15, 2001 0.127396
------------
$ 0.543291
============
Six Months
For the six months ended June 30, 2001, April 13,royalty income was $55,404,820, compared
with $22,270,326 for the same 2000 period. This 149% increase in royalty income
is primarily the result of higher oil and gas prices, partially offset by higher
costs.
After adding interest income of $104,321 and deducting administration expense of
$123,021, distributable income for the six months ended June 30, 2001 0.420781
------------
$ 0.841362
============was
$55,386,120, or $1.384653 per unit of beneficial interest. For the six months
ended June 30, 2000, distributable income was $22,203,760, or $0.555094 per
unit.
Royalty Income
Royalty income is recorded when received by the trust, which is the month
following receipt by Cross Timbers,XTO Energy, and generally two months after oil and gas
production. Royalty 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 royalty income.
12
The following is a summary of the calculation of royalty income received by the
trust:
Three Months
Ended March 31 (a)
------------------------- Increase
2001 2000 (Decrease)
----------- ----------- ----------
Sales Volumes
Gas (Mcf) (b)
Underlying properties............. 9,190,752 9,709,634 (5%)
Average per day.................. 99,899 105,540 (5%)
Net profits interests............. 5,467,116 4,701,389 16%
Oil (Bbls) (b)
Underlying properties............. 96,098 100,205 (4%)
Average per day.................. 1,045 1,089 (4%)
Net profits interests............. 55,624 49,605 12%
Average Sales Prices
Gas (per Mcf)..................... $ 6.31 $ 2.32 172%
Oil (per Bbl)..................... $ 30.43 $ 25.19 21%
Revenues
Gas sales......................... $58,025,281 $22,501,491 158%
Oil sales......................... 2,924,708 2,524,047 16%
----------- -----------
60,949,989 25,025,538 144%
----------- -----------
Costs
Taxes, transportation
and other........................ 5,289,244 2,415,586 119%
Production expense................ 4,913,786 3,286,303 50%
Development costs................. 7,130,252 3,866,107 84%
Overhead.......................... 1,819,691 1,730,442 5%
----------- -----------
Total Costs..................... 19,152,973 11,298,438 70%
----------- -----------
Other Proceeds
Property sales....................
Three Months Six Months
Ended June 30 (a) Ended June 30 (a)
--------------------------- Increase --------------------------- Increase
2001 2000 (Decrease) 2001 2000 (Decrease)
------------ ------------ ---------- ------------ ------------ ----------
Sales Volumes
Gas (Mcf) (b)
Underlying properties......... 8,705,314 8,636,974 1% 17,896,066 18,346,608 (2%)
Average per day............... 97,813 95,966 2% 98,873 100,806 (2%)
Net profits interests......... 4,242,301 4,350,412 (2%) 9,709,417 9,051,801 7%
Oil (Bbls) (b)
Underlying properties......... 101,587 104,525 (3%) 197,685 204,730 (3%)
Average per day............... 1,141 1,161 (2%) 1,092 1,125 (3%)
Net profits interests......... 47,586 52,065 (9%) 103,210 101,670 2%
Average Sales Prices
Gas (per Mcf)................. $5.33 $2.54 110% $5.84 $2.42 141%
Oil (per Bbl)................. $28.37 $27.63 3% $29.38 $26.43 11%
Revenues
Gas sales..................... $ 46,430,124 $ 21,898,246 112% $104,455,405 $ 44,399,737 135%
Oil sales..................... 2,882,422 2,887,909 - 5,807,130 5,411,956 7%
------------ ------------ ------------ ------------
Total Revenues................ 49,312,546 24,786,155 99% 110,262,535 49,811,693 121%
------------ ------------ ------------ ------------
Costs
Taxes, transportation
and other.................... 5,022,857 2,414,202 108% 10,312,101 4,829,788 114%
Production expense (c)........... 4,264,707 3,152,441 35% 8,676,812 6,265,840 38%
Development costs (c)............ 10,960,343 3,337,976 228% 18,592,276 7,376,987 152%
Overhead......................... 1,913,454 1,770,729 8% 3,733,145 3,501,171 7%
------------ ------------ ------------ ------------
Total Costs................... 22,161,361 10,675,348 108% 41,314,334 21,973,786 88%
------------ ------------ ------------ ------------
Other Proceeds
Property sales................ - - - 307,824 - -
------------ ------------ ------------ ------------
Net Proceeds...................... 27,151,185 14,110,807 92% 69,256,025 27,837,907 149%
Net Profits Percentage............ 80% 80% 80% 80%
------------ ------------ ------------ ------------
Royalty Income.................... $ 21,720,948 $ 11,288,646 92% $ 55,404,820 $ 22,270,326 149%
============ ============ ============ ============
- -
----------- -----------
Net Proceeds........................ 42,104,840 13,727,100 207%
Net Profits Percentage.............. 80% 80%
----------- -----------
Royalty Income...................... $33,683,872 $10,981,680 207%
=========== ===========
- -------------------------------------
(a) Because of the two-month interval between time of production and receipt of
royalty income by the trust, (1) oil and gas sales for the quarter ended
March
31June 30 generally represent production for the period February through
April and (2) oil and gas sales for the six months ended June 30, generally
represent production for the period November through January.April.
(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 expenses 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) As of the quarter and six months ended June 30, 2001, the costs related to
well recompletions and remedial workovers are reflected in the calculation
of royalty income as development costs, consistent with their budget
classification. Previously these costs were included in production expense.
These costs are reclassified in prior periods for consistency with current
period presentation.
13
The following are explanations of significant variances:variances from second quarter 2000
to 2001 and from the first six months of 2000 to the comparable period in 2001:
Sales Volumes
Gas
Second quarter gas sales volumes increased 1% primarily because of new wells and
workovers, partially offset by natural production decline. For the six-month
period, natural production decline exceeded the effects of new wells and
workovers, resulting in a 2% decline in sales volumes.
The July 2001 distribution, declared on July 20 and payable on August 14,
includes cash receipts related to underlying gas sales volumes of approximately
96,450 Mcf per day which were primarily produced in May. Including volumes
related to delayed receipts, primarily from new wells, and excluding volume
adjustments, gas sales volumes related to this distribution are estimated to be
98,100 Mcf per day.
Oil
Oil sales volumes were 5% lower and oil volumes were 4%3% lower for firstboth the second quarter 2001 than first quarter 2000 volumes. This is primarilyand the six-month
period because of natural production decline, partially offset by new wells.wells and
workovers.
Sales Prices
Gas
The firstGas prices for the second quarter 2001 average gas price was $6.31 per Mcf, a 172% increase overincreased 110% to $5.33 and for the first quarter 2000 price of $2.32.six-month
period increased 141% to $5.84. After declining briefly at the end of 1999, gas
prices strengthened in 2000, reaching a record high of $10.10 per MMBtu in
December 2000 as winter demand strained gas supplies. Gas prices are
expected to remain at higher levelsdeclined in
2001 because of sustainedmilder weather which has reduced the demand relatedfor gas as fuel to
an extended heating season, electrical power generation requirementsgenerate electricity and lower gas storage levels.has allowed for increased storage. The average NYMEX
price for FebruaryMay through AprilJuly 2001 was $5.56$3.94 per MMBtu. At May 1,July 31, 2001, the
average NYMEX price for the following twelve months was $4.86$3.64 per MMBtu. Recent
trust gas prices have averaged approximately $0.40 per MMBtu lower than the
NYMEX price.
Oil
The average oil price for firstthe second quarter 2001 was $30.43 per Bbl, which is a 21%
increase overincreased 3% to $28.37 and for the
first quarter 2000 average oil price of $25.19.six-month period increased 11% to $29.38. During 2000, West Texas Intermediate
("WTI") posted prices fluctuated between a low of $21.50 per Bbl in January to a
high of $34.25 in September, as increased demand buoyed prices. Lagging demand
in 2001, caused by a worldwide economic slowdown, has caused oil prices to
decline. OPEC members agreed to cut production by one million barrels per day
effective April 1 to stem declining prices. OPEC recently announced it will cut an
additional one million barrels per day effective September to adjust for weak
demand and excess supply. The average WTI posted price for FebruaryMay through AprilJuly 2001
was $25.14.$24.44. Recent trust oil prices have averaged approximately $2.70$2.40 higher
than the WTI posted price.
Costs
Costs deducted in the calculation of royalty income for first quarter 2001
totaled $19,152,973. Total costs for first quarter 2001 were 70% higher thanTaxes
Taxes, transportation and other increased 108% for the same 2000second quarter and 114%
for the six-month period because of higher production taxes and purchaser
deductions related to increased revenues.
14
Production
Production expense increased 35% for the second quarter and 38% for the six-
month period, primarily because of increased production taxes associated
with higher revenue, increased production expenses related to the timing of maintenance projects, and prior periodincreased
fuel adjustments,costs related to higher gas prices and increased compressor rentals.
Production expense for the calendar year 2001 budget (generally relating to
trust distributions declared March 2001 through February 2002) have averaged
$1.5 million per month, or approximately 16% higher than the initial estimate of
$1.3 million per month, primarily because of increased service and fuel costs
related to higher natural gas prices.
Development
Development costs increased 228% from $3,337,976 to $10,960,343 for the second
quarter, and 152% from $7,376,987 to $18,592,276 for the six-month period.
Increased costs are primarily related to new wells drilled in Oklahoma and
Wyoming and workovers. During the first half of 2001, 22 wells were completed on
the underlying properties and 12 wells were pending completion at June 30.
Depending upon commodity prices, another two wells may be drilled during the
last half of 2001. With the exception of five completed wells and one pending
completion in the Fontenelle Unit of Wyoming, all 2001 drilling activity is in
western Oklahoma.
XTO Energy has advised the trustee that development costs for calendar year 2001
budget are currently expected to total $29.4 million. Expected development costs
are higher than the initial estimate of $23 million primarily because of higher
drilling, service and workoversequipment costs related to demand generated by higher
natural gas prices and carryover of costs from the year 2000 budget.
Development costs deducted for the July 2001 distribution were $2,650,000,
resulting in Oklahoma.a total of $16.6 million for the March through July distributions.
Remaining development costs of $12.8 million are expected to be deducted at a
monthly rate of $1,825,000 for the August 2001 through February 2002
distributions. Monthly development costs will be periodically reviewed and
adjusted as necessary. As of the July distribution, actual development costs
have exceeded the amount deducted by $2.3 million.
Other Proceeds
Royalty income for the quartersix months ended March 31,June 30, 2001 includes proceeds of
$307,824 ($246,259 net to the trust) from the sale of properties in Sweetwater
County, Wyoming.
14
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, development costs
and other expenses, underlying properties and industry and market conditions,
are forward-looking statements that are subject to risks and uncertainties which
are detailed in the trust's annual report on Form 10-K for the year ended
December 31, 2000, which is incorporated by this reference as though fully set
forth herein. Although Cross
TimbersXTO Energy believes that the expectations reflected in
such forward-looking statements are reasonable, neither Cross TimbersXTO Energy nor the
trustee can give any assurance that such expectations will prove to be correct.
15
Item 3. Quantitative and Qualitative Disclosures about Market Risk
There have been no material changes in the trust's market risks, as disclosed in
the trust's Form 10-K for the year ended December 31, 2000.
1516
PART II - OTHER INFORMATION
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Item 1. Legal ProceedingsProceedings.
A lawsuit, United States of America ex rel. Grynberg v. Cross Timbers Oil
Company, et al., was filed in the United States District Court for the Western
District of Oklahoma. This action alleges that XTO Energy underpaid royalties on
natural gas produced from federal leases and lands owned by Native Americans by
at least 20% during the past ten years as a result of mismeasuring the volume of
natural gas and wrongfully analyzing its heating content. The suit, which was
brought under the qui tam provisions of the U.S. False Claims Act, seeks treble
damages for the unpaid royalties (with interest), civil penalties between $5,000
and $10,000 for each violation of the U.S. False Claims Act, and an order for
XTO Energy to cease the allegedly improper measuring practices. The cases
against XTO Energy and other defendants have been consolidated in the United
States District Court for Wyoming. XTO Energy and other defendants filed a
motion to dismiss the lawsuit, which was denied. XTO Energy believes that the
allegations of this lawsuit are without merit and intends to vigorously defend
the action. However, an order to change measuring practices or a related
settlement could adversely affect the trust by reducing net proceeds in the
future by an amount that is presently not determinable, but, in XTO Energy
management's opinion, is not expected to be material to the trust's annual
distributable income, financial position or liquidity.
In June 2001 XTO Energy was served with a lawsuit styled Quinque Operating Co.,
et al. v. Gas Pipelines, et al. The action was filed in the District Court of
Stevens County, Kansas, against XTO Energy and one of its subsidiaries, along
with over 200 natural gas transmission companies, producers, gatherers, and
processors of natural gas. Plaintiffs seek to represent a class of plaintiffs
consisting of all similarly situated gas producers, overriding royalty owners,
working interest owners and state taxing authorities either from whom defendants
had purchased natural gas or who received economic benefit from the sale of such
gas since January 1, 1974. No class has been certified. The allegations in the
case are similar to those in the Grynberg case; however, the Quinque case
broadens the claims to cover all oil and gas leases (other than the federal and
Native American leases that are the subject of the Grynberg case). The complaint
alleges that the defendants have mismeasured both the volume and heat content of
natural gas delivered into their pipelines resulting in underpayments to
plaintiffs. Plaintiffs assert a breach of contract claim, negligent or
intentional misrepresentation, civil conspiracy, common carrier liability,
conversion, violation of a variety of Kansas statutes and other common law
causes of action. No amount of damages has been specified in the complaint.
While XTO Energy is unable to estimate any possible loss or predict the outcome
of this case, it believes these claims are without merit and intends to
vigorously defend this suit. However, an order to change measuring practices or
a related settlement could adversely affect the trust by reducing net proceeds
in the future by an amount that is presently not determinable, but, in XTO
Energy management's opinion, is not expected to be material to the trust's
annual distributable income, financial position or liquidity.
A lawsuit, Bishop, et al. v. Amoco Production Co., et al., was filed in May 2000
in the Third Judicial District Court in Lincoln County, Wyoming by owners of
royalty and overriding royalty interests in wells located in Wyoming. The
plaintiffs alleged that Cross TimbersXTO Energy and the other producer defendants deducted
impermissible costs of production from royalty payments that were made to the
plaintiffs and other similarly situated persons, and failed to properly inform
the plaintiffs and others of the deductions taken. The action was brought as a
class action on behalf of all persons who own an interest in wells located in
Wyoming as to which the defendants pay royalties and overriding royalties. The
plaintiffs sought a declaratory judgment that the deductions made were
impermissible and sought damages in the amount of the deductions made together
with interest and attorneys' fees. Cross Timbers hasXTO Energy reached a settlement in this
action, which is subject towas approved by the court approval. Cross Timbers will receivein June 2001. XTO Energy received a
release of claims relating to deductions taken, the statutory reporting of
claims, and other miscellaneous matters. Cross TimbersXTO Energy agreed not to take similar
17
deductions in the future and to itemize other deductions from future royalty
disbursements. In a hearing in April 2001, the court provisionally
certified the class and authorized notices to be mailed to potential class
members. Cross Timbers expects the court will give final approval in June 2001.
The trust's portion of the settlement iswill be $155,769 ($124,615
net to the trust). XTO Energy expects that the settlement will be deducted from
the trust distribution declared for August 2001.
Items 2 through 4. Not applicable.
Item 5. Other Information.
XTO Energy has advised the trustee that development costs for calendar year 2001
budget (generally relating to trust distributions declared for March 2001
through February 2002) are currently expected to total $29.4 million. Expected
development costs are higher than the initial estimate of $23 million primarily
because of higher drilling, service and equipment costs related to demand
generated by higher natural gas prices and carryover of costs from the year 2000
budget.
Development costs deducted for the July 2001 distribution were $2,650,000,
resulting in a total of $16.6 million for the March through July 2001
distributions. Remaining development costs of $12.8 million are expected to be
less than $200,000.
Items 2deducted at a monthly rate of $1,825,000 for the August 2001 through 5. Not applicable.February
2002 distributions. Monthly development costs will be periodically reviewed and
adjusted as necessary. As of the July distribution, actual development costs
have exceeded the amount deducted by $2.3 million.
Item 6. (a) Exhibits.
Exhibit Number
and Description Page
--------------- ----
(15) Awareness letter of Arthur Andersen LLP 1820
(b) Reports on Form 8-K.
No reports on Form 8-K have been filed during
the quarter for which this report is filed.
1618
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
HUGOTON ROYALTY TRUST
By BANK OF AMERICA, N.A., TRUSTEE
By RON E. HOOPER
-----------------------------------------------------------------------
Ron E. Hooper
Senior Vice President
CROSS TIMBERS OIL COMPANYXTO ENERGY INC.
Date: May 10,August 2, 2001 By LOUIS G. BALDWIN
-----------------------------------------------------------------------
Louis G. Baldwin
Executive Vice President and
Chief Financial Officer
1719