<PAGE>
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________________ to ____________________
Commission File number 33-37983-34
SWIFT ENERGY OPERATING PARTNERS 1995-B, LTD.
(Exact name of registrant as specified in
its Certificate of Limited Partnership)
TEXAS 76-0486527
(State of Organization) (I.R.S. Employer Identification No.)
16825 Northchase Dr., Suite 400
Houston, Texas 77060
(281) 874-2700
(Address and telephone number of principal executive offices)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods that the registrant was
required), and (2) has been subject to such filing requirements for the past 90
days.
Yes X No
---- ----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
Registrant does not have an aggregate market value for its Limited Partnership
Interests.
Documents Incorporated by Reference
Document Incorporated as to
Registration Statement No. 33-37983 Items 1 and 13
on Form S-1
<PAGE>
TABLE OF CONTENTS
Form 10-K Annual Report
For the Period Ended December 31, 1996
SWIFT ENERGY OPERATING PARTNERS 1995-B, LTD.
<TABLE>
<CAPTION>
ITEM NO. PART I PAGE
<S> <C> <C>
1 Business I-1
2 Properties I-5
3 Legal Proceedings I-7
4 Submission of Matters to a Vote of
Security Holders I-7
PART II
5 Market Price of and Distributions on the
Registrant's SDIs and Related Interest
Holder Matters II-1
6 Selected Financial Data II-2
7 Management's Discussion and Analysis of
Financial Condition and Results of Operations II-2
8 Financial Statements and Supplementary Data II-2
9 Disagreements on Accounting and Financial
Disclosure II-2
PART III
10 Directors and Executive Officers of the
Registrant III-1
11 Executive Compensation III-2
12 Security Ownership of Certain Beneficial
Owners and Management III-2
13 Certain Relationships and Related Transactions III-2
PART IV
14 Exhibits, Financial Statement Schedules
and Reports on Form 8-K IV-1
OTHER
Signatures
</TABLE>
<PAGE>
SWIFT ENERGY OPERATING PARTNERS 1995-B, LTD.
PART I
Item 1. Business
General Description of Partnership
Swift Energy Operating Partners 1995-B, Ltd., a Texas limited
partnership (the "Partnership" or the "Registrant"), is a partnership formed
under a public serial limited partnership offering denominated Swift Depositary
Interests I (Registration Statement No. 33-37983 on Form S-1, originally
declared effective March 19, 1991, and amended effective May 1, 1992, April 1,
1993, April 19, 1994 and May 9, 1995 [the "Registration Statement"]). The
Partnership was formed effective December 14, 1995 under a Limited Partnership
Agreement dated December 14, 1995. The initial 178 investors made capital
contributions of $2,500,000. Investors in the Partnership hold Swift Depositary
Interests ("SDIs") representing beneficial ownership interests in the
Partnership.
The Partnership is principally engaged in the business of acquiring,
developing and, when appropriate, disposing of working interests in proven oil
and gas properties within the continental United States. The Partnership does
not engage in exploratory drilling. Each working interest held by the
Partnership entitles the Partnership to receive, in kind or in value, a share of
the production of oil and gas from the producing property, and obligates the
Partnership to participate in the operation of the property and to bear its
proportionate share of all operating costs associated therewith. The Partnership
typically holds less than the entire working interest in its producing
properties.
At December 31, 1996, the Partnership had expended or committed to
expend 6% of the Interest Holders' commitments in the acquisition and
development of producing properties, which properties are described under Item
2, "Properties," below. The Partnership's revenues and profits are derived
almost entirely from the sale of oil and gas produced from its properties and
from the sale of acquired oil and gas properties, when the sale of such
properties is economically preferable to continued operation.
The Partnership's business and affairs are conducted by its Managing
General Partner, Swift Energy Company, a Texas corporation ("Swift"). The
Partnership's Special General Partner, VJM Corporation, a California corporation
("VJM"), consults with and advises Swift as to certain financial matters. Swift
is the designated operator of many of the properties in which the Partnership
owns interests. The remaining properties are operated by industry operators
designated by the owners of a majority of the working interest in each property.
The general manner in which the Partnership acquires producing
properties and otherwise conducts its business is described in detail in the
Registration Statement under "Proposed Activities of the Partnerships," which is
incorporated herein by reference. The following is intended only as a summary of
the Partnership's manner of doing business and specific activities to date.
Manner of Acquiring Properties; Net Profits and Overriding Royalty Interest
Agreement
For the sake of legal and administrative convenience, the producing
properties owned by the Registrant have typically been acquired initially by
Swift, which then conveyed ownership of each such property to the Registrant.
The Registrant acquires producing properties from Swift at the property
acquisition cost of such properties to Swift, as adjusted for intervening
operations
The Registrant entered into a Net Profits and Overriding Royalty
Interest Agreement dated December 14, 1995, (the "NP/OR Agreement") with Swift
Energy Pension Partners 1995-B, Ltd. (the "Pension Partnership"). The Pension
Partnership is a Texas limited partnership that is also managed by Swift and
VJM. The Pension Partnership was formed to acquire nonoperating interests, such
as net profits, royalty and overriding royalty interests, in producing oil and
gas properties.
I-1
<PAGE>
SWIFT ENERGY OPERATING PARTNERS 1995-B, LTD.
Under the NP/OR Agreement, the Registrant and the Pension Partnership
have, in effect, combined their funds in acquiring producing properties; using
funds committed to the NP/OR Agreement by both partnerships, the Registrant
acquires producing properties, then promptly conveys nonoperating interests
therein to the Pension Partnership. The Registrant initially committed
$2,500,000 and the Pension Partnership initially committed $2,866,912 for
acquisitions under the NP/OR Agreement. The Registrant is obligated under the
NP/OR Agreement to convey to the Pension Partnership a 53% fixed net profits
interest and a variable overriding royalty interest in specified depths of every
producing property it acquires, except that (i) properties anticipated to
require significant development operations, and (ii) nonoperating interests
offered to the Registrant by third parties may be purchased by the registrant
outside the NP/OR Agreement, without participation by the Pension Partnership.
The Registrant is entitled to withdraw up to 30% of its committed funds under
the NP/OR Agreement for such acquisitions.
All properties acquired by the Registrant since the date of the NP/OR
Agreement have been acquired subject to the NP/OR Agreement and the nonoperating
interests created thereby. At December 31, 1996, the Registrant had not made any
withdrawals to acquire properties anticipated to require significant
development.
In accordance with its obligations under the NP/OR Agreement, as of
December 31, 1996 the Registrant had conveyed to the Pension Partnership a net
profits interest burdening certain depths of all producing properties acquired
by the Registrant since the date of the NP/OR Agreement. Typically, a net
profits interest in an oil and gas property entitles the owner to a specified
percentage share of the gross proceeds generated by the burdened property, net
of operating costs. The 53% net profits interest conveyed to the Pension
Partnership under the NP/OR Agreement differs from the typical net profits
interest in that it is calculated over the entire group of producing properties
acquired under the NP/OR Agreement; i.e., all operating costs attributable to
the burdened depths of such properties are aggregated, and the total is then
subtracted from the total of all gross proceeds attributable to such depths in
order to calculate the net profits to which the Pension Partnership is entitled.
The net profits interest conveyed to the Pension Partnership burdens only those
depths of each subject property which were evaluated to contain proved reserves
at the date of acquisition, to the extent such depths underlie specified surface
acreage.
The Registrant has also conveyed to the Pension Partnership under the
NP/OR agreement an overriding royalty interest in each property acquired since
the date of the NP/OR Agreement. An overriding royalty interest is a fractional
interest in the gross production (or the gross proceeds therefrom) of oil and
gas from a property, free of any exploration, development, operation or
maintenance expenses. Under the NP/OR Agreement, the overriding royalty interest
burdens the portions of each producing property that were evaluated at the date
of acquisition not to contain proved reserves.
Competition, Markets and Regulations
Competition
The oil and gas industry is highly competitive in all its phases. The
Partnership encounters strong competition from many other oil and gas producers,
many of which possess substantial financial resources, in acquiring economically
desirable Producing Properties.
Markets
The amounts of and price obtainable for oil and gas production from
Partnership Properties will be affected by market factors beyond the control of
the Partnership. Such factors include the extent of domestic production, the
level of imports of foreign oil and gas, the general level of market demand on a
regional, national and worldwide basis, domestic and foreign economic conditions
that determine levels of industrial production, political events in foreign
oil-producing regions, and variations in governmental regulations and tax laws
and the imposition of new governmental requirements upon the oil and gas
industry. There can be no assurance that oil and gas prices will not decrease in
the future, thereby decreasing net Revenues from Partnership Properties.
From time to time, there may exist a surplus of natural gas or oil
supplies, the effect of which may be to reduce the amount of hydrocarbons that
the Partnerships may produce and sell while such oversupply exists. In recent
years, initial steps have been taken to provide additional gas transportation
lines from Canada to the United States. If additional Canadian gas is brought to
the United States market, it could create downward pressure on United States gas
prices.
I-2
<PAGE>
SWIFT ENERGY OPERATING PARTNERS 1995-B, LTD.
Regulations
Environmental Regulation
The federal government and various state and local governments have
adopted laws and regulations regarding the control of contamination of the
environment. These laws and regulations may require the acquisition of a permit
by Operators before drilling commences, prohibit drilling activities on certain
lands lying within wilderness areas or where pollution arises and impose
substantial liabilities for pollution resulting from operations, particularly
operations near or in onshore and offshore waters or on submerged lands. These
laws and regulations may also increase the costs of routine drilling and
operation of wells. Because these laws and regulations change frequently, the
costs to the Partnership of compliance with existing and future environmental
regulations cannot be predicted. However, the Managing Partner does not believe
that the Partnership is affected in a significantly different manner by these
regulations than are its competitors in the oil and gas industry.
Federal Regulation of Natural Gas
The transportation and sale of natural gas in interstate commerce is
heavily regulated by agencies of the federal government. The following
discussion is intended only as a summary of the principal statutes, regulations
and orders that may affect the production and sale of natural gas from
Partnership Properties. This summary should not be relied upon as a complete
review of applicable natural gas regulatory provisions.
FERC Orders
Several major regulatory changes have been implemented by the Federal
Energy Regulatory Commission ("FERC") from 1985 to the present that affect the
economics of natural gas production, transportation and sales. In addition, the
FERC continues to promulgate revisions to various aspects of the rules and
regulations affecting those segments of the natural gas industry that remain
subject to the FERC's jurisdiction. In April 1992, the FERC issued Order No. 636
pertaining to pipeline restructuring. This rule requires interstate pipelines to
unbundle transportation and sales services by separately stating the price of
each service and by providing customers only the particular service desired,
without regard to the source for purchase of the gas. The rule also requires
pipelines to (i) provide nondiscriminatory "no-notice" service allowing firm
commitment shippers to receive delivery of gas on demand up to certain limits
without penalties, (ii) establish a basis for release and reallocation of firm
upstream pipeline capacity and (iii) provide non-discriminatory access to
capacity by firm transportation shippers on a downstream pipeline. The rule
requires interstate pipelines to use a straight fixed variable rate design. The
rule imposes these same requirements upon storage facilities.
FERC Order No. 500 affects the transportation and marketability of
natural gas. Traditionally, natural gas has been sold by producers to pipeline
companies, which then resold the gas to end-users. FERC Order No. 500 alters
this market structure by requiring interstate pipelines that transport gas for
others to provide transportation service to producers, distributors and all
other shippers of natural gas on a nondiscriminatory, "first-come, first-served"
basis ("open access transportation"), so that producers and other shippers can
sell natural gas directly to end-users. FERC Order No. 500 contains additional
provisions intended to promote greater competition in natural gas markets.
It is not anticipated that the marketability of and price obtainable
for natural gas production from Partnership Properties will be significantly
affected by FERC Order No. 500. Gas produced from Partnership Properties
normally will be sold to intermediaries who have entered into transportation
arrangements with pipeline companies. These intermediaries will accumulate gas
purchased from a number of producers and sell the gas to end-users through open
access pipeline transportation.
I-3
<PAGE>
SWIFT ENERGY OPERATING PARTNERS 1995-B, LTD.
State Regulations
Production of any oil and gas from Partnership Properties will be
affected to some degree by state regulations. Many states in which the
Partnership will operate have statutory provisions regulating the production and
sale of oil and gas, including provisions regarding deliverability. Such
statutes, and the regulations promulgated in connection therewith, are generally
intended to prevent waste of oil and gas and to protect correlative rights to
produce oil and gas between owners of a common reservoir. Certain state
regulatory authorities also regulate the amount of oil and gas produced by
assigning allowable rates of production to each well or proration unit.
Federal Leases
Some of the Partnership's properties are located on federal oil and gas
leases administered by various federal agencies, including the Bureau of Land
Management. Various regulations and orders affect the terms of leases,
exploration and development plans, methods of operation and related matters.
Employees
The Partnership has no employees. Swift, however, has a staff of
geologists, geophysicists, petroleum engineers, landmen, and accounting
personnel who administer the operations of Swift and the Partnership. As of
December 31, 1996, Swift had 191 employees. Swift's administrative and overhead
expenses attributable to the Partnership's operations are borne by the
Partnership.
I-4
<PAGE>
SWIFT ENERGY OPERATING PARTNERS 1995-B, LTD.
Item 2. Properties
As of December 31, 1996, the Partnership has acquired interests in
producing oil and gas properties which are generally described below.
Principal Oil and Gas Producing Properties
The Partnership's fields are highly diversified in 2 states, none of
which equals or exceeds 15 percent of the total Partnership value.
Title to Properties
Title to substantially all significant producing properties of the
Partnership has been examined. The properties are subject to royalty, overriding
royalty and other interests customary in the industry. The Managing General
Partner does not believe any of these burdens materially detract from the value
of the properties or will materially detract from the value of the properties or
materially interfere with their use in the operation of the business of the
Partnership.
Production and Sales Price
The following table summarizes the sales volumes of the Partnership's
net oil and gas production expressed in MCFs. Equivalent MCFs are obtained by
converting oil to gas on the basis of their relative energy content; one barrel
equals 6,000 cubic feet of gas.
<TABLE>
<CAPTION>
Net Production
-------------------
For The Year
Ended
December 31, 1996
-------------------
<S> <C>
Net Volumes (Equivalent MCFs) 41,126
Average Sales Price
per Equivalent MCF $2.77
Average Production Cost
per Equivalent MCF
(includes production taxes) $0.23
</TABLE>
I-5
<PAGE>
SWIFT ENERGY OPERATING PARTNERS 1995-B, LTD.
Net Proved Oil and Gas Reserves
Presented below are the estimates of the Partnership's proved reserves
as of December 31, 1996. All of the Partnership's proved reserves are located in
the United States.
<TABLE>
<CAPTION>
December 31,
----------------------
1996
----------------------
Natural
Oil Gas
------- --------
(BBLS) (MMCF)
<S> <C> <C>
Proved developed
reserves at end of year 5,360 226
------- -----
Proved reserves
Balance at beginning
of year -- --
Purchase of minerals
in place 7,000 292
Revisions of previous
estimates -- --
Sales of minerals in
place -- --
Production (908) (36)
------- -----
Balance at end of year 6,092 256
------- -----
</TABLE>
Revisions of previous quantity estimates are related to upward or
downward variations based on current engineering information for production
rates, volumetrics and reservoir pressure. Additionally, changes in quantity
estimates are the result of the increase or decrease in crude oil and natural
gas prices at each year end which have the effect of adding or reducing proved
reserves on marginal properties due to economic limitations.
I-6
<PAGE>
SWIFT ENERGY OPERATING PARTNERS 1995-B, LTD.
The following table summarizes by acquisition the Registrant's reserves
and gross and net interests in producing oil and gas wells as of December 31,
1996:
<TABLE>
<CAPTION>
Reserves
December 31, 1996
---------------------
Natural Wells
Oil Gas ------------------------
Acquisition State(s) (BBLS) (MMCF) Gross Net
- ----------- -------- ------- ----- ------- -------
<S> <C> <C> <C> <C> <C>
BHP Petroleum LA 690 137 15 0.006
Nuevo Energy TX 5,402 119 5 0.109
------ ----- ---- -----
6,092 256 20 0.115
------ ----- ---- -----
</TABLE>
There are numerous uncertainties inherent in estimating quantities of
proved reserves and in projecting the future rates of production, timing and
plan of development. 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 above, audited by H. J. Gruy and Associates, Inc., an
independent petroleum consulting firm. 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 oil and natural gas reserves, the Registrant, in
accordance with criteria prescribed by the Securities and Exchange Commission,
has used prices received as of December 31, 1996 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. The Registrant does not believe that any favorable or adverse event
causing a significant change in the estimated quantity of proved reserves has
occurred between December 31, 1996 and the date of this report.
Future prices received for the sale of the Partnership's products may
be higher or lower than the prices used in the evaluation described above; the
operating costs relating to such production may also increase or decrease from
existing levels. The estimates presented above are in accordance with rules
adopted by the Securities and Exchange Commission.
Item 3. Legal Proceedings
The Partnership is not aware of any material pending legal proceedings
to which it is a party or of which any of its property is the subject.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of Interest Holders during the
fourth quarter of the fiscal year covered by this report.
I-7
<PAGE>
SWIFT ENERGY OPERATING PARTNERS 1995-B, LTD.
PART II
Item 5. Market Price of and Distributions on the Registrant's SDIs and Related
Interest Holder Matters
Market Information
SDIs in the Partnership were initially sold at a price of $1 per SDI.
SDIs are not traded on any exchange and there is no established public trading
market for the SDIs. Swift is aware of negotiated transfers of SDIs between
unrelated parties; however, these transfers have been limited and sporadic. Due
to the nature of these transactions, Swift has no verifiable information
regarding prices at which SDIs have been transferred.
Holders
As of December 31, 1996, there were 178 Interest Holders holding SDIs
in the Partnership.
Distributions
The Partnership generally makes distributions to Interest Holders on a
quarterly basis, subject to the restrictions set forth in the Limited
Partnership Agreement. Because the Partnership was formed late in 1995, no
distributions were made during the fiscal year ending December 31, 1995. The
Partnership distributed a total of $93,900 during the year ended December 31,
1996 to the holders of its SDIs. Cash distributions constitute net proceeds from
sale of oil and gas production after payment of lease operating expenses and
other partnership expenses. Some or all of such amounts or any proceeds from the
sale of partnership properties could be deemed to constitute a return of
investors' capital.
Oil and gas investments involve a high risk of loss, and no assurance
can be given that any particular level of distributions to holders of SDIs can
be achieved or maintained. Although it is anticipated that quarterly
distributions will continue to be made through 1997, the Partnership's ability
to make distributions could be diminished by any event adversely affecting the
oil and gas properties in which the Partnership owns interests or the amount of
revenues received by the Partnership therefrom.
The Partnership's Limited Partnership Agreement contains various
provisions which might serve to delay, defer or prevent a change in control of
the Partnership, such as the requirement of a vote of Limited Partners in order
to sell all or substantially all of the Partnership's properties or the
requirement of consent by the Managing General Partner to transfers of limited
partnership interests and provisions prohibiting the transfer of Limited
Partnership Units in any fiscal year in excess of a limit which has been
established in order to comply with certain federal income tax regulations.
II-1
<PAGE>
SWIFT ENERGY OPERATING PARTNERS 1995-B, LTD.
Item 6. Selected Financial Data
The following selected financial data, prepared in accordance with
generally accepted accounting principles for the year ended December 31, 1996
and the period from inception (December 14, 1995) through December 31, 1995,
should be read in conjunction with the financial statements included in Item 8:
<TABLE>
<CAPTION>
1996 1995
--------------- -------------
<S> <C> <C>
Revenues $ 244,620 $ --
Income $ 95,456 $ --
Total Assets $ 2,693,092 $ 2,500,000
Cash Distributions $ 93,899 $ --
</TABLE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Liquidity and Capital Resources
The Partnership has expended approximately 6 percent of the Interest
Holders' commitments available for property acquisitions and development by
acquiring producing oil and gas properties. In the current year the Partnership
spent approximately $369,958 to purchase certain producing oil and gas
properties. The most significant of these acquisitions was BHP Petroleum which
was purchased for $188,837. (See Item 2. Properties for further information,
including the number of wells, state locations and oil and gas reserves
associated with this acquisition.) The partnership invests primarily in proved
producing properties with nominal levels of future costs of development for
proven but undeveloped reserves. Significant purchases of additional reserves or
extensive drilling activity are not anticipated. Oil and gas reserves are
depleting assets and therefore often experience significant production declines
each year from the date of acquisition through the end of the life of the
property. The primary source of liquidity to the Partnership comes almost
entirely from the income generated from nonoperating interests in oil and gas
produced from oil and gas properties. This source of liquidity and the related
results of operations will decline in future periods as the oil and gas produced
from these properties also declines.
The Managing General Partner anticipates that the Partnership will have
adequate liquidity from income from continuing operations to satisfy any future
capital expenditure requirements. Funds generated from bank borrowings and
proceeds from sale of oil and gas properties will be used to supplement this
effort if deemed necessary.
Results of Operations
The Partnership was formed effective December 14, 1995 and accordingly,
has a limited operating history. From inception to December 31, 1996, the
Partnership acquired producing oil and gas properties described in Item 2.
Properties. The 1996 revenues were attributable to sales of oil and gas produced
from these acquired properties and to a lesser degree, from interest income
recognized on the remaining unexpected Interests Holders' commitments. Oil and
gas sales will increase in 1997 as the Partnership will complete the first full
year of production from the producing oil and gas properties acquired.
During 1997 Partnership revenues and costs are expected to be shared
between the Interest Holders and general partners in a 85:15 ratio. Based on
current oil and gas prices, anticipated levels of oil and gas production and
expected cash distributions during 1997 the Managing General Partner anticipates
that the Partnership sharing ratio will continue to be 85:15.
Item 8. Financial Statements and Supplementary Data
See Part IV, Item 14(a) for index to financial statements.
Item 9. Disagreements on Accounting and Financial Disclosure
None.
II-2
<PAGE>
SWIFT ENERGY OPERATING PARTNERS 1995-B, LTD.
PART III
Item 10. Directors and Executive Officers of the Registrant
As a limited partnership, the Registrant has no directors or executive
officers. The business and affairs of the Registrant are managed by Swift as
Managing General Partner. Set forth below is certain information as of March 17,
1997, regarding the directors and executive officers of Swift.
<TABLE>
<CAPTION>
Position(s) with
Name Age Swift and Other Companies
---- --- -------------------------
<S> <C> <C>
DIRECTORS
A. Earl Swift 63 President, Chief Executive Officer and
Chairman of the Board
Virgil N. Swift 68 Executive Vice President - Business
Development, Vice Chairman of the Board
G. Robert Evans 65 Director of Swift; Chairman of the Board,
Material Sciences Corporation;
Director, Consolidated Freightways, Inc.,
Fibreboard Corporation, Elco Industries, and
Old Second Bancorp
Raymond O. Loen 72 Director of Swift; President, R. O. Loen
Company
Henry C. Montgomery 61 Director of Swift; Chairman of the Board,
Montgomery Financial Services Corporation;
Director, Southwall Technology Corporation
Clyde W. Smith, Jr. 48 Director of Swift; President, Somerset
Properties, Inc.
Harold J. Withrow 69 Director of Swift
EXECUTIVE OFFICERS
Terry E. Swift 41 Executive Vice President, Chief
Operating Officer
John R. Alden 51 Senior Vice President - Finance,
Chief Financial Officer and Secretary
Bruce H. Vincent 49 Senior Vice President - Funds Management
James M. Kitterman 52 Senior Vice President - Operations
Alton D. Heckaman, Jr. 39 Vice President - Finance and Controller
</TABLE>
III-1
<PAGE>
SWIFT ENERGY OPERATING PARTNERS 1995-B, LTD.
From time to time, Swift as Managing General Partner of the Partnership
purchases Units in the Partnership from investors who offer the Units pursuant
to their right of presentment, which purchases are made pursuant to terms set
out in the Partnership's original Limited Partnership Agreement. Due to the
frequency and large number of these transactions, Swift reports these
transactions under Section 16 of the Securities Exchange Act of 1934 on an
annual rather than a monthly basis. In some cases such annual reporting may
constitute a late filing of the required Section 16 reports under the applicable
Section 16 rules.
Item 11. Executive Compensation
As noted in Item 10, "Directors and Executive Officers of the
Registrant," above, the Partnership has no executive officers. The executive
officers of Swift and VJM are not compensated by the Partnership.
Certain fees and allowances contemplated by the Limited Partnership
Agreement were paid by the Partnership to Swift and VJM. See Note (4) in Notes
To Financial Statements (Related-Party Transactions) for further discussion.
Item 12. Security Ownership of Certain Beneficial Owners and Management
No single Interest Holder is known to the Partnership to be the
beneficial owner of more than five percent of the Partnership's SDIs.
Swift and VJM are not aware of any arrangement, the operation of which
may at a subsequent date result in a change in control of the Partnership.
Item 13. Certain Relationships and Related Transactions
As noted in Item 10, "Directors and Executive Officers of the
Registrant," above, the Partnership has no executive officers or directors, and
thus has not engaged in any transactions in which any such person had an
interest. The Partnership is permitted to engage in certain transactions with
Swift as Managing General Partner and VJM as Special General Partner, subject to
extensive guidelines and restrictions described in the "Conflicts of Interest"
section of the Prospectus contained in the Registration Statement, which is
incorporated herein by reference.
Summarized below are the principal transactions that have occurred
between the Partnership and Swift, VJM and their affiliates.
1. The oil and gas properties acquired by the Partnership, as described
in Item 2, "Properties" above, were typically acquired initially by Swift from
the seller thereof and subsequently transferred to the Partnership. Such
transfers were made by Swift at its Property Acquisition Costs or Fair Market
Value (as provided in the Limited Partnership Agreement), less any amounts
received from sale of production between the time of acquisition by Swift and
the time of sale to the Partnership.
2. Swift acts as operator for many of the wells in which the
Partnership has acquired interests and during 1995 received compensation for
such activities in accordance with standard industry operating agreements.
3. The Partnership paid to Swift and VJM certain fees as contemplated
by the Limited Partnership Agreement. See Note (4) in Notes To Financial
Statements (Related-Party Transactions) for further discussion.
III-2
<PAGE>
SWIFT ENERGY OPERATING PARTNERS 1995-B, LTD.
PART IV
<TABLE>
<CAPTION>
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
a(1) FINANCIAL STATEMENTS PAGE NO.
--------
<S> <C>
Report of Independent Public Accountants IV-3
Balance Sheets as of December 31, 1996 and 1995 IV-4
Statements of Operations for the year ended
1996 and the period from inception
(December 14, 1995) through December 31,
1995 IV-5
Statements of Partners' Capital for the year
ended 1996 and the period from inception
(December 14, 1995) through December 31,
1995 IV-6
Statements of Cash Flows for the year ended
1996 and the period from inception
(December 14, 1995) through December 31,
1995 IV-7
Notes to Financial Statements IV-8
</TABLE>
a(2) FINANCIAL STATEMENT SCHEDULES
All schedules required by the SEC are either inapplicable or the
required information is included in the Financial Statements, the
Notes thereto, or in other information included elsewhere in this
report.
a(3) EXHIBITS
3.1 Limited Partnership Agreement of Swift Energy Operating
Partners 1995-B, Ltd., dated December 14, 1995. (Form 10-K
for year ended December 31, 1995, Exhibit 3.1).
3.2 Certificate of Limited Partnership of Swift Energy
Operating Partners 1995-B, Ltd., as filed December 14,
1995, with the Texas Secretary of State. (Form 10-K for
year ended December 31, 1995, Exhibit 3.2).
10.1 Net Profits and Overriding Royalty Interest Agreement
between Swift Energy Operating Partners 1995-B, Ltd., and
Swift Energy Pension Partners 1995-B, Ltd., dated December
14, 1995.
99.1 A copy of the following section of the Prospectus dated
May 9, 1995, contained in Post-Effective Amendment No. 4
to Registration Statement No. 33-37983 on Form S-1 for
Swift Energy Depositary Interests I, as filed on May 9,
1995, which have been incorporated herein by reference:
"Proposed Activities" (pp 25 - 34) and "Conflicts of
Interests" (pp 92 - 96). (Form 10-K for year ended
December 31, 1995, Exhibit 28.1).
b(1) REPORTS ON FORM 8-K
No reports on Form 8-K have been filed during the quarter ended
December 31, 1996.
IV-1
<PAGE>
SWIFT ENERGY OPERATING PARTNERS 1995-B, LTD.
Supplemental Information to be Furnished with Reports Filed Pursuant to Section
15(d) of the Act by Registrants Which Have Not Registered Securities Pursuant to
Section 12 of the Act.
No annual report to security holders covering the Partnership's 1996
fiscal year, or proxy statement, form of proxy or other proxy soliciting
material has been sent to Interest Holders of the Partnership.
IV-2
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Swift Energy Operating Partners 1995-B, Ltd.:
We have audited the accompanying balance sheets of Swift Energy
Operating Partners 1995-B, Ltd., (a Texas limited partnership) as of December
31, 1996 and 1995, and the related statements of operations, partners' capital
and cash flows for the year ended December 31, 1996 and the period from
inception (December 14, 1995) through December 31, 1995. These financial
statements are the responsibility of the general partner's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Swift Energy
Operating Partners 1995-B, Ltd., as of December 31, 1996 and 1995, and the
results of its operations and its cash flows for the year ended December 31,
1996 and the period from inception (December 14, 1995) through December 31,
1995, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
February 10, 1997
IV-3
<PAGE>
SWIFT ENERGY OPERATING PARTNERS 1995-B, LTD.
BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
-------------- --------------
<S> <C> <C>
ASSETS:
Current Assets:
Cash and cash equivalents $ 2,277,683 $ 2,500,000
Oil and gas sales receivable 81,502 --
Other 9,825 --
-------------- --------------
Total Current Assets 2,369,010 2,500,000
-------------- --------------
Oil and Gas Properties, using full cost
accounting 369,958 --
Less-Accumulated depreciation, depletion
and amortization (45,876) --
-------------- --------------
324,082 --
-------------- --------------
$ 2,693,092 $ 2,500,000
============== ==============
LIABILITIES AND PARTNERS' CAPITAL:
Current Liabilities:
Accounts payable and accrued liabilities $ 10,466 $ --
Payable related to property acquisitions 181,069 --
-------------- --------------
Total Current Liabilities 191,535 --
-------------- --------------
Partners' Capital 2,501,557 2,500,000
-------------- --------------
$ 2,693,092 $ 2,500,000
============== ==============
</TABLE>
See accompanying notes to financial statements.
IV-4
<PAGE>
SWIFT ENERGY OPERATING PARTNERS 1995-B, LTD.
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996 AND THE PERIOD
FROM INCEPTION (DECEMBER 14, 1995) THROUGH DECEMBER 31, 1995
<TABLE>
<CAPTION>
1996 1995
--------------- ---------------
<S> <C> <C>
REVENUES:
Oil and gas sales $ 116,317 $ --
Interest income 128,303 --
--------------- ---------------
244,620 --
--------------- ---------------
COSTS AND EXPENSES:
Lease operating 3,781 --
Production taxes 5,821 --
Depreciation, depletion
and amortization 45,876 --
General and administrative 93,686 --
--------------- ---------------
149,164 --
--------------- ---------------
INCOME (LOSS) $ 95,456 $ --
=============== ===============
</TABLE>
See accompanying notes to financial statements.
IV-5
<PAGE>
SWIFT ENERGY OPERATING PARTNERS 1995-B, LTD.
STATEMENTS OF PARTNERS' CAPITAL
FOR THE YEAR ENDED DECEMBER 31, 1996 AND THE PERIOD
FROM INCEPTION (DECEMBER 14, 1995) THROUGH DECEMBER 31, 1995
<TABLE>
<CAPTION>
Limited General Combining
Partners Partners Adjustment Total
--------------- --------------- --------------- --------------
<S> <C> <C> <C> <C>
Cash Contributions,
net of syndication costs $ 2,500,000 $ -- $ -- $ 2,500,000
--------------- --------------- --------------- ---------------
Balance,
December 31, 1995 2,500,000 -- -- 2,500,000
--------------- --------------- --------------- ---------------
Income (Loss) 65,385 1,496 28,575 95,456
Cash Distributions (93,899) -- -- (93,899)
--------------- --------------- --------------- ---------------
Balance,
December 31, 1996 $ 2,471,486 $ 1,496 $ 28,575 $ 2,501,557
=============== =============== =============== ==============
Limited Partners' net income (loss)
per unit
1995 $ --
===============
1996 $ .03
===============
</TABLE>
See accompanying notes to financial statements.
IV-6
<PAGE>
SWIFT ENERGY OPERATING PARTNERS 1995-B, LTD.
STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1996 AND THE PERIOD
FROM INCEPTION (DECEMBER 14, 1995) THROUGH DECEMBER 31, 1995
<TABLE>
<CAPTION>
1996 1995
--------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Income (Loss) $ 95,456 $ --
Adjustments to reconcile income (loss) to
net cash provided by operations:
Depreciation, depletion and amortization 45,876 --
Change in assets and liabilities:
(Increase) decrease in oil and gas sales receivable (81,502) --
(Increase) decrease in other current assets (9,825) --
Increase (decrease) in accounts payable and accrued liabilities 10,466 --
--------------- ---------------
Net cash provided by (used in) operating activities 60,471 --
--------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to oil and gas properties (188,889) --
--------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Capital contributions from Interest Holders -- 2,999,592
Payments of syndication costs -- (499,592)
Cash distributions to Interest Holders (93,899) --
--------------- ---------------
Net cash provided by (used in) financing activities (93,899) 2,500,000
--------------- ---------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (222,317) 2,500,000
--------------- ---------------
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 2,500,000 --
--------------- ---------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,277,683 $ 2,500,000
=============== ===============
Supplemental disclosure of non-cash investing and financing activities:
Oil and gas properties acquired which were paid for in a
subsequent period $ 181,069 $ --
=============== ===============
</TABLE>
See accompanying notes to financial statements.
IV-7
<PAGE>
SWIFT ENERGY OPERATING PARTNERS 1995-B, LTD.
NOTES TO FINANCIAL STATEMENTS
(1) Organization and Terms of Partnership Agreement -
Swift Energy Operating Partners 1995-B, Ltd., a Texas limited
partnership (the Partnership), was formed on December 14, 1995, for the purpose
of purchasing and operating producing oil and gas properties within the
continental United States and Canada. Swift Energy Company ("Swift"), a Texas
corporation, and VJM Corporation ("VJM"), a California corporation, serve as
Managing General Partner and Special General Partner of the Partnership,
respectively. The sole limited partner of the Partnership is Swift Depositary
Company, which has assigned all of its beneficial (but not of record) rights and
interests as limited partner to the investors in the Partnership ("Interest
Holders"), in the form of Swift Depositary Interests ("SDIs").
The Managing General Partner has paid or will pay out of its own
corporate funds (as a capital contribution to the Partnership) $499,592 which
includes all selling commissions, offering expenses, printing, legal and
accounting fees and other formation costs incurred in connection with the
offering of SDIs and the formation of the Partnership, for which the Managing
General Partner will receive an interest in continuing costs and revenues of the
Partnership. The 178 interest holders made total capital contributions of
$2,500,000.
Generally, all continuing costs (including development costs, operating
costs, general and administrative reimbursements and direct expenses) and
revenues are allocated 85 percent to the Interest Holders and 15 percent to the
general partners. After partnership payout, as defined in the Partnership
Agreement, continuing costs and revenues will be shared 75 percent by the
Interest Holders, and 25 percent by the general partners. Payout had not
occurred as of December 31, 1996.
(2) Significant Accounting Policies -
Use of Estimates --
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
estimates.
Oil and Gas Properties --
For financial reporting purposes, the Partnership follows the
"full-cost" method of accounting for oil and gas property costs. Under this
method of accounting, all productive and nonproductive costs incurred in the
acquisition and development of oil and gas reserves are capitalized. Such costs
include lease acquisitions, geological and geophysical services, drilling,
completion, equipment and certain general and administrative costs directly
associated with acquisition and development activities. General and
administrative costs related to production and general overhead are expensed as
incurred. No general and administrative costs were capitalized during the years
ended December 31, 1996 and 1995.
Future development, site restoration, dismantlement and abandonment
costs, net of salvage values, are estimated on a property-by-property basis
based on current economic conditions and are amortized to expense as the
Partnership's capitalized oil and gas property costs are amortized.
The unamortized cost of oil and gas properties is limited to the
"ceiling limitation", (calculated separately for the Partnership, limited
partners, and general partners). The "ceiling limitation" is calculated on a
quarterly basis and represents the estimated future net revenues from proved
properties using current prices, discounted at ten percent, and the lower of
cost or fair value of unproved properties. Proceeds from the sale or disposition
of oil and gas properties are treated as a reduction of oil and gas property
costs with no gains or losses being recognized except in significant
transactions.
IV-8
<PAGE>
SWIFT ENERGY OPERATING PARTNERS 1995-B, LTD.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The Partnership computes the provision for depreciation, depletion and
amortization of oil and gas properties on the units-of-production method. Under
this method, the provision is calculated by multiplying the total unamortized
cost of oil and gas properties, including future development, site restoration,
dismantlement and abandonment costs, by an overall amortization rate that is
determined by dividing the physical units of oil and gas produced during the
period by the total estimated units of proved oil and gas reserves at the
beginning of the period.
The calculation of the "ceiling limitation" and the provision for
depreciation, depletion, and amortization is based on estimates of proved
reserves. There are numerous uncertainties inherent in estimating quantities of
proved reserves and in projecting the future rates of production, timing and
plan of development. 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. Accordingly, reserve
estimates are often different from the quantities of oil and gas that are
ultimately recovered.
Statement of Cash Flows --
Highly liquid debt instruments with an initial maturity of three months
or less are considered to be cash equivalents.
(3) Oil and Gas Capitalized Costs -
The following table sets forth capital expenditures related to the
Partnership's oil and gas operations:
<TABLE>
<CAPTION>
Inception
(December 14, 1995)
through
December 31, 1995
-----------------
<S> <C>
Acquisition of
proved properties $ 369,906
Development 52
-------------
$ 369,958
-------------
</TABLE>
All oil and gas property acquisitions are made by Swift on behalf of
the Partnership. The costs of the properties include the purchase price plus any
costs incurred by Swift in the evaluation and acquisition of properties.
In 1996, the Partnership acquired interests in producing oil and gas
properties for $369,906, which included $21,078 of costs incurred by Swift in
the evaluation and acquisition effort, including costs related to properties not
acquired.
During 1996, the limited partners' share of unamortized oil and gas
property costs exceeded their "ceiling limitation", resulting in a valuation
allowance of $17,557. This amount is included in the income (loss) attributable
to the limited partners shown in the statement of partners' capital together
with a "combining adjustment" for the difference between the limited partners'
valuation allowance and the Partnership's valuation allowance. The "combining
adjustment" changes quarterly as the Partnership's total depreciation, depletion
and amortization provision is more or less than the combined depreciation,
depletion and amortization provision attributable to general and limited
partners.
IV-9
<PAGE>
SWIFT ENERGY OPERATING PARTNERS 1995-B, LTD.
NOTED TO FINANCIAL STATEMENTS (CONTINUED)
(4) Related-Party Transactions -
During 1996, the Partnership paid Swift $37,500 as a general and
administrative overhead allowance.
During 1996, the Partnership also paid Swift an incentive amount, as
defined in the Partnership Agreement, for services rendered to the Partnership.
Such amount totaled $37,500 in 1996 and is included in general and
administrative expenses.
Effective December 14, 1995, the Partnership entered into a Net Profits
and Overriding Royalty Interest Agreement ("NP/OR Agreement") with Swift Energy
Pension Partners 1995-B, Ltd. (Pension Partnership), managed by Swift for the
purpose of acquiring interests in producing oil and gas properties. Under the
terms of the NP/OR Agreement, the Partnership has conveyed to the Pension
Partnership a nonoperating interest in the aggregate net profits (i.e., oil and
gas sales net of related operating costs) of the properties acquired equal to
its proportionate share of the property acquisition costs.
(5) Federal Income Taxes -
The Partnership is not a tax-paying entity. No provision is made in the
accounts of the Partnership for federal or state income taxes, since such taxes
are liabilities of the individual partners, and the amounts thereof depend upon
their respective tax situations.
The tax returns and the amount of distributable Partnership income are
subject to examination by the federal and state taxing authorities. If the
Partnership's ordinary income for federal income tax purposes is ultimately
changed by the taxing authorities, the tax liability of the Interest Holders
could be changed accordingly. Ordinary income reported on the Partnership's
federal return of income for the year ended December 31, 1996 and the period
from inception (December 14, 1995) through December 31, 1995, was $9,888 and $0,
respectively. The difference between ordinary income for federal income tax
purposes reported by the Partnership and net income or loss reported herein
primarily results from the exclusion of depletion (as described below) form
ordinary income reported in the Partnership's federal return of income.
For federal income tax purposes, depletion with respect to production
of oil and gas is computed separately by the partners and not by the
Partnership. Since the amount of depletion on the production of oil and gas is
not computed at the Partnership level, depletion is not included in the
Partnership's income for federal income tax purposes but is charged directly to
the partners' capital accounts to the extent of the cost of the leasehold
interests, and thus is treated as a separate item on the partners' Schedule K-1.
Depletion for federal income tax purposes may vary from that computed for
financial reporting purposes in cases where a ceiling adjustment is recorded, as
such amount is not recognized for tax purposes.
(6) Vulnerability Due to Certain Concentrations -
The Partnership's revenues are primarily the result of sales of its oil
and natural gas production. Market prices of oil and natural gas may fluctuate
and adversely affect operating results.
The Partnership extends credit to various companies in the oil and gas
industry which results in a concentration of credit risk. This concentration of
credit risk may be affected by changes in economic or other conditions and may
accordingly impact the Partnership's overall credit risk. However, the Managing
General Partner believes that the risk is mitigated by the size, reputation, and
nature of the companies to which the Partnership extends credit. In addition,
the Partnership generally does not require collateral or other security to
support customer receivables.
(7) Fair Value of Financial Instruments -
The Partnership's financial instruments consist of cash and cash
equivalents. The carrying amounts approximate fair value due to the highly
liquid nature of the short-term instruments.
IV-10
<PAGE>
SWIFT ENERGY OPERATING PARTNERS 1995-B, LTD
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
SWIFT ENERGY OPERATING
PARTNERS 1995-B, LTD.
(Registrant)
By: SWIFT ENERGY COMPANY
General Partner
Date: March 17, 1997 By: s/b A. Earl Swift
-------------- ----------------------------------
A. Earl Swift
President
Date: March 17, 1997 By: s/b John R. Alden
-------------- ----------------------------------
John R. Alden
Principal Financial Officer
Date: March 17, 1997 By: s/b Alton D. Heckaman, Jr.
-------------- ----------------------------------
Alton D. Heckaman, Jr.
Principal Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
SWIFT ENERGY OPERATING
PARTNERS 1995-B, LTD.
(Registrant)
By: SWIFT ENERGY COMPANY
General Partner
Date: March 17, 1997 By: s/b A. Earl Swift
-------------- ----------------------------------
A. Earl Swift
Director and Principal
Executive Officer
Date: March 17, 1997 By: s/b Virgil N. Swift
-------------- ----------------------------------
Virgil N. Swift
Director and Executive
Vice President - Business
Development
IV-11
<PAGE>
SWIFT ENERGY OPERATING PARTNERS 1995-B, LTD.
Date: March 17, 1997 By: s/b G. Robert Evans
-------------- -----------------------------------
G. Robert Evans
Director
Date: March 17, 1997 By: s/b Raymond O. Loen
-------------- -----------------------------------
Raymond O. Loen
Director
Date: March 17, 1997 By: s/b Henry C. Montgomery
-------------- -----------------------------------
Henry C. Montgomery
Director
Date: March 17, 1997 By: s/b Clyde W. Smith, Jr.
-------------- -----------------------------------
Clyde W. Smith, Jr.
Director
Date: March 17, 1997 By: s/b Harold J. Withrow
-------------- -----------------------------------
Harold J. Withrow
Director
IV-12
NET PROFITS AGREEMENT
This Net Profits Agreement (the "Net Profits Agreement") is entered
into effective this 14th day of December, 1995, by and between Swift Energy
Pension Partners 1995-B, Ltd., a Texas limited partnership (hereinafter "Pension
Partnership"), and Swift Energy Operating Partners 1995-B, Ltd., a Texas limited
partnership (hereinafter "Operating Partnership").
RECITALS
WHEREAS, Operating Partnership has been formed for the purpose of
acquiring working interests, and Pension Partnership has been formed for the
purpose of acquiring nonoperating interests, in producing oil and gas
properties;
WHEREAS, Operating Partnership and Pension Partnership each desire to
commit capital to acquire various interests in producing properties, so as to
increase the number and diversity of properties in which each partnership owns
interests;
WHEREAS, Pension Partnership desires that Operating Partnership
purchase interests in producing properties and thereafter carve out and convey
to Pension Partnership certain nonoperating interests in such properties, namely
Net Profits Interests and Overriding Royalty Interests, as defined herein; and
WHEREAS, Operating Partnership and Pension Partnership desire to enter
into this Net Profits Agreement to establish the terms and conditions upon which
such purchases of producing properties will be made and nonoperating interests
will be carved out and conveyed;
NOW, THEREFORE, BE IT RESOLVED, that in consideration of the mutual
covenants, agreements, representations and warranties herein contained, and
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties hereto agree as follows:
Article I
Definitions
As herein used the following words, terms or phrases have the following
meanings:
Section 1.01. "Adjusted Fixed Percentage" means, when the election in
Section 4.04 has been made by the Pension Partnership to increase its Net
Profits Interest as a result of interim revenues and there has been compliance
with all of the provisions of said Section 4.04, the quotient, expressed as a
percentage, obtained by dividing the total of (i) the unexpended and not
withdrawn amount of the Allocated Amount and (ii) the Fixed Percentage of any
interim revenues, net of expenses, generated by the properties to be burdened
with the relevant Net Profits Interest since the closing date of purchase of
said properties by the Operating Partnership, by the total of (i) the unexpended
and not withdrawn amount of the Allocated Amount and (ii) the unexpended and not
withdrawn amount of the Committed Amount, which for purposes of this definition
shall include the portion of the Committed Amount used to purchase the
properties to be burdened with the Net Profits Interest being conveyed. The
Adjusted Fixed Percentage shall replace the Fixed Percentage, when appropriate,
for all sections of this Net Profits Agreement (including Section 4.03), except
in Section 1.10, when making determinations of a Net Profits Interest subject to
the election in Section 4.04.
Section 1.02. "Affiliate" means when used with reference to a specified
Person, (i) any Person that directly or indirectly through one or more
intermediaries controls or is controlled by or is under common control with the
specified Person, (ii) any Person that is an officer, director, general partner,
or trustee of, or serves in a similar capacity with respect to, the specified
Person or of which the specified Person is an officer, director, general partner
or trustee, or with respect to which the specified Person serves in a similar
capacity, (iii) any Person that, directly or indirectly, is the beneficial owner
of 10% or more of any class of equity securities of the specified Person or of
which the specified Person is directly or indirectly the owner of 10% or more of
any class of equity securities, (iv) any member of the immediate family of the
specified Person or his or her spouse, and (v) if the specified Person is an
officer, director or partner, any company for which such Person acts in such
capacity.
Section 1.03. "Affiliated Entity" means any corporation, partnership,
joint venture or entity owned, in whole or in part, by the Operating Partnership
and which owns Leases.
<PAGE>
Section 1.04. "Allocated Amount" means that amount of money allocated
by Pension Partnership in Section 2.02 hereof to the future purchase of the Net
Profits Interests and Overriding Royalty Interests from Operating Partnership,
subject to Pension Partnership's rights of withdrawal and redirection of all or
portions of such amount pursuant to Section 2.05 hereof.
Section 1.05. "Committed Amount" means that amount of money committed
by Operating Partnership in Section 2.01 hereof to the purchase of Leases under
this Net Profits Agreement and/ or a net profits agreement with one or more
Affiliated Entities, subject to Operating Partnership's rights of withdrawal and
redirection of up to thirty percent (30%) of the Committed Amount under Section
2.04 hereof.
Section 1.06. "Consultant" means any one of the independent petroleum
engineering firms of Golden Engineering, Inc., R.E. Davis and Associates, Inc.,
Gruy Engineering Corporation, Kahn and Associates or any other qualified
independent petroleum engineering firm or independent geologist or petroleum
engineer that performs the duties of the Consultant described herein.
Section 1.07. "Conveyance(s)" means those certain Net Profits and
Overriding Royalty Interest Conveyance(s) from Operating Partnership to Pension
Partnership under which Pension Partnership shall acquire Net Profits Interests
and Overriding Royalty Interests from Operating Partnership. There may be more
than one Conveyance to accommodate successive acquisitions or purchases of Net
Profits Interests.
Section 1.08. "Development Well" means a well drilled as an additional
well to the same reservoir as other producing wells on a lease, or drilled on an
offset lease usually not more than one location away from a well producing from
the same reservoir or drilled to otherwise develop Proved Undeveloped Reserves.
Section 1.09. "Excess Operating Costs" at any point in time means, with
respect to a Net Profits Interest, an amount equal to the excess of Operating
Costs over Gross Proceeds of such Net Profits Interest for each calculation
period. Excess Operating Costs shall be reduced by any revenues that would
reduce Operating Costs pursuant to Section 1.17 hereinbelow but have not
otherwise reduced such Operating Costs.
Section 1.10. "Fixed Percentage" means, the quotient, expressed as a
percentage, obtained by dividing the unexpended and not withdrawn amount of the
Allocated Amount, at the time a Net Profits Interest is assigned by the total of
(i) the unexpended and not withdrawn amount of the Allocated Amount and (ii) the
unexpended and not withdrawn amount of the Committed Amount, which for purposes
of this definition shall include the portion of the Committed Amount used to
purchase the properties to be burdened by the Net Profits Interest being
conveyed, each amount being determined at the time such Net Profits Interest is
conveyed.
Section 1.11. "Gross Proceeds" means the amounts received by Operating
Partnership from the Sale of Subject Minerals, subject to the following:
(a) If any Subject Minerals are Processed before disposition,
the amount of the Gross Proceeds for such Subject Minerals shall be the
Wellhead Value thereof.
(b) There shall be excluded any amount for Subject Minerals
attributable to nonconsent operations conducted with respect to the
Operating Partnership (or any portion thereof) as to which Operating
Partnership shall be a nonconsenting party and which is dedicated to
the recoupment or reimbursement of costs and expenses of the consenting
party or parties by the terms of the relevant operating agreement, unit
agreement, contract for development or other instrument providing for
such nonconsent operations, provided, Operating Partnership's election
not to participate in such operations is made in conformity with the
provisions of Section 8.01 of this Net Profits Agreement.
(c) If a controversy or possible controversy exists (whether
by reason of any statute, order, decree, rule, regulation, litigation,
contract or otherwise) between Operating Partnership and any purchaser
as to the correct sales price or sales volume of any Subject Mineral
then
(i) amounts withheld by the purchaser or deposited by
it with an escrow agent shall not be considered to be received
by Operating Partnership until actually collected by Operating
Partnership, but the amounts received by Operating Partnership
shall include any interest, penalty, or other amount paid to
Operating Partnership in respect thereof;
(ii) amounts received by Operating Partnership and
promptly deposited by it with an escrow agent shall not be
considered to have been received by Operating Partnership, but
all amounts thereafter paid to Operating Partnership by such
escrow agent shall be considered to be amounts received from
the sale of Subject Minerals; and
2
<PAGE>
(iii) amounts received by Operating Partnership and
not deposited in an escrow account shall be considered to be
received for purposes of this definition.
(d) There shall be excluded any amount which Operating
Partnership shall receive as a bonus for any Lease or assignment of any
of the Subject Interests or out of payments made to Operating
Partnership in connection with the drilling or deferring of drilling of
any well on any of the Subject Interests or in connection with any
adjustment of any well and leasehold equipment upon unitization of any
of the Subject Interests.
(e) There shall be excluded any amount for Subject Minerals
unavoidably lost in the production thereof or used by Operating
Partnership in conformity with prudent practices for drilling,
production and plant operations (including gas injection, secondary or
tertiary recovery, pressure maintenance, repressuring, cycling
operations, plant fuel or shrinkage) conducted for the purpose of
producing Subject Minerals or producing from any unit to which the
Subject Interests are committed, but only so long as such Subject
Minerals are so used.
(f) Except as provided in Section 1.11(i) hereof, amounts
received as a loan by Operating Partnership from a purchaser of Subject
Minerals, whether with or without interest, shall not be considered to
be derived from the sale of Subject Minerals, provided that the related
Sales Contract meets the requirements of Section 7.04 hereof.
(g) So long as and to the extent that the same may be required
by applicable laws and regulations in the case of any Lease from the
United States of America included in the Subject Interests, the
obligation to pay and the right of Pension Partnership to receive the
proceeds of oil produced from such Lease shall be suspended in the
event that the Secretary of the Interior suspends such obligation and
right upon determination pursuant to 43 CFR 3103.3-3, and such
suspension shall apply separately to any zone or portion of such Lease
segregated for computing government royalties.
(h) Unless the same item is otherwise treated as part of
Operating Costs hereunder, there shall be deducted from Gross Proceeds
all general property (ad valorem), production severance, sales,
gathering and other taxes (whether state, federal or otherwise)
assessed or levied on or in connection with the Subject Interests, the
Net Profits Interest, the Overriding Royalty Interests, or the
production therefrom or equipment on the Subject Leases or against
Operating Partnership as owner of the Subject Interests or Pension
Partnership as owner of the Net Profits Interest or the Overriding
Royalty Interests, and which taxes (as adjusted or as finally
determined) are deducted or excluded from proceeds of Sale received by
Operating Partnership or paid by Operating Partnership and, in either
case, are attributable to the Pension Partnership's proportionate share
of Subject Minerals.
(i) There shall be included in Gross Proceeds amounts received
by Operating Partnership from a purchaser of Subject Minerals as
advance payments and payments pursuant to take-or-pay and similar
provisions of Sales Contracts as and when paid to Operating
Partnership.
(j) Except as otherwise provided in this Section 1.11, there
shall be included in Gross Proceeds any amounts received by Operating
Partnership for use of the Subject Interests burdened by a Net Profits
Interest or Overriding Royalty Interest without regard to whether such
Subject Interests have ceased to produce Subject Minerals.
(k) All payments made to Pension Partnership shall be made
entirely and exclusively out of amounts received from the sale or other
disposition of Subject Minerals as described in subsections 1.11(a)
through (j) above, and in no event shall such payments exceed the
percentages set forth herein with respect to the Net Profits Interest
and the Overriding Royalty Interests.
Section 1.12. "Leases" means all oil, gas and other mineral leases
acquired by Operating Partnership under this Net Profits Agreement and from out
of which the Net Profits Interests and the Overriding Royalty Interests shall be
conveyed to Pension Partnership under and pursuant to the Conveyances. To the
extent that Operating Partnership shall also acquire mineral fee interest(s) in
any acquisition(s), the term "Leases" shall include such mineral fees or
interests, but "Leases" shall not include any nonoperating interest(s) acquired
by Operating Partnership.
Section 1.13. "Managing General Partner" means the managing general
partner of Operating Partnership.
3
<PAGE>
Section 1.14. "Net Proceeds" for any period means the excess of Gross
Proceeds received by or for the account of Operating Partnership attributable to
the Subject Interests burdened by a Net Profits Interest during such period over
the sum of (a) Operating Costs paid by or for the account of Operating
Partnership attributable to the Subject Interests burdened by such Net Profits
Interest during such period and (b) cumulative unrecovered Excess Operating
Costs as of the end of the immediately preceding period attributable to the
Subject Interests burdened by such Net Profits Interest.
Section 1.15. "Net Profits Interest" means a nonoperating interest
carved out of the working interest or a mineral fee interest purchased by
Operating Partnership in the Leases specified by the Operating Partnership
insofar as such Leases cover the Net Profits Depth and insofar as such Leases
cover Net Profits Surface Acreage and pursuant to which the Pension Partnership
will be entitled to the Fixed Percentage share of the Net Proceeds attributable
to Subject Minerals produced from the Net Profits Depth.
Section 1.16. "Non-Affiliate" means, as to the party specified, any
Person who is not an Affiliate of such party.
Section 1.17. "Operating Costs" means, all expenditures made and costs
incurred and which are attributable to the Subject Interests in connection with
the operation and maintenance of Leases designated by the Operating Partnership
in which Pension Partnership owns nonoperating interests and the production and
marketing of hydrocarbons therefrom, including without limitation: (i) all costs
of lifting and producing hydrocarbons, including all costs of labor, fuel,
repair, hauling, materials, supplies, utility charges, supervisory fees, and
other costs incident thereto; (ii) unless the same items are otherwise paid by
virtue of being excluded from Gross Proceeds, all general property (ad valorem),
production severance, sales, gathering, and other taxes (whether state, federal
or otherwise); (iii) insurance and casualty loss expenses; (iv) expenses of
recompleting, equipping, reworking, and other remedial servicing operations, as
well as plugging and abandoning wells and including all costs associated with
development, as well as all costs of identifying and analyzing the need for and
all costs of undertaking said expenditures and capital items; (v) interest,
commitment fees and other financing charges and expenses of Operating
Partnership's borrowings associated with these operations; (vi) to the extent
such costs and expenditures do not relate to or arise out of costs associated
with purchasing or acquiring the Leases, the costs of processing facilities,
pipelines, gas sales facilities, secondary or tertiary recovery operations and
other procedures and facilities necessary to produce efficiently the reserves of
oil and gas from the Leases; (vii) delay rentals, shut-in well payments, and
other lease maintenance payments; (viii) any other compensation or reimbursement
made to operators or others for services rendered in conducting such operations,
including compensation or reimbursement paid to the Managing General Partner or
its Affiliates; (ix) all costs incurred by operators and other working interest
owners to market or to transport Subject Minerals to the point of sale thereof
or charged by third-party marketers or transporters, including the Managing
General Partner or its Affiliates, to transport Subject Minerals off the Leases;
and (x) all other costs and expenses incurred and which are attributable to the
Subject Interests in connection with the operation, maintenance and development
of the Leases and the production of hydrocarbons therefrom. Operating Costs
shall be reduced by (i) any revenues generated directly or indirectly by
equipment located on or below Net Profits Surface Acreage or related right of
way acreage and directly or indirectly related to the production of Subject
Minerals from Net Profits Depth, (ii) any fees received for operations on the
Net Profits Surface Acreage not related to the production of Subject Minerals,
and (iii) any funds received in the form of or attributable to the payment of
interest on Sales proceeds for Subject Minerals held in suspense by any third
party, which Sales proceeds relate to Subject Minerals produced and sold from
the Net Profits Depth. Operating Costs shall not include any amounts included in
the determination of the Property Acquisition Cost of any Lease.
Section 1.18. "Overriding Royalty Depth" means (i) with respect to
acreage within each of the Leases but outside the Net Profits Surface Acreage
(as defined in Section 4.02.c(ii)), all depths, and (ii) with respect to the Net
Profits Surface Acreage, those depths not included in the definition of Net
Profits Depth (as defined in Section 4.02(c)(i)). The Overriding Royalty Depth
as to each of the Subject Interests in the Leases shall be determined by a
Consultant based upon information provided to the Consultant by the Operating
Partnership or the Pension Partnership.
Section 1.19. "Overriding Royalty Interest(s)" means the fractional
interests delineated in Section 5.01 hereof in the Gross Proceeds derived from
the sale of Subject Minerals from each of the Leases burdened by a Net Profits
Interest insofar as each such Lease covers the Overriding Royalty Depth
(including the Overriding Royalty Depth as it underlies the Net Profits Surface
Acreage) or insofar as each such Lease covers Overriding Royalty Surface
Acreage.
Section 1.20. "Overriding Royalty Surface Acreage" means all the
surface acreage of each of the Leases, although to the extent that the
Overriding Royalty Surface Acreage is coextensive with the Net Profits Surface
Acreage, it is understood that depth distinctions are made herein with respect
to the nonoperating interests attaching thereto.
4
<PAGE>
Section 1.21. "Person" means any individual, corporation, partnership,
trust, estate or other entity or organization.
Section 1.22. "Prime Interest Rate" means the average highest daily
prime rate stated in the "Money Rates" column of the Wall Street Journal for the
90-day period preceding the date as of which the Prime Interest Rate is to be
determined, provided that the interest rate used shall not be less than 10%.
Section 1.23. "Process" or "Processing" means to manufacture, refine,
market, compress or transport Subject Minerals in a manner which does not
constitute well operations.
Section 1.24. "Property Acquisition Cost" means the amount paid by
Operating Partnership to identify, analyze and purchase one or more Subject
Interests, and shall include, in addition to the price actually paid for such
Subject Interests, bonuses and all expenses relating to the acquisition of
Subject Interests. The expenses relating to the acquisition of Subject Interests
shall include, but not be limited to: (i) title insurance and title examination
costs, brokers' commissions, finders' fees, escrow fees, filing fees, recording
costs, and transfer taxes, if any; (ii) taxes paid in connection with
acquisition of the Subject Interests, including, but not limited to, ad valorem,
real estate, personal property and excise taxes paid; (iii) geological,
geophysical, seismic, land, engineering, drafting, accounting, auditing, legal
and other costs incurred in connection with the property transaction; (iv)
Development Costs and Secondary or Tertiary recovery costs undertaken on the
property by the Operating Partnership prior to creation of Nonoperating
Interests burdening such property; and (v) such portion of the reasonable,
necessary and actual expenses incurred by the Managing General Partner, its
Affiliates or Operating Partnership not more than thirty-six months prior to the
property transaction for geological, geophysical, seismic, land, nominee,
engineering, drafting, accounting, auditing, legal or like services, Development
Costs, and Secondary or Tertiary recovery costs obtained or provided by the
Managing General Partner, its Affiliates or Operating Partnership which are
allocated to the Subject Interests in accordance with accepted industry practice
normally employed by the Managing General Partner and its Affiliates, including
the costs of funds used for any of these purposes, inclusive of interest, loan
commitment fees and other financing fees and charges for such funds. The
Property Acquisition Cost for a particular Subject Interest shall also include
all reasonable, necessary and actual expenses incurred by the Managing General
Partner, its Affiliates or Operating Partnership for the services listed above
in connection with the evaluation of properties which, for whatever reasons, are
not subsequently purchased by Operating Partnership, and which expenses are
allocated to that Subject Interest. If it is determined on or before the date of
acquisition of a Producing Property that Development Costs or Secondary or
Tertiary Recovery Operations should be undertaken on that property, and both the
conducting of such operations and the Managing General Partner's estimate of the
costs of those operations are approved by the Consultant on or before such date,
then the costs of such operations shall be classified as Property Acquisition
Costs.
Section 1.25. "Proved Reserves" shall mean 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. Depending upon their status of development,
such Proved Reserves are subdivided into the following classifications:
(i) Proved Developed Reserves. These are crude oil, natural
gas and natural gas liquids reserves which can be expected to be
recovered through existing wells with existing equipment and operating
methods. This classification includes:
(A) Proved Developed Producing Reserves. These are
Proved Developed Reserves which are expected to be produced
from existing completion intervals now open for production in
existing wells; and
(B) Proved Developed Nonproducing Reserves. These are
Proved Developed Reserves which exist behind the casing of
existing wells, or in minor depths below the present bottom of
such wells, which are expected to be produced through these
wells in the predictable future, where the cost of making such
oil and gas available for production should be relatively
small compared to the cost of a new well.
Additional oil and gas expected to be obtained through the application
of fluid injection or other improved recovery techniques for
supplementing the natural forces and mechanisms of primary recovery
shall be included as Proved Developed Reserves only after testing by a
pilot project or after the operation of an installed program has
confirmed through production responses that increased recovery will be
achieved.
5
<PAGE>
(ii) Proved Undeveloped Reserves. These are Proved Reserves
which are expected to be recovered from new wells on undrilled acreage,
or from existing wells where relatively major expenditures are required
for recompletion. Reserves on undrilled acreage are limited to those
drilling units offsetting productive units, which are virtually certain
of production when drilled. Proved Reserves for other undrilled units
can be claimed only where it can be demonstrated with certainty that
there is continuity of production from the existing productive
formation. Estimates for Proved Undeveloped Reserves do not include
estimates relating to any acreage for which an application of fluid
injection or other improved recovery technique is contemplated, unless
such techniques have been proved effective by actual tests in the area
in the same reservoir.
Section 1.26. "Purchase Percentage" means the quotient, expressed as a
percentage, obtained by dividing the then-unused and not withdrawn amounts of
the Committed Amount by the total of (i) the then-unused and not withdrawn
amounts of the Committed Amount and (ii) the then-unused and not withdrawn
amounts of the Allocated Amount.
Section 1.27. "Royalty Owner" means Pension Partnership while it owns
an interest in the Net Profits Interest or the Overriding Royalty Interests, and
any other person or persons who subsequently acquire legal title to all or any
portion of the Net Profits Interest or the Overriding Royalty Interests.
Section 1.28. "Sale" includes sales, exchanges and other dispositions
for value.
Section 1.29. "Sales Contracts" means all contracts and agreements for
the offer or sale of, or commitment to offer or sell, or right of first refusal
to purchase, Subject Minerals.
Section 1.30. "Subject Interests" means each kind and character of
right, title, claim or interest (subject to those interests excluded under
Section 2.04 hereof) which Operating Partnership has in the Leases or, as the
case may be, the Leases insofar as they cover variously, (i) the Net Profits
Depth, (ii) the Net Profits Surface Acreage, (iii) the Overriding Royalty Depth,
or (iv) the Overriding Royalty Surface Acreage, and the unitization and pooling
agreements and the units created thereby which are described in the documents
under which Operating Partnership acquires the Leases, whether such right,
title, claim or interest be under and by virtue of a Lease, a unitization or
pooling agreement, a unitization or pooling order, an operating agreement, a
division order, a transfer order or any other type of contract, conveyance or
instrument or under any other type of claim or title, legal or equitable,
recorded or unrecorded, even though the assignor's or Operating Partnership's
interests be incorrectly or incompletely described in, or a description thereof
be omitted from such documents, all as the same shall be enlarged by the
discharge of any payments out of production or by the removal of any charges or
encumbrances to which any of the same are subject and any and all renewals and
extensions of any of the same; provided, however, that Subject Interests shall
never include any form of nonoperating mineral interests, royalty interests,
overriding royalty interests, or any other types of nonoperating interests of
Operating Partnership, but Subject Interests may include mineral fee interests
acquired by Operating Partnership on the date upon which Operating Partnership
acquires Subject Interests in the Leases, provided such mineral fee interests
are not nonoperating in nature.
Section 1.31. "Subject Minerals" means all oil, gas and other minerals
(whether similar or dissimilar) in and under and produced, saved and sold from,
and which shall accrue and be attributable to, the Subject Interests from and
after the date upon which Operating Partnership acquires Subject Interests in
the Leases.
Section 1.32. "Wellhead Value" means the amount for which such Subject
Minerals are sold less a charge for the Processing which occurs prior to such
sale equal to the sum of (A) any Processing charges attributable to the Subject
Minerals paid to Non-Affiliates and (B) the expenditures incurred attributable
to the Subject Minerals in Processing such Subject Minerals; provided, however,
that in no event shall the expenses of Operating Partnership and its Affiliates
in such Processing exceed the costs which third parties charge in the same area
for rendering comparable services.
Article II
Partnerships' Committed and Allocated Amounts
Section 2.01. Operating Partnership Committed Amount. Operating
Partnership agrees that it shall make available for the purchase of Subject
Interests in Leases in accordance with the terms of this Net Profits Agreement
the sum of $2,500,000.00, which shall be the initial Committed Amount. The
Committed Amount may be reduced from time to time after the date hereof in
accordance with Section 2.04 hereof and shall be reduced as expended for
interests in Properties pursuant to this Net Profits Agreement but shall be
increased by Net Profits Interests sales proceeds received from the Pension
Partnership.
6
<PAGE>
Section 2.02. Pension Partnership Allocated Amount. Pension Partnership
agrees that it shall make available for the purchase of nonoperating interests
in Leases from Operating Partnership in accordance with the terms of this Net
Profits Agreement the sum of $2,866,912.00, which shall be the initial Allocated
Amount. The Allocated Amount may be reduced from time to time after the date
hereof in accordance with Section 2.05 hereof and shall be reduced as expended
for interests in Properties pursuant to this Net Profits Agreement.
Section 2.03. Other Net Profits Agreements. Pension Partnership may
enter into other Net Profits Agreements with partnerships other than Operating
Partnership managed by the Managing General Partner, on or after the date of
this Net Profits Agreement, and may reserve any portion of its funds for
commitment to such other agreements. Operating Partnership may enter into other
Net Profits Agreements with partnerships other than Pension Partnership managed
by the Managing General Partner, but only subject to the following conditions:
a. Operating Partnership must enter into and execute such
other agreements and make its designation of any committed amounts thereunder on
the date of this Net Profits Agreement, and failing which execution and
designation, Operating Partnership shall not be permitted to enter into any
other Net Profits Agreement; and
b. Operating Partnership must collectively contribute to this
Net Profits Agreement and such other agreements all of its funds available for
the purchase of Leases as of such execution date.
Section 2.04. Reduction of Committed Amount. Operating Partnership may
reduce the Committed Amount under the following circumstances:
a. After having provided notice to the Pension Partnership of
such reduction, an amount equal to up to thirty percent (30%) of the initial
Committed Amount (as set forth in Section 2.01 above) may be withdrawn by
Operating Partnership for the purchase of Subject Interests in Leases which are
not suitable for acquisition hereunder because the Managing General Partner
anticipates that when taken together with interests in other properties subject
to the Net Profits Agreement, material drilling or development activities will
be required in connection with such Leases. The determination that a Lease will
require material drilling or development activities will be made by the Managing
General Partner in its sole discretion.
b. If Pension Partnership withdraws some fraction of the
Allocated Amount in the manner permitted by Section 2.05.a hereof, Operating
Partnership may withdraw an equal fraction of the Committed Amount, which
reduction shall not diminish the amount of the reduction permitted by paragraph
a. above.
Section 2.05. Reduction of Allocated Amount. After having provided
notice to the Operating Partnership of such reduction, Pension Partnership may
reduce the Allocated Amount under the following circumstances and with the
following exceptions:
a. From the date Producing Properties are first acquired that
are subject to this Net Profits Agreement until the first anniversary of the
date thereof, Pension Partnership shall be entitled at any time to withdraw all
or any portion of the Allocated Amount for use in the acquisition of
nonoperating interests from Persons other than Operating Partnership.
b. From the end of the period specified in paragraph a. above
until that date which is eighteen (18) months from the date of this Net Profits
Agreement, Pension Partnership shall have no right to withdraw any portion of
the Allocated Amount.
c. If by the end of the period specified in paragraph b. above
Operating Partnership has not (i) assigned to Pension Partnership nonoperating
interests and/or (ii) provided notice to the Pension Partnership informing it
that Leases have been acquired and/or are being acquired that will be the
subject of a Net Profits Interest within a reasonable period of time, which
collectively will constitute sufficient nonoperating interests to cause all of
the Allocated Amount to be expended, then the unexpended balance of the
Allocated Amount shall no longer be subject to this Net Profits Agreement.
d. If Operating Partnership withdraws some fraction of the
Committed Amount in the manner permitted by Section 2.04.a above, then Pension
Partnership shall be entitled to withdraw an equal fraction of the Allocated
Amount. Such withdrawal shall be made within thirty (30) days of the withdrawal
by Operating Partnership.
7
<PAGE>
Article III
Identification and Purchase of Subject Interests
Section 3.01. Identification of Leases. Promptly after the date of this
Net Profits Agreement, the Managing General Partner shall begin to identify and
analyze Leases suitable for purchase by Operating Partnership and from which
nonoperating interests suitably may be carved out and conveyed to Pension
Partnership. Suitable Leases shall be Leases: (i) from which there is either
current oil and/or gas production in commercial quantities, or upon which is
located a well or wells capable of such production but which is shut-in or
otherwise not producing for reasons found acceptable to the Managing General
Partner; (ii) which are located in the continental United States, including all
state and federal waters, or in Canada; and (iii) which, when taken together
with interests in other properties subject to the Net Profits Agreement, are not
anticipated by the Managing General Partner to require material drilling or
development activities.
Section 3.02. Purchase of Leases. The Operating Partnership shall
purchase suitable Leases. Such Leases may be purchased in whole or in part from
either the Managing General Partner or its Affiliates or Non-Affiliated third
parties. The Operating Partnership shall acquire only the Purchase Percentage of
any Leases to be acquired more than thirty (30) days prior to the time the
Operating Partnership intends to assign a Net Profits Interest burdening such
Leases. At such time as Operating Partnership intends to create and sell a Net
Profits Interest to Pension Partnership, it shall purchase additional Leases, or
additional portions of Leases it already holds, from the Managing General
Partner, its Affiliates, or Non-Affiliated third parties. Payment for such
Leases, or portions of Leases, shall be made in a manner reasonably acceptable
to the seller.
Article IV
Creation and Conveyance of Net Profits Interest
Section 4.01. Operating Partnership's Obligation to Carve Out and
Convey Net Profits Interests; Notice. From time to time during the period in
which Operating Partnership is acquiring Subject Interests in Leases, Operating
Partnership shall carve out of such Subject Interests and convey to Pension
Partnership Net Profits Interests burdening such Leases. Each Net Profits
Interest may burden more than one Lease. Each Net Profits Interest shall burden
all Leases acquired by Operating Partnership using funds committed to this Net
Profits Agreement which were acquired prior to the date of assignment to Pension
Partnership, which are not otherwise excluded from this Net Profits Agreement by
virtue of being subject to material drilling and development activities, and
which are not subject to previously conveyed Net Profits Interests. The number
of Net Profits Interests to be conveyed to Pension Partnership pursuant to this
Net Profits Agreement and the time or times at which such Net Profits Interests
are to be conveyed shall be determined by Operating Partnership in its sole
discretion. The Operating Partnership shall provide the Pension Partnership with
notice of an assignment of a Net Profits Interest at least two business days
prior to such assignment.
Section 4.02. Description of Net Profits Interest. Each Net Profits
Interest conveyed to Pension Partnership shall have the following
characteristics:
a. Percentage Size. Except as otherwise modified by Section 4.04 or
4.05, each Net Profits Interest shall be in a percentage amount equal to the
Fixed Percentage as determined at the time of assignment.
b. Amount Payable. The dollar amount payable under each Net Profits
Interest for any period shall be equal to the Fixed Percentage of Net Proceeds,
but in no event shall exceed gross income from the Property.
c. Depths and Acreage Burdened. Each Net Profits Interest shall attach
to the burdened Leases only insofar as such Leases cover both the depths
described in subparagraph i. below (the "Net Profits Depth") and the acreage
described in subparagraph ii. below (the "Net Profits Surface Acreage"):
i. The Net Profits Depth with respect to a specific Net
Profits Interest shall be those depths underlying the Net Profits
Surface Acreage in the burdened Leases downward from one hundred (100)
feet above the top of the reservoir(s) or formation(s) evaluated as
containing Proved Reserves, on the date the Net Profits Interest is
created, for the Subject Interests in the Leases to one hundred (100)
feet below the base of such reservoir(s) or formation(s), or the
stratigraphic equivalent(s) of such depth(s); provided, however, that
should the Subject Interests in the Leases be limited to an interval
less than that designated herein, the Net Profits Depth shall be
limited to such lesser interval. It is understood that there could be
more than one depth in a well or on a lease which meet this definition.
The Net Profits Depth as to each of the Subject Interests in the Leases
shall be determined by the Consultant based upon information provided
to the Consultant by Operating Partnership or Pension Partnership. In
the event of any question concerning reservoir(s) or formation(s) as
above mentioned, determinations made by the governmental body having
jurisdiction over the production of oil and gas in the state concerned
(or, in the case of federal lands, the governmental body having
jurisdiction over oil and gas production from such lands) shall be
given due weight by the Consultant.
8
<PAGE>
ii. The Net Profits Surface Acreage with respect to a specific
Net Profits Interest shall be that surface acreage of each of the
burdened Leases for the Subject Interests, on the date the Net Profits
Interest is created, which is included in any production or spacing
unit filed with or designated by the governmental agency or authority
of the state concerned having jurisdiction of oil and gas production
or, if federal lands, the federal body or agency having jurisdiction of
oil and gas production from federal lands or, if included in a
voluntarily pooled unit for production purposes, the surface acreage of
the Leases included within that pooled unit, plus, in any of the above
cases, an additional amount of surface acreage in all directions equal
to the equivalent of one spacing unit from all boundaries of the
production unit, spaced unit or voluntarily pooled unit, as the case
may be, provided, however, that there shall be excluded from such
surface acreage those production units, spaced units or voluntarily
pooled units no portion of which overlies that subsurface area
containing Proved Reserves. Should there not be an applicable
production unit, spaced unit or pooled unit as above contemplated, the
Net Profits Surface Acreage shall be the surface acreage which overlies
that subsurface area containing Proved Reserves for the existing well,
all as determined by the Consultant based upon information provided by
Operating Partnership or Pension Partnership.
In determining the Net Profits Depth and the Net Profits Surface Acreage of a
Subject Interest at the date of the creation of the Net Profits Interest, the
Operating Partnership and the Consultant shall be entitled to rely upon the
determination of the Consultant at the time such Subject Interest was acquired
by the Operating Partnership or Managing General Partner; provided, however,
that (i) if any material capital expenditures relating to the Subject Interest
have been undertaken since the acquisition or are projected and included within
Property Acquisition Costs, or (ii) in the judgment of the Consultant, material
changes have occurred since the acquisition, the Consultant shall redetermine
the Net Profits Depth and Net Profits Surface Acreage.
Section 4.03. Payment for Net Profits Interest and Overriding Royalty
Interests. At the time the Operating Partnership assigns to the Pension
Partnership a Net Profits Interest and the associated Overriding Royalty
Interests, the Pension Partnership shall pay in cash to the Operating
Partnership the Fixed Percentage of the Property Acquisition Costs as reduced by
any interim revenues, less related expenses, received by the Operating
Partnership prior to the assignment of the Net Profits Interest. Notwithstanding
anything to the contrary hereinabove, if a Subject Interest or a nonoperating
interest has been held by an Operating Partnership for more than nine months
prior to the transfer by the Operating Partnership of a nonoperating interest
carved out of such Subject Interest or a nonoperating interest held by the
Operating Partnership, then the Property Acquisition Cost of such interest shall
be the lesser of the Property Acquisition Costs as reduced by any interim
revenues, less related expenses, or the fair market value of such interest as
determined by an independent expert, i.e., a person with no material
relationship to the Managing General Partner or its Affiliates who is in the
business of rendering opinions regarding the value of oil and gas properties
based upon the evaluation of all pertinent economic, financial, geologic and
engineering information available to the Managing General Partner or its
Affiliates.
Section 4.04. Election to Increase Net Profits Interest. If the
Property Acquisition Cost for any Net Profits Interest will be reduced because
of net revenues generated by some or all of the properties to be burdened by the
Net Profits Interest prior to the carve out pursuant to Section 4.01 herein,
then the Pension Partnership may elect to increase its Net Profits Interest in
such group of properties being conveyed by an amount proportionally equal to the
reduced purchase price. Such election may be made by providing notice to the
Operating Partnership within twenty-four hours of receiving notice of the
Operating Partnership's notice of intended assignment pursuant to Section 4.01.
In no event shall the Operating Partnership be required to convey any Net
Profits Interest that is greater than ninety percent (90%). If an election is
made pursuant to this Section 4.04, then the calculation of the Net Profits
Interest and Overriding Royalty Interests shall be made as provided herein
except that the Adjusted Fixed Percentage shall replace the Fixed Percentage.
Section 4.05. Final Gross Up Election. After notice of and prior to
creation of a Net Profits Interest by the Operating Partnership, the Pension
Partnership may notify the Operating Partnership of its election to make a
greater cash payment for the Net Profits Interest and receive a correspondingly
larger Net Profits Interest. This "Final Gross Up Election" may be made subject
to the following requirements: (i) the Operating Partnership shall not be
required to convey a Net Profits Interest that is greater than ninety percent
(90%); (ii) the Pension Partnership may only make this election when the
Managing General Partner determines in its sole discretion that the Net Profits
Interest intended to be subject to this election will be the final Net Profits
Interest acquired under this Net Profits Agreement; and (iii) the increase in
purchase price resulting from this election can not be an amount in excess of
fifteen percent (15%) of Pension Partnership's initial Allocated Amount. For
purposes of calculating the Fixed Percentage or the Adjusted Fixed Percentage of
the Net Profits Interest and Overriding Royalty Interests, the amount of cash
associated with the Final Gross Up Election shall be added to Pension
Partnership's Allocated Amount (for purposes of the numerator and denominator)
in Section 1.04 and Section 1.01.
9
<PAGE>
Article V
Creation and Conveyance Of Overriding Royalty Interests
Section 5.01. Overriding Royalty Interest Defined. Whenever Operating
Partnership conveys a Net Profits Interest to Pension Partnership, Operating
Partnership shall, in addition to the transfer to Pension Partnership of the Net
Profits Interest as contemplated and provided for above, convey unto Pension
Partnership Overriding Royalty Interests in the Subject Interests insofar as
Subject Interests and the Leases cover the Overriding Royalty Depth and the
Overriding Royalty Surface Acreage. The Overriding Royalty Interests of Pension
Partnership shall be applicable to Gross Proceeds attributable to the production
of Subject Minerals from either the Overriding Royalty Depth or the Overriding
Royalty Surface Acreage and such Overriding Royalty Interests shall not bear any
portion of Operating Costs. The Overriding Royalty Interest shall be in a
percentage amount equal to the following:
(a) Before Payout. Until such time as one hundred percent
(100%) of the development and operating costs incurred to establish and
maintain production from the Overriding Royalty Depth or the Overriding
Royalty Surface Acreage and attributable to the Subject Interests are
recovered by the party paying such costs, the Overriding Royalty
Interest shall equal that percentage derived by (i) deducting all lease
burdens filed of record in the county or parish on the date Operating
Partnership acquires the Subject Interests (expressed as a percentage)
as to such depth or surface acreage (not including Pension
Partnership's Overriding Royalty Interest) from twenty-two and one-half
percent (22.5%), (ii) multiplying the difference obtained by the Fixed
Percentage, and (iii) multiplying such resultant percentage by the
percentage amount of working interest owned by Operating Partnership in
that particular Lease. By way of example, assume Operating Partnership
owns sixty percent (60%) of the working interest in a Subject Interest
at the relevant depth or as to the relevant surface acreage, assume the
Fixed Percentage equals fifty percent (50%) and that the Fixed
Percentage attaches to the Operating Partnership's entire working
interest in the Lease, and assume further that the existing lease
burdens are only mineral owners' royalty of twelve and one-half percent
(12.5%), then in such event the Overriding Royalty Interest of Pension
Partnership shall equal three percent (3%). That is to say, ten percent
(10%) (the percent by which existing lease burdens are less than 22%)
multiplied by fifty percent (50%) (the Fixed Percentage), multiplied by
sixty percent (60%) (the Operating Partnership's working interest). It
is understood, however, and agreed that should existing lease burdens
(not including Pension Partnership's Overriding Royalty Interest) equal
or exceed twenty-two and one-half percent (22.5%), the Overriding
Royalty Interest before cost recoupment will be zero.
(b) After Payout. At that point in time when one hundred
percent (100%) of the development and operating costs expended to
establish and maintain production from the Overriding Royalty Depth
and/or the Overriding Royalty Surface Acreage are recovered by the
party paying such costs, then the Overriding Royalty Interest
determined under Section 5.01(a) above shall automatically be adjusted
to an Overriding Royalty Interest equal to (i) twelve and one-half
percent (12.5%) of 8/8ths, (ii) multiplied by the Fixed Percentage,
then (iii) multiplied by the percentage working interest of Operating
Partnership in that Lease. That is to say, if it is assumed as in the
example above that Operating Partnership owns sixty percent (60%) of
the working interest which is fully subject to Pension Partnership's
Net Profits Interest, and if it is assumed that the Fixed Percentage is
fifty percent (50%), then Pension Partnership's Overriding Royalty
Interest converts to three and three-quarters percent (3.75%), i.e.,
twelve and one-half percent (12.5%) of 8/8ths multiplied by fifty
percent (50%) (the Fixed Percentage) multiplied by sixty percent (60%)
(the Operating Partnership's working interest).
The resultant Overriding Royalty Interest calculated under (a) or (b)
above shall be reduced or increased proportionately to reflect any sliding scale
or reversionary overriding royalty, working interest or similar arrangements
contained in the Leases or Subject Interests covering the Overriding Royalty
Depth or Overriding Royalty Surface Acreage or contained in any other document
as to which such Leases or Subject Interests are made subject as of the date of
acquisition.
Section 5.02. Payment of Overriding Royalty Interests. The Overriding
Royalty Interests of Pension Partnership shall be payable separately from the
Net Profits Interests owned by Pension Partnership. Further, such Overriding
Royalty Interests shall be payable on a well-by-well basis (and recoupment of
costs as above provided shall be determined on a well-by-well basis) and shall
not be aggregated in any manner by Operating Partnership for payment purposes.
Further, should Operating Partnership enter into a farmout agreement or similar
agreement with a Non-Affiliate relating to the Overriding Royalty Depth and/or
the Overriding Royalty Surface Acreage, or should Operating Partnership acquire
an interest in the Overriding Royalty Depth and/or Overriding Royalty Surface
Acreage which is at the date of acquisition burdened by a farmout agreement or a
similar instrument with a Non-Affiliate, which farmout agreement or instrument
therein specifies a definition of cost recoupment or "payout" applicable to
establishing and maintaining production from the Overriding Royalty Depth or the
Overriding Royalty Surface Acreage, then the definition of "payout" or the
concept of cost recoupment utilized in such third-party agreement shall prevail
for purposes of determining when the provisions of Sections 5.01(a) and (b)
above and this Section 5.02 apply.
10
<PAGE>
Section 5.03. Payment of Taxes. Overriding Royalty Interests shall bear
their proportionate share of all ad valorem, production severance and excise
taxes applicable to such interests and any treatment fees or other fees or
expenses of whatever nature necessary or appropriate in the judgment of the
operator of the Leases to prepare the Subject Minerals produced from such depth
or surface acreage for sale and actually to market such Subject Minerals.
Article VI
Form Of Conveyance Of Net Profits Interests And
Overriding Royalty Interests
Section 6.01. Conveyances. At the point(s) in time when Operating
Partnership has acquired Subject Interests in Leases and desires to sell and
convey to Pension Partnership a Net Profits Interest and Overriding Royalty
Interests in such Subject Interests, Operating Partnership shall execute and
deliver unto Pension Partnership a form of conveyance denominated a "Net Profits
and Overriding Royalty Interest Conveyance" ("Conveyance"), the terms and
conditions of which shall accomplish the objectives and intentions of this Net
Profits Agreement and be consistent herewith. Pension Partnership and Operating
Partnership agree that the Conveyance is subject to such modifications as to
form, but not as to substance, as are necessary for compliance with the laws of
the jurisdiction in which the Leases are located. The Conveyance shall make
specific reference to this Net Profits Agreement and relevant terms hereof shall
be incorporated by reference into the Conveyance. Both parties agree that the
purpose of the Conveyance is to implement the terms, conditions, and
relationships delineated in this Net Profits Agreement.
Section 6.02. Filing of Conveyances in Real Property Records. Pension
Partnership and Operating Partnership agree that a Conveyance shall be made and
filed of record in each county or parish in which Operating Partnership acquires
Subject Interests in Leases out of which it conveys Net Profits Interests and
Overriding Royalty Interests to Pension Partnership. If the Operating
Partnership and Pension Partnership so agree, the parties may stipulate that the
Net Profits Interest and the Overriding Royalty Interests applicable to the
Subject Interests in the Leases shall relate to each and every Subject Interest
owned by Operating Partnership in such county or parish unless Operating
Partnership and Pension Partnership prepare and execute a schedule to the
Conveyance setting forth those leases as to which either the Net Profits
Interest and the Overriding Royalty Interests are not applicable or as to which
the Net Profits Interest of Pension Partnership attaches to less than all of the
working interest owned by Operating Partnership. Additionally, the parties agree
that in lieu of filing this Net Profits Agreement in each county or parish in
which there are located Leases, it shall be sufficient to file a memorandum or
some other notice to interested parties that a copy of this Net Profits
Agreement is filed of record in Harris County, Texas, or, in the alternative, in
some county or parish within a state at the option of Operating Partnership.
Article VII
Payment And Marketing
Section 7.01. Payment. No later than the thirtieth (30th) day after
receipt by the Operating Partnership of revenues attributable to the production
of Subject Minerals as to which the Net Profits Interests and/or Overriding
Royalty Interests relate (excluding Saturday, Sunday or any other day on which
national banking institutions in the City of Houston, Texas are closed as
authorized or required by law), Operating Partnership shall pay to Pension
Partnership its Net Profits Interests and Overriding Royalty Interests. Pension
Partnership shall be entitled to receive all interest earned on revenues
attributable to its Net Profits Interests and Overriding Royalty Interests
between the date of their receipt by Operating Partnership and the date of their
payment to Pension Partnership. Operating Partnership is authorized to make
estimated payments to Pension Partnership hereunder and adjust subsequent
payments to take into account shortfalls or overages in estimated payments so
made.
Section 7.02. Interest on Past Due Payments. Any amount not paid by
Operating Partnership to Pension Partnership when due shall bear, and Operating
Partnership will pay, interest at the per annum rate of one percentage point
over the Prime Interest Rate in effect during the period of such nonpayment,
provided that such interest shall not be in excess of the maximum amount allowed
by law.
Section 7.03. Overpayment. If at any time Operating Partnership
inadvertently pays Pension Partnership more than the amount due, Pension
Partnership shall not be obligated to return any such overpayment, but the
amount or amounts otherwise payable for any subsequent period or periods shall
be reduced by the sum of (i) such overpayment, plus (ii) an amount equal to
interest computed at a per annum rate of one percentage point over the weighted
average Prime Interest Rate in effect during the period of such overpayment,
provided such interest shall not be in excess of the maximum amount allowed by
law.
11
<PAGE>
Section 7.04. Marketing of Subject Minerals. Operating Partnership
shall market or use its best efforts to cause operators of the Leases to market
the Subject Minerals at the best prices and on the best terms that it or the
operator of the Leases shall deem reasonably obtainable under the circumstances
and in any event at prices and terms at least as favorable as Operating
Partnership obtains for minerals not subject to this Net Profits Agreement which
are of the same type, in the same location and similarly dedicated, but Pension
Partnership shall have, and at all times retain, the right to receive production
in kind with respect to Subject Minerals attributable to either the Net Profits
Interests or the Overriding Royalty Interests. Subject to the foregoing, to the
extent comparisons exist, sales of the Subject Minerals by Operating Partnership
to an Affiliate shall be made at prices and on terms comparable to the prices
and terms received by other Persons in the area. Operating Partnership will
exercise its best efforts to perform all obligations binding on it under Sales
Contracts in accordance with the terms thereof and will use its best efforts to
enforce performance of the obligations of third parties thereunder; provided
that Operating Partnership shall have no liability for its failure to so perform
except where such failure is due to Operating Partnership's negligence or
misconduct. As to any third parties, the acts of Operating Partnership shall be
binding on Pension Partnership. Operating Partnership will bring the Subject
Minerals to market in accordance with reasonable and prudent business judgment
and sound oil and gas field practices.
Section 7.05. Non-Liability of Pension Partnership. In no event shall
Pension Partnership be liable or responsible in any way for the direct payment
to Operating Partnership or to any third party for any Operating Costs or other
costs or liabilities incurred by Operating Partnership or other lessees
attributable to the Leases or to the Subject Minerals produced therefrom.
Article VIII
Operation of Leased Premises
Section 8.01. Prudent Operator Standard. To the extent Operating
Partnership controls such matters, Operating Partnership agrees that it will
conduct and carry on or cause to be conducted and carried on the development,
maintenance and operation of the Leases with reasonable and prudent business
judgment and in accordance with sound oil and gas field practices, and that it
will drill or cause to be drilled such wells as a prudent operator would drill
from time to time in order to develop the Overriding Royalty Depth and the
Overriding Royalty Surface Acreage and to protect them from drainage. However,
nothing contained in this Section 8.01 shall be deemed to prevent or restrict
Operating Partnership from electing not to participate in any operation which is
to be conducted under the terms of any operating agreement, unit operating
agreement, contract for development or similar instrument affecting or
pertaining to the Leases (or any portion thereof) and allowing consenting
parties to conduct nonconsent operations thereon, if such election is made by
Operating Partnership in good faith and in conformity with sound field
practices, unless the operator under such operating agreement, unit operating
agreement, contract for development or similar instrument is an Affiliate of
Operating Partnership.
Section 8.02. Abandonment of Properties. Nothing herein contained shall
obligate Operating Partnership to drill any well, or to continue to operate any
well or to operate or maintain in force or attempt to maintain in force any of
the Leases when, in Operating Partnership's opinion, such well or Lease ceases
to produce or is not capable of producing oil, gas or other minerals in paying
quantities. The expiration of a Lease in accordance with the terms and
conditions applicable thereto shall not be considered to be a voluntary
surrender or abandonment thereof.
Section 8.03. Insurance. Operating Partnership shall acquire or cause
to be acquired such insurance as it deems to be (i) reasonable for the
protection of the Subject Interests in the Leases and (ii) economical under the
circumstances.
Section 8.04. Farmout. Operating Partnership shall have the power and
right to enter into farmout agreements with respect to (i) the Overriding
Royalty Depth and the Overriding Royalty Surface Acreage, free from any Net
Profits Interest but subject to Pension Partnership's Overriding Royalty
Interests, and (ii) the Net Profits Depth and the Net Profits Surface Acreage,
free from the Overriding Royalty Interest but subject to any Net Profits
Interest.
12
<PAGE>
Article IX
Unitization
Section 9.01. Pooled Subject Interests. Certain of the Subject
Interests may be pooled and unitized for the production of Subject Minerals
prior to acquisition by Operating Partnership. Such Subject Interests are and
shall be subject to the terms and provisions of such pooling and unitization
agreements, the depth and surface acreage distinctions required hereunder shall
be made subject to such pooling and unitization agreement, and the Net Profits
Interest and Overriding Royalty Interest of Pension Partnership in each such
Subject Interest shall apply to and affect only the production from such units
which accrues to such interests under and by virtue of the applicable pooling
and unitization agreements; provided, however, that should certain of the
Subject Interests be so pooled and unitized or form all or a part of a
production unit, a spacing unit, an area of unitization or communitization, or,
in the case of federal lands, a participation area, on or prior to the date upon
which Operating Partnership acquires Subject Interests in the Leases, in no
event shall any change occurring after such date in either the surface acreage
configuration or the depth designation(s) of any such pooled unit, production
unit, spacing unit, area of unitization or communitization, or participation
area, whether such change is voluntary or compulsory (pursuant to governmental
rule, regulation or order) alter or have the effect of altering the Net Profits
Surface Acreage, the Net Profits Depth, the Overriding Royalty Surface Acreage,
or the Overriding Royalty Depth under this Net Profits Agreement, a Net Profits
Interest or in the Conveyance(s) contemplated hereunder.
Section 9.02. Right to Pool. Subject to the terms of the last sentence
of this Section 9.02, Operating Partnership shall have the right and power,
exercisable only during the period provided in Section 9.03 hereof, to pool and
unitize any of the Subject Interests and to alter, change or amend or terminate
any pooling or unitization agreements heretofore or hereafter entered into, as
to all or any part of the land covered thereby, as to any one or more of the
formations or horizons thereunder, and as to any one or more Subject Minerals,
upon such terms and provisions as Operating Partnership shall in its sole
discretion determine, subject in all events to the Net Profits Interests and the
Overriding Royalty Interests of Pension Partnership as herein provided. If and
whenever through the exercise of such right and power, or pursuant to any law
hereafter enacted or any rule, regulation or order of any governmental body or
official hereunder promulgated, any of the Subject Interests are pooled or
unitized in any manner, the Net Profits Interests and the Overriding Royalty
Interests insofar as they affect such Subject Interests shall also be pooled and
unitized and in any such event such Net Profits Interests and Overriding Royalty
Interests in such Subject Interests shall apply to and affect only the
production which accrues to such Subject Interests under and by virtue of the
pooling and unitization. The right and power of Operating Partnership as above
provided to pool and unitize any of the Subject Interests or to alter, change or
amend or terminate any pooling or unitization agreements shall in no event
change or have the effect of changing the Net Profits Surface Acreage, the Net
Profits Depth, the Overriding Royalty Surface Acreage or the Overriding Royalty
Depth under this Net Profits Agreement, a Net Profits Interest or the
Conveyance(s) contemplated hereunder.
Section 9.03. Applicable Period. Operating Partnership's power and
right to pool and unitize the Subject Interests and the Net Profits Interests
and Overriding Royalty Interests shall be exercisable and enjoyed only during
the period of the life of the last survivor of the descendants of Joseph P.
Kennedy, father of the late President of the United States of America, living on
the date of execution hereof, plus twenty-one (21) years after the death of such
last survivor, or the term of the Conveyance itself, whichever period shall
first expire.
Article X
Government Regulation
Section 10.01. Compliance with Laws. All obligations of the parties
hereunder shall be subject to all applicable laws of the federal government of
the United States or Canada and any other state, provincial, or local government
having jurisdiction, as well as to the applicable rules, regulations and orders
of any federal, state or local body, agency, board, official or commission
having jurisdiction. Rates permitted under the Natural Gas Act, the Natural Gas
Policy Act of 1978, and any other applicable statute or law, and the rules and
regulations thereunder, to be paid for the Subject Minerals shall be controlling
if lower than prices established in Sales Contracts. Operating Partnership shall
be entitled to use its reasonable discretion in making filings, for itself and
on behalf of the Pension Partnership, with the Federal Energy Regulatory
Commission, the Department of Energy or any other governmental body, agency,
board, official or commission having jurisdiction, affecting the prices and
other matters at which Subject Minerals may be sold.
13
<PAGE>
Article XI
Assignments
Section 11.01. Assignment by Operating Partnership. Operating
Partnership shall have the right to assign, sell, transfer or convey its rights
and obligations under this Net Profits Agreement and/or all of the Subject
Interests, or any part thereof, subject to any Net Profits Interests and
Overriding Royalty Interests of Pension Partnership and the terms and provisions
of this Net Profits Agreement. Should Operating Partnership sell, transfer or
convey less than all of the Subject Interests burdened by a Net Profits Interest
to a third party, each of the Subject Interests so sold or conveyed shall be
subject to this Net Profits Agreement and the Net Profits Interest and Pension
Partnership's interests hereunder and in and to each of the Subject Interests
sold or conveyed; provided, however, that all of the provisions hereof relating
to the aggregation of proceeds and costs as to such Subject Interests shall not
then apply and Pension Partnership's Net Profits Interest shall be calculable
with respect to each of the sold or conveyed Subject Interests separately and
the Fixed Percentage determined hereunder shall apply thereto.
Section 11.02. Assignment by Pension Partnership. Pension Partnership
has the right to assign any Net Profits Interest or Overriding Royalty Interest
in whole or in part. However, an assignment of a Net Profits Interest will not
affect the method of aggregation contemplated hereunder.
Section 11.03. Change in Ownership. No change of ownership or right to
receive payment of a Net Profits Interest or the Overriding Royalty Interest, or
of any part of either, however accomplished, shall be binding upon Operating
Partnership until notice thereof shall have been furnished by the Person
claiming the benefit thereof, and then only with respect to payments thereafter
made. Notice of sale or assignment shall consist of a certified copy of the
recorded instrument accomplishing the same; notice of change of ownership or
right to receive payment accomplished in any other manner (for example by reason
of incapacity, death or dissolution) shall consist of certified copies of
recorded documents and complete proceedings legally binding and conclusive of
the rights of all parties. Until such notice shall have been furnished Operating
Partnership as is above provided herein, the payment or tender of all sums
payable on the Net Profits Interests or the Overriding Royalty Interests may be
made in the manner provided herein precisely as if no such change in interest or
ownership or right to receive payment had occurred. The kind of notice herein
provided shall be exclusive, and no other kind, whether actual or constructive,
shall be binding on Operating Partnership.
Article XII
Records and Reports
Section 12.01. Books and Records. Operating Partnership shall at all
times maintain or have maintained true and correct books and records to
determine the amounts payable to Pension Partnership for each Net Profits
Interest and the attendant Overriding Royalty Interests, including, but not
limited to, a Net Proceeds account to which Gross Proceeds, Operating Costs and
Excess Operating Costs are credited and charged, as well as separate
well-by-well records with respect to Overriding Royalty Interests payable to
Pension Partnership.
Section 12.02. Inspections. The books and records referred to in
Section 12.01 shall be open for inspection at the office of the Managing General
Partner during normal business hours.
Section 12.03. Quarterly Statements. Within forty-five (45) days next
following the close of each calendar quarter, Operating Partnership shall
deliver to Pension Partnership a statement showing the computation of all
payments paid or due to Pension Partnership for each interest owned by Pension
Partnership attributable to such quarter.
Section 12.04. Pension Partnership's Exceptions to Quarterly
Statements. If Pension Partnership shall take exception to any item or items
included in the quarterly statements rendered by Operating Partnership, Pension
Partnership shall notify Operating Partnership in writing within ninety (90)
days after the receipt of the report, setting forth in such notice the specific
charges or computations complained of and to which exception is taken or the
specific credits which should have been made and allowed; and with respect to
such complaints and exceptions as are agreed upon, adjustment shall be made. If
Pension Partnership shall fail to give Operating Partnership notice of such
complaints and exceptions prior to the expiration of such 90 day period, then
the statements for such calendar quarter as originally rendered by Operating
Partnership shall be deemed to be correct as rendered.
14
<PAGE>
Article XIII
Miscellaneous
Section 13.01. Proportionate Reduction. In the event of failure or
deficiency in title to any of the Subject Interests, the portion of the
production from such Subject Interests out of which a Net Profits Interest or
the Overriding Royalty Interests attributable to such Subject Interests shall be
payable shall be reduced in the same proportion that such Subject Interests are
reduced.
Section 13.02. Term. This Net Profits Agreement and the Conveyance(s)
made pursuant hereto shall remain in force so long as the Subject Interests are
in effect.
Section 13.03. Amendments Hereof and Further Assurances. Should any
additional instruments of assignment and conveyance be required to describe more
specifically any interests subject hereto or any conveyance made pursuant
hereto, Operating Partnership agrees to execute and deliver the same. Also, if
any other or additional instruments are required in connection with the transfer
of state or federal lease interests in order to comply with applicable laws or
regulations, Operating Partnership will execute and deliver the same. Further,
this Net Profits Agreement may be amended by a writing executed by Operating
Partnership and Pension Partnership and multiple amendments are specifically
authorized.
Section 13.04. Notices. All notices, statements, payments and
communications between the parties hereto shall be deemed to have been
sufficiently given and delivered if enclosed in a postage paid wrapper and
deposited in the United States mails directed or to be furnished or made at
their respective addresses, as follows:
Operating Partnership: Swift Energy Company
16825 Northchase Drive, Suite 400
Houston, Texas 77060
Attn: Terry E. Swift
Pension Partnership: Swift Energy Company
16825 Northchase Drive, Suite 400
Houston, Texas 77060
Attn: Bruce H. Vincent
Either party or the successors or assignees of the interests or rights
or obligations of either party hereunder may change its address or designate a
new or different address or addresses for the purposes hereof by a similar
notice given or directed to all parties interested hereunder at the time.
Section 13.05. Binding Effect. This Net Profits Agreement and any
Conveyance executed pursuant hereto shall bind and inure to the benefit of
successors and assigns of Operating Partnership and Pension Partnership.
Section 13.06. Headings. Article and Section headings used in this Net
Profits Agreement are for convenience only and shall not affect the construction
of this Net Profits Agreement.
Section 13.07. Substitution of Warranty. Any Conveyance made pursuant
hereto shall be made with full substitution and subrogation of Pension
Partnership in and to all covenants of warranty by others heretofore given or
made with respect to the Leases or any part thereof or interest therein.
Section 13.08. Severability. Every provision of this Net Profits
Agreement is intended to be severable. If any term or provision hereof is
illegal or invalid for any reason whatsoever, such illegality or invalidity
shall not affect the validity of the remainder hereof.
Section 13.09. Choice of Law. This Net Profits Agreement, and the
application or interpretation hereof, shall be governed exclusively by its terms
and by the local, internal laws of the State of Texas.
Section 13.10. Cumulative Rights. The rights and remedies provided by
this Net Profits Agreement are cumulative and the use of any one right or remedy
by any party shall not preclude or waive its rights to use any or all other
remedies. Said rights and remedies are given in addition to any other rights the
parties may have by law, statute, ordinance or otherwise.
Section 13.11. Counterparts. This Net Profits Agreement may be executed
in any number of counterparts with the same effect as if all parties hereunder
had signed the same document. All counterparts shall be construed together and
shall constitute one agreement.
15
<PAGE>
Section 13.12. Successors and Assigns. Each and all of the covenants,
terms, provisions and agreements herein contained shall be binding upon and
inure to the benefit of the parties hereto and, to the extent permitted by this
Net Profits Agreement, their respective successors and assigns.
IN WITNESS WHEREOF, each of the parties hereto has caused this Net
Profits Agreement to be executed in its name and behalf in multiple originals,
as of December 14, 1995.
SWIFT ENERGY OPERATING PARTNERS 1995-B, LTD.
ATTEST:
BY: Swift Energy Company, Managing
General Partner
- --------------------------
Adrian D. Shelley
Assistant Secretary BY: --------------------------------
Terry E. Swift
Executive Vice President
WITNESS:
- --------------------------
SWIFT ENERGY PENSION PARTNERS 1995-B, LTD.
ATTEST:
BY: Swift Energy Company, Managing
General Partner
- --------------------------
Adrian D. Shelley
Assistant Secretary BY: --------------------------------
Bruce H. Vincent
Senior Vice President - Funds Management
WITNESS:
- --------------------------
STATE OF TEXAS :
COUNTY OF HARRIS :
On this 29th day of December, 1995, before me the undersigned, a Notary
Public in and for the county and state aforesaid, personally appeared TERRY E.
SWIFT to me personally known to be the identical person who signed the name of
the maker thereof to the within and foregoing instrument as its Executive Vice
President and acknowledged to me that he executed the same as his free and
voluntary act and deed, and as the free and voluntary act and deed of said
corporation, for the uses and purposes therein set forth.
Given under my hand and seal this day and year last above written.
----------------------------------
Notary Public in and for the
STATE OF TEXAS
----------------------------------
PRINT NAME OF NOTARY
16
<PAGE>
STATE OF TEXAS :
COUNTY OF HARRIS :
On this 29th day of December, 1995, before me the undersigned, a Notary
Public in and for the county and state aforesaid, personally appeared BRUCE H.
VINCENT to me personally known to be the identical person who signed the name of
the maker thereof to the within and foregoing instrument as its Senior Vice
President Funds Management and acknowledged to me that he executed the same as
his free and voluntary act and deed, and as the free and voluntary act and deed
of said corporation, for the uses and purposes therein set forth.
Given under my hand and seal this day and year last above written.
----------------------------------
Notary Public in and for the
STATE OF TEXAS
----------------------------------
PRINT NAME OF NOTARY
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Swift Energy
Operating Partners 1995-B, Ltd's balance sheet and statement of operations con-
tained in its Form 10-K for the year ended December 31, 1996 and is qualified in
its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 2,619,944
<SECURITIES> 0
<RECEIVABLES> 85,840
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,717,084
<PP&E> 424,253
<DEPRECIATION> (52,542)
<TOTAL-ASSETS> 3,088,795
<CURRENT-LIABILITIES> 215,645
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 2,873,150
<TOTAL-LIABILITY-AND-EQUITY> 3,088,795
<SALES> 122,378
<TOTAL-REVENUES> 272,340
<CGS> 0
<TOTAL-COSTS> 52,542<F1>
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 113,638
<INCOME-TAX> 0
<INCOME-CONTINUING> 113,638
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 113,638
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
<F1>Includes lease operating expenses, production taxes and depretion,
depletion and amortization expense. Excludes general and administrative and
interest expense.
</FN>
</TABLE>
