SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a)of the Securities Exchange Act of 1934
(Amendment No. 2)
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[X] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by
Rule 14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to ss. 240.14a-11(c) or ss. 240.14a-12
Swift Energy Pension Partners 1991-B, Ltd.
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(Name of Registrant as Specified In Its Charter)
Swift Energy Company
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(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[ ] $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), 14a-6(i)(2) or
Item 22(a)(2) of Schedule 14A.
[ ] $500 per each party to the controversy pursuant to Exchange Act
Rule 14a-6(i)(4).
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
1) Title of each class of securities to which transaction applies:
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2) Aggregate number of securities to which transaction applies:
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3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
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4) Proposed maximum aggregate value of transaction:
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5) Total fee paid:
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[X] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
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2) Form, Schedule or Registration Statement No.:
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3) Filing Party:
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4) Date Filed:
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September 30, 1997
Dear Interest Holders:
Enclosed is a proxy statement and related information pertaining to a
proposal to sell all of the Partnership's properties and dissolve and liquidate
the Partnership. In order for the sale and liquidation to take place, Interest
Holders holding a majority of the outstanding SDIs must approve this proposal.
See "The Proposal -- Reasons for the Proposal" and "Recommendation of the
Managing General Partner." The Managing General Partner recommends that you vote
in favor of such sale and liquidation for a number of reasons. It is important
that you review the enclosed materials before voting on the proposal.
Swift Energy Managed Pension Assets Partnership 1991-B, Ltd. has been in
existence for almost six years, and most of the properties underlying its net
profits interest were purchased by the first half of 1991. No capital is
available for any enhancement activities on the properties in which the
Partnership owns non-operating interests or to produce the proved non-producing
reserves on those properties. The Partnership's interest in proved reserves that
can be produced without requiring further expenditures is limited. The
Partnership's interest in proved producing reserves at January 1, 1997 is
533,640 Mcfe. Thus, even if oil and gas prices were unusually high, there would
be limited impact upon the Partnership's ultimate economic performance. See "The
Proposal -- Partnership Financial Performance and Conditions." To continue
operation of the Partnership means that Partnership direct and administrative
expenses (such as costs of audits, reserve reports, and Securities and Exchange
Commission filings), as well as the cost of operating the properties in which
the Partnership owns an interest, will continue while revenues decrease, which
may decrease the funds ultimately available for Interest Holders. See "The
Proposal -- Estimates of Liquidating Distribution Amount." Thus, approval of the
current sale of the Partnership's Property Interests at this time will
accelerate the receipt by the Interest Holders of the remaining cash value of
the Partnership's Property Interests.
If Interest Holders holding a majority of the SDIs approve this proposal,
the Managing General Partner will attempt to complete the sale of all
Partnership properties by the end of 1997.
Included in this package are the most recent financial and other
information prepared regarding the Partnership. If you need any further material
or have questions regarding this proposal, please feel free to contact the
Managing General Partner at (800) 777-2750.
We urge you to complete your Proxy and return it immediately, as your vote
is important in reaching a quorum necessary to have an effective vote on this
proposal. Enclosed is a green Proxy, along with a postage-paid envelope
addressed to the Managing General Partner for your use in voting and returning
your Proxy. Thank you very much.
SWIFT ENERGY COMPANY,
Managing General Partner
By: /s/ A. Earl Swift
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A. Earl Swift
Chairman
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Swift Energy Pension Partners 1991-B, Ltd.
16825 Northchase Drive, Suite 400
Houston, Texas 77060
(281) 874-2700
NOTICE OF SPECIAL MEETING OF INTEREST HOLDERS
To be held October 30, 1997
Notice is hereby given that a special meeting of Interest Holders who hold
depositary interests in Swift Energy Pension Partners 1991-B, Ltd. (the
"Partnership") will be held at 16825 Northchase Drive, Houston, Texas, on
Thursday, October 30, 1997 at 4:00 p.m. Central Time to consider and vote upon:
The adoption of a proposal for (a) sale of substantially all of the assets
of the Partnership (consisting of its net profits interest) including the
purchase in certain circumstances of a portion of the Partnership's
property interests underlying its net profits interests by the Managing
General Partner and (b) the dissolution, winding up and termination of the
Partnership (the "Termination"). All asset sales and the Termination
comprise a single proposal (the "Proposal"), and a vote in favor of the
Proposal will constitute a vote in favor of each of these matters.
A record of Interest Holders has been taken as of the close of business on
September 15, 1997, and only Interest Holders of record on that date will be
entitled to notice of and to vote at the meeting, or any adjournment thereof.
If you do not expect to be present in person at the meeting or prefer to
vote by proxy in advance, please sign and date the enclosed proxy and return it
promptly in the enclosed postage-paid envelope which has been provided for your
convenience. The prompt return of the proxy will ensure a quorum and save the
Partnership the expense of further solicitation.
SWIFT ENERGY COMPANY,
Managing General Partner
/s/ John R. Alden
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JOHN R. ALDEN
Secretary
September 30, 1997
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Swift Energy Pension Partners 1991-B, Ltd.
16825 Northchase Drive, Suite 400
Houston, Texas 77060-9468
(281) 874-2700
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PROXY STATEMENT
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SUMMARY
General
This Proxy Statement is being provided by Swift Energy Company, a Texas
corporation (the "Managing General Partner") in its capacity as the Managing
General Partner of Swift Energy Pension Partners 1991-B, Ltd. a Texas limited
partnership (the "Partnership"), to holders of depositary interests ("SDIs")
representing an initial investment of $1.00 per SDI in the Partnership. This
Proxy Statement and the enclosed proxy are provided for use at a special meeting
of interest holders (the "Interest Holders"), and any adjournment of such
meeting (the "Meeting") to be held at 16825 Northchase Drive, Houston, Texas, at
4:00 p.m. Central Time on Thursday, October 30, 1997. The Meeting is called for
the purpose of considering and voting upon a proposal to (a) sell substantially
all of the assets of the Partnership (consisting of its net profits interest),
including the purchase in certain circumstances of the Partnership's Property
Interests underlying its net profits interest by the Managing General Partner,
and (b) dissolve, wind up and terminate the Partnership (the "Proposal"), in
accordance with the terms and provisions of Article XIX of the Partnership's
Limited Partnership Agreement dated September 30, 1991 (the "Partnership
Agreement"), and the Texas Revised Limited Partnership Act (the "Texas Act").
This Proxy Statement and the enclosed proxy are first being mailed to Interest
Holders on or about October 6, 1997.
Under Section 14.09 of the Partnership Agreement, the affirmative vote of
Interest Holders holding at more than 50% of the SDIs then held by Interest
Holders as of the Record Date (as defined) is required for approval of the
Proposal. Each Interest Holder appearing on the Partnership's records as of
September 15, 1997 (the "Record Date"), is entitled to notice of the Meeting and
is entitled to one vote for each SDI held by such Interest Holder. Under Section
14.09 of the Partnership Agreement, the General Partners may not vote its SDIs
for matters such as the Proposal. VJM Corporation, a California corporation, the
Special General Partner of the Partnership, owns a .75% interest in the
Partnership as a General Partner, but owns no SDIs. The Managing General Partner
currently owns approximately 4.52% of all outstanding SDIs. Therefore, the
affirmative vote of holders of more than 50% of the remaining SDIs is required
to approve the proposed sale.
Partnership Property Interests
The working interest in the producing oil and gas properties in which the
Partnership owns the Property Interests is owned by an affiliated companion
partnership, Swift Energy Operating Partners 1991-B, Ltd. (the "Operating
Partnership"). The Partnership's assets consist of a net profits interest that
covers multiple working interests, and which may be divided into multiple net
profits interests if the Operating Partnership separately sells one or more of
its working interests burdened by the net profits interest (the "Property
Interests"). Upon approval of the Proposal by the Interest Holders, the Managing
General Partner intends to sell substantially all of the Partnership's Property
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Property Interests, together with the Operating Partnership's working interests
in the same properties, in a sale or series of sales, use the proceeds to pay or
provide for the payment of liabilities, and then wind up the affairs of the
Partnership. The total PV-10 Value of the Partnership's reserves as of December
31, 1996 was $843,558. During 1996, approximately 53% of the Partnership's
revenue was attributable to natural gas production. For more information, see
the attached Annual Report on Form 10-K for the year ended December 31, 1996 and
the Form 10-Q for the second quarter of 1997.
Method of Sale
It is highly likely that the Property Interests will be sold in a series of
sales rather than in a single transaction. The Managing General Partner
anticipates that most of the Partnership's Property Interests will be offered
for sale at auctions (together with the working interest owned by the Operating
Partnership) conducted by the Oil & Gas Asset Clearinghouse (the "O&G
Clearinghouse"), or a similar company engaged in auctions of oil and gas
properties, although some of the Partnership's Property Interests may be sold in
negotiated transactions with third parties. Other than the possible sale of
interests in the AWP Olmos Field to the Managing General Partner (discussed in
"Special Factors" below if no third party exceeds the minimum bid amount at
auction) all sales will be made to unaffiliated third parties at auction or
through negotiated transactions. The procedures to be followed for offering the
AWP Olmos Field Property Interests at auction are discussed under "Special
Factors" and "The Proposal -- Auction Procedure" herein. The Managing General
Partner will not begin the sales process until the Proposal has been approved by
the Interest Holders. A minimum auction price will be set for sale of certain of
the Operating Partnership's working interest and the Partnership's Property
Interest in the same field. If the Managing General Partner has an interest in
purchasing certain of the Partnership's Property Interests if no higher price is
paid at auction, the Managing General Partner will obtain an independent
appraisal of the value of the Property Interest by an independent Consultant,
J.R. Butler and Company ("J.R. Butler") before such Property Interest is offered
at auction. A purchase of such property by the Managing General Partner will
take place only if the Property Interest is first offered to third parties at
auction, and then only if a price higher than the appraised value is not
received from third parties. Bids over the minimum price from third parties will
be accepted at auction. If no third party purchases these Property Interests at
auction at prices above the minimum bid, then the Managing General Partner will
purchase those interests for the minimum bid amount set by the third party
appraisals.
The Managing General Partner is asking for approval of the Proposal prior
to offering the Partnership's Property Interests for sale, and thus before the
sales prices for Partnership properties are known, to avoid delay in selling the
Property Interests. Furthermore, as the Managing General Partner must sell the
Partnership's Property Interests in its oil and gas properties together with the
working interests in those same properties owned by the Operating Partnerships
and several other Partnerships which it manages, solicitation of approval of
each purchase offer from all of the partnerships would be impractical.
It is possible, though unlikely, that less than all of the Partnership's
Property Interests will be sold. See "The Proposal--Steps to Implement the
Proposal--Negotiated Sale." The Managing General Partner anticipates that the
majority of sales will be made by the end of the first quarter of 1998. The sale
of Partnership Property Interests that account for at least 662/3% of the total
value of the Partnership Property Interests will cause the Partnership to
dissolve automatically under the terms of the Partnership Agreement and the
Texas Act. Any Partnership Property Interests that are not sold at auction may
be sold pursuant to negotiated sales to third parties. Currently there are no
buyers for the Property Interests and the price at which they will be sold has
not yet been determined. The Managing General Partner cannot accurately predict
the prices at which the Property Interests ultimately will be sold. See "The
Proposal--Estimates of Liquidating Distribution Amount." In addition to the
foregoing, there are some risks involved in the Proposal. See "Risk Factors."
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SPECIAL FACTORS
Partnership Property Interests
The chart below presents information on those fields in which the
Partnership has a Property Interest which constitutes 10% or more of the
Partnership's PV-10 Value at January 1, 1997. The information below includes the
location of each field, the number of wells and operator(s), together with
information on the percentage of the Partnership's total PV-10 Value ($843,558)
on January 1, 1997 attributable to each of these fields. Information is also
provided regarding the percentage of the Partnership's production for the 18
months ended June 30, 1997 on a volumetric basis from each of these fields. On a
volumetric basis, the percentages of the PV-10 Value at January 1, 1997 of these
fields attributable to natural gas averaged 67.4% and most of the production
from these fields (in excess of 60% for all fields shown) has been natural gas.
Of the remaining 12 fields in which the Partnership owns a Property
Interest, 4 fields each comprise less than 1% of the Partnership's PV-10 Value
at January 1, 1997 and the PV-10 Value of each of the other 8 fields average 3%
of the Partnership's PV-10 Value at the same date.
<TABLE>
<CAPTION>
North
Buck North Big 12
Draw Foss River AWP Other
Field Field Field Field Fields
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<S> <C>
Campbell Custer Adams McMullen TX (9);
County and State County, County, County, County, OK (27);
Wyoming Oklahoma Mississippi Texas KS (27);
MS (9);
AR (12);
LA (2)
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Number of Wells 17 8 6 5 86
.....................................................
Operator Devon Anson KFG Petroleum Swift Swift and
3 others
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% of 1/1/97 PV-10 Value 36.3% 13.0% 10.2% 6.8% 33.7%
.....................................................
% of Total Production for
18 months ended 6/30/97
(Vol.) 12.9% 8.9% 9.2% 1.3% 67.7%
...................................................
</TABLE>
Possible Sale of AWP Olmos Field Property Interest to the Managing General
Partner
If approved by a majority of the Limited Partners, the Proposal described
above to sell substantially all of the Partnership's assets and subsequently to
dissolve and terminate the Partnership will also result in the possible sale to
the Managing General Partner, after first offering such Property Interest to
third parties at auction, of the Partnership's Property Interest in the AWP
Olmos Field, representing 6.8% of its PV-10 Value at January 1, 1997, for
$45,900. The possible sale of the Partnership's AWP Olmos Field Property
Interest to the Managing General Partner is being proposed for Limited Partner
approval in an attempt to realize the highest value for this Property Interest.
The reasons for proposing the sale of the Partnership's Property Interests at
this time are described in detail under "The Proposal -- Reasons for the
Proposal." In summary, these reasons include: (i) the reduced levels of cash
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flow from the Partnership's Property Interests, which has resulted in only
$286,500 in cash distributions to Limited Partners since January 1, 1996; (ii)
the inherent decline in hydrocarbons produced over time in the absence of any
further capital expenditures on the properties in which the Partnership has a
Property Interest; (iii) the continuation of certain fixed oil field overhead
and operating costs ($22,709 in 1996) which are incurred regardless of the level
of production; and (iv) continued direct costs (audits, reserve reports,
partnership filings) incurred each year ($56,749 in 1996). Because of the
depletion of the Partnership's oil and gas reserves (761,874 Mcfe at January 1,
1997) and lack of cash flow, the Managing General Partner believes that the
Partnership's asset base and future net revenues no longer justify the
continuation of the Partnership's operations. It is also the Managing General
Partner's belief that improvements over the last several years in the level of
oil and gas prices, particularly those for natural gas, make this an appropriate
time to consider the sale of the Partnership's Property Interests, which also
increases the likelihood of maximizing the value of the Partnership's assets,
although the level of future prices cannot be predicted with any accuracy. By
selling its Property Interests and liquidating the Partnerships, future overhead
and direct costs can be avoided and the receipt of the value of the
Partnership's reserves accelerated so that such funds are received at one time.
Such sale and liquidation is viewed by the Managing General Partner as
preferable to requiring the periodic sale of a portion of its Property Interests
over a long period of time to pay the expenses of future operations and
administration.
AWP Olmos Field
Of the Partnership's interest in remaining reserves (before including any
reduction for costs and excess costs), 6.8% of the PV-10 Value of such reserves
is located in the AWP Olmos Field, located in McMullen County in South Texas. Of
the Partnership's 1996 revenues attributable to production, 1.1% was from the
AWP Olmos Field. Although the AWP Olmos Field is the Managing General Partner's
largest producing property, the Partnership's interest in the AWP Olmos Field is
immaterial in relation to the Managing General Partner's interest in the field.
The Managing General Partner operated 240 wells and had an acreage position of
approximately 35,000 net acres in the AWP Olmos Field as of December 31, 1996.
The General Partner has been an operator in the field since 1989 and has
extensive experience with the field. Approximately 76% of the Partnership's
reserves attributable to the AWP Olmos Field are proved nonproducing reserves,
that cannot be produced without additional capital expenditures, which makes
such reserves less valuable to the Partnership. On the other hand, in its
position as operator of these properties, the Managing General Partner is in a
position to provide information to J.R. Butler and Company ("Consultant"), an
independent petroleum geological firm, that will allow Consultant to fully
evaluate and give value to these behind-pipe reserves.
Fair Market Value Opinion of J.R. Butler and Company Regarding AWP Olmos Field
Property Interest
The Managing General Partner selected J.R. Butler and Company ("J.R.
Butler" or the "Consultant") to appraise the Property Interests in the AWP Field
held by three different partnerships. J.R. Butler is an established engineering
consulting firm headquartered in Houston, Texas since 1948. J.R. Butler was
selected from among three established consulting firms interviewed by the
Managing General Partner. The Managing General Partner requested bid proposals
and met with all three firms. The Managing General Partner selected J.R. Butler
based upon the Managing General Partner's appraisal of Butler's capabilities,
experience, responsiveness, fees quoted for the engagement and Butler's
familiarity with the region in which the Property Interests are located.
There has been no pre-existing relationship between the Managing General
Partner and J.R. Butler prior to engagement of J.R. Butler in 1997 to appraise
certain interests owned by three different partnerships for purposes of
determining values or assessing the sale or possible sale of certain properties.
These partnerships have paid J.R. Butler approximately $30,000 for such
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appraisal services. Although the Managing General Partner has no arrangement
with J.R. Butler for future work, it is likely that the Managing General Partner
would employ J.R. Butler for any future appraisals of properties owned by
partnerships managed by Managing General Partner.
The Managing General Partner did not instruct J.R. Butler as to values or
limit the scope of J.R. Butler's investigation for purposes of preparing the
appraisals. The Managing General Partner provided J.R. Butler with data, logs,
maps, production and tests for Butler's use in determining the fair market value
of the Property Interests. J.R. Butler prepared its own reserves analysis of the
Property Interests and provided the fair market value thereof, and the Managing
General Partner did not provide any values for the Property Interests. The J.R.
Butler appraisal did not opine on the fairness of the transaction to the Limited
Partners.
The fair market value opinion ("Opinion") of the Consultant states that in
the opinion of the Consultant, the aggregate market value of the Partnership's
hydrocarbon reserves and future net revenues as of January 1, 1997, from the AWP
Properties, is approximately $45,900. If the Partnership continues to operate
with no sales of properties, it would not recognize these values because of the
need to reduce any potential payments under the net profits interest by the
amount of excess costs incurred by the Operating Partnership in relation to the
properties in which the Partnership has an interest. The Opinion does not in any
manner address the underlying business decision to sell these Property
Interests. Moreover, the Opinion is necessarily based upon market, economic and
other conditions as they existed on or could be evaluated as of January 1, 1997.
The Consultant selected by the Managing General Partner to provide the fair
market value opinion was chosen through a process whereby several independent
consulting firms were interviewed by the Managing General Partner. The Managing
General Partner determined that having a single independent appraisal of certain
Property Interests to establish a minimum price at which such properties could
be sold at auction would be adequate protection against conflicts of interest in
any potential sale of such Property Interests to the Managing General Partner.
Therefore, the Managing General Partner deemed such process to be a better use
of Partnership resources than the retention of multiple appraisers to determine
minimum prices to be based upon the highest or average value determined by the
various appraisers. The Managing General Partner has not acquired a separate
report or opinion regarding the fairness to the Limited Partners of the price at
which the Partnership's Property Interest in the AWP Olmos Field may be sold to
the Managing General Partner.
The Consultant prepared the reserves and future performance estimates
utilizing standard petroleum engineering methods. For properties with sufficient
production history, reserves estimates and rate projections were based primarily
on extrapolation of established performance trends and reconciled, whenever
possible, with volumetric and/or material balance calculations. For the
undeveloped locations, reserves were determined by a combination of volumetric
calculations (geologic mapping) and analogy. The Opinion states that
volumetrically determined reserves or those determined by analogy are generally
subject to greater qualifications than reserves estimates supported by
established production decline curves and/or material balance calculations.
Consultant performed the determination and classification of reserves (with
exception of the escalated prices and costs) in accordance with Securities and
Exchange Commission guidelines. The definitions used by Consultant also conform
to those promulgated by the Society of Petroleum Engineers (SPE) and the Society
of Petroleum Evaluation Engineers (SPEE).
Basic evaluation data used by Consultant, including production data,
estimates of drilling, completion and workover costs and operating costs were
obtained principally from the Managing General Partner. Gas and liquid prices
were obtained from averaging the actual prices received by the Managing General
Partner in 1996 through the month of October. The value of the wet gas stream
was reflected by the Btu-adjusted gas price for each well. An additional
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adjustment in gas prices included a 5% reduction to reflect lease use. The
estimates of future net revenue prepared by Consultant consisted of those
revenues expected to be realized from the sale of the estimated reserves after
deduction of royalties, ad valorem and production taxes, direct operating costs,
excess costs and required capital expenditures, when applicable. Future net
revenues used by Consultant were determined before the deduction of federal
income tax. Consultant prepared market value estimates by applying qualitative
risk adjustments considered by Consultant to be appropriate for the various
reserves categories and "profit factors" (as applicable) against the spread of
future net revenue values obtained from three pricing scenarios (one
non-escalated and two escalation assumptions) and two present value discount
rates of 10% and 17%.
The reserves and the resulting "value estimates" included in the study by
Consultant are not exact quantities. Future conditions may affect the recovery
of estimated reserves and revenue, and all categories of reserves may be subject
to revision and/or reclassification as more performance and well data become
available. Furthermore, the Opinion states that any oil or gas reserves estimate
or forecast of production and income is a function of engineering and geological
interpretation and judgment and that such estimates should be used with the
understanding that additional information obtained subsequent to a study may
justify revisions which could increase or decrease the original estimates of
reserves and value.
Consultant is an independent consulting firm as provided in the Standards
Pertaining to the Estimating and Auditing of Oil and Gas Reserves Information
promulgated by the SPE. Neither Consultant nor any of its personnel have any
direct or indirect interest in the Managing General Partner or the Partnership
and Consultant's compensation was not contingent upon the results of its
reserves estimates, cash flow analyses or market value opinion resulting from
its review of the Partnership properties.
In preparing the Opinion, Consultant assumed the accuracy and completeness
of the financial and other information provided to it by the Managing General
Partner or which were publicly available and did not attempt to independently
verify such information. Consultant did not make field inspections or judgments
relative environmental or other legal liabilities.
AWP Olmos Field Sale
The properties to be sold at auction include the Partnership's Property
Interest in the AWP Olmos Field. Because of the inherent conflict of interest
between the Managing General Partner's fiduciary duty to the Partnership to
obtain the highest price for the sale of the AWP Property Interest, and the
Managing General Partner's interest as a buyer of such Properties, the Managing
General Partner has developed a procedure to address these conflicts of interest
in bidding on such property. At auction of this Property Interest, a minimum
price will be set for sale of the Operating Partnership's working interest and
the Partnership's Property Interest in the AWP Olmos Field. This minimum price
will be based upon the fair market value provided by the Consultant for the AWP
Olmos Field Property Interests.
The Managing General Partner will purchase the AWP Property Interest only
if no third party offers to purchase the AWP Property Interest at auction for a
price which exceeds the minimum bid amount. J.R. Butler and Company, an
independent third party appraiser, has already provided an appraisal which
determined that the fair market value of the AWP Property Interest at January 1,
1997 was $45,900 (before any deductions for excess costs). This is also the
amount to be used as the minimum bid amount at auction, and in the event such
interest is not purchased at auction, will also be the price at which the
Managing General Partner would purchase such Property Interest. The basis upon
which this appraisal was prepared is discussed in detail under "Fair Market
Value Opinion of J.R. Butler and Company" above, and the appraisal itself is
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included with this Proxy Statement and incorporated herein by reference. The AWP
Olmos Field Property Interest constitutes 6.8% of the Partnership's PV-10 Value
at January 1, 1997, or approximately $57,362. If any third party bids more than
the minimum bid amount, then it will be sold to such third party. If, however,
the minimum bid amount is not received from a third party, then the Managing
General Partner will purchase the Property Interest for that amount.
The possible purchase of the Partnership's Property Interest in the AWP
Olmos Field has been structured in a manner to ensure that the price received by
the Partnership for its most important Property Interest is the best price
available, principally through first requiring that the Property Interest be
offered at auction to any third party which desires to purchase it. The
appraised value of such AWP interest by J.R. Butler and Company of $45,900
compares to the PV-10 Value of the same interest as of January 1, 1997 of
$57,362. The Managing General Partner does not believe that the PV-10 Value
accurately reflects the amount that oil and gas industry members are currently
paying to purchase producing properties on the open market, especially when so
much of the PV-10 Value of the AWP Property Interest is attributable to proved
non-producing reserves (76% of the PV-10 Value of the AWP Property Interest at
January 1, 1997).
During the auction process, the auctioneer does not disclose to prospective
bidders the minimum bid amount which has been set on any Property Interest. When
a bid first exceeds the sales price minimum, the auctioneer announces that the
minimum amount has been exceeded and that the property will be sold. If the
highest bid received does not exceed the minimum amount, the auctioneer
announces that this is the case without disclosing the exact amount of the
minimum bid required.
Fairness of Proposed AWP Sale
The Managing General Partner believes that this proposed method of sale of
the Partnership's AWP Olmos Field interest is fair to Limited Partners for a
variety of reasons, none of which is given greater weight than another:
1. Requiring that the Property Interest be offeed at auction to third
parties before any sale is made to the Managing General Partner
provides a mechanism for receiving the highest price a third party is
willing to pay. Only in the event that a higher price is not received
will a sale be made to the Managing General Partner.
2. The minimum price at which the Managing General Partner might buy the
Partnership's AWP Olmos Field interest has been based upon an
independent third party appraisal of its fair market value. The
factors and methods used by J.R. Butler in making this appraisal are
discussed in detail under "Fair Market Value Opinion of J.R. Butler
and Company" above.
3. Because of its position as the operator of the AWP Olmos Field and
because of the significant number of wells which it operates in that
field, the Managing General Partner believes it is in the position to
offer the highest purchase price for such Property Interest based upon
its familiarity with the costs of operating the field and its
reservoir characteristics.
4. No transaction will take place unless the Proposal is approved by a
majority of Limited Partners, without the Managing General Partner
voting its 4.52% limited partnership interest in the Partnership.
Although the Managing General Partner has given consideration to offering
the AWP Property Interests at auction to the third party highest bidder with no
minimum sales price set, this alternative was rejected because there is no
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assurance that a price equal to that willing to be paid by the Managing General
Partner would be received from third party bidders. Because of the Managing
General Partner's substantial control and operation of the AWP Olmos Field, the
level of interest and the amount that a third party would be willing to pay to
purchase such interest might be negatively affected by the lack of control of
such third party over such field and its operations. Similarly, attempts to
negotiate transactions with third parties are likely to be negatively affected
by the same lack of control and carry the same risks of receiving an
insufficient price for this Property Interest.
The possible sale of the AWP Olmos Field Property Interests to the Managing
General Partner and the procedures established for such a sale have been
approved by unanimous vote of the Board of Directors of the Managing General
Partner. The funds for any such purchase by the Managing General Partner of the
AWP interest will be funded from the Managing General Partner's working capital.
Neither the Managing General Partner nor a majority of its independent
directors retained an unaffiliated representative to act on behalf of the
Partnership's Limited Partners for the purposes of negotiating the terms upon
which any sale of the AWP Olmos Field interest to the Managing General Partner
would be made or preparing a report concerning the fairness of such transaction.
THE PROPOSAL INVOLVES CERTAIN RISKS. SEE "RISK FACTORS."
o If the Proposal is approved, the Interest Holders will not have an
opportunity to approve the specific terms of any particular sale of the
Property Interests.
o Currently there are no third party buyers for the Property Interests and
the price at which they will be sold has not yet been determined. The
Managing General Partner cannot accurately predict the prices at which the
Property Interests ultimately will be sold to third parties.
o No minimum prices will be established for many of the Property Interests,
so there is no guarantee that the Property Interests will be sold at or
above their fair market value.
o If the Proposal is adopted, a small portion of certain of the Partnership's
Property Interests may be sold to the Managing General Partner if no higher
bid is offered to third parties at auction. Any such sale must be at the
price determined by a single third party appraisal, which is also the price
used as the minimum price at which such Property Interests will be offered,
which may not reflect the fair market value of the Property Interests.
o The sale of the Property Interests is dependent upon the simultaneous sale
of the Operating Partnership's interest in the same properties. The failure
of the Operating Partnership to approve the proposal could significantly
adversely affect the likelihood of the sale of the Property Interests.
o If the Proposal is adopted, although a final liquidating distribution is
anticipated, the amount thereof is not assured. See "The
Proposal--Estimates of Liquidating Distribution Amount."
If the Proposal is not approved by Interest Holders holding more than 50%
of the SDIs held by Interest Holders other than the Managing General Partner,
the Partnership will continue to exist. In that event, however, due to the
expected decline in revenues, the Managing General Partner estimates that a
portion of the Partnership's Property Interests ranging from an average of 10%
to 15% will need to be sold each year in order to cover future direct costs,
operating costs and administrative costs.
8
<PAGE>
The Managing General Partner receives operating fees for wells in which the
Partnership has a net profits interest and for which the Managing General
Partner or its affiliates serve as operator. It is anticipated that, due to the
sale of interests in wells by the Operating Partnership, the Managing General
Partner will no longer serve as operator for a number of the wells in which the
Partnership has a net profits interest. To the extent that the operator changes
because of a change in ownership of the properties, the Managing General Partner
will lose the revenues it currently earns as operator. The Managing General
Partner believes, however, that it will be positively affected, on the other
hand, by liquidation of the Partnership, on the basis of its ownership interest
in the Partnership. See "The Proposal--Estimates of Liquidating Distribution
Amount," and "The Proposal--Impact on the Managing General Partner."
INTEREST HOLDERS ARE URGED TO COMPLETE, SIGN AND DATE THE ENCLOSED
PROXY AND TO RETURN IT TO THE MANAGING GENERAL PARTNER NO LATER
THAN OCTOBER 24, 1997.
9
<PAGE>
GLOSSARY OF TERMS
Btu means British Thermal Unit, which is a heating equivalent measure for
natural gas.
Mcf means thousand cubic feet of natural gas.
Mcfe means thousand cubic feet of natural gas equivalent, which is determined
using the ratio of one barrel of oil, condensate or natural gas liquids to six
Mcf of natural gas.
Mmbtu means million British Thermal Units, which is a heating equivalent measure
for natural gas.
Net Profits Interest means an interest in oil and gas property which entitles
the owner to a specified percentage share of the Gross Proceeds generated by
such property, net of aggregate operating costs. Under the NP/OR Agreement, the
Partnership receives a Net Profits Interest entitling it to a specified
percentage of the aggregate Gross Proceeds generated by, less the aggregate
operating costs attributable to, those depths of all Producing Properties
acquired pursuant to such agreement that are evaluated at the respective dates
of acquisition to contain Proved Reserves, to the extent such depths underlie
specified surface acreage.
NP/OR Agreement means the form of Net Profits and Overriding Royalty Interest
Agreement entered into between the Partnership and an Operating Partnership
pursuant to which the Partnership acquired a Net Profits Interest, or in certain
instances various Overriding Royalty Interests, from the Operating Partnership
in a group of Producing Properties. The Working Interest in such group of
properties is held by the Operating Partnership.
PV-10 Value means the estimated future net revenue to be generated from the
production of proved reserves discounted to present value using an annual
discount rate of 10%; these amounts are calculated net of estimated production
costs and future development costs, using prices and costs in effect as of a
certain date, without escalation and without giving effect to non-property
related expenses such as general and administrative expenses, debt service,
future income tax expense or depreciation, depletion and amortization.
Producing Properties means Properties (or interests in properties) producing oil
and gas in commercial quantities, or containing shut-in wells capable of such
production, or properties which are acquired as an incidental part of the
acquisition of such properties. Producing Properties shall include associated
well machinery and equipment gathering systems, storage facilities or processing
installations or other equipment and property associated with the production and
field processing of oil or gas. Interests in Producing Properties may include
Working Interests, production payments, Royalty Interests, Overriding Royalty
Interest, Net Profits Interests, and other nonoperating interests. Producing
Properties may include gas gathering lines or pipelines. The geographical limits
of a Producing Property may be enlarged or contracted on the basis of
subsequently acquired geological data to define the productive limits of a
reservoir, or as a result of action by a regulatory agency employing such
criteria as the regulatory agency may determine.
Proved Reserves means those quantities of crude oil, natural gas, and natural
gas liquids which, upon analysis of geologic and engineering data, appear with
reasonable certainty to be recoverable in the future from known oil and gas
reservoirs under existing economic and operating conditions. Proved Reserves are
10
<PAGE>
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.
Royalty Interest means a fractional interest in the gross production, or the
Gross Proceeds therefrom, of oil and gas and other minerals under a lease; free
of any expenses of exploration, development, operation and maintenance.
Working Interest means the operating interest under an oil, gas and mineral
lease or other property interest covering a specific tract or tracts of land.
The owner of a Working Interest has the right to explore for, drill and produce
the oil, gas and other minerals covered by such lease or other property interest
and the obligation to bear the costs of exploration, development, operation or
maintenance applicable to his interest.
11
<PAGE>
VOTING ON THE PROPOSAL
Vote Required
According to the terms of the Partnership Agreement, approval of the
Proposal requires the affirmative vote of Interest Holders holding more than 50%
of the SDIs held by Interest Holders. Therefore, an abstention by an Interest
Holder will have the same effect as a vote against the Proposal. This
solicitation is being made for votes in favor of the Proposal (which will result
in liquidation and dissolution). As of the Record Date, 2,938,207.44 SDIs were
outstanding and were held of record by 338 Interest Holders. Each Interest
Holder is entitled to one vote for each SDI held in his name on the Record Date.
Accordingly, the affirmative vote of holders of more than 1,469,103.72 SDIs is
required to approve the Proposal. The General Partners and their Affiliates are
not entitled to vote SDIs held by them on the Proposal under Section 14.09 of
the Partnership Agreement.
Interest Holders should be aware that once they approve the Proposal
pursuant to this Proxy Statement, they will have no opportunity to evaluate the
actual terms of any specific purchase offers for the Partnership's Property
Interests. See "The Proposal - General" herein. See "The Proposal -- Reasons for
the Proposal" and "The Partnership -- Transactions Between the Managing General
Partner and the Partnership."
Proxies; Revocation
A sample of the form of proxy is included in this Proxy Statement. The
actual proxy to be used to register your vote on the Proposal is the separate
green sheet of paper included with the Proxy Statement. PLEASE USE THE GREEN
PROXY TO VOTE UPON THE PROPOSAL.
If a proxy is properly signed and is not revoked by an Interest Holder, the
SDIs it represents will be voted in accordance with the instructions of the
Interest Holder. If no specific instructions are given, the SDIs will be voted
FOR the Proposal. An Interest Holder may revoke his proxy at any time before it
is voted at the Meeting. Any Interest Holder who attends the Meeting and wishes
to vote in person may revoke his proxy at that time. Otherwise, an Interest
Holder must advise the Managing General Partner of revocation of his proxy in
writing, which revocation must be received by the Managing General Partner at
16825 Northchase Drive, Suite 400, Houston Texas 77060 prior to the time the
vote is taken.
No Appraisal or Dissenters' Rights Provided
In connection with the proposal to sell substantially all of its assets and
liquidate the Partnership, Limited Partners are not entitled to any dissenters'
or appraisal rights such as would be available to shareholders in a corporation
engaging in a merger. Dissenting Limited Partners are protected under state law
by virtue of the fiduciary duty of general partners to act with prudence in the
business affairs of the Partnership.
Payment of Liquidating Distributions
Following the approval of the Proposal at the Meeting, Interest Holders
will receive a final liquidating distribution in cash from the Partnership as
soon as practicable after the affairs of the Partnership have been wound up. The
Managing General Partner expects that such payment will be made by year-end
1997. It will not be necessary for Interest Holders to surrender any certificate
or other documents representing their ownership of SDIs. Payment will be made to
each Interest Holder identified on the Partnership's records as of the Record
Date, or, upon appropriate written instruction from an Interest Holder, to his
assignee.
12
<PAGE>
Solicitation
The solicitation is being made by the Partnership. The Partnership will
bear the costs of the preparation of this Proxy Statement and of the
solicitation of proxies and such costs will be allocated 85% to the Interest
Holders and 15% to the General Partners with respect to their general
partnership interests pursuant to Section 9.01. As the Managing General Partner
holds approximately 4.52% of the SDIs held by all Interest Holders, 4.52% of the
costs borne by the Interest Holders will be borne by the Managing General
Partner, in addition to its portion borne as a General Partner. Solicitations
will be made primarily by mail. In addition to solicitations by mail, a number
of regular employees of the Managing General Partner may, if necessary to ensure
the presence of a quorum, solicit proxies in person or by telephone. The
Managing General Partner also may retain a proxy solicitor to assist in
contacting brokers or Interest Holders to encourage the return of proxies,
although it does not anticipate doing so. The costs of this proxy solicitation,
including legal and accounting fees and expenses, printing and mailing costs,
and related costs are estimated to be approximately $25,000.
RISK FACTORS
An Interest Holder considering whether to vote in favor of the Proposal
should give careful consideration to the risks involved, including those
summarized below:
Uncertainty of Liquidating Distributions
While the Managing General Partner is not aware of any unknown liabilities
at this time, should any unexpected liabilities come to light prior to making
the final liquidating distribution, such liabilities could significantly reduce,
or eliminate altogether, such final distribution.
Undetermined Sales Prices; Volatility of Oil and Gas Prices
Interest Holders will not have an opportunity to approve the specific terms
of any particular sale of the Property Interests and anticipated sales prices
for the Property Interests may not be achieved. Should domestic gas prices
strengthen after the sales of the assets, it is possible that more advantageous
sales prices for the properties might have been realized at a later date.
Potential Purchase by an Affiliate
The Partnership's Property Interests in the AWP Olmos Field may be sold to
the Managing General Partner if the minimum price for those properties, set by
an independent appraiser retained by the Managing General Partner, is not
exceeded by a bid from a third party at auction. The Managing General Partner
will use this procedure for Property Interests in the AWP Olmos Field and may
determine to use this procedure for sale of certain other properties. Property
Interests may also be conveyed to the Managing General Partner for no
consideration if it such interests cannot be sold to third parties and it is
determined that there is no value. There is no guarantee that any of the other
Property Interests will be sold at or above their fair market value.
Dependence on Operating Partnership
If the Partnership approves the proposal to sell its properties but the
Operating Partnership does not approve the sale of its Property Interests and
actually sell its interests in the same properties, then the Partnership will be
13
<PAGE>
forced to sell its net profits interest as a single property (or undivided
interests therein). The purchaser or purchasers would have no control as working
interest owners, as the working interest will still be retained by the Operating
Partnership. If this lack of control prevents an economic sale to a third party
of the Partnership's Property Interests, the Managing General Partner will again
obtain a third party appraisal of the Partnership's Property Interests from J.R.
Butler and purchase those properties itself for the appraisal price. Therefore,
the likelihood of sale of the Partnership's Property Interests will be
significantly affected by the ability of the Partnership and its companion
Operating Partnership to sell their ownership interests in the same properties
together, which in turn is dependent upon approval of the proposal being made to
the Partnership and the similar proposal being made simultaneously to the
companion Operating Partnership. Failure to approve the proposal by either
partnership could significantly adversely affect the sale of properties by the
other partnership. See "The Proposal--Simultaneous Proposal to Operating
Partnership."
Prices Used for Calculation of PV-10 Value of Proved Reserves
The PV-10 Value of the Partnership's proved oil and gas reserves upon which
the estimates of the range of liquidating distributions have been calculated
using an estimate of 1997 average prices without any escalation of $2.25 per
MMBTU. These estimates were based upon pricing scenarios determined by the
Managing General Partner and are not the same as those mandated by the
Securities and Exchange Commission for reserves disclosures under applicable SEC
Rules, which require use of prices at year-end, although the discount rate and
lack of escalation are the same. If estimates of reserves and future net
revenues had been prepared using December 31, 1996 prices, as mandated by the
SEC, reserves, future net revenues and the present value thereof would be
significantly higher. These higher prices have not been used because of the fall
in prices since year-end 1996 and the Managing General Partner's determination
that reserve estimates using 1997 average prices more accurately reflect values
likely to be received upon sale of the Partnership's Property Interests within
the next six months than estimates based upon year-end 1996 prices. If this
assumption is incorrect or prices increase rapidly at the end of 1997, the
estimates of the Partnership's PV-10 Value and proceeds receivable upon
liquidation of its Property Interests are likely to be too low.
14
<PAGE>
THE PROPOSAL
General
The Managing General Partner has proposed that the Partnership's net
profits interest be sold, the Partnership be dissolved and that the Managing
General Partner, acting as liquidator, wind up its affairs and make final
distributions to its partners. The Partnership's assets consist of a net profits
interest (the "Property Interests") in producing oil and gas properties in which
the working interest is owned by an affiliated partnership also managed by the
Managing General Partner and formed at approximately the same time as the
Partnership was organized. The Partnership's non-operating net profits interest
exists by virtue a Net Profits and Overriding Royalty Interest Agreement ("NP/OR
Agreement") dated September 30, 1991 with Swift Energy Operating Partners
1991-B, Ltd. (the "Operating Partnership"). The NP/OR Agreement gives the
Partnership a net profits interest in a group of producing properties in which
the Operating Partnership owns the working interests, and entitles the
Partnership to receive a portion of the net profits from operation of the group
of producing properties owned by the Operating Partnership which are subject to
the NP/OR Agreement. The net profits percentage to which the Partnership is
entitled is based upon a percentage of the gross proceeds (reduced by certain
costs) from the sale of oil and gas production from these properties.
The Managing General Partner intends to sell most of the Partnership's
Property Interests through auction conducted by the O&G Clearinghouse or a
similar company, although some of the Partnership's Property Interests might be
sold to a third party in negotiated transactions or to the Managing General
Partner under certain circumstances discussed in detail herein. The Managing
General Partner expects to sell all properties not sold by auction pursuant to
negotiated sales conducted by the Managing General Partner or a third party
engaged to dispose of the Partnership's assets. The Partnership, if not
terminated earlier, will terminate automatically, pursuant to the terms of the
Partnership Agreement, on December 31, 2021.
The Managing General Partner is an independent oil and gas company engaged
in the exploration, development, acquisition and operation of oil and gas
properties, both directly and through partnership and joint venture
arrangements, and therefore holds various interests in numerous oil and gas
properties. Furthermore, the Managing General Partner is the managing general
partner of a number of oil and gas partnerships.
Partnership Financial Performance and Condition
The Partnership owns non-operating Property Interests in producing oil and
gas properties within the continental United States in which Operating
Partnerships managed by the Managing General Partner own the working interests.
By the end of 1991 the Partnership had expended all of its original capital
contributions for the purchase of a Property Interest in oil and gas producing
properties. During 1996 approximately 53% of the Partnership's revenue was
attributable to natural gas production. The Operating Partnership has, from time
to time, performed workovers and recompletions of wells in which the Partnership
has Property Interests, using funds advanced by the Managing General Partner to
perform these operations, a portion of which amounts has been subsequently
repaid from production.
Interest Holders made contributions of $2,938,207, in the aggregate to the
Partnership. The Managing General Partner has made capital contributions with
respect to its general partnership interest of $337,948. Additionally, pursuant
to the presentment right set forth in Article XV of the Partnership Agreement,
it purchased 132,928 SDIs from Interest Holders.
15
<PAGE>
From inception through January 31, 1997, the Partnership has made cash
distributions to its Interest Holders totaling $1,191,100. Through January 31,
1997, the Managing General Partner has received cash distributions from the
Partnership of $228,835 with respect to its general partnership interest, and
distributions of $4,757 related to the limited number of SDIs it purchased from
Interest Holders. On a per SDI basis, Interest Holders had received, as of
January 31, 1997, $0.41 per SDI, or approximately 40.54% of their initial
capital contributions.
The Partnership acquired its Property Interests at a time when oil and gas
prices and industry projections of future prices were much higher than actually
occurred in subsequent years. As detailed in the Designated Properties
Supplement dated March 19, 1991 (as amended July 31, 1991) regarding Property
Interests to be acquired by the Partnership, when the Managing General Partner
projected future oil and gas prices to evaluate the economic viability of an
acquisition, it compared its forecasts with those made by banks, oil and gas
industry sources, the U.S. government, and other companies acquiring producing
properties. Acquisition decisions for the Partnership were based upon a range of
increasing prices that were within the mainstream of the forecasts made by these
outside parties. At the time that the Partnership's Property Interests covering
producing properties were acquired, prices averaged about $21.42 per barrel of
oil and $1.94 per Mcf of natural gas. Oil and gas prices were expected to
escalate during subsequent years of the Partnership's operations. In general, in
early 1991 all of these sources forecasted increases in product prices that were
based upon oil and gas prices at the time, which reflected the invasion of
Kuwait by Iraq in the summer of 1990 and the commencement of hostilities in the
Gulf War in 1991. The Partnership's Property Interest was acquired during the
first quarter of 1991 when current prices were predicted to escalate according
to certain parameters from then current levels. The predicted price increases
did not occur and prices fell precipitously from 1991 to 1992. The bulk of the
Partnership's reserves were produced from 1992-1995 during which time the
Partnership's oil prices in fact averaged $16.97 per barrel and natural gas
prices averaged approximately $1.74 per Mcf.
The following graphs illustrate the above factors with respect to gas
revenues only, due to the fact that a substantial majority of the Partnership's
production to date being natural gas, the bulk of which was produced during the
years when gas prices were the lowest.
16
<PAGE>
<TABLE>
<CAPTION>
GAS PER MCF
------------------------
YEAR ACTUAL EXPECTED YEAR MCFE
- ---- ------ -------- ---- ------
<S> <C> <C> <C> <C>
1990 1.86 2.04 1990 253497
1991 1.63 2.24 1991 806323
1992 1.80 2.68 1992 704598
1993 1.96 3.19 1993 527436
1994 1.89 3.38 1994 463380
1995 1.44 3.58 1995 357960
1996 2.02 3.79 1996 305494
</TABLE>
[GRAPHIC OMITTED -- Represented by table above.] (Comparison of Gas Prices
Expected in 1990 to Gas Prices Actually Received)
[GRAPHIC OMITTED -- Represented by table above.] (Amounts of Production to Date
Produced by Year)
17
<PAGE>
In addition to the effect of prices, Partnership performance has been
negatively affected by problems related to specific wells in the Operating
Partnership's original acquisitions included within the net profits interests,
which disproportionately decreased cash flow because these wells had been
anticipated to have significant early cash flows. In 1992, a well in the
Lewisburg Field, Acadia Parish, Louisiana required certain workover procedures,
due to increased water production. The procedures were unsuccessful and the well
was recompleted higher in the producing zone. Although production was
re-established, the well is producing at a rate lower than prior to the water
encroachment. Additionally, the producing zones of four wells in the Simbrah
Field, Jackson County, Texas experienced rapid depletion of the producing zone
in 1992 and 1993. Recompletion attempts into upper zones were unsuccessful and
the wells were plugged and abandoned in 1994. Recompletion procedures were
attempted on several other wells in Louisiana with limited success between 1993
and 1996. Subsequent enhancement activities were undertaken on the properties in
which the Operating Partnership held a working interest. To the extent funds
were available from 1993 to 1995, the Partnership's companion Operating
Partnership drilled seven material development wells on properties in which the
Partnership had Property Interests, of which six were successful. Five of the
seven wells were in McMullen County, Texas in the AWP Olmos Field and the other
two wells were in Custer County, Oklahoma and Fayette County, Texas,
respectively. The benefit of these enhancement activities, however, was reduced
by the need to repay the costs incurred for these enhancements.
Lower prices also had an effect on the Partnership's interest in proved
reserves. Estimates of proved reserves represent quantities of oil and gas
which, upon analysis of engineering and geologic data, appear with reasonable
certainty to be recoverable in the future from known oil and gas reservoirs
under existing economic and operating conditions. When economic or operating
conditions change, proved reserves can be revised either up or down. If prices
had risen as predicted, the volumes of oil and gas reserves that are
economically recoverable might have been higher than the year-end levels
actually reported because higher prices typically extend the life of reserves as
production rates from mature wells remain economical for a longer period of
time. Production enhancement projects that are not economically feasible at low
prices can also be implemented as prices rise. At present, because of the small
remaining amount of reserves, further price increases would not have a
significant impact on the Partnership's performance.
As required by the Partnership Agreement, the Partnership expended all of
the partners' net commitments available for property acquisitions many years ago
to acquire Property Interests in producing oil and gas properties. The net
profits paid by the Operating Partnership to the Partnership have been reduced
by amounts used by the Operating Partnership to pay operating and enhancement
costs to the third party operator. These costs relate to the working interests
that were subject to the Partnership's net profits interest. The Managing
General Partner of the Operating Partnership advanced most of these costs
because it felt that such expenditures would increase the value of the
properties in which the Partnership and the Operating Partnership have an
interest. Neither the Operating Partnership's partnership agreement nor the
Partnership's partnership agreement allow additional assessments to be made
against any Interest Holder. No material funds are available at the current time
from Partnership revenues or other sources to enable the Partnership to make
additional capital expenditures and no new capital expenditures are planned. The
Managing General Partner anticipates that a sale of the Partnership's Property
Interests will generate sufficient cash to make a liquidating distribution to
the Interest Holders.
Estimates of Liquidating Distribution Amount
It is not possible to accurately predict the prices at which the Property
Interests will be sold. The sales price of the Partnership's net profits
interest or possibly multiple net profits interests may vary. In the latter
case, certain Property Interests might sell for a higher price and others for a
lower price than those estimated below. The projected range of sales prices
18
<PAGE>
below has been based upon estimated future net revenues for the Partnership's
Property Interests, using an estimate of 1997 average prices without any
escalation of $2.25 per Mmbtu. The "high" range of estimated distributions from
liquidation is based upon estimated future net revenues discounted to present
value at 10% per annum. The "low" range is 70% of the "high" range estimate. The
1997 price estimate grew out of the pricing scenarios determined by the Managing
General Partner, which scenarios are used in various circumstances, including
economic modeling of partnership returns and evaluating the economics of
property sales or property acquisitions for the Managing General Partner or for
partnerships managed by the Managing General Partner. These pricing assumptions
vary from those mandated by the Securities and Exchange Commission ("SEC") for
reserves disclosures under applicable SEC rules, which require use of prices at
year-end, although the discount rate and lack of escalation are the same. If
estimates of reserves and future net revenues had been prepared using December
31, 1996 prices, as mandated by the SEC, reserves, future net revenues and the
present value thereof would be significantly higher. The Managing General
Partner has determined not to use these higher prices because current estimates
of 1997 average prices more accurately reflect prices purchasers of properties
are willing to pay, rather than higher values which do not reflect the decrease
in prices since year-end 1996. For example, the weighted average price of gas
received by the Partnership for the first six months of 1997 was $2.04 per Mcf
as compared to $4.67 per Mcf at December 31, 1996. For the lower end of such
projected sales proceeds, the estimated sales proceeds have been further reduced
to 70% of those shown for the higher end of the range. On July 1, the Managing
General Partner's estimated weighted average price of gas for the remainder of
1997 was $2.58 per Mcf.
Set forth in the table below are estimated proceeds that the Partnership
may realize from sales of the Partnership's properties, estimated expenses of
the related dissolution and liquidation of the Partnership, and the estimated
amount of net distributions available for Interest Holders as a result of such
sales.
<TABLE>
<CAPTION>
Range of Interest Holders' Share of Estimated Distributions
from Property Sales and Liquidation
Projected Range
----------------------
Low High
--------- ----------
<S> <C> <C> <C>
Net Sales Proceeds(1) $ 927,850 $1,175,400
Partnership Dissolution Expenses(2) $ (21,250) $ (21,250)
---------- ----------
Net Distributions payable to Interest Holders $ 906,600 $1,154,150
========== ==========
Net Distributions per $1.00 SDI $ .31 $ .39
========== ==========
<FN>
- -------------------
(1) Includes cash and net receivables and payables of the Partnership, net of
selling expenses estimated to be 7% of sales proceeds.
(2) Includes Interest Holders' share of all costs associated with dissolution
and liquidation of the Partnership.
</FN>
</TABLE>
If, on the other hand, the Partnership were to retain its Property
Interests and continue to benefit from production of those properties until
depletion, the table below estimates the return to Interest Holders, discounted
to present value, based upon the same pricing and discount assumptions used
above. The estimates of the present value of future net distributions have been
19
<PAGE>
further reduced by continuing audit, tax return preparation and reserve
engineering fees associated with continued operations of the Partnership, along
with direct and general and administrative expenses estimated to occur during
this time. Such estimates do not take into account any sale of a portion of the
Partnership's Property Interests necessary in order to generate sufficient cash
proceeds to pay general, administrative and operating expenses, which would
reduce the revenues of the Partnership.
Estimated Share of Interest Holders'
Net Distributions from Continued Operations
Projected
Cash Flows
-------------
Future Net Revenues from Net Profits Interest (over 20 years)(1) $ 1,699,600
Partnership Direct and Administrative Expenses(2) $ (76,100)
-------------
Net Distributions to Interest Holders (payable over 20 years)(3) $ 1,623,500
=============
Net Distributions per $1.00 SDI(4) $ .55
Present Value of Net Distributions per $1.00 SDI(5) $ .41
- --------------------
(1) Includes cash and net receivables and payables of the Partnership. Interest
Holders' future net revenues are based on the reserve estimates at December
31, 1996, assuming unescalated prices based on predictions of 1997 average
prices. To a limited extent, future net revenues may be influenced by a
material change in the selling prices of oil or gas. For further discussion
of this, see "--Reasons for the Proposal." The actual prices that will be
received and the associated costs may be more or less than those projected.
See "The Partnership--Partnership Financial Condition and Performance."
(2) Includes Interest Holders' share of general and administrative expenses,
and audit, tax, and reserve engineering fees.
(3) Based upon the Partnership's reserves having a projected 20-year life,
assuming flat pricing. To a limited extent, net distributions may be
influenced by a material change in the selling prices of oil or gas. For
further discussion of this, see "--Reasons for the Proposal." The actual
prices that will be received and the associated costs may be more or less
than those projected.
(4) Does not reflect effect of intermittent sales of Property Interests to pay
administrative costs once the properties no longer generate sufficient
revenues to cover such costs. The Managing General Partner estimates that
Property Interests ranging from an average of 10% to 15% of the value of
the Partnership's properties would have to be sold each year to cover such
costs.
(5) Discounted at 10% per annum.
Among factors which can affect the ultimate sales price received for
Partnership Property Interests are the following:
(1) The above cases presume that 100% of the Partnership's Property
Interests will be sold.
(2) In certain instances, the Partnership, together with the Operating
Partnerships which will be offering its working interest in the
properties in which the Partnership owns a Property Interest, will own
a large enough interest in the properties to allow the purchaser to
designate a new operator of the properties, which normally increases
the amount that a purchaser is willing to pay.
(3) Changes in the market for gas or oil may affect the pricing
assumptions used by purchasers in evaluating property value and
possible purchase prices.
20
<PAGE>
(4) Different evaluations of the amount of money required to be spent to
enhance or maintain production may have a significant effect upon the
ultimate purchase price.
(5) In certain instances, the Managing General Partner may set minimum
bidding prices for those properties offered at auction, which may not
be met.
(6) The Managing General Partner may choose to package certain less
attractive properties together with other properties in order to
enhance the likelihood of their sale. Such packaging could result in a
significant discount by prospective purchasers of the value of the
Partnership's more productive properties contained in such packages.
The Partnership Agreement authorizes the Managing General Partner to sell
the Partnership Property Interests at a price that the Managing General Partner
deems reasonable. The proceeds of all sales, to the extent available for
distribution, are to be distributed to the Interest Holders and the General
Partners in accordance with Section 9.01 of the Partnership Agreement as
follows. After use of available proceeds from property sales to reserves for
contingent or unforeseen liabilities of the Partnership, the proceeds are to be
used to repay the capital accounts of the Partners whose capital accounts have
not yet been repaid. The amounts finally distributed will depend on the actual
sales prices received for the Partnership assets, results of operations until
such sales and other contingencies and circumstances.
Fairness of the Proposal; Comparison of Sale Versus Continuing Operations
The Managing General Partner believes that the Proposal to sell the
Partnership's Property Interests and liquidate is fair to Interest Holders for
several reasons. No such transactions will take place unless the Proposal is
approved by a majority of Interest Holders, without the Managing General Partner
voting its 4.52% of SDIs. The Partnership's Property Interests will be sold to
the highest third-party bidder at auction or to the third party which is willing
to purchase the interests for the highest price in a negotiated sale unless the
Managing General Partner purchases the Partnership's Property Interest in the
AWP Olmos Field in the absence of a third-party bid at auction higher than the
appraised value of that interest. The fairness of making such a sale to the
Managing General Partner is discussed in detail under "Special Factors
[Considerations]-- Fairness of Possible Sale of AWP Olmos Field Interest to the
Managing General Partner." Based on the above tables, it is estimated that an
Interest Holder could expect to receive from $0.31 to $0.39 per $1.00 SDI upon
immediate sale of the Partnership Property Interests. In comparison, it is
estimated that a Limited Partner could expect to receive approximately $0.41 per
$1.00 SDI, discounted to present value ($0.55 per $1.00 SDI over 17 years on an
undiscounted basis) if the Partnership continued operations. Although the
estimates contained under "The Proposal--Estimates of Liquidating Distribution
Amount" above show that estimated cash distributions to Interest Holders (based
on net present value) from continued operations over twenty years would be
approximately 5.1% higher than estimated cash distributions from selling the
Partnership's properties and liquidating the Partnership at this time (based on
the "high" range of estimates), the Managing General Partner believes there is a
substantial advantage in receiving the liquidating distribution in one lump sum
currently. The estimates of distributions from continued operations are based
upon current prices. It is highly likely that over such a long period of time,
oil and gas prices will vary appreciably and possibly widely from the prices
used to prepare these estimates. Continued operations over such a long period of
time subject Interest Holders to the risk of receiving lower levels of cash
distributions if oil and gas prices over this twenty year period are lower on
average than those used in preparing the estimates of cash distributions from
continued operations. With no further capital to invest, continued operations
over twenty years subject Interest Holders to the risks of price volatility and
to possible changes in costs or need for workover or similar significant
remedial work on the properties in which the Partnership owns Property
Interests, for which the Partnership has no capital. The Managing General
Partner also believes that there is an advantage to Interest Holders taking any
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funds to be received upon liquidation and redeploying those assets in other
investments, rather than continuing to receive small distributions over such a
long period of time.
Such estimates are based on December 31, 1996 reserve estimates assuming
unescalated pricing throughout the remaining life of the properties in which the
Partnership owns an interest. The actual prices that will be received and the
associated costs may be more or less than those projected. See "--Estimate of
Liquidating Distribution Amount."
Reasons for the Proposal
The Managing General Partner believes that it is in the best interest of
the Partnership and the Interest Holders for the Partnership to sell its
properties at this time and to dissolve the Partnership and make a final
liquidating cash distribution to its Interest Holders and General Partners for
the reasons discussed below.
Potential Liquidating Distribution. After the sale of the Partnership's
Property Interests, there will be funds available for a liquidating
distribution. As discussed above, the Managing General Partner believes that the
ability to receive the estimated liquidating distribution in one lump sum
currently, rather than in smaller amounts over a 20 year period, is one of the
benefits of the Proposal, without the continuing risk of such potential
distributions being negatively affected but oil and gas price decreases. A vote
in favor of the proposal thus might have the effect of making additional funds
currently available to the Limited Partners.
Amount of Remaining Assets. As of December 31, 1996, approximately 63% of
the Partnership's ultimate recoverable reserves had been produced, and the
Interest Holders' share of the Partnership's remaining reserves, before any
reduction for costs, is estimated to be less than 762,000 Mcfe. The
Partnership's share of oil and gas reserves are expected to continue to decline
as remaining reserves are produced. Distributions to Interest Holders in recent
years have declined and are not expected to increase appreciably. Declines in
well production are based principally upon the maturity of the wells, not on
market factors. Each producing well requires a certain amount of overhead costs,
as operating and other costs are incurred regardless of the level of production.
Likewise, direct costs and/or general and administrative expenses such as
compliance with the securities laws, producing reports to Interest Holders and
filing partnership tax returns do not decline as revenues decline. As a result
of the depletion of the Partnership's oil and gas reserves, the Managing General
Partner believes the Partnership's asset base and future net revenues no longer
justify the continuation of operations. Consequently, the Managing General
Partner expects that the Partnership will have to start selling a portion of its
Property Interests to pay the expenses of future operations and administration.
By accelerating the liquidation of the Partnership, those future administrative
costs can be avoided and the receipt of the remaining cash value of the
interests of the Interest Holders in the Partnership can be accelerated.
Effect of Gas Prices on Value. The Managing General Partner believes that
the key factor affecting the Partnership's long-term performance has been the
decrease in oil and gas prices that occurred subsequent to the purchase of the
Partnership's properties. Additionally, prices are expected to continue to vary
widely over the remaining life of the Partnership, and such changes in gas
prices will affect future estimates of revenues from continued operations of the
Partnership. Based on 1996 year-end reserve calculations, the Partnership had
only about 43% of its ultimate recoverable reserves, before any reduction for
costs, remaining for future production. Because of this small amount of
remaining reserves, even if oil and gas prices were to increase in the future,
such increases would be unlikely to have a net positive impact on the total
return on investment to the partners in view of the expenses of the Partnership
as described above.
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Potential of the Properties. Recovery in amounts great enough to
significantly impact the results of the Partnership's operations and the
ultimate cash distributions can only occur with the investment of new capital.
As provided in the Partnership Agreement, the Partnership expended all of the
partners' net commitments for the acquisition of Property Interests many years
ago, and it no longer has capital to invest in improvement of the properties
through secondary or tertiary recovery. No additional development activities are
contemplated by the Operating Partnership on the properties in which the
Partnership has a non-operating interest.
Orderly Sale of Properties Through Approval of the Proposal. The oil and
gas market is volatile, making the sale of the properties at optimal prices very
time sensitive. The approval of the Proposal would also allow the Managing
General Partner to begin the winding up and dissolution of the Partnership
following the final sale of the Partnership's Property Interests. The approval
of the Proposal will act as the approval of all future assets sales without the
approval by the Interest Holders of the specific terms of such future sales.
Interest Holders' Tax Reporting. Interest Holders will continue to have a
partnership income tax reporting obligation with respect to their SDIs as long
as the Partnership continues to exist. There is no trading market for the SDIs,
so Interest Holders generally are unable to dispose of their interests. See "The
Partnership - No Trading Market." The approval of the Proposal would also allow
the Managing General Partner to begin the winding up and dissolution of the
Partnership. Following the approval of the Proposal and the dissolution and sale
of the properties, the Interest Holders will realize gain or loss or a
combination of both under the federal income tax laws. Thereafter, Interest
Holders will have no further tax reporting obligations with respect to the
Partnership. See "Federal Income Tax Consequences."
Simultaneous Proposal to Operating Partnership
Simultaneously with this proposal to the Partnership's Interest Holders to
sell all of its Property Interests, a similar proposal is being made to the
interest holders of the companion Operating Partnership which owns the working
interest in the same properties in which the Partnership owns a non-operating
interest. If both Partnerships approve the proposal, then the working interest
and non-operating interest will be sold simultaneously.
If the Partnership approves the proposal but its companion Operating
Partnership does not, then the Managing General Partner will attempt to sell the
Non-Operating Interest owned by the Partnership to a third party. If no economic
sale can be made to a third party, which may occur due to the difficulty in
selling a net profits interest in a property when operating and spending
decisions are controlled by another entity, then the Managing General Partner
will get a fair market appraisal of the value of the Partnership's Property
Interests and will purchase the Partnership's non-operating interests itself for
the highest price for which the Property Interests are appraised. The Managing
General Partner intends to obtain any such fair market value appraisal from J.
R. Butler.
If the Partnership does not approve the proposal but its companion
Operating Partnership approves the proposal to sell its properties, then the
Operating Partnership will be forced to sell its working interests in its
properties subject to the net profits interest owned by the Partnership which
burdens the Operating Partnership's properties. Again this may affect the
saleability of the Operating Partnership's properties due to the burden on cash
flow caused by the existence of the Partnership's net profits interest. If this
burden prevents an economic sale to a third party, then the Managing General
Partner will again obtain a third party appraisal of the Operating Partnership's
properties and purchase those Property Interests itself.
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Therefore the likelihood of sale of the Partnership's Property Interests
will be significantly affected by the ability of the Partnership and its
companion Operating Partnership to sell their ownership interests in the same
properties at approximately the same time, which in turn is dependent upon
approval of the proposal being made to the Partnership and the similar proposal
being made simultaneously to the companion Operating Partnership. Failure to
approve the proposal by either partnership could significantly adversely affect
the sale of properties by the other partnership to the NP/OR Agreement.
Steps to Implement the Proposal
Following the approval of the Proposal, the Managing General Partner
intends to take the following steps to implement it:
1. Make available to the appropriate persons (that is, the third party,
if any, handling the negotiated sales and/or the auction house and
prospective purchasers) the following types of data:
o Engineering and Geological Data
- Production curve
- Completion report
- Historical production data
- Engineering well files
- Geological maps (if available)
- Logs (if available)
o Land/Legal Data
- Net Profits Interest schedule for all properties
- Land files
- Payout data
o Accounting Data
- Lease operating statements by well
- Gas marketing data
- Oil marketing data
- Gas balancing data
2. Pay or provide for payment of the Partnership's liabilities and
obligations to creditors (See -- "Liquidation") using the
Partnership's cash on hand and proceeds from the sale of Partnership
properties;
3. Conduct a final accounting and distribute any remaining cash to the
Interest Holders and the General Partners of the Partnership in
accordance with the Partnership Agreement;
4. Cause final Partnership tax returns to be prepared and filed with the
Internal Revenue Service and appropriate state taxing authorities;
5. Distribute to the Interest Holders final Form K-1 tax information; and
6. File a Certificate of Cancellation on behalf of the Partnership with
the Secretary of State of the State of Texas.
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Auction. The Managing General Partner intends to engage the O&G
Clearinghouse or another similar company to conduct live auctions for the sales
working interests of the Operating Partnership and the non-operating interests
of the Partnership. The O&G Clearinghouse (as well as other such auction
companies) is in the business of conducting auctions for oil and gas properties.
The O&G Clearinghouse establishes a data room, which they leave open for a
period of time (generally three to four weeks), after which they hold a live
auction. The O&G Clearinghouse requires advance registration for all bidders.
Bidders may participate by invitation only, after having qualified as
knowledgeable and sophisticated parties routinely or actively engaged in the oil
and gas business. The O&G Clearinghouse publishes a brochure regarding the
properties. The O&G Clearinghouse is headquartered in Houston, Texas. In
auctions conducted by the O&G Clearinghouse, properties are generally grouped
into small packages with a single field often comprising a property. If the
Managing General Partner determines it is interested in buying other Property
Interests owned by the Partnership if no higher price is bid at auction, then
the same procedure will be used, in each case with the minimum bid amount to be
based upon an independent appraisal of the value of the Property Interest by J.
R. Butler, the independent Consultant, with the property to be offered at
auction to third parties before the Managing General Partner can purchase these
Property Interests for the minimum price, and then only if no higher price is
received from third parties. The Managing General Partner will not purchase any
Property Interests from the Partnership in a negotiated transaction.
Estimated Selling Costs. The expenses associated with the auction process
(auctioneer's fee plus advertising fee) is expected to be approximately 7% of
the sales price received. This does not include internal costs of the Managing
General Partner with respect to the sales, nor fees owed to third parties for
services incident to the sale. For example, if the Managing General Partner
engaged a third party to sell the properties, this would entail an additional
fee (although in such a case the Managing General Partner's internal costs would
be lower). This also does not include the costs of the proxy solicitation. See
"General Information-- Solicitation."
Negotiated Sale. Although the Managing General Partner intends to offer
most of the Partnership's and the Operating Partnership's Property Interests at
auction, it is possible that the Managing General Partner or a third party
engaged for the purpose of selling the Partnership's assets may approach other
oil and gas companies and negotiate a sale of certain Property Interests. The
Managing General Partner (or such third party) may solicit bids on the oil and
gas properties for which the Managing General Partner is the operator. If the
Managing General Partner (or third party) solicits bids, it will provide all
interested parties with information about the properties needed to bid on such
properties. Such information would include raw data and historical information
on all of the operated properties that any of the partnerships managed by the
Managing General Partner intends to sell. See "--Steps to Implement the
Proposal." The data will be organized by property. Neither the Managing General
Partner nor its affiliates nor any of the partnerships managed by the Managing
General Partner will purchase any of the Partnership's Property Interests in
this manner. In the event of a bid that is lower than a price the Managing
General Partner believes is reasonable, it may sell the property to a third
party bidder for such lower bid price, use another method of sale such as an
auction, or have the Partnership continue to hold such property for a while
longer. If a property cannot be sold to a third party at auction or on a
negotiated basis, which usually occurs because it has no appreciable value,
often accompanied by the fact that the property requires expenditures to plug
and abandon wells, the Managing General Partner may dispose of such property by
conveying it to the operator or by conveying the property to itself, for no
consideration. Determination as to whether any such conveyances will be made,
including conveyances to the Managing General Partner in such cases, will be
made solely by the Managing General Partner. The Managing General Partner is not
currently aware of any Property Interests owned by the Partnership which are
likely to be conveyed in this manner. Except as described below with respect to
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Property Interests in the AWP Olmos Field, in no event is the Managing General
Partner obligated to purchase any of the Property Interests. See "--AWP Olmos
Field."
Other. Any sale of the Partnership Property Interests and the subsequent
liquidating distributions to the Interest Holders, pursuant to the Proposal will
be taxable transactions under federal and state income tax laws. See "Federal
Income Tax Consequences."
Impact on the Managing General Partner
The Managing General Partner may purchase certain of the Partnership's
Property Interests if the Proposal is approved. In addition, the Managing
General Partner will be economically impacted by liquidation in at least two
ways. First, to the extent of its ownership of SDIs, liquidation will have the
same effect on it as on the Interest Holders. See "--Estimate of Liquidating
Distribution Amount," and "--Estimated Share of Interest Holders' Net
Distributions from Continued Operations." Second, because of the dissolution and
liquidation of the Partnership, together with liquidation of other partnerships,
the Managing General Partner will no longer hold the majority interest in
various wells. Different operators are likely to be selected and the Managing
General Partner will therefore lose revenues that it currently realizes from its
role as operator for those properties. The Managing General Partner is making
its recommendations as set forth below, on the basis of its fiduciary duties to
the Partnership and its partners, rather than on the basis of the direct
economic impact on the Managing General Partner.
Recommendation of the Managing General Partner
For the foregoing reasons, the Managing General Partner believes that it is
in the best interests of the Interest Holders to dissolve and liquidate the
Partnership in an effort to maximize the value of the Partnership's remaining
assets and the amounts distributed to Interest Holders and to accelerate the
receipt of such liquidating distributions. The Managing General Partner
believes, based on the estimates of liquidating distributions and distributions
from continued operations contained therein, that through the liquidation of the
Partnership's remaining assets in the near term, Interest Holders will benefit
from the current higher levels of oil and gas prices and therefore, may receive
a greater liquidating cash distribution than if the Partnership were to continue
to operate as a going concern, and be subject to possible future negative
changes in oil and gas prices. Additionally, distribution amounts will be
affected by the anticipated continuation of declines in revenues and the
continuing relatively fixed general and administrative and operating expenses
that will be incurred by the Partnership. Continued operations of the
Partnership would mean continuation of the additional costs incurred by the
Interest Holders, including the costs associated with inclusion of information
from the Schedule K-1 relating to the Partnership in their personal income tax
returns. Termination of the Partnership will allow the current receipt of the
remaining value of the Partnership and the preparation of a final tax return.
The Managing General Partner recommends that the Interest Holders vote FOR
the Proposal.
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FEDERAL INCOME TAX CONSEQUENCES
General
The following summarizes certain federal income tax consequences to the
Interest Holders arising from the Partnership's proposed sale of its oil and gas
properties and liquidation pursuant to the Proposal. This discussion is not
based upon an opinion of counsel and it is possible that results different from
those described may occur. Statements of legal conclusions regarding tax
consequences are based upon relevant provisions of the Internal Revenue Code of
1986, as amended (the "Code"), and accompanying Treasury Regulations, as in
effect on the date hereof, upon a private letter ruling dated February 6, 1991,
upon reported judicial decisions and published positions of the Internal Revenue
Service (the "Service"), and upon further assumptions that the Partnership
constitutes a partnership for federal tax purposes and that the Partnership will
be liquidated as described herein. The laws, regulations, administrative rulings
and judicial decisions which form the basis for conclusions with respect to the
tax consequences described herein are complex and are subject to prospective or
retroactive change at any time and any change may adversely affect Interest
Holders.
This summary does not describe all the tax aspects which may affect
Interest Holders because the tax consequences may vary depending upon the
individual circumstances of an Interest Holder. It is directed to Interest
Holders that are qualified plans and trusts under Code Section 401(a) and
individual retirement accounts ("IRAs") under Code Section 408 (collectively
"Tax Exempt Plans") and that are the original purchasers of the SDIs and hold
interests in the Partnership as "capital assets" (generally, property held for
investment). Interest Holders were not admitted to the Partnership as limited
partners but are treated as partners of the Partnership for federal income tax
purposes. Except as otherwise specifically set forth herein, this summary does
not address foreign, state or local tax consequences, and is inapplicable to
nonresident aliens, foreign corporations, debtors under the jurisdiction of a
court in a case under federal bankruptcy laws or in a receivership, foreclosure
or similar proceeding, or an investment company, financial institution or
insurance company.
Tax Treatment of Tax Exempt Plans
Sale of Property Interest and Liquidation of Partnership
The Managing General Partner is proposing to sell the Partnership's
Property Interest as well as any other royalties and overriding royalties the
Partnership may own. After the sale of the properties, the Partnership's assets
will consist solely of cash, which will be distributed to the Interest Holders
in complete liquidation of the partnership.
Tax Exempt Plans are subject to tax on their unrelated business taxable
income ("UBTI"). UBTI is income derived by an organization from the conduct of a
trade or business that is substantially unrelated to its performance of the
function that constitutes the basis of its tax exemption (aside from the need of
such organization for funds). Royalty interests, dividends, interest and gain
from the disposition of capital assets are generally excluded from
classification as UBTI. Notwithstanding these exclusions, royalties, interest,
dividends, and gains will create UBTI if they are received from debt-financed
property, as discussed below.
The Internal Revenue Service has previously ruled that the Partnership's
Property Interest, as structured under the NP/OR, is a royalty, as are any
overriding royalties the Partnership may own. To the extent that the Property
Interest is not debt-financed property, neither the sale of the Property
Interest by the Partnership nor the liquidation of the Partnership is expected
to cause Interest Holders to recognize taxable gain or loss for federal
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income tax purposes, even though there may be gain or loss upon the sale of the
Property Interest for federal income tax purposes.
Debt-Financed Property
Debt-financed property is property held to produce income that is subject
to acquisition indebtedness. The income is taxable in the same proportion which
the debt bears to the total cost of acquiring the property. Generally,
acquisition indebtedness is the unpaid amount of (i) indebtedness incurred by a
Tax Exempt Plan to acquire an interest in a partnership, (ii) indebtedness
incurred in acquiring or improving property, or (iii) indebtedness incurred
either before or after the acquisition or improvement of property or the
acquisition of a partnership interest if such indebtedness would not have been
incurred but for such acquisition or improvement, and if incurred subsequent to
such acquisition or improvement, the incurrence of such indebtedness was
reasonably foreseeable at the time of such acquisition or improvement.
Generally, property acquired subject to a mortgage or similar lien is considered
debt-financed property even if the organization acquiring the property does not
assume or agree to pay the debt. Notwithstanding the foregoing, acquisition
indebtedness excludes certain indebtedness incurred by Tax Exempt Plans other
than IRAs to acquire or improve real property. Although this exception may
apply, its usefulness may be limited due to its technical requirements and the
fact that the debt excluded from classification as acquisition indebtedness
appears to be debt incurred by a partnership and not debt incurred by a partner
directly or indirectly in acquiring a partnership interest.
If an Interest Holder borrowed to acquire its Partnership Interest or had
borrowed funds either before or after it acquired its Partnership Interest
(i.e., SDIs), its pro rata share of Partnership gain on the sale of the Property
Interest may be UBTI. The Managing General Partner has represented that (i) the
Partnership did not borrowed money to acquire its Property Interest, and (ii)
that the Property Interest of the Partnership is not subject to any debt,
mortgages or similar liens that will cause the Partnership's Property Interest
to be debt-financed property under Code Section 514. If a Tax Exempt Plan has
not caused its Partnership Interest to be debt-financed property, and based upon
the representations of the Managing General, the Property Interest is not
expected to be considered debt-financed property.
Tax Treatment of Interest Holders Subject to Federal Income Tax Due to
Debt-financing
All references hereinbelow to Interest Holders refers solely to Interest
Holders whose Partnership Interest is debt-financed. To the extent that a Tax
Exempt Plan's Partnership Interest is only partially debt-financed, the
percentage of gain or loss from the sale of the Property Interest and
liquidation of the Partnership that will be subject to taxation as UBTI is the
percentage of the Tax Exempt Plan's share of Partnership income, gain, loss and
deduction adjusted by the following calculation. Section 514(a)(1) includes,
with respect to each debt-financed property, as gross income from an unrelated
trade or business an amount which is the same percentage of the total gross
income derived during the taxable year from or on account of the property as (i)
the average acquisition indebtedness for the taxable year with respect to the
property is of (ii) the average amount of the adjusted basis of the property
during the period it is held by the organization during the taxable year (the
"debt/basis percentage").
A similar calculation is used to determine the allowable deductions. For
each debt-financed property, the amount of the deductions directly attributable
to the property are multiplied by the debt/basis percentage, which yields the
allowable deductions. If the average acquisition indebtedness is equal to the
average adjusted basis, the debt/basis percentage is zero and all the income and
deductions are included within UBTI. The debt/basis percentage is calculated on
an annual basis.
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Tax Exempt Plans with debt-financed Partnership Interests should consult
their tax advisors to determine the portion of gain or loss that may be
recognized for federal income tax purposes. The following discussion of the tax
consequences of the sale of the Partnership Property Interest and the
liquidation of the Partnership assumes that all of an Interest Holder's income,
gain, loss and deduction from the Partnership is subject to federal taxation.
Taxable Gain or Loss Upon Sale of Properties
An Interest Holder will realize and recognize gain or loss, or a
combination of both, upon the Partnership's sale of its properties prior to
liquidation. The amount of gain realized with respect to each property, or
related asset, will be an amount equal to the excess of the amount realized by
the Partnership and allocated to the Interest Holder (i.e., cash or
consideration received) over the Interest Holder's adjusted tax basis for such
property. Conversely, the amount of loss realized with respect to each property
or related asset will be an amount equal to the excess of the Interest Holder's
tax basis over the amount realized by the Partnership for such property and
allocated to the Interest Holder. It is projected that taxable loss will be
realized upon the sale of Partnership properties and that such loss will be
allocated among the Interest Holders in accordance with the Partnership
Agreement. The Partnership Agreement includes an allocation provision that
requires allocations pursuant to a liquidation be made among Partners (i.e., the
Interest Holders and the Managing General Partner) in a fashion that equalizes
capital accounts of the Partners so that the amount in each Partner's capital
account will reflect such Partner's sharing ratio of income and loss. The extent
to which capital accounts can be equalized, however, is limited by the amount of
gain and loss available to be allocated.
Realized gains and losses generally must be recognized and reported in the
year the sale occurs. Accordingly, each Interest Holder will realize and
recognize his allocable share of gains and losses in his tax year within which
the Partnership properties are sold.
Liquidation of the Partnership
After sale of its properties, the Partnership's assets will consist solely
of cash which it will distribute to its partners (including Interest Holders) in
complete liquidation. The Partnership will not realize gain or loss upon such
distribution of cash to its partners in liquidation. If the amount of cash
distributed to an Interest Holder in liquidation is less than such Interest
Holder's adjusted tax basis in his Partnership interest, the Interest Holder
will realize and recognize a capital loss to the extent of the excess. If the
amount of cash distributed is greater than such Interest Holder's adjusted tax
basis in his Partnership interest, the Interest Holder will recognize a capital
gain to the extent of the excess.
Capital Gains Tax
Net long-term capital gains of individuals, trusts and estates will be
taxed at a maximum rate of 28%, while ordinarily income, including income from
the recapture of depletion, will be taxed at a maximum rate depending on that
Interest Holder's taxable income of 36% or 39.6%. With respect to net capital
losses, other than Section 1231 net losses, the amount of net long-term capital
loss that can be utilized to offset ordinary income will be limited to the sum
of net capital gains from other sources recognized by the Interest Holder during
the tax year, plus $3,000 ($1,500, in the case of a married individual filing a
separate return). The excess amount of such net long-term capital loss may be
carried forward and utilized in subsequent years subject to the same
limitations. Corporations are taxed on net long-term capital gains at their
ordinary Section 11 rates and are allowed to carry net capital losses back three
years and forward five years.
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Passive Loss Limitations
Interest Holders that are individuals, trusts, estates, or personal service
corporations are subject to the passive activity loss limitations rules that
were enacted as part of the Tax Reform Act of 1986.
An Interest Holder's allocable share of Partnership income, gain, loss, and
deduction is treated as derived from a passive activity, except to the extent of
Partnership portfolio income, which includes interest, dividends, royalty income
and gains from the sale of property held for investment purposes. An Interest
Holder's allocable share of any gain or loss realized on sale of the
Partnership's net profit interests is expected to be characterized as portfolio
and may not be offset, or be offset by, passive activity gains or losses.
THE FOREGOING DISCUSSION IS INTENDED TO BE A SUMMARY OF CERTAIN INCOME TAX
CONSIDERATIONS OF THE SALE OF PROPERTIES AND LIQUIDATION. EACH INTEREST HOLDER
SHOULD CONSULT ITS OWN TAX ADVISOR CONCERNING ITS PARTICULAR TAX CIRCUMSTANCES
AND THE FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX CONSEQUENCES TO IT OF THE
SALE OF PROPERTIES AND THE LIQUIDATION OF THE PARTNERSHIP.
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BUSINESS OF THE PARTNERSHIP
The Partnership is a Texas limited partnership formed September 30, 1991.
SDIs in the Partnership are registered under Section 12(g) of the Securities
Exchange Act of 1934. In addition to the following information about the
business of the Partnership, see the attached Annual Report on Form 10-K for the
year ended December 31, 1996, and its quarterly report on Form 10-Q for the
second quarter of 1997, both included herewith.
Reserves
For information about the Partnership's interest in oil and gas reserves
and future net revenue expected from the production of those reserves as of
December 31, 1996, see the attached report, which was audited by H. J. Gruy and
Associates, Inc., independent petroleum consultants. It should be noted that the
reserve estimates in the Annual Report on Form 10-K reflect the entire
Partnership reserves and that the reserve report in the attached letter from H.
J. Gruy and Associates, Inc. reflects only the Interest Holders' share of the
Partnership's estimated oil and gas reserves. Neither of these reports reflect
the Partnership's share of future costs of operations which must be debited from
the Partnership's interest in reserves in order to determine the Partnership's
net interest in reserves by virtue of its net profits interest. This report has
not been updated to include the effect of production since year-end 1996, nor
has the annual review of estimated quantities done each year-end taken place for
1997.
There are numerous uncertainties inherent in estimating quantities of
proved reserves and in projecting the future rates and timing of production,
future costs and future development plans. Oil and gas reserve engineering must
be recognized as a subjective process of estimating underground accumulations of
oil and gas that cannot be measured in an exact way, and estimates of other
engineers might differ from those in the attached report. The accuracy of any
reserve estimate is a function of the quality of available data and of
engineering and geological interpretation and judgment. Results of drilling,
testing and production subsequent to the date of the estimate may justify
revision of such estimate, and, as a general rule, reserve estimates based upon
volumetric analysis are inherently less reliable than those based on lengthy
production history. Accordingly, reserve estimates are often different from the
quantities of oil and gas that are ultimately recovered.
In estimating the Partnership's interest in oil and natural gas reserves,
the Managing General Partner has used flat pricing based upon estimates of 1997
average prices, without escalation, except in those instances where fixed and
determinable gas price escalations are covered by contracts, limited to the
price the Partnership reasonably expects to receive. These pricing assumptions
vary from those mandated by the Securities and Exchange Commission ("SEC") for
reserves disclosed under applicable SEC rules, which require use of prices at
year-end, although the discount rate and lack of escalation are the same. If
estimates of reserves and future net revenues had been prepared using December
31, 1996 prices, as mandated by the SEC, reserves, future net revenues and the
present value thereof would be significantly higher. The Managing General
Partner has determined not to use these higher prices because current estimates
of 1997 average prices more accurately reflect prices purchasers of properties
are willing to pay, rather than higher values which do not reflect the decrease
in prices since year-end 1996. For example, the weighted average price of gas
received by the Partnership during the first six months of 1997 was $2.04 per
Mcf, as compared to $4.67 per Mcf at December 31, 1996. The Managing General
Partner does not believe that any favorable or adverse event causing a
significant change in the estimated quantity of proved reserves set forth in the
attached report has occurred between December 31, 1996, and the date of this
Proxy Statement.
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Future prices received for the sale of the Partnership's products may be
higher or lower than the prices used in the Partnership's estimates of oil and
gas reserves; the operating costs relating to such production may also increase
or decrease from existing levels.
The Managing General Partner
Subject to certain limitations set forth in the Partnership Agreement, the
Managing General Partner has full, exclusive and complete discretion in the
management and control of the business of the Partnership. The Managing General
Partner has general liability for the debts and obligations of the Partnership.
The Managing General Partner is engaged in the business of oil and gas
exploration, development and production, and the Managing General Partner serves
as the general partner of a number of other oil and gas income and pension
partnerships. The Managing General Partner's common stock is traded on the New
York and Pacific Stock Exchanges.
The principal executive offices of the Managing General Partner are located
at 16825 Northchase Drive, Suite 400, Houston, Texas 77060, telephone number
(281) 874-2700.
Transactions Between the Managing General Partner and the Partnership
The Managing General Partner receives operating fees for wells in which the
Partnership has a net profits interest and for which the Managing General
Partner or its affiliates serve as operator. It is anticipated that, due to the
sale of interests in wells by the Operating Partnership, the Managing General
Partner will no longer serve as operator for a number of the wells in which the
Partnership has a net profits interest. To the extent that the operator changes
because of a change in ownership of the properties, the Managing General Partner
will lose the revenues it currently earns as operator, which are less than 1.0%
of the Managing General Partner's net revenues. The Managing General Partner
believes, however, that it will be positively affected, on the other hand, by
liquidation of the Partnership, on the basis of its ownership interest in the
Partnership. See "The Proposal--Estimates of Liquidating Distribution Amount,"
and "The Proposal--Impact on the Managing General Partner."
Under the Partnership Agreement, the Managing General Partner has received
certain compensation for its services and reimbursement for expenditures made on
behalf of the Partnership, which was paid at closing of the offering of SDIs, in
addition to revenues distributable to the Managing General Partner with respect
to its general partnership interest or SDIs it has purchased. In addition to
those revenues, compensation and reimbursements, the following summarizes the
transactions between the Managing General Partner and the Partnership pursuant
to which the Managing General Partner has been paid or has had its expenses
reimbursed on an ongoing basis:
o The Managing General Partner has received internal acquisition costs
reimbursements of $218,599 from the Partnership from inception through
June 30, 1997.
o The Managing General Partner receives per-well monthly operating fees
from the Operating Partnership for certain producing wells in which
the Partnership owns Property Interests and for which it serves as
operator in accordance with the joint operating agreements for each of
such wells. The fees that are set in the joint operating agreements
are negotiated with the other working interest owners of the
properties.
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o The Managing General Partner is entitled to be reimbursed for and has
been reimbursed from inception to June 30, 1997, $288,199 for general
and administrative costs incurred on behalf of and allocable to the
Partnership, including employee salaries and office overhead. Amounts
are calculated on the basis of Interest Holders' capital contributions
to the Partnership relative to contributions of all interest holders
or limited partners of partnerships for which the Managing General
Partner serves as Managing General Partner.
o The Managing General Partner has been reimbursed $9,139 for direct
expenses, all of which were billed by, and then paid directly to,
third party vendors.
o The Managing General Partner has received a nonaccountable incentive
amount of $68,751 for services rendered from inception to June 30,
1997.
No Trading Market
There is no trading market for the SDIs, and none is expected to develop.
Under the Partnership Agreement, the Interest Holders have the right to present
their SDIs to the Managing General Partner for repurchase at a price determined
in accordance with the formula established by Article XV of the Partnership
Agreement. Originally 339 Interest Holders invested in the Partnership. Through
December 31, 1996, the Managing General Partner has purchased 132,928 SDIs from
Interest Holders pursuant to the right of presentment. As of August 15, 1997,
there were 338 Interest Holders (excluding the Managing General Partner). The
Managing General Partner does not have an obligation to repurchase interests
pursuant to this right of presentment but merely an option to do so when such
interests are presented for repurchase.
Principal Holders of SDIs
The Managing General Partner holds 4.52% of the SDIs in the Partnership. To
the knowledge of the Managing General Partner, there is no holder of SDIs that
holds more than 5% of the SDIs.
Approvals
No federal or state regulatory requirements must be satisfied or approvals
obtained in connection with the sale of the Partnership's Property Interests.
Legal Proceedings
The Managing General Partner is not aware of any material pending legal
proceedings to which the Partnership is a party or of which any of its property
is the subject.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE AND ATTACHMENT OF
SUCH INFORMATION HERETO
The Partnership's Annual Report on Form 10-K for the year ended December
31, 1996, and its quarterly report on Form 10-Q for the second quarter of 1997,
which are attached hereto and incorporated herein by reference.
33
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OTHER BUSINESS
The Managing General Partner does not intend to bring any other business
before the Meeting and has not been informed that any other matters are to be
presented at the Meeting by any other person.
SWIFT ENERGY COMPANY
as Managing General Partner of
Swift Energy Pension Partners 1991-B, Ltd.
/s/ John R. Alden
--------------------------------------------
John R. Alden
Secretary
34
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FORM OF PROXY
SWIFT ENERGY PENSION PARTNERS 1991-B, LTD.
This Proxy is Solicited by the Managing General
Partner for a Special Meeting of Interest Holders to be
held on October 30, 1997
The undersigned hereby constitutes and appoints A. Earl Swift, Bruce H.
Vincent, Terry E. Swift or John R. Alden, as duly authorized officers of Swift
Energy Company, acting in its capacity as Managing General Partner of the
Partnership, or any of them, with full power of substitution and revocation to
each, the true and lawful attorneys and proxies of the undersigned at a Special
Meeting of the Interest Holders (the "Meeting") of SWIFT ENERGY MANAGED PENSION
PARTNERS 1991-B, LTD. (the "Partnership") to be held on October 30, 1997 at 4:00
p.m. Houston time, at 16825 Northchase Drive, Houston, Texas, and any
adjournments thereof, and to vote as designated, on the matter specified below,
the Depositary Interests standing in the name of the undersigned on the matter
specified below, the Depositary Interests standing in the name of the
undersigned on the books of the Partnership (or which the undersigned may be
entitled to vote) on the record date for the Meeting with all powers the
undersigned would possess if personally present at the Meeting:
The adoption of a proposal FOR AGAINST ABSTAIN
("Proposal") for (a) sale of
substantially all of the [ ] [ ] [ ]
assets of the Partnership
(consisting of its net
profits interest) including
the purchase in certain
circumstances of the Partner-
ship's property interests
underlying its net profits
interests by the Managing
General Partner and/or its
affiliates, and (b) the
dissolution, winding up and
termination of the Partnership.
The undersigned hereby directs
said proxies to vote:
This proxy will be voted in accordance with the specifications made hereon.
If no contrary specification is made, it will be voted FOR the Proposal.
Receipt of the Partnership's Notice of Special Meeting of Interest Holders
and Proxy Statement dated September 30, 1997 is acknowledged.
PLEASE SIGN AND RETURN THE PROXY IN THE ENCLOSED,
POSTAGE-PAID, PRE-ADDRESSED ENVELOPE BY
OCTOBER 24, 1997.
SIGNATURE DATE
--------------------------- -------------------------
SIGNATURE DATE
--------------------------- -------------------------
SIGNATURE DATE
--------------------------- -------------------------
If Depositary Interests are held jointly, all joint tenants must sign.
36
<PAGE>
Documents Included
The Partnership's Annual Report on Form 10-K for the year ended December
31, 1996 and its quarterly report on Form 10-Q for the second quarter of 1997
are included with this Proxy Statement and incorporated herein by reference. See
"Incorporation of Certain Information By Reference and Attachment of Such
Information Hereto." Additionally, a reserve report dated May 20, 1997, prepared
as of December 31, 1996, and audited by H. J. Gruy and Associates, Inc., is
attached hereto together with the appraisal of J. R. Butler and Company dated
May 9, 1997 of the fair market value of the Partnership's Property Interests in
the AWP Olmos Field.
TABLE OF CONTENTS
SUMMARY .................................................................... 1
SPECIAL FACTORS.............................................................. 6
Documents Included.................................................. 6
Vote Required....................................................... 6
Proxies; Revocation................................................. 6
Dissenters' Rights.................................................. 8
Payment of Liquidating Distributions................................ 7
Solicitation..................................................... 8
RISK FACTORS................................................................. 8
Uncertainty of Liquidating Distributions............................ 8
Undetermined Sales Prices; Volatility of Oil and Gas Prices......... 8
Potential Purchases by an Affiliate................................. 8
Dependence on Operating Partnership................................. 9
THE PROPOSAL................................................................. 10
General ........................................................... 10
Partnership Financial Performance and Condition..................... 10
Estimates of Liquidating Distribution Amount........................ 13
Comparison of Sale Versus Continuing Operations..................... 16
Reasons for the Proposal............................................ 16
The AWP Olmos Field................................................. 18
Auction Procedure................................................... 18
Fair Market Value Opinion of J.R. Butler and Company................ 19
Simultaneous Proposal to Operating Partnership...................... 20
Steps to Implement the Proposal..................................... 21
Impact on the Managing General Partner.............................. 23
Recommendation of the Managing General Partner...................... 23
FEDERAL INCOME TAX CONSEQUENCES.............................................. 24
General............................................................. 24
Tax Treatment of Tax Exempt Plans................................... 24
Tax Treatment of Interest Holders Subject to Federal Income
Due to Debt-financing............................................ 25
Taxable Gain or Loss Upon Sale of Properties........................ 26
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Liquidation of the Partnership...................................... 25
Capital Gains Tax................................................... 26
Passive Loss Limitations............................................ 27
BUSINESS OF THE PARTNERSHIP.................................................. 28
Reserves ........................................................... 28
The Managing General Partner........................................ 29
Transactions Between the Managing General Partner and the
Partnership................................................ 29
No Trading Market................................................... 30
Principal Holders of SDIs........................................... 30
Approvals........................................................... 30
Legal Proceedings................................................... 30
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
AND ATTACHMENT OF SUCH INFORMATION HERETO........................... 30
OTHER BUSINESS............................................................... 31
FORM OF PROXY................................................................ 32
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