SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
(Amendment No. 2)
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[X] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to ss. 240.14a-11(c) or ss. 240.14a-12
Swift Energy Managed Pension Assets Partnership 1991-A, Ltd.
(Name of Registrant as Specified In Its Charter)
Swift Energy Company
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[ ] $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), 14a-6(i)(2) or
Item 22(a)(2) of Schedule 14A.
[ ] $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(4).
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
1) Title of each class of securities to which transaction applies:
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2) Aggregate number of securities to which transaction applies:
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3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
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4) Proposed maximum aggregate value of transaction:
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5) Total fee paid:
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[X] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
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2) Form, Schedule or Registration Statement No.:
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3) Filing Party:
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4) Date Filed: _______________________________________
August 19, 1997
Dear Limited Partner:
Enclosed is a proxy statement and related information pertaining to a
proposal to sell all of the Partnership's properties and dissolve and liquidate
the Partnership. In order for the sale and liquidation to take place, Limited
Partners holding a majority of the outstanding Units must approve this proposal.
The Managing General Partner recommends that you vote in favor of such sale and
liquidation for a number of reasons.
Swift Energy Managed Pension Assets Partnership 1991-A, Ltd. has been
in existence for over six years, and most of the properties underlying its net
profits interest were purchased by 1991. All economically feasible enhancement
opportunities have already been implemented by the Partnership's companion
partnership on the properties in which the Partnership owns non-operating
interests. Consequently, the Partnership's interest in proved reserves that can
be produced without requiring further expenditures is quite low. The net profits
received by the Partnership have been reduced by amounts used by its companion
partnership to pay operating and enhancement costs, and the balance of these
excess costs exceed estimates of future net profits available to the
Partnership, and significantly reduce the value of the Partnership's reserves.
Thus, even if oil and gas prices were unusually high, there would be very little
impact upon the Partnership's ultimate economic performance. To continue
operation of the Partnership means that Partnership administrative expenses
(such as costs of audits, reserve reports, and Securities and Exchange
Commission filings), as well as the cost of operating the properties in which
the Partnership owns an interest, will continue while revenues decrease and thus
will increase excess costs. Thus, approval of the current sale of the
Partnership's Property Interests is likely to result in higher levels of
liquidating distributions to Limited Partners than the present value of any cash
received in future years from continued operation of the Partnership.
If Limited Partners holding a majority of the Units approve this
proposal, the Managing General Partner will attempt to complete the sale of all
Partnership properties by the end of 1997.
Included in this package are the most recent financial and other
information prepared regarding the Partnership. If you need any further material
or have questions regarding this proposal, please feel free to contact the
Managing General Partner at (800) 777-2750.
We urge you to complete your Proxy and return it immediately, as your
vote is important in reaching a quorum necessary to have an effective vote on
this proposal. Enclosed is a green Proxy, along with a postage-paid envelope
addressed to the Managing General Partner for your use in voting and returning
your Proxy. Thank you very much.
SWIFT ENERGY COMPANY,
Managing General Partner
By: /s/ A. Earl Swift
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A. Earl Swift
Chairman
Swift Energy Managed Pension Assets Partnership 1991-A, Ltd.
16825 Northchase Drive, Suite 400
Houston, Texas 77060
(281) 874-2700
NOTICE OF SPECIAL MEETING OF LIMITED PARTNERS
To be held September 30, 1997
Notice is hereby given that a special meeting of limited partners of
Swift Energy Managed Pension Assets Partnership 1991-A, Ltd. (the "Partnership")
will be held at 16825 Northchase Drive, Houston, Texas, on Tuesday, September
30, 1997 at 4:00 p.m. Central Time to consider and vote upon:
The adoption of a proposal for (a) sale of substantially all of the
assets of the Partnership (consisting of its net profits interest)
including the possible purchase in certain circumstances of the
Partnership's net profits interests by the Managing General Partner,
and (b) the dissolution, winding up and termination of the Partnership
(the "Termination"). All asset sales and the Termination comprise a
single proposal (the "Proposal"), and a vote in favor of the Proposal
will constitute a vote in favor of each of these matters.
A record of limited partners of the Partnership has been taken as of
the close of business on August 15, 1997, and only limited partners of record on
that date will be entitled to notice of and to vote at the meeting, or any
adjournment thereof.
If you do not expect to be present in person at the meeting or prefer
to vote by proxy in advance, please sign and date the enclosed proxy and return
it promptly in the enclosed postage-paid envelope which has been provided for
your convenience. The prompt return of the proxy will ensure a quorum and save
the Partnership the expense of further solicitation.
SWIFT ENERGY COMPANY,
Managing General Partner
/s/ John R. Alden
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JOHN R. ALDEN
Secretary
August 19, 1997
TABLE OF CONTENTS
SUMMARY ......................................................................1
GENERAL INFORMATION............................................................6
Documents Included....................................................6
Vote Required.........................................................6
Proxies; Revocation...................................................6
Dissenters' Rights....................................................6
Solicitation..........................................................7
RISK FACTORS...................................................................7
Uncertainty of Liquidating Distributions..............................7
Undetermined Sales Prices; Volatility of Oil and Gas Prices...........7
Potential Purchase by an Affiliate....................................7
Dependence on Operating Partnerships..................................7
THE PROPOSAL...................................................................9
General .............................................................9
Partnership Financial Performance and Condition.......................9
Anticipated Impact of Property Sales and Liquidation.................12
Estimates of Liquidating Distribution Amount.........................13
Comparison of Sale Versus Continuing Operations......................15
Reasons for the Proposal.............................................16
The AWP Olmos Field..................................................17
Auction Procedure....................................................18
Fair Market Value Opinion of J.R. Butler & Company...................18
Simultaneous Proposal to Operating Partnerships......................19
Steps to Implement the Proposal......................................20
Impact on the Managing General Partner...............................22
Recommendation of the Managing General Partner.......................22
FEDERAL INCOME TAX CONSEQUENCES...............................................23
General ............................................................23
Tax Treatment of Tax Exempt Plans....................................23
Tax Treatment of Limited Partners Subject to Federal Income
Tax Due to Debt-financing or Who are Not Tax Exempt Plans.........24
Taxable Gain or Loss Upon Sale of Properties.........................25
Liquidation of the Partnership.......................................25
Capital Gains Tax....................................................26
Passive Loss Limitations.............................................26
BUSINESS OF THE PARTNERSHIP...................................................27
Reserves ............................................................27
The Managing General Partner.........................................28
Transactions Between the Managing General Partner and
the Partnership...................................................28
No Trading Market....................................................29
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Principal Holders of Limited Partner Units...........................29
Approvals............................................................29
Legal Proceedings....................................................29
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE AND ATTACHMENT OF SUCH
INFORMATION HERETO...................................................29
OTHER BUSINESS................................................................30
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Swift Energy Managed Pension Assets Partnership 1991-A, Ltd.
16825 Northchase Drive, Suite 400
Houston, Texas 77060-9468
(281) 874-2700
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PROXY STATEMENT
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SUMMARY
This Proxy Statement is being provided by Swift Energy Company, a Texas
corporation (the "Managing General Partner") in its capacity as the Managing
General Partner of Swift Energy Managed Pension Assets Partnership 1991-A, Ltd.
a Texas limited partnership (the "Partnership"), to holders of units of limited
partnership interests representing an initial investment of $100 per Unit in the
Partnership (the "Units"). This Proxy Statement and the enclosed proxy are
provided for use at a special meeting of limited partners (the "Limited
Partners"), and any adjournment of such meeting (the "Meeting") to be held at
16825 Northchase Drive, Houston, Texas, at 4:00 p.m. Central Time on Tuesday,
September 30, 1997. The Meeting is called for the purpose of considering and
voting upon a proposal to (a) sell substantially all of the assets of the
Partnership (consisting of its net profits interest), including the possible
purchase of the Partnership's net profits interests by the Managing General
Partner, and (b) dissolve, wind up and terminate the Partnership (the
"Proposal"), in accordance with the terms and provisions of Article XVI of the
Partnership's Limited Partnership Agreement dated March 31, 1991 (the
"Partnership Agreement"), and the Texas Revised Limited Partnership Act (the
"Texas Act"). This Proxy Statement and the enclosed proxy are first being mailed
to Limited Partners on or about August 19, 1997.
Under Article XVI.C of the Partnership Agreement, the affirmative vote
of Limited Partners holding at least 51% of the Units then held by Limited
Partners as of the Record Date (as defined) is required for approval of the
Proposal. Each Limited Partner appearing on the Partnership's records as of
August 15, 1997 (the "Record Date"), is entitled to notice of the Meeting and is
entitled to one vote for each Unit held by such Limited Partner. Under Article
XX.H of the Partnership Agreement, the General Partners may not vote any Units
owned by them for matters such as the Proposal. VJM Corporation, a California
corporation, the Special General Partner of the Partnership, owns a 1% interest
in the Partnership as a General Partner, but owns no Units. The Managing General
Partner currently owns approximately 1.21% of all outstanding Units. Therefore,
the affirmative vote of holders of 51% of the remaining Units is required to
approve the proposed sale.
The working interest in the producing oil and gas properties in which
the Partnership owns the Property Interests is owned by an affiliated companion
partnership, Swift Energy Income Partners 1991-A, Ltd. (the "Operating
Partnership"). The Partnership's assets consist of a net profits interest that
covers multiple working interests, and which may be divided into multiple net
profits interests if the Operating Partnership separately sells one or more of
its working interests burdened by the net profits interest (the "Property
Interests"). Upon approval of the Proposal by the Limited Partners, the Managing
General Partner intends to sell substantially all of the Partnership's Property
Interests, together with the Operating Partnership's working interests in the
same properties, in a sale or series of sales, use the proceeds to pay or
provide for the payment of liabilities, and then wind up the affairs of the
Partnership. The Partnership's Property Interests currently cover 130
1
wells. The total PV-10 value of the Partnership's remaining reserves as of
December 31, 1996 is $238,256, before reduction for excess costs. The bulk of
the Partnership's remaining reserves are in the AWP Olmos Field in McMullen
County, Texas, which comprises approximately 76% of the value of the
Partnership's remaining reserves, before reduction for excess costs. During
1996, approximately 73% of the Partnership's revenue was attributable to natural
gas production. For more information, see the attached Annual Report on Form
10-K for the year ended December 31, 1996 and the Form 10-Q for the second
quarter of 1997.
It is highly likely that the Property Interests will be sold in a
series of sales rather than in a single transaction. The Managing General
Partner anticipates that most of the Partnership's Property Interests will be
sold in auctions (together with the working interest owned by the Operating
Partnership) conducted by the Oil & Gas Asset Clearinghouse (the "O&G
Clearinghouse"), or a similar company engaged in auctions of oil and gas
properties, although some of the Partnership's Property Interests may be sold in
negotiated transactions. The Managing General Partner will not begin the sales
process until the Proposal has been approved by the Limited Partners. A minimum
auction price will be set for sale of certain of the Operating Partnership's
working interest and the Partnership's Property Interest in the same field. In
those instances in which the Managing General Partner has an interest in
purchasing the Partnership's Property Interests if no higher price is paid at
auction, the Managing General Partner will obtain an independent appraisal of
the value of the Property Interest by an independent Consultant, J.R. Butler. A
purchase of such property by the Managing General Partner will take place only
if the Property Interest is first offered to third parties at auction, and then
only if no higher price is received from third parties. Bids over the minimum
price from third parties will be accepted at auction. If no third party
purchases these Property Interests at auction at prices above the minimum bid,
then the Managing General Partner will purchase those interests for the minimum
bid amount set by the third party appraisals.
The properties to be offered at auction include the Partnership's
Property Interests in the AWP Olmos Field. The Managing General Partner intends
to obtain an independent appraisal of the value of the Partnership's Property
Interest in the AWP Olmos Field by J.R. Butler, the independent Consultant, and
to purchase such Property Interest at auction if no third party offers the
minimum bid, in accordance with the procedures discussed above.
The Managing General Partner is asking for approval of the Proposal
prior to offering the Partnership's Property Interests for sale, and thus before
the sales prices for Partnership properties are known, to avoid delay in selling
the Property Interests. Furthermore, as the Managing General Partner must sell
the Partnership's Property Interests in its oil and gas properties together with
the working interests in those same properties owned by the Operating
Partnerships and several other Partnerships which it manages, solicitation of
approval of each purchase offer from all of the partnerships would be
impractical.
It is possible, though unlikely, that less than all of the
Partnership's Property Interests will be sold. See "The Proposal--Steps to
Implement the Proposal--Negotiated Sale." The Managing General Partner
anticipates that the majority of sales will be made by the end of 1997. The sale
of Partnership Property Interests that account for at least 662/3% of the total
value of the Partnership Property Interests will cause the Partnership to
dissolve automatically under the terms of the Partnership Agreement and the
Texas Act. Any Partnership Property Interests that are not sold at auction may
be sold pursuant to negotiated sales to third parties.
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THE PROPOSAL INVOLVES CERTAIN RISKS. SEE "RISK FACTORS."
o If the Proposal is approved, the Limited Partners will not have an
opportunity to approve the specific terms of any particular sale of the
Property Interests.
o Currently there are no buyers for the Property Interests and the price
at which they will be sold has not yet been determined. The Managing
General Partner cannot accurately predict the prices at which the
Property Interests ultimately will be sold.
o No minimum prices will be established for most of the Property
Interests, so there is no guarantee that the Property Interests will be
sold at or above their fair market value.
o If the Proposal is adopted, Property Interests may be sold to the
Managing General Partner after being offered to third parties at
auction. Any such sale must be at the price determined by a single
third party appraisal, which is also the price used as the minimum
price at which such Property Interests will be offered which may not
reflect the fair market value of the Property Interests.
o The sale of the Property Interests is dependent upon the simultaneous
sale of the Operating Partnership's interest in the same properties.
The failure of the Operating Partnership to approve the proposal could
significantly adversely affect the likelihood of the sale of the
Property Interests.
o If the Proposal is adopted, the receipt of a final liquidating
distribution or the amount thereof is not assured. See "The
Proposal--Estimates of Liquidating Distribution Amount."
If the Proposal is not approved by Limited Partners holding 51% or more
of the Units held by Limited Partners, the Partnership will continue to exist.
In that event, however, due to the expected decline in revenues, the Managing
General Partner estimates that a portion of the Partnership's Property Interests
ranging from an average of 10% to 15% will need to be sold each year in order to
cover future direct costs, operating costs and administrative costs.
The Managing General Partner receives operating fees for wells in which
the Partnership has a net profits interest and for which the Managing General
Partner or its affiliates serve as operator. It is anticipated that, due to the
sale of interests in wells by the Operating Partnership, the Managing General
Partner will no longer serve as operator for a number of the wells in which the
Partnership has a net profits interest. To the extent that the operator changes
because of a change in ownership of the properties, the Managing General Partner
will lose the revenues it currently earns as operator. The Managing General
Partner believes, however, that it will be positively affected, on the other
hand, by liquidation of the Partnership, on the basis of its ownership interest
in the Partnership. See "The Proposal--Estimates of Liquidating Distribution
Amount," and "The Proposal--Impact on the Managing General Partner."
LIMITED PARTNERS ARE URGED TO COMPLETE, SIGN AND DATE THE ENCLOSED
PROXY AND TO RETURN IT TO THE MANAGING GENERAL PARTNER NO LATER
THAN SEPTEMBER 15, 1997.
3
GLOSSARY OF TERMS
Btu means British Thermal Unit, which is a heating equivalent measure for
natural gas.
Mcf means thousand cubic feet of natural gas.
Mcfe means thousand cubic feet of natural gas equivalent, which is determined
using the ratio of one barrel of oil, condensate or natural gas liquids to six
Mcf of natural gas.
Mmbtu means million British Thermal Units, which is a heating equivalent measure
for natural gas.
Net Profits Interest means an interest in oil and gas property which entitles
the owner to a specified percentage share of the Gross Proceeds generated by
such property, net of Operating Costs. Under the NP/OR Agreement, the
Partnership receives a Net Profits Interest entitling it to a specified
percentage of the aggregate Gross Proceeds generated by, less the aggregate
Operating Costs attributable to, those depths of all Producing Properties
acquired pursuant to such agreement that are evaluated at the respective dates
of acquisition to contain Proved Reserves, to the extent such depths underlie
specified surface acreage.
NP/OR Agreement means the form of Net Profits and Overriding Royalty Interest
Agreement entered into between the Partnership and an Operating Partnership
pursuant to which the Partnership acquired a Net Profits Interest, or in certain
instances various Overriding Royalty Interests, from the Operating Partnership
in a group of Producing Properties. The Working Interest in such group of
properties is held by the Operating Partnership.
PV-10 Value means the estimated future net revenue to be generated from the
production of proved reserves discounted to present value using an annual
discount rate of 10%; these amounts are calculated net of estimated production
costs and future development costs, using prices and costs in effect as of a
certain date, without escalation and without giving effect to non-property
related expenses such as general and administrative expenses, debt service,
future income tax expense or depreciation, depletion and amortization.
Producing Properties means Properties (or interests in properties) producing oil
and gas in commercial quantities, or containing shut-in wells capable of such
production, or properties which are acquired as an incidental part of the
acquisition of such properties. Producing Properties shall include associated
well machinery and equipment gathering systems, storage facilities or processing
installations or other equipment and property associated with the production and
field processing of oil or gas. Interests in Producing Properties may include
Working Interests, production payments, Royalty Interests, Overriding Royalty
Interest, Net Profits Interests, and other nonoperating interests. Producing
Properties may include gas gathering lines or pipelines. The geographical limits
of a Producing Property may be enlarged or contracted on the basis of
subsequently acquired geological data to define the productive limits of a
reservoir, or as a result of action by a regulatory agency employing such
criteria as the regulatory agency may determine.
Proved Reserves means those quantities of crude oil, natural gas, and natural
gas liquids which, upon analysis of geologic and engineering data, appear with
reasonable certainty to be recoverable in the future from known oil and gas
reservoirs under existing economic and operating conditions. Proved Reserves are
limited to those quantities of oil and gas which can be reasonably expected to
be recoverable commercially at current prices and costs, under existing
regulatory practices and with existing conventional equipment and operating
methods.
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Royalty Interest means a fractional interest in the gross production, or the
Gross Proceeds therefrom, of oil and gas and other minerals under a lease; free
of any expenses of exploration, development, operation and maintenance.
Working Interest means the operating interest under an oil, gas and mineral
lease or other property interest covering a specific tract or tracts of land.
The owner of a Working Interest has the right to explore for, drill and produce
the oil, gas and other minerals covered by such lease or other property interest
and the obligation to bear the costs of exploration, development, operation or
maintenance applicable to his interest.
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GENERAL INFORMATION
Documents Included
The Partnership's Annual Report on Form 10-K for the year ended
December 31, 1996 and its quarterly report on Form 10-Q for the second quarter
of 1997 are included with this Proxy Statement and incorporated herein by
reference. See "Incorporation of Certain Information By Reference and Attachment
of Such Information Hereto." Additionally, a reserve report dated May 20, 1997,
prepared as of December 31, 1996, and audited by H. J. Gruy & Associates, is
attached hereto together with the appraisal of J. R. Butler and Company dated
May 9, 1997 of the fair market value of the Partnership's Property Interests in
the AWP Olmos Field.
Vote Required
According to the terms of the Partnership Agreement, approval of the
Proposal requires the affirmative vote by the holders of at least 51%of the
Units held by Limited Partners. Therefore, an abstention by a Limited Partner
will have the same effect as a vote against the Proposal. This solicitation is
being made for votes in favor of the Proposal (which will result in liquidation
and dissolution). As of the Record Date, 14,314.86 Units were outstanding and
were held of record by 169 Limited Partners (excluding the Managing General
Partner's Units). Each Limited Partner is entitled to one vote for each Unit
held in his name on the Record Date. Accordingly, the affirmative vote of
holders of at least 7,300.58 Units is required to approve the Proposal. The
Managing General Partner holds 175 Units, but, in accordance with Article XX.H
of the Partnership Agreement, the Managing General Partner may not vote its
Units. The Managing General Partner's non-vote, in contrast to abstention by
Limited Partners, will not affect the outcome, because for purposes of adopting
the Proposal its Units are excluded from the total number of voting Units.
The Limited Partners should be aware that once they approve the
Proposal pursuant to this Proxy Solicitation, they will have no opportunity to
evaluate the actual terms of any specific purchase offers for the Partnership's
Property Interests. See "The Proposal - General" herein. See "The Proposal --
Reasons for the Proposal" and "The Partnership -- Transactions Between the
Managing General Partner and the Partnership."
Proxies; Revocation
If a proxy is properly signed and is not revoked by a Limited Partner,
the Units it represents will be voted in accordance with the instructions of the
Limited Partner. If no specific instructions are given, the Units will be voted
FOR the Proposal. A Limited Partner may revoke his proxy at any time before it
is voted at the Meeting. Any Limited Partner who attends the Meeting and wishes
to vote in person may revoke his proxy at that time. Otherwise, a Limited
Partner must advise the Managing General Partner of revocation of his proxy in
writing, which revocation must be received by the Managing General Partner at
16825 Northchase Drive, Suite 400, Houston Texas 77060 prior to the time the
vote is taken.
Dissenters' Rights
Limited Partners are not entitled to any dissenters' or appraisal
rights in connection with the approval of the Proposal. Dissenting Limited
Partners are protected under state law by virtue of the fiduciary duty of
general partners to act with prudence in the business affairs of the
Partnership.
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Solicitation
The solicitation is being made by the Partnership. The Partnership will
bear the costs of the preparation of this Proxy Statement and of the
solicitation of proxies and such costs will be allocated 90% to the Limited
Partners and 10% to the General Partners with respect to their general
partnership interests pursuant to Article VIII.A(iv). As the Managing General
Partner holds approximately 1.21% of the Units held by all Limited Partners,
1.21% of the costs borne by the Limited Partners will be borne by the Managing
General Partner, in addition to its portion borne as a General Partner.
Solicitations will be made primarily by mail. In addition to solicitations by
mail, a number of regular employees of the Managing General Partner may, if
necessary to ensure the presence of a quorum, solicit proxies in person or by
telephone. The Managing General Partner also may retain a proxy solicitor to
assist in contacting brokers or Limited Partners to encourage the return of
proxies, although it does not anticipate doing so. The costs of this proxy
solicitation, including legal and accounting fees and expenses, printing and
mailing costs, and related costs are estimated to be approximately $20,000.
RISK FACTORS
A Limited Partner considering whether to vote in favor of the Proposal
should give careful consideration to the risks involved, including those
summarized below:
Uncertainty of Liquidating Distributions
While the Managing General Partner is not aware of any unknown
liabilities at this time, should any unexpected liabilities come to light prior
to making any final liquidating distribution, such liabilities could
significantly reduce, or eliminate altogether, any final distribution.
Undetermined Sales Prices; Volatility of Oil and Gas Prices
Limited Partners will not have an opportunity to approve the specific
terms of any particular sale of the Property Interests and anticipated sales
prices for the Property Interests may not be achieved. Should domestic gas
prices strengthen after the sales of the assets, it is possible that more
advantageous sales prices for the properties might have been realized at a later
date.
Potential Purchase by an Affiliate
Some of the Partnership's Property Interests may be sold to the
Managing General Partner if the minimum price for those properties, set by an
independent appraiser retained by the Managing General Partner, is not exceeded
by a bid from a third party at auction. The Managing General Partner will use
this procedure for Property Interests in the AWP Olmos Field and may determine
to use this procedure for sale of certain other properties. Property Interests
may also be conveyed to the Managing General Partner for no consideration if it
determines that there is no value to such interests. There is no guarantee that
any of the other Property Interests will be sold at or above their fair market
value.
Dependence on Operating Partnerships
If the Partnership approves the proposal to sell its properties but the
Operating Partnership does not approve the sale of its Property Interests and
actually sell its interests in the same properties, then the
7
Partnership will be forced to sell its net profits interest as a single property
(or undivided interests therein). The purchaser or purchasers would have no
control as working interest owners, as the working interest will still be
retained by the Operating Partnership. Because this may affect the saleability
of the Partnership's Property Interests, it may be necessary for the Managing
General Partner to purchase the Partnership's interests in such properties.
Therefore, the likelihood of sale of the Partnership's Property Interests will
be significantly affected by the ability of the Partnership and its companion
Operating Partnership to sell their ownership interests in the same properties
together, which in turn is dependent upon approval of the proposal being made to
the Partnership and the similar proposal being made simultaneously to the
companion Operating Partnership. Failure to approve the proposal by either
partnership could significantly adversely affect the sale of properties by the
other partnership. See "The Proposal--Simultaneous Proposal to Operating
Partnerships."
8
THE PROPOSAL
General
The Managing General Partner has proposed that the Partnership's net
profits interest be sold, the Partnership be dissolved and that the Managing
General Partner, acting as liquidator, wind up its affairs and make final
distributions to its partners. The Partnership's assets consist of a net profits
interest (the "Property Interests") in producing oil and gas properties in which
the working interest is owned by an affiliated partnership also managed by the
Managing General Partner and formed at approximately the same time as the
Partnership was organized. The Partnership's non-operating net profits interest
exists by virtue a Net Profits and Overriding Royalty Interest Agreement ("NP/OR
Agreement") dated March 31, 1991 with Swift Energy Income Partners 1991-A, Ltd.
(the "Operating Partnership"). The NP/OR Agreement gives the Partnership a net
profits interest in a group of producing properties in which the Operating
Partnership owns the working interests, and entitles the Partnership to receive
a portion of the net profits from operation of the group of producing properties
owned by the Operating Partnership which are subject to the NP/OR Agreement. The
net profits percentage to which the Partnership is entitled is based upon a
percentage of the gross proceeds (reduced by certain costs) from the sale of oil
and gas production from these properties.
The Managing General Partner intends to sell most of the Partnership's
Property Interests through auction conducted by the O&G Clearinghouse or a
similar company, although some of the Partnership's Property Interests might be
sold to a third party in negotiated transactions. The Managing General Partner
expects to sell all properties not sold by auction pursuant to negotiated sales
conducted by the Managing General Partner or a third party engaged to dispose of
the Partnership's assets. The Partnership, if not terminated earlier, will
terminate automatically, pursuant to the terms of the Partnership Agreement, on
January 1, 2021.
The Managing General Partner is an independent oil and gas company
engaged in the exploration, development, acquisition and operation of oil and
gas properties, both directly and through partnership and joint venture
arrangements, and therefore holds various interests in numerous oil and gas
properties. Furthermore, the Managing General Partner is the managing general
partner of a number of oil and gas partnerships.
Partnership Financial Performance and Condition
The Partnership owns non-operating Property Interests in producing oil
and gas properties within the continental United States in which Operating
Partnerships managed by the Managing General Partner own the working interests.
By the end of 1991 the Partnership had expended all of its original capital
contributions for the purchase of a Property Interest in oil and gas producing
properties. During 1996 approximately 73% of the Partnership's revenue was
attributable to natural gas production. The Operating Partnership has, from time
to time, performed workovers and recompletions of wells in which the Partnership
has Property Interests, using funds advanced by the Managing General Partner to
perform these operations, a portion of which amounts has been subsequently
repaid from production.
The Limited Partners have made contributions of $1,448,986, in the
aggregate to the Partnership. The Managing General Partner has made capital
contributions with respect to its general partnership interest of $11,528.
Additionally, pursuant to the presentment right set forth in Article XVIII of
the Partnership Agreement, it purchased 175 Units from Limited Partners.
9
From inception through January 31, 1997, the Partnership has made cash
distributions to its Limited Partners totaling $495,000, although no
distributions have been made since January 1, 1996. Through January 31, 1997,
the Managing General Partner has received cash distributions from the
Partnership of $36,695 with respect to its general partnership interest, and no
distributions related to its limited partnership interests. On a per Unit basis,
Limited Partners had received, as of January 31, 1997, $34.16 per $100 Unit, or
approximately 34.16% of their initial capital contributions.
The Partnership acquired its Property Interests at a time when oil and
gas prices and industry projections of future prices were much higher than
actually occurred in subsequent years. As detailed in the Designated Properties
Supplement dated January 29, 1991 regarding Property Interests to be acquired by
the Partnership, when the Managing General Partner projected future oil and gas
prices to evaluate the economic viability of an acquisition, it compared its
forecasts with those made by banks, oil and gas industry sources, the U.S.
government, and other companies acquiring producing properties. Acquisition
decisions for the Partnership were based upon a range of increasing prices that
were within the mainstream of the forecasts made by these outside parties. At
the time that the Partnership's Property Interests covering producing properties
were acquired, prices averaged about $23 per barrel of oil and $1.90 per Mcf of
natural gas. Oil and gas prices were expected to escalate during subsequent
years of the Partnership's operations. In general, in 1990 and early 1991, all
of these sources forecasted increases in product prices that were based upon oil
and gas prices at the time, which reflected the invasion of Kuwait by Iraq in
the summer of 1990 and the commencement of hostilities in the Gulf War in 1991.
The majority of the Partnership's Property Interests were acquired during the
fourth quarter of 1990 and the first quarter of 1991 when current prices were
predicted to escalate according to certain parameters from then current levels.
Thus the majority of properties were bought upon an evaluated weighted average
price of $1.90 per Mcf. The predicted price increases did not occur and prices
fell precipitously from late 1991 to 1992. The bulk of the Partnership's
reserves were produced from 1991-1994 during which time the Partnership's oil
prices in fact averaged $17.37 per barrel and natural gas prices averaged
approximately $1.78 per Mcf.
The following graphs illustrate the above factors with respect to gas
revenues only, due to the fact that a substantial majority of the Partnership's
production to date being natural gas, the bulk of which was produced during the
years when gas prices were the lowest.
10
PRICE PER MCF PRODUCTION
---------------------- ---------------------
YEAR ACTUAL EXPECTED YEAR MCFE
- ---- ------ -------- ---- ------
1991 1.50 2.20 1991 146,691
1992 1.70 2.59 1992 122,890
1993 2.02 3.08 1993 135,541
1994 1.91 3.26 1994 121,458
1995 1.46 3.46 1995 61,233
1996 2.57 3.67 1996 37,866
[GRAPHIC OMITTED] (Comparison of Gas Prices Expected in 1991 to Gas Prices
Actually Received)
[GRAPHIC OMITTED] (Amounts of Production to Date Produced by Year)
In addition to the effect of prices, Partnership performance has been
negatively affected by problems related to specific wells in the Operating
Partnership's original acquisitions included within the net profits interests,
which disproportionately decreased cash flow because these wells had been
anticipated to have significant early cash flows. In 1992, a well in the
Lewisburg Field, Acadia Parish, Louisiana required certain workover procedures,
due to increased water production. The procedures were unsuccessful and the well
was
11
recompleted higher in the producing zone. Although production was
re-established, the well is producing at a rate lower than prior to the water
encroachment. Additionally, four wells in the Simbrah Field, Jackson County,
Texas experienced rapid depletion of the producing zone in 1992 and 1993.
Recompletion attempts into upper zones were unsuccessful and the wells were
plugged and abandoned in 1994. Recompletion procedures were attempted on several
other wells in Louisiana with limited success between 1993 and 1996. Subsequent
enhancement activities were undertaken on the properties in which the Operating
Partnership held a working interest. To the extent funds were available from
1993 to 1995, the Partnership's companion Operating Partnership drilled seven
material development wells on properties in which the Partnership had Property
Interests, of which six were successful. Five of the seven wells were in
McMullen County, Texas in the AWP Olmos Field and the other two wells were in
Custer County, Oklahoma and Fayette County, Texas, respectively. The benefit of
these enhancement activities, however, was reduced by the need to repay the
costs incurred for these enhancements.
Lower prices also had an effect on the Partnership's interest in proved
reserves. Estimates of proved reserves represent quantities of oil and gas
which, upon analysis of engineering and geologic data, appear with reasonable
certainty to be recoverable in the future from known oil and gas reservoirs
under existing economic and operating conditions. When economic or operating
conditions change, proved reserves can be revised either up or down. If prices
had risen as predicted, the volumes of oil and gas reserves that are
economically recoverable might have been higher than the year-end levels
actually reported because higher prices typically extend the life of reserves as
production rates from mature wells remain economical for a longer period of
time. Production enhancement projects that are not economically feasible at low
prices can also be implemented as prices rise. At present, because of the small
remaining amount of reserves, further price increases would not have a
significant impact on the Partnership's performance.
As required by the Partnership Agreement, the Partnership expended all
of the partners' net commitments available for property acquisitions many years
ago to acquire Property Interests in producing oil and gas properties. The net
profits paid by the Operating Partnership to the Partnership have been reduced
by amounts used by the Operating Partnership to pay operating and enhancement
costs to the third party operator. These costs relate to the working interests
that were subject to the Partnership's net profits interest. The Managing
General Partner of the Operating Partnership advanced most of these costs
because it felt that such expenditures would increase the value of the
properties in which the Partnership and the Operating Partnership have an
interest.
Anticipated Impact of Property Sales and Liquidation
As of December 31, 1996, the properties on which the Partnership holds
its net profits interest still carried excess operating costs of $308,068.
Because of the large amount of remaining costs, no cash distributions have been
made to its Limited Partners since January 1, 1996. Given the large amount of
costs incurred in excess of net revenues on properties in which the Partnership
has a non-operating interest (which has resulted in a large payable by the
Operating Partnership to the Managing General Partner which has not been repaid
by the Operating Partnership), it is highly likely that any further net profits
payments from the Operating Partnership to the Partnership will be delayed for
significant periods of time and will be generally insignificant. The reserve
value of the Partnership's net profits interest is quite low because of these
costs. Neither the Operating Partnership's partnership agreement nor the
Partnership's partnership agreement allow additional assessments to be made
against any Limited Partners, nor may any portion of Partnership capital may be
remitted to the Operating Partnership to reduce these excess operating costs.
Under the NP/OR Agreement these significant excess operating costs must be
debited from revenues generated by the working interests before any net profits
can be paid to the Partnership or a subsequent owner of the net profits
interest. This
12
requirement substantially diminishes the fair market value of the net profits
interest. Therefore, the Managing General Partner anticipates that a sale of the
Partnership's Property Interest will generate a larger amount of cash for a
liquidating distribution to the Limited Partners than the present value of
future distributions if the Partnership were to continue in existence.
Estimates of Liquidating Distribution Amount
It is not possible to accurately predict the prices at which the
Property Interests will be sold. The sales price of the Partnership's net
profits interest or possibly multiple net profits interests may vary. In the
latter case, certain Property Interests might sell for a higher price and others
for a lower price than those estimated below. The projected range of sales
prices below has been based upon estimated future net revenues for the
Partnership's Property Interests, using an estimate of 1997 average prices
without any escalation of $2.25 per Mmbtu. The future net revenues from
production of such properties have then been discounted to present value at 10%
per annum. The 1997 price estimate grew out of the pricing scenarios determined
by the Managing General Partner, which scenarios are used in various
circumstances, including economic modeling of partnership returns and evaluating
the economics of property sales or property acquisitions for the Managing
General Partner or for partnerships managed by the Managing General Partner.
These pricing assumptions vary from those mandated by the Securities and
Exchange Commission ("SEC") for reserves disclosures under applicable SEC rules,
which require use of prices at year-end, although the discount rate and lack of
escalation are the same. If estimates of reserves and future net revenues had
been prepared using December 31, 1996 prices, as mandated by the SEC, reserves,
future net revenues and the present value thereof would be significantly higher.
The Managing General Partner has determined not to use these higher prices
because current estimates of 1997 average prices more accurately reflect prices
purchasers of properties are willing to pay, rather than higher values which do
not reflect the decrease in prices since year-end 1996. For example, the
weighted average price of gas received by the Partnership for the first six
months of 1997 was $2.69 per Mcf as compared to $4.83 per Mcf at December 31,
1996. For the lower end of such projected sales proceeds, the estimated sales
proceeds have been further reduced to 70% of those shown for the higher end of
the range. On July 1, the estimated weighted average price of gas for the
remainder of 1997 was $2.58 per Mcf.
Set forth in the table below are estimated proceeds that the
Partnership may realize from sales of the Partnership's properties, after taking
into account reduction of the value of those Property Interests due to excess
costs, estimated expenses of the related dissolution and liquidation of the
Partnership, and the estimated amount of any net distributions available for
Limited Partners as a result of such sales.
13
Range of Limited Partners' Share of Estimated Distributions
from Property Sales and Liquidation
Projected Range
-------------------------------
Low High
--------- ----------
Net Sales Proceeds(1) $ 58,700 $ 130,200
Partnership Dissolution Expenses(2) $ (18,000) $ (18,000)
---------- ----------
Net Distributions payable to Limited Partners $ 40,700 $ 112,200
========= =========
Net Distributions per $100 Unit $ 2.81 $ 7.75
========= =========
(1) Includes cash and net receivables and payables of the Partnership, net
of selling expenses estimated to be 7% of sales proceeds.
(2) Includes Limited Partners' share of all costs associated with
dissolution and liquidation of the Partnership.
If, on the other hand, the Partnership were to retain its Property
Interests and continue to benefit from production of those properties until
depletion, the table below estimates the return to Limited Partners, discounted
to present value, based upon the same pricing and discount assumptions used
above. The estimates of the present value of future net distributions have been
further reduced by continuing audit, tax return preparation and reserve
engineering fees associated with continued operations of the Partnership, along
with direct and general and administrative expenses estimated to occur during
this time. Such estimates do not take into account any sale of a portion of the
Partnership's Property Interests necessary in order to generate sufficient cash
proceeds to pay general, administrative and operating expenses, which would
reduce the revenues of the Partnership. Moreover, the following estimated future
net revenues do not take into account any growth in excess costs which might be
incurred by the Partnership's companion partnership due to needed future
maintenance or remedial work on the properties in which the Partnership has an
interest.
Estimated Share of Limited Partners'
Net Distributions from Continued Operations
Future Net Revenues from Net Profits Interest (over 17 years)(1) $165,600
Partnership Direct and Administrative Expenses(2) $(32,000)
--------
Net Distributions to Limited Partners (payable over 17 years)(3) $133,600
========
Net Distributions per $100 Unit(4) $ 9.22
Present Value of Net Distributions per $100 Unit(5) $ 5.82
(1) Limited Partners' future net revenues are based on the reserve
estimates at December 31, 1996 after reduction for excess costs,
assuming unescalated prices based on predictions of 1997 average
prices. To a limited extent, future
14
net revenues may be influenced by a material change in the selling
prices of oil or gas. For further discussion of this, see "--Reasons
for the Proposal." The actual prices that will be received and the
associated costs may be more or less than those projected. See "The
Partnership--Partnership Financial Condition and Performance."
(2) Includes Limited Partners' share of general and administrative
expenses, and audit, tax, and reserve engineering fees.
(3) Based upon the Partnership's reserves having a projected 17-year life,
assuming flat pricing. To a limited extent, net distributions may be
influenced by a material change in the selling prices of oil or gas.
For further discussion of this, see "--Reasons for the Proposal." The
actual prices that will be received and the associated costs may be
more or less than those projected.
(4) Does not reflect effect of intermittent sales of Property Interests to
pay administrative costs once the properties no longer generate
sufficient revenues to cover such costs. The Managing General Partner
estimates that Property Interests ranging from an average of 10% to 15%
of the value of the Partnership's properties would have to be sold each
year to cover such costs.
(5) Discounted at 10% per annum.
Among factors which can affect the ultimate sales price received for
Partnership Property Interests are the following:
(1) The above cases presume that 100% of the Partnership's
Property Interests will be sold.
(2) In certain instances, the Partnership, together with the
Operating Partnerships which will be offering its working
interest in the properties in which the Partnership owns a
Property Interest, will own a large enough interest in the
properties to allow the purchaser to designate a new operator
of the properties, which normally increases the amount that a
purchaser is willing to pay.
(3) Changes in the market for gas or oil may affect the pricing
assumptions used by purchasers in evaluating property value
and possible purchase prices.
(4) Different evaluations of the amount of money required to be
spent to enhance or maintain production may have a significant
effect upon the ultimate purchase price.
(5) In certain instances, the Managing General Partner may set
minimum bidding prices for those properties offered at
auction, which may not be met.
(6) The Managing General Partner may choose to package certain
less attractive properties together with other properties in
order to enhance the likelihood of their sale. Such packaging
could result in a significant discount by prospective
purchasers of the value of the Partnership's more productive
properties contained in such packages.
The Partnership Agreement authorizes the Managing General Partner to
sell the Partnership Property Interests at a price that the Managing General
Partner deems reasonable. The proceeds of all sales, to the extent available for
distribution, are to be distributed to the Limited Partners and the General
Partners in accordance with Article XVI.E of the Partnership Agreement as
follows. After use of available proceeds from property sales to reserves for
contingent or unforeseen liabilities of the Partnership, the proceeds are to be
used to repay the capital accounts of the Partners whose capital accounts have
not yet been repaid. The amounts finally distributed will depend on the actual
sales prices received for the Partnership assets, results of operations until
such sales and other contingencies and circumstances.
Comparison of Sale Versus Continuing Operations
Based on the above tables, it is estimated that a Limited Partner could
expect to receive from $2.81 to $7.75 per $100 Unit upon immediate sale of the
Partnership Property Interests. In comparison, it is estimated that a Limited
Partner could expect to receive less than $1.00 per $100 Unit, discounted to
present value
15
($9.22 per $100 Unit in actual dollars on an undiscounted basis) over the life
of its Property Interests, approximately 17 years, if the Partnership continued
operations.
Such estimates are based on December 31, 1996 reserve estimates
assuming unescalated pricing throughout the remaining life of the properties in
which the Partnership owns an interest. The actual prices that will be received
and the associated costs may be more or less than those projected. See
"--Estimate of Liquidating Distribution Amount."
Reasons for the Proposal
The Managing General Partner believes that it is in the best interest
of the Partnership and the Limited Partners for the Partnership to sell its
properties at this time and to dissolve the Partnership.
Partnership Cash Flow; Potential Liquidating Distribution. Over the
past 19 months, the Partnership has received no net profits payments under the
NP/OR Agreement, principally due to the large amount of excess costs incurred
over a long period in connection with operation and enhancement of the oil and
gas properties in which the Partnership owns a non-operating interest. This
large balance of excess costs reduces significantly the value of the
Partnership's net profits interest, which will reduce the sales proceeds from
any sale of the Partnership's Property Interests. Depending upon the proceeds
from sale of the Partnership's Property Interests, there may be some small
amount available for a liquidating distribution. Current estimates of the range
of such liquidating distributions are significantly higher than the net present
value discounted at 10% per annum, of the Limited Partners' estimated
distributions to be received from continued operations of the Partnership for
the reminder of its term. A vote in favor of the proposal thus might have the
effect of making additional funds currently available to the Limited Partners.
As discussed below, prices of gas are expected to vary over the remaining life
of the Partnership and the likelihood of receiving the estimated price over the
life of the Partnership is subject to significant uncertainty. The Managing
General Partner believes that the ability to receive the estimated liquidating
distribution in one lump sum currently, rather than the estimated distributions
from continued operations over the remaining life of the Partnership, is one of
the benefits of the proposal.
Small Amount of Remaining Assets in Relation to Expenses. As of
December 31, 1996, approximately 72% of the Partnership's ultimate recoverable
reserves had been produced, and the Limited Partners' share of the Partnership's
interest in remaining reserves, before any reduction for costs, is estimated to
be less than 242,000 Mcfe. The Partnership's share of oil and gas reserves are
expected to continue to decline as remaining reserves are produced.
Distributions to partners have ceased and are not expected to recommence due to
excess costs. Declines in well production are based principally upon the
maturity of the wells, not on market factors. Each producing well requires a
certain amount of overhead costs, as operating and other costs are incurred
regardless of the level of production. Likewise, general and administrative
expenses such as compliance with the securities laws, producing reports to
partners and filing partnership tax returns do not decline as revenues decline.
It is expected that in future periods operating costs, excess operating costs
incurred which are offset before paying net profits to the Partnership, and
general and administrative expenses, which are relatively fixed amounts, may
exceed revenues. As a result of the depletion of the Partnership's oil and gas
reserves, the Managing General Partner believes the Partnership's asset base and
future net revenues no longer justify the continuation of operations.
Consequently, the Managing General Partner expects that the Partnership will
have to start selling a portion of its Property Interests to pay the expenses of
future operations and administration. By accelerating the liquidation of the
Partnership, those future administrative costs can be avoided.
16
Effect of Gas Prices on Value. The Managing General Partner believes
that the key factor affecting the Partnership's long-term performance has been
the decrease in oil and gas prices that occurred subsequent to the purchase of
the Partnership's properties. Additionally, prices are expected to continue to
vary widely over the remaining life of the Partnership, and such changes in gas
prices will affect future estimates of revenues from continued operations of the
Partnership. Based on 1996 year-end reserve calculations, the Partnership had
only about 28% of its ultimate recoverable reserves, before any reduction for
costs, remaining for future production. Because of this small amount of
remaining reserves, even if oil and gas prices were to increase in the future,
such increases would be unlikely to have a net positive impact on the total
return on investment to the partners in view of the expenses of the Partnership
as described above.
Potential of the Properties. Recovery in amounts great enough to
significantly impact the results of the Partnership's operations and the
ultimate cash distributions can only occur with the investment of new capital.
As provided in the Partnership Agreement, the Partnership expended all of the
partners' net commitments for the acquisition of Property Interests many years
ago, and it no longer has capital to invest in improvement of the properties
through secondary or tertiary recovery. No additional development activities are
contemplated by the Operating Partnership on the properties in which the
Partnership has a non-operating interest.
Limited Partners' Tax Reporting. Even though future distributions to
Partners are expected to cease, each Limited Partner will continue to have a
partnership income tax reporting obligation with respect to his Units as long as
the Partnership continues to exist. There is no trading market for the Units, so
Limited Partners generally are unable to dispose of their interests. See "The
Partnership - No Trading Market." The approval of the Proposal would also allow
the Managing General Partner to begin the winding up and dissolution of the
Partnership. Following the approval of the Proposal and the dissolution and sale
of the properties, the Limited Partners will recognize gain or loss or a
combination of both under the federal income tax laws. Thereafter, Limited
Partners will have no further tax reporting obligations with respect to the
Partnership. The dissolution of the Partnership will also allow Limited Partners
to take a capital loss deduction for syndication costs incurred in connection
with formation of the Partnership. See "Federal Income Tax Consequences."
The AWP Olmos Field
Of the Partnership's interest in remaining reserves (before including
any reduction for costs and excess costs), 76% of the PV-10 value of such
reserves is located in the AWP Olmos Field, located in McMullen County in South
Texas, approximately 87% of which are proven undeveloped reserves that cannot be
produced without additional capital expenditures. Of the Partnership's 1996
revenues attributable to production, 18% was from the AWP Olmos Field. Although
the AWP Olmos Field is the Managing General Partner's largest producing
property, the Partnership's interest in the AWP Olmos Field is immaterial in
relation to the Managing General Partner's interest in the field. The Managing
General Partner operated 240 wells and had an acreage position of approximately
35,000 net acres in the AWP Olmos Field as of December 31, 1996. The General
Partner has been an operator in the field since 1989 and has extensive
experience with the field. Approximately 87% of the Partnership's remaining
reserves (not including any reduction for costs and excess costs) in the AWP
Olmos Field are undeveloped, which makes such reserves less valuable to the
Partnership, which does not have sufficient funds to drill to develop such
reserves. On the other hand, in its position as operator of these properties,
the Managing General Partner is in a position to provide information to J.R.
Butler and Company ("Consultant"), an independent petroleum geological firm,
that will allow Consultant to fully evaluate and give value to these behind-pipe
reserves.
17
Auction Procedure
The properties to be sold at auction include the Partnership's Property
Interest in the AWP Olmos Field. Because of the inherent conflict of interest
between the Managing General Partner's fiduciary duty to the Partnership to
obtain the highest price for the sale of the AWP Property Interest, and the
Managing General Partner's interest as a buyer of such Properties, the Managing
General Partner has developed a procedure to address these conflicts of interest
in bidding on such property. At auction of this Property Interest, a minimum
price will be set for sale of the Operating Partnership's working interest and
the Partnership's Property Interest in the AWP Olmos Field. This minimum price
will be based upon the highest fair market value provided by the Consultant,
J.R. Butler, for the AWP Olmos Field Property Interests. Bids over that price
from third parties will be accepted at auction. If a third party offers to
purchase the AWP Properties at auction for a price equal to or in excess of the
minimum amount the Managing General Partner is willing to pay, they will be sold
to the third party. If no third party purchases either of these Property
Interests at auction, then the Managing General Partner will purchase those
interests for the fair market value price that constituted the minimum bid for
the auction.
If the Managing General Partner determines it is interested in buying
other Property Interests owned by the Partnership if no higher price is bid at
auction, then the same procedure will be used, in each case with the minimum bid
amount to be based upon an independent appraisal of the value of the Property
Interest by J.R. Butler, the independent Consultant, with the property to be
offered at auction to third parties before the Managing General Partner can
purchase these Property Interests for the minimum price, and then only if no
higher price is received from third parties. The Managing General Partner will
not purchase any Property Interests from the Partnership in a negotiated
transaction.
The Consultant selected by the Managing General Partner to provide the
fair market value opinion was chosen through a process whereby several
independent consulting firms were interviewed by the Managing General Partner.
The Managing General Partner determined that having a single independent
appraisal of certain Property Interests to establish a minimum price at which
such properties could be sold at auction would be adequate protection against
conflicts of interest in any potential sale of such Property Interests to the
Managing General Partner. Therefore, the Managing General Partner deemed such
process to be a better use of Partnership resources than the retention of
multiple appraisers to determine minimum prices to be based upon the highest or
average value determined by the various appraisers.
Fair Market Value Opinion of J.R. Butler & Company
The fair market value opinion ("Opinion") of the Consultant states that
in the opinion of the Consultant, the aggregate market value of the
Partnership's hydrocarbon reserves and future net revenues as of January 1,
1997, from the AWP Properties, in each case before reduction for any excess
costs, is approximately $138,600. If the Partnership continues to operate with
no sales of properties, it would not recognize these values because of the need
to reduce any potential payments under the net profits interest by the amount of
excess costs incurred by the Operating Partnership in relation to the properties
in which the Partnership has an interest. The Opinion does not in any manner
address the underlying business decision to sell these Property Interests.
Moreover, the Opinion is necessarily based upon market, economic and other
conditions as they existed on, and could be evaluated as of January 1, 1997.
Consultant prepared the reserves and future performance estimates
utilizing standard petroleum engineering methods. For properties with sufficient
production history, reserves estimates and rate projections were based primarily
on extrapolation of established performance trends and reconciled, whenever
possible,
18
with volumetric and/or material balance calculations. For the undeveloped
locations, reserves were determined by a combination of volumetric calculations
(geologic mapping) and analogy. The Opinion states that volumetrically
determined reserves or those determined by analogy are generally subject to
greater qualifications than reserves estimates supported by established
production decline curves and/or material balance calculations. Consultant
performed the determination and classification of reserves (with exception of
the escalated prices and costs) in accordance with Securities and Exchange
Commission guidelines. The definitions used by Consultant also conform to those
promulgated by the Society of Petroleum Engineers (SPE) and the Society of
Petroleum Evaluation Engineers (SPEE).
Basic evaluation data used by Consultant, including production data,
estimates of drilling, completion and workover costs and operating costs were
obtained principally from the Managing General Partner. Gas and liquid prices
were obtained from averaging the actual prices received by the Managing General
Partner in 1996 through the month of October. The value of the wet gas stream
was reflected by the Btu-adjusted gas price for each well. An additional
adjustment in gas prices included a 5% reduction to reflect lease use. The
estimates of future net revenue prepared by Consultant consisted of those
revenues expected to be realized from the sale of the estimated reserves after
deduction of royalties, ad valorem and production taxes, direct operating costs,
excess costs and required capital expenditures, when applicable. Future net
revenues used by Consultant were determined before the deduction of federal
income tax. Consultant prepared market value estimates by applying qualitative
risk adjustments considered by Consultant to be appropriate for the various
reserves categories and "profit factors" (as applicable) against the spread of
future net revenue values obtained from three pricing scenarios (one
non-escalated and two escalation assumptions) and two present value discount
rates of 10% and 17%.
The reserves and the resulting "value estimates" included in the study
by Consultant are not exact quantities. Future conditions may affect the
recovery of estimated reserves and revenue, and all categories of reserves may
be subject to revision and/or reclassification as more performance and well data
become available. Furthermore, the Opinion states that any oil or gas reserves
estimate or forecast of production and income is a function of engineering and
geological interpretation and judgment and that such estimates should be used
with the understanding that additional information obtained subsequent to a
study may justify revisions which could increase or decrease the original
estimates of reserves and value.
Consultant is an independent consulting firm as provided in the
Standards Pertaining to the Estimating and Auditing of Oil and Gas Reserves
Information promulgated by the SPE. Neither Consultant nor any of its personnel
have any direct or indirect interest in the Managing General Partner or the
Partnership and Consultant's compensation was not contingent upon the results of
its reserves estimates, cash flow analyses or market value opinion resulting
from its review of the Partnership properties.
In preparing the Opinion, Consultant assumed the accuracy and
completeness of the financial and other information provided to it by the
Managing General Partner or which were publicly available and did not attempt to
independently verify such information. Consultant did not make field inspections
or judgments relative environmental or other legal liabilities.
Simultaneous Proposal to Operating Partnerships
Simultaneously with this proposal to the Partnership's Limited Partners
to sell all of its Property Interests, a similar proposal is being made to the
limited partners of the companion Operating Partnership which owns the working
interest in the same properties in which the Partnership owns a non-operating
interest. If both
19
Partnerships approve the proposal, then the working interest and non-operating
interest will be sold simultaneously.
If the Partnership approves the proposal but its companion Operating
Partnership does not, then the Managing General Partner will attempt to sell the
Non-Operating Interest owned by the Partnership to a third party. If no economic
sale can be made to a third party, which may occur due to the difficulty in
selling a net profits interest in a property when operating and spending
decisions are controlled by another entity and when excess costs exist, then the
Managing General Partner will get a fair market appraisal of the value of the
Partnership's Property Interests and will purchase the Partnership's
non-operating interests itself for the highest price for which the Property
Interests are appraised. The Managing General Partner intends to obtain any such
fair market value appraisal from J.R. Butler & Company.
If the Partnership does not approve the proposal but its companion
Operating Partnership approves the proposal to sell its properties, then the
Operating Partnership will be forced to sell its working interests in its
properties subject to the net profits interest owned by the Partnership which
burdens the Operating Partnership's properties. Again this may affect the
saleability of the Operating Partnership's properties due to the burden on cash
flow caused by the existence of the Partnership's net profits interest. If this
burden prevents an economic sale to a third party, then the Managing General
Partner will again obtain a third party appraisal of the Operating Partnership's
properties and purchase those Property Interests itself.
Therefore the likelihood of sale of the Partnership's Property
Interests will be significantly affected by the ability of the Partnership and
its companion Operating Partnership to sell their ownership interests in the
same properties at approximately the same time, which in turn is dependent upon
approval of the proposal being made to the Partnership and the similar proposal
being made simultaneously to the companion Operating Partnership. Failure to
approve the proposal by either partnership could significantly adversely affect
the sale of properties by the other partnership to the NP/OR Agreement.
Steps to Implement the Proposal
Following the approval of the Proposal, the Managing General Partner
intends to take the following steps to implement it:
1. Make available to the appropriate persons (that is,
the third party, if any, handling the negotiated
sales and/or the auction house and prospective
purchasers) the following types of data:
o Engineering and Geological Data
- Production curve
- Completion report
- Historical production data
- Engineering well files
- Geological maps (if available)
- Logs (if available)
o Land/Legal Data
- Net Profits Interest schedule for all
properties
- Land files
- Payout data
20
o Accounting Data
- Lease operating statements by well
- Gas marketing data
- Oil marketing data
- Gas balancing data
2. Pay or provide for payment of the Partnership's
liabilities and obligations to creditors (See --
"Liquidation") using the Partnership's cash on hand
and proceeds from the sale of Partnership properties;
3. Conduct a final accounting in accordance with the
Partnership Agreement;
4. Cause final Partnership tax returns to be prepared
and filed with the Internal Revenue Service and
appropriate state taxing authorities;
5. Distribute to the Limited Partners final Form K-1 tax
information; and
6. File a Certificate of Cancellation on behalf of the
Partnership with the Secretary of State of the State
of Texas.
Auction. The Managing General Partner (or a third party seller) intends
to engage the O&G Clearinghouse or another similar company to conduct live
auctions for the sales working interests of the Operating Partnership and the
non-operating interests of the Partnership. The O&G Clearinghouse (as well as
other such auction companies) is in the business of conducting auctions for oil
and gas properties. The O&G Clearinghouse establishes a data room, which they
leave open for a period of time (generally three to four weeks), after which
they hold a live auction. The O&G Clearinghouse requires advance registration
for all bidders. Bidders may participate by invitation only, after having
qualified as knowledgeable and sophisticated parties routinely or actively
engaged in the oil and gas business. The O&G Clearinghouse publishes a brochure
regarding the properties. The O&G Clearinghouse is headquartered in Houston,
Texas. In auctions conducted by the O&G Clearinghouse, properties are generally
grouped into small packages with a single field often comprising a property.
Estimated Selling Costs. The expenses associated with the auction
process (auctioneer's fee plus advertising fee) is expected to be approximately
7% of the sales price received. This does not include internal costs of the
Managing General Partner with respect to the sales, nor fees owed to third
parties for services incident to the sale. For example, if the Managing General
Partner engaged a third party to sell the properties, this would entail an
additional fee (although in such a case the Managing General Partner's internal
costs would be lower). This also does not include the costs of the proxy
solicitation. See "General Information-Solicitation."
Negotiated Sale. Although the Managing General Partner intends to offer
the Partnership's and the Operating Partnership's Property Interests at auction,
it is possible that the Managing General Partner or a third party engaged for
the purpose of selling the Partnership's assets may approach other oil and gas
companies and negotiate a sale of certain Property Interests. The Managing
General Partner (or such third party) may solicit bids on the oil and gas
properties for which the Managing General Partner is the operator. If the
Managing General Partner (or third party) solicits bids, it will provide all
interested parties with information about the properties needed to bid on such
properties. Such information would include raw data and historical information
on all of the operated properties that any of the partnerships managed by the
21
Managing General Partner intends to sell. See "--Steps to Implement the
Proposal." The data will be organized by property. Neither the Managing General
Partner or its affiliates nor any of the partnerships managed by the Managing
General Partner will purchase any of the properties in this manner. In the event
of a bid that is lower than a price the Managing General Partner believes is
reasonable, it may sell the property to a third party bidder for such lower bid
price, use another method of sale such as an auction, or have the Partnership
continue to hold such property for a while longer. If the property has no
appreciable value, which is likely to occur only if a Property Interest has no
reserves but requires expenditures to plug and abandon wells, the Managing
General Partner may dispose of such property by conveying it to the operator or
by conveying the property to itself, for no consideration. Determinations as to
whether any such conveyances will be made, including conveyances to the Managing
General Partner in such cases, will be made solely by the Managing General
Partner. Except as described below with respect to Property Interests in the AWP
Olmos Field, in no event is the Managing General Partner obligated to purchase
any of the Property Interests.
See "--AWP Olmos Field."
Other. Any sale of the Partnership Property Interests and the
subsequent liquidating distributions to the Limited Partners, if any, pursuant
to the Proposal will be taxable transactions under federal and state income tax
laws. See "Federal Income Tax Consequences."
Impact on the Managing General Partner
The Managing General Partner may purchase certain of the Partnership's
Property Interests if the Proposal is approved. In addition, the Managing
General Partner will be economically impacted by liquidation in at least two
ways. First, to the extent of its ownership of Units, liquidation will have the
same effect on it as on the Limited Partners. See "--Estimate of Liquidating
Distribution Amount," and "--Estimated Share of Limited Partners' Net
Distributions from Continued Operations." Second, because of the dissolution and
liquidation of the Partnership, together with liquidation of other partnerships,
the Managing General Partner will no longer hold the majority interest in
various wells. Different operators are likely to be selected and the Managing
General Partner will therefore lose revenues that it currently realizes from its
role as operator for those properties. The Managing General Partner is making
its recommendations as set forth below, on the basis of its fiduciary duty to
the Limited Partners, rather than on the basis of the direct economic impact on
the Managing General Partner.
Recommendation of the Managing General Partner
For the foregoing reasons, the Managing General Partner believes that
it is in the best interests of the Limited Partners to dissolve and liquidate
the Partnership. The Managing General Partner believes, based on the estimates
of liquidating distributions and distributions from continued operations
contained herein, that it is in the best interests of the Limited Partners to
sell the Partnership's remaining properties to conclude Partnership activities.
Liquidation will allow the Limited Partners to receive any available liquidating
distribution currently, rather than receiving estimated distributions over the
remaining life of the Partnership, so as not to be subjected to the risk of
future negative changes in oil and gas prices during the lengthy period of 17
years necessary to produce the Partnership's remaining reserves. There is
virtually no prospect for further distributions to Limited Partners without
capital to develop behind pipe and undeveloped reserves, especially given the
large amount of excess costs over future net revenues and the relatively fixed
nature of general and administrative and current operating expenses. Continued
operations of the Partnership would mean continuation of the additional costs
incurred by the Limited Partners, including the costs associated with inclusion
of information from the Schedule K-1 relating to the Partnership in their
personal income tax returns. Termination of the Partnership will allow
preparation of a final tax return, and certain additional deductions may be
generated in connection with this termination.
22
The Managing General Partner recommends that the Limited Partners vote
FOR the Proposal.
FEDERAL INCOME TAX CONSEQUENCES
General
The following summarizes certain federal income tax consequences to the
Limited Partners arising from the Partnership's proposed sale of its oil and gas
properties and liquidation pursuant to the Proposal. This discussion is not
based upon an opinion of counsel and it is possible that different results than
those described may occur. Statements of legal conclusions regarding tax
consequences are based upon relevant provisions of the Internal Revenue Code of
1986, as amended (the "Code"), and accompanying Treasury Regulations, as in
effect on the date hereof, upon private letter rulings dated October 6, 1987 and
August 22, 1991, upon reported judicial decisions and published positions of the
Internal Revenue Service (the "Service"), and upon further assumptions that the
Partnership constitutes a partnership for federal tax purposes and that the
Partnership will be liquidated as described herein. The laws, regulations,
administrative rulings and judicial decisions which form the basis for
conclusions with respect to the tax consequences described herein are complex
and are subject to prospective or retroactive change at any time and any change
may adversely affect Limited Partners.
This summary does not describe all the tax aspects which may affect
Limited Partners because the tax consequences may vary depending upon the
individual circumstances of a Limited Partner. It is generally directed to
Limited Partners that are qualified plans and trusts under Code Section 401(a)
and individual retirement accounts ("IRAs") under Code Section 408 (collectively
"Tax Exempt Plans") and that are the original purchasers of the Units and hold
interests in the Partnership as "capital assets" (generally, property held for
investment). Each Limited Partner that is not a tax-exempt Plan is strongly
encouraged to consult its own tax advisor as to the rules which are specifically
applicable to it. Except as otherwise specifically set forth herein, this
summary does not address foreign, state or local tax consequences, and is
inapplicable to nonresident aliens, foreign corporations, debtors under the
jurisdiction of a court in a case under federal bankruptcy laws or in a
receivership, foreclosure or similar proceeding, or an investment company,
financial institution or insurance company.
Tax Treatment of Tax Exempt Plans
Sale of Property Interest and Liquidation of Partnership
The Managing General Partner is proposing to sell the Partnership's
Property Interest as well as any other royalties and overriding royalties the
Partnership may own. After the sale of the properties, the Partnership's assets
will consist solely of cash, which will be distributed to the partners in
complete liquidation of the partnership.
Tax Exempt Plans are subject to tax on their unrelated business taxable
income ("UBTI"). UBTI is income derived by an organization from the conduct of a
trade or business that is substantially unrelated to its performance of the
function that constitutes the basis of its tax exemption (aside from the need of
such organization for funds). Royalty interests, dividends, interest and gain
from the disposition of capital assets are generally excluded from
classification as UBTI. Notwithstanding these exclusions, royalties, interest,
dividends, and gains will create UBTI if they are received from debt-financed
property, as discussed below.
23
The Internal Revenue Service has previously ruled that the
Partnership's Property Interest, as structured under the NP/OR, is a royalty, as
are any overriding royalties the Partnership may own. To the extent that the
Property Interest is not debt-financed property, neither the sale of the
Property Interest by the Partnership nor the liquidation of the Partnership is
expected to cause Limited Partners that are Tax Exempt Plans to recognize
taxable gain or loss for federal income tax purposes, even though there may be
gain or loss upon the sale of the Property Interest for federal income tax
purposes.
Debt-Financed Property
Debt-financed property is property held to produce income that is
subject to acquisition indebtedness. The income is taxable in the same
proportion which the debt bears to the total cost of acquiring the property.
Generally, acquisition indebtedness is the unpaid amount of (i) indebtedness
incurred by a Tax Exempt Plan to acquire an interest in a partnership, (ii)
indebtedness incurred in acquiring or improving property, or (iii) indebtedness
incurred either before or after the acquisition or improvement of property or
the acquisition of a partnership interest if such indebtedness would not have
been incurred but for such acquisition or improvement, and if incurred
subsequent to such acquisition or improvement, the incurrence of such
indebtedness was reasonably foreseeable at the time of such acquisition or
improvement. Generally, property acquired subject to a mortgage or similar lien
is considered debt-financed property even if the organization acquiring the
property does not assume or agree to pay the debt. Notwithstanding the
foregoing, acquisition indebtedness excludes certain indebtedness incurred by
Tax Exempt Plans other than IRAs to acquire or improve real property. Although
this exception may apply, its usefulness may be limited due to its technical
requirements and the fact that the debt excluded from classification as
acquisition indebtedness appears to be debt incurred by a partnership and not
debt incurred by a partner directly or indirectly in acquiring a partnership
interest.
If a Limited Partner that is a Tax Exempt Plan borrowed to acquire its
Partnership interest or had borrowed funds either before or after it acquired
its Partnership Interest, its pro rata share of Partnership gain on the sale of
the Property Interest may be UBTI. The Managing General Partner has represented
that (i) the Partnership did not borrowed money to acquire its Property
Interest, and (ii) that the Property Interest of the Partnership is not subject
to any debt, mortgages or similar liens that will cause the Partnership's
Property Interest to be debt-financed property under Code Section 514. If a Tax
Exempt Plan has not caused its Partnership Interest to be debt-financed
property, and based upon the representations of the Managing General, the
Property Interest is not expected to be considered debt-financed property.
Tax Treatment of Limited Partners Subject to Federal Income Tax Due to
Debt-financing or Who are Not Tax Exempt Plans
All references hereinbelow to Limited Partners refers solely to Limited
Partners that either are not Tax Exempt Plans or are Tax Exempt Plans whose
Partnership Interest is debt-financed. To the extent that a Tax Exempt Plan's
Partnership Interest is only partially debt-financed, the percentage of gain or
loss from the sale of the Property Interest and liquidation of the Partnership
that will be subject to taxation as UBTI is the percentage of the Tax Exempt
Plan's share of Partnership income, gain, loss and deduction adjusted by the
following calculation. Section 514(a)(1) includes, with respect to each
debt-financed property, as gross income from an unrelated trade or business an
amount which is the same percentage of the total gross income derived during the
taxable year from or on account of the property as (i) the average acquisition
indebtedness for the taxable year with respect to the property is of (ii) the
average amount of the adjusted basis of the property during the period it is
held by the organization during the taxable year (the "debt/basis percentage").
24
A similar calculation is used to determine the allowable deductions.
For each debt-financed property, the amount of the deductions directly
attributable to the property are multiplied by the debt/basis percentage, which
yields the allowable deductions. If the average acquisition indebtedness is
equal to the average adjusted basis, the debt/basis percentage is zero and all
the income and deductions are included within UBTI. The debt/basis percentage is
calculated on an annual basis.
Tax Exempt Plans with debt-financed Partnership Interests should
consult their tax advisors to determine the portion of gain or loss that may be
recognized for federal income tax purposes. The following discussion of the tax
consequences of the sale of the Partnership Property Interest and the
liquidation of the Partnership assumes that all of a Limited Partner's income,
gain, loss and deduction from the Partnership is subject to federal taxation.
Taxable Gain or Loss Upon Sale of Properties
A Limited Partner will realize and recognize gain or loss, or a
combination of both, upon the Partnership's sale of its properties prior to
liquidation. The amount of gain realized with respect to each property, or
related asset, will be an amount equal to the excess of the amount realized by
the Partnership and allocated to the Limited Partner (i.e., cash or
consideration received) over the Limited Partner's adjusted tax basis for such
property. Conversely, the amount of loss realized with respect to each property
or related asset will be an amount equal to the excess of the Limited Partner's
tax basis over the amount realized by the Partnership for such property and
allocated to the Limited Partner. It is projected that taxable loss will be
realized upon the sale of Partnership properties and that such loss will be
allocated among the Limited Partners in accordance with the Partnership
Agreement. The Partnership Agreement includes an allocation provision that
requires allocations pursuant to a liquidation be made among Partners in a
fashion that equalizes capital accounts of the Partners so that the amount in
each Partner's capital account will reflect such Partner's sharing ratio of
income and loss. The extent to which capital accounts can be equalized, however,
is limited by the amount of gain and loss available to be allocated.
Because the properties owned by the Partnership are properties used in
a trade or business, the character of gains and losses realized by the Partners
generally will be governed by Section 1231 of the Code. Deductions for
intangible drilling and development costs, depletion and depreciation expenses
with respect to these properties, however, may be subject to recapture as
ordinary income, in an amount which does not exceed gain recognized. Code
Section 1254 recaptures all intangible drilling and development costs and
depletion (to the extent of basis) as ordinary income. The Partnership did not
incur material amounts of intangible drilling and development costs, and
accordingly the recapture of same is not expected to be material if gain is
recognized.
Realized gains and losses generally must be recognized and reported in
the year the sale occurs. Accordingly, each Limited Partner will realize and
recognize his allocable share of gains and losses in his tax year within which
the Partnership properties are sold. Each Limited Partner's recognized allocable
share of the net Partnership 1231 gains or losses must be netted with that
Limited Partner's individual section 1231 gains and losses recognized during the
year in order to determine the character of such net gains or net losses under
section 1231. Net gains will be treated as capital gains except to the extent
recharacterized as ordinary income due to recapture and net losses will be
treated as ordinary losses.
25
Liquidation of the Partnership
After sale of its properties, the Partnership's assets will consist
solely of cash which it will distribute to its partners in complete liquidation.
The Partnership will not realize gain or loss upon such distribution of cash to
its partners in liquidation. If the amount of cash distributed to a Limited
Partner in liquidation is less than such Limited Partner's adjusted tax basis in
his Partnership interest, the Limited Partner will realize and recognize a
capital loss to the extent of the excess. If the amount of cash distributed is
greater than such Limited Partner's adjusted tax basis in his Partnership
interest, the Limited Partner will recognize a capital gain to the extent of the
excess. Because each Limited Partner paid a portion of syndication and formation
costs upon entering the Partnership, neither of which costs were deductible
expenses, it is anticipated that liquidating distributions to Limited Partners
will be less than such Limited Partners' bases in their Partnership interests
and thusly will generate capital losses.
Capital Gains Tax
Net long-term capital gains of individuals, trusts and estates will be
taxed at a maximum rate of 28%, while ordinarily income, including income from
the recapture of intangible drilling and development costs, depreciation and
depletion, will be taxed at a maximum rate depending on that Limited Partner's
taxable income of 36% or 39.6%. With respect to net capital losses, other than
Section 1231 net losses, the amount of net long-term capital loss that can be
utilized to offset ordinary income will be limited to the sum of net capital
gains from other sources recognized by the Limited Partner during the tax year,
plus $3,000 ($1,500, in the case of a married individual filing a separate
return). The excess amount of such net long-term capital loss may be carried
forward and utilized in subsequent years subject to the same limitations.
Corporations are taxed on net long-term capital gains at their ordinary Section
11 rates and are allowed to carry net capital losses back three years and
forward five years.
Passive Loss Limitations
Limited Partners that are individuals, trusts, estates, or personal
service corporations are subject to the passive activity loss limitations rules
that were enacted as part of the Tax Reform Act of 1986.
A Limited Partner's allocable share of Partnership income, gain, loss,
and deduction is treated as derived from a passive activity, except to the
extent of Partnership portfolio income, which includes interest, dividends,
royalty income and gains from the sale of property held for investment purposes.
A Limited Partner's allocable share of any gain realized on sale of Partnership
properties (other than gain from the sale of portfolio investments) will be
characterized as passive activity income that may be offset by passive activity
losses from other passive activity investments. Moreover, because the sale of
properties and liquidation of the Partnership will terminate the Limited
Partner's interest in the passive activity, a Limited Partner's allocable share
of any loss (i) previously realized as a Limited Partner in the Partnership and
suspended because of its passive characterization, (ii) realized on the
liquidating sale of Partnership properties, or (iii) realized by the Limited
Partner upon liquidation of his Partnership interest, will not be characterized
as losses from a passive activity.
THE FOREGOING DISCUSSION IS INTENDED TO BE A SUMMARY OF CERTAIN INCOME
TAX CONSIDERATIONS OF THE SALE OF PROPERTIES AND LIQUIDATION. EACH LIMITED
PARTNER SHOULD CONSULT ITS OWN TAX ADVISOR CONCERNING ITS PARTICULAR TAX
CIRCUMSTANCES AND THE FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX CONSEQUENCES
TO IT OF THE SALE OF PROPERTIES AND THE LIQUIDATION OF THE PARTNERSHIP.
26
BUSINESS OF THE PARTNERSHIP
The Partnership is a Texas limited partnership formed March 31, 1991.
Units in the Partnership are registered under Section 12(g) of the Securities
Exchange Act of 1934. In addition to the following information about the
business of the Partnership, see the attached Annual Report on Form 10-K for the
year ended December 31, 1996, and its quarterly report on Form 10-Q for the
second quarter of 1997, both included herewith.
Reserves
For information about the Partnership's interest in oil and
gas reserves and future net revenue expected from the production of those
reserves as of December 31, 1996, see the attached report, which was audited by
H. J. Gruy & Associates, Inc., independent petroleum consultants. It should be
noted that the reserve estimates in the Annual Report on Form 10-K reflect the
entire Partnership reserves and that the reserve report in the attached letter
from H. J. Gruy & Associates, Inc. reflects only the Limited Partners' share of
the Partnership's estimated oil and gas reserves. Neither of these reports
reflect the Partnership's share of existing and future costs of operations which
must be debited from the Partnership's interest in reserves in order to
determine the Partnership's net interest in reserves by virtue of its net
profits interest. This report has not been updated to include the effect of
production since year-end 1996, nor has the annual review of estimated
quantities done each year-end taken place for 1997.
There are numerous uncertainties inherent in estimating
quantities of proved reserves and in projecting the future rates and timing of
production, future costs and future development plans. Oil and gas reserve
engineering must be recognized as a subjective process of estimating underground
accumulations of oil and gas that cannot be measured in an exact way, and
estimates of other engineers might differ from those in the attached report. The
accuracy of any reserve estimate is a function of the quality of available data
and of engineering and geological interpretation and judgment. Results of
drilling, testing and production subsequent to the date of the estimate may
justify revision of such estimate, and, as a general rule, reserve estimates
based upon volumetric analysis are inherently less reliable than those based on
lengthy production history. Accordingly, reserve estimates are often different
from the quantities of oil and gas that are ultimately recovered.
In estimating the Partnership's interest in oil and natural
gas reserves, the Managing General Partner has used flat pricing based upon
estimates of 1997 average prices, without escalation, except in those instances
where fixed and determinable gas price escalations are covered by contracts,
limited to the price the Partnership reasonably expects to receive. These
pricing assumptions vary from those mandated by the Securities and Exchange
Commission ("SEC") for reserves disclosures under applicable SEC rules, which
require use of prices at year-end, although the discount rate and lack of
escalation are the same. If estimates of reserves and future net revenues had
been prepared using December 31, 1996 prices, as mandated by the SEC, reserves,
future net revenues and the present value thereof would be significantly higher.
The Managing General Partner has determined not to use these higher prices
because current estimates of 1997 average prices more accurately reflect prices
purchasers of properties are willing to pay, rather than higher values which do
not reflect the decrease in prices since year-end 1996. For example, the
weighted average price of gas received by the Partnership during the first six
months of 1997 was $2.69 per Mcf, as compared to $4.83 per Mcf at December 31,
1996. The Managing General Partner does not believe that any favorable or
adverse event causing a significant change in the estimated quantity of proved
reserves set forth in the attached report has occurred between December 31,
1996, and the date of this Proxy Statement.
27
Future prices received for the sale of the Partnership's
products may be higher or lower than the prices used in the Partnership's
estimates of oil and gas reserves; the operating costs relating to such
production may also increase or decrease from existing levels.
The Managing General Partner
Subject to certain limitations set forth in the Partnership Agreement,
the Managing General Partner has full, exclusive and complete discretion in the
management and control of the business of the Partnership. The Managing General
Partner has general liability for the debts and obligations of the Partnership.
The Managing General Partner is engaged in the business of oil and gas
exploration, development and production, and the Managing General Partner serves
as the general partner of a number of other oil and gas income and pension
partnerships. The Managing General Partner's common stock is traded on the New
York and Pacific Stock Exchanges.
The principal executive offices of the Managing General Partner are
located at 16825 Northchase Drive, Suite 400, Houston, Texas 77060, telephone
number (281) 874-2700.
Transactions Between the Managing General Partner and the Partnership
Under the Partnership Agreement, the Managing General Partner has
received certain compensation for its services and reimbursement for
expenditures made on behalf of the Partnership, which was paid at closing of the
offering of Units, in addition to revenues distributable to the Managing General
Partner with respect to its general partnership interest or limited partnership
interests it has purchased. In addition to those revenues, compensation and
reimbursements, the following summarizes the transactions between the Managing
General Partner and the Partnership pursuant to which the Managing General
Partner has been paid or has had its expenses reimbursed on an ongoing basis:
o The Managing General Partner has received management fees of
$36,225, internal acquisition costs reimbursements of $76,362
and formation costs reimbursements of $28,980 from the
Partnership from inception through June 30, 1997.
o The Managing General Partner receives per-well monthly
operating fees from the Operating Partnership for certain
producing wells in which the Partnership owns Property
Interests and for which it serves as operator in accordance
with the joint operating agreements for each of such wells.
The fees that are set in the joint operating agreements are
negotiated with the other working interest owners of the
properties.
o The Managing General Partner is entitled to be reimbursed for
general and administrative costs incurred on behalf of and
allocable to the Partnership, including employee salaries and
office overhead. Amounts are calculated on the basis of
Limited Partner capital contributions to the Partnership
relative to limited partner contributions of all partnerships
for which the Managing General Partner serves as Managing
General Partner. However, in both 1995 and 1996, the Managing
General Partner, under authority provided in the Partnership
Agreement, determined in its discretion that the Partnership
would neither accrue nor pay the general and administrative
overhead allowance to which the Managing General Partner is
otherwise entitled under the Partnership Agreement, thus
foregoing receipt of any amounts attributable to that
allowance since that time. These amounts were not material to
the Partnership. Prior to that time, the Managing General
Partner
28
had received $87,102 in the general and administrative
overhead allowance. Given the lack of current revenues of the
Partnership, it is unlikely that such allowance will be paid
in future periods.
o The Managing General Partner has been reimbursed $5,668 in
direct expenses, all of which was billed by, and then paid
directly to, third party vendors.
No Trading Market
There is no trading market for the Units, and none is expected to
develop. Under the Partnership Agreement, the Limited Partners have the right to
present their Units to the Managing General Partner for repurchase at a price
determined in accordance with the formula established by Article XVIII of the
Partnership Agreement. Originally 173 Limited Partners invested in the
Partnership. Through December 31, 1996, the Managing General Partner has
purchased 175 Units from Limited Partners pursuant to the right of presentment.
As of August 15, 1997, there were 169 Limited Partners (excluding the Managing
General Partner). The Managing General Partner does not have an obligation to
repurchase Limited Partner interests pursuant to this right of presentment but
merely an option to do so when such interests are presented for repurchase.
Principal Holders of Limited Partner Units
The Managing General Partner holds 1.21% of the Units of the
Partnership. To the knowledge of the Managing General Partner, there is no
holder of Units that holds more than 5% of the Units.
Approvals
No federal or state regulatory requirements must be satisfied or
approvals obtained in connection with the sale of the Partnership's Property
Interests.
Legal Proceedings
The Managing General Partner is not aware of any material pending legal
proceedings to which the Partnership is a party or of which any of its property
is the subject.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE AND ATTACHMENT OF
SUCH INFORMATION HERETO
The Partnership's Annual Report on Form 10-K for the year ended
December 31, 1996, and its quarterly report on Form 10-Q for the second quarter
of 1997, which are attached hereto and incorporated herein by reference.
29
OTHER BUSINESS
The Managing General Partner does not intend to bring any other
business before the Meeting and has not been informed that any other matters are
to be presented at the Meeting by any other person.
SWIFT ENERGY COMPANY
as Managing General Partner of
Swift Energy Managed Pension Assets
Partnership 1991-A, Ltd.
/s/ John R. Alden
-------------------------------------
John R. Alden
Secretary
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