Hugoton Royalty Trust
NOTES TO FINANCIAL STATEMENTS(Continued)
For the year ended December 31, 2021, excess costs recovered on properties underlying the Oklahoma
net profits interests were $11,919,681 ($9,535,743 net to the Trust). This includes excess cost recoveries of $5,547,816 ($4,438,252 net to the Trust) for the quarter ended December 31, 2021.
For the year ended December 31, 2021, excess costs recovered on properties underlying the Wyoming net profits interests were $3,675,432 ($2,940,346
net to the Trust). This includes excess cost recoveries of $1,674,227 ($1,339,382 net to the Trust) for the quarter ended December 31, 2021.
Underlying cumulative excess costs for the Kansas, Oklahoma and Wyoming conveyances remaining as of December 31, 2021 totaled $19.3 million
($15.5 million net to the Trust), including accrued interest of $3.1 million ($2.5 million net to the Trust). This balance does not include the portion of the Chieftain settlement the Panel determined could be charged as a
production cost. XTO Energy has estimated the amount to be approximately $14.6 million (net to the Trust).
5. Administration Expense
Administrative expenses are incurred so that the Trustee may meet its reporting obligations to the unitholders and regulatory entities and otherwise
manage the administrative functions of the Trust. These obligations include, but are not limited to, all expenses, taxes, compensation to the Trustee for managing the Trust, fees to consultants, accountants, attorneys, transfer agents, other
professional and expert persons, expenses for clerical and other administrative assistance, and fees and expenses for all other services. See Item 11. Executive Compensation, for further information on the remuneration received by the
Trustee.
6. Income Taxes
For federal income tax
purposes, the Trust constitutes a fixed investment trust that is taxed as a grantor trust. A grantor trust is not subject to tax at the trust level. Accordingly, no provision for income taxes has been made in the financial statements. The
unitholders are considered to own the Trusts 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. Impairments recorded for book purposes will not result in a loss for tax purposes for the unitholders until the loss is recognized.
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 generally required to file Kansas and Oklahoma income tax returns 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. However, the Trust will not file a Kansas return for the 2021 tax year because the Trust had no revenues, income or deductions
in 2021 attributable to properties located in Kansas. The Trust did not file a Kansas income tax return for the 2020 and 2019 tax years for the same reason.
Wyoming does not impose a state income tax.
The
Trust may be required to bear a portion of the legal settlement costs arising from the Chieftain royalty class action settlement. For information on contingencies, including the Chieftain class action, see Note 8 to Financial
Statements. The Panel has determined the Trust is responsible for a portion of the costs. However, the arbitration matter is stayed. Pending finalization of all claims included in the arbitration, XTO Energy would have the right to deduct the
costs in its calculation of the net profits income payable to the Trust from the applicable net profits interests. Thus, for unitholders, the portion of legal settlement costs for which the Trust is determined to be responsible will be reflected
through a reduction in net profits income received from the Trust and thus in a reduction in the gross royalty income reported by and
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