1 of 22
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2004
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________ to ________________
Commission file number 0-15408
Southwest Royalties, Inc. Income Fund V
(Exact name of registrant as specified
in its limited partnership agreement)
Tennessee 75-2104619
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
407 N. Big Spring, Suite 300
Midland, Texas 79701
(Address of principal executive offices)
(432) 686-9927
(Registrant's telephone number,
including area code)
Indicate by check mark whether registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for
the past 90 days:
Yes X No ___
Indicate by check mark whether the registrant is an accelerated
filer (as defined in Exchange Act Rule 12b-2). Yes No X
The registrant's outstanding securities consist of Units of limited
partnership interests for which there exists no established public
market from which to base a calculation of aggregate market value.
The total number of pages contained in this report is 22.
Glossary of Oil and Gas Terms
The following are abbreviations and definitions of terms commonly
used in the oil and gas industry that are used in this filing. All
volumes of natural gas referred to herein are stated at the legal
pressure base to the state or area where the reserves exit and at 60
degrees Fahrenheit and in most instances are rounded to the nearest
major multiple.
Bbl. One stock tank barrel, or 42 United States gallons liquid
volume.
Developmental well. A well drilled within the proved area of an
oil or natural gas reservoir to the depth of a stratigraphic horizon
known to be productive.
Exploratory well. A well drilled to find and produce oil or gas
in an unproved area to find a new reservoir in a field previously
found to be productive of oil or natural gas in another reservoir or
to extend a known reservoir.
Farm-out arrangement. An agreement whereby the owner of the
leasehold or working interest agrees to assign his interest in
certain specific acreage to the assignee, retaining some interest,
such as an overriding royalty interest, subject to the drilling of
one (1) or more wells or other performance by the assignee.
Field. An area consisting of a single reservoir or multiple
reservoirs all grouped on or related to the same individual
geological structural feature and/or stratigraphic condition.
Mcf. One thousand cubic feet.
Net Profits Interest. An agreement whereby the owner receives
a specified percentage of the defined net profits from a producing
property in exchange for consideration paid. The net profits
interest owner will not otherwise participate in additional costs
and expenses of the property.
Oil. Crude oil, condensate and natural gas liquids.
Overriding royalty interest. Interests that are carved out of a
working interest, and their duration is limited by the term of the
lease under which they are created.
Present value and PV-10 Value. When used with respect to oil
and natural gas reserves, the estimated future net revenue to be
generated from the production of proved reserves, determined in all
material respects in accordance with the rules and regulations of
the SEC (generally using prices and costs in effect as of the date
indicated) without giving effect to non-property related expenses
such as general and administrative expenses, debt service and future
income tax expenses or to depreciation, depletion and amortization,
discounted using an annual discount rate of 10%.
Production costs. Costs incurred to operate and maintain wells
and related equipment and facilities, including depreciation and
applicable operating costs of support equipment and facilities and
other costs of operating and maintaining those wells and related
equipment and facilities.
Proved Area. The part of a property to which proved reserves
have been specifically attributed.
Proved developed oil and gas reserves. Proved developed oil and
gas reserves are reserves that can be expected to be recovered from
existing wells with existing equipment and operating methods.
Proved properties. Properties with proved reserves.
Proved reserves. The estimated quantities of crude oil, natural
gas, and natural gas liquids that geological and engineering data
demonstrate with reasonable certainty to be recoverable in future
years from known reservoirs under existing economic and operating
conditions.
Proved undeveloped reserves. Proved undeveloped oil and gas
reserves are reserves that are expected to be recovered from new
wells on undrilled acreage, or from existing wells where a
relatively major expenditure is required for recompletion.
Reservoir. A porous and permeable underground formation
containing a natural accumulation of producible oil or gas that is
confined by impermeable rock or water barriers and is individual and
separate from other reservoirs.
Royalty interest. An interest in an oil and natural gas
property entitling the owner to a share of oil or natural gas
production free of costs of production.
Working interest. The operating interest that gives the owner
the right to drill, produce and conduct operating activities on the
property and a share of production.
Workover. Operations on a producing well to restore or increase
production.
PART I. - FINANCIAL INFORMATION
Item 1. Financial Statements
The unaudited condensed financial statements included herein have
been prepared by the Registrant (herein also referred to as the
"Partnership") in accordance with generally accepted accounting
principles for interim financial information and with the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X.
Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, all
adjustments necessary for a fair presentation have been included and
are of a normal recurring nature. The financial statements should
be read in conjunction with the audited financial statements and the
notes thereto for the year ended December 31, 2003, which are found
in the Registrant's Form 10-K Report for 2003 filed with the
Securities and Exchange Commission. The December 31, 2003 balance
sheet included herein has been taken from the Registrant's 2003 Form
10-K Report. Operating results for the three month period ended
March 31, 2004 are not necessarily indicative of the results that
may be expected for the full year.
Southwest Royalties, Inc. Income Fund V
Balance Sheets
March 31, December
31,
2004 2003
------ ------
(unaudited)
Assets
- ---------
Current assets:
Cash and cash equivalents $ 23,707 42,849
Receivable from Managing General 78,698 58,326
Partner
----------- ----------
-- ---
Total current assets 102,405 101,175
----------- ----------
-- ---
Oil and gas properties - using the
full-
cost method of accounting 6,216,644 6,216,644
Less accumulated depreciation,
depletion and amortization 5,649,496 5,641,497
----------- ----------
-- ---
Net oil and gas properties 567,148 575,147
----------- ----------
-- ---
$ 669,553 676,322
======= =======
Liabilities and Partners' Equity
- -----------------------------------
- -----
Current liability:
Distribution payable $ 25 34
----------- ----------
-- ---
Asset retirement obligation 260,285 255,181
----------- ----------
-- ---
Partners' equity:
General partner (634,439) (633,253)
Limited partners 1,043,682 1,054,360
----------- ----------
-- ---
Total partners' equity 409,243 421,107
----------- ----------
-- ---
$ 669,553 676,322
======= =======
Southwest Royalties, Inc. Income Fund V
Statements of Operations
(unaudited)
Three Months Ended
March 31,
2004 2003
------ ------
Revenues
- ------------
Income from net profits $ 96,839 92,510
interests
Interest 79 7
Other 247 -
---------- --------
--
97,165 92,517
---------- --------
--
Expenses
- ------------
General and administrative 30,925 28,746
Depreciation, depletion and 8,000 7,000
amortization
Accretion of asset 5,104 4,735
retirement obligation
---------- --------
--
44,029 40,481
---------- --------
--
Net income before cumulative 53,136 52,036
effect
Cumulative effect of change
in accounting
principle - SFAS No. 143 - - 129,495
See Note 3
---------- --------
--
Net income $ 53,136 181,531
====== ======
Net income allocated to:
Managing General Partner $ 5,314 18,153
====== ======
Limited partners $ 47,822 163,378
====== ======
Per limited partner $ 6.38
unit before cumulative 6.25
effect
Cumulative effect per -
limited partner unit 15.54
---------- --------
--
Per limited partner $ 6.38
unit 21.79
====== ======
Southwest Royalties, Inc. Income Fund V
Statements of Cash Flows
(unaudited)
Three Months Ended
March 31,
2004 2003
------- -------
Cash flows from operating
activities:
Cash received from income from
net profits
interests $ 79,871 47,814
Cash paid to suppliers (34,330) (39,262)
Interest received 79 7
Other 247 -
-------- --------
-- --
Net cash provided by operating 45,867 8,559
activities
-------- --------
-- --
Cash flows provided by investing
activities
Sale of oil and gas properties - 1,215
-------- --------
-- --
Cash flows used in financing
activities:
Distributions to partners (65,009) (283)
-------- --------
-- --
Net (decrease) increase in cash (19,142) 9,491
and cash equivalents
Beginning of period 42,849 7,539
-------- --------
-- --
End of period $ 23,707 17,030
====== ======
Reconciliation of net income to
net
cash provided by operating
activities:
Net income $ 53,136 181,531
Adjustments to reconcile net
income to
net cash provided by operating
activities:
Depreciation, depletion and 8,000 7,000
amortization
Accretion of asset retirement 5,104 4,735
obligation
Cumulative effect of change in
accounting
principle - SFAS No. 143 - (129,495
)
Increase in receivables (16,968) (44,696)
Decrease in payables (3,405) (10,516)
-------- --------
-- --
Net cash provided by operating $ 45,867 8,559
activities
====== ======
Noncash investing and financing
activities:
Increase in oil and gas
properties - Adoption
of SFAS No.143 $ - 366,254
====== ======
Southwest Royalties, Inc. Income Fund V
(a Tennessee limited partnership)
Notes to Financial Statements
1. Organization
Southwest Royalties, Inc. Income Fund V was organized under the
laws of the state of Tennessee on May 1, 1986, for the purpose
of acquiring producing oil and gas properties and to produce
and market crude oil and natural gas produced from such
properties for a term of 50 years, unless terminated at an
earlier date as provided for in the Partnership Agreement. The
Partnership sells its oil and gas production to a variety of
purchasers with the prices it receives being dependent upon the
oil and gas economy. Southwest Royalties, Inc. serves as the
Managing General Partner. Revenues, costs and expenses are
allocated as follows:
Limited General
Partners Partners
-------- --------
-- --
Interest income on capital 100% -
contributions
Oil and gas sales 90% 10%
All other revenues 90% 10%
Organization and offering 100% -
costs (1)
Amortization of organization 100% -
costs
Property acquisition costs 100% -
Gain/loss on property 90% 10%
disposition
Operating and administrative 90% 10%
costs (2)
Depreciation, depletion and
amortization
of oil and gas properties 90% 10%
All other costs 90% 10%
(1) All organization costs in excess of 3% of initial
capital contributions will be paid by the Managing General
Partner and will be treated as a capital contribution.
The Partnership paid the Managing General Partner an
amount equal to 3% of initial capital contributions for
such organization costs.
(2) Administrative costs in any year, which exceed 2% of
capital contributions shall be paid by the Managing
General Partner and will be treated as a capital
contribution.
2. Summary of Significant Accounting Policies
The interim financial information as of March 31, 2004, and for
the three months ended March 31, 2004, is unaudited. Certain
information and footnote disclosures normally included in
financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted
in this Form 10-Q pursuant to the rules and regulations of the
Securities and Exchange Commission. However, in the opinion of
management, these interim financial statements include all the
necessary adjustments to fairly present the results of the
interim periods and all such adjustments are of a normal
recurring nature. The interim consolidated financial
statements should be read in conjunction with the Partnership's
Annual Report on Form 10-K for the year ended December 31,
2003.
3. Cumulative effect of change in accounting principle - SFAS No.
143
On January 1, 2003, the Partnership adopted Statement of
Financial Accounting Standards No. 143, Accounting for Asset
Retirement Obligations ("SFAS No. 143"). Adoption of SFAS No.
143 is required for all companies with fiscal years beginning
after June 15, 2002. The new standard requires the Partnership
to recognize a liability for the present value of all legal
obligations associated with the retirement of tangible long-
lived assets and to capitalize an equal amount as a cost of the
asset and depreciate the additional cost over the estimated
useful life of the asset. On January 1, 2003, the Partnership
recorded additional costs, net of accumulated depreciation, of
approximately $366,254, a long term liability of approximately
$236,759 and a gain of approximately $129,495 for the
cumulative effect on depreciation of the additional costs and
accretion expense on the liability related to expected
abandonment costs of its oil and natural gas producing
properties. At March 31, 2004, the asset retirement obligation
was $260,285. The increase in the asset retirement obligation
from January 1, 2004 is due to accretion expense of $5,104.
Southwest Royalties, Inc. Income Fund V
(a Tennessee limited partnership)
Notes to Financial Statements
4. Subsequent Event
Subsequent to December 31, 2003, the Managing General Partner
announced that its Board of Directors had decided to explore a
merger or sale of the stock of the Company. The Board formed a
Special Committee of independent directors to oversee the sale
process. The Special Committee retained independent financial
and legal advisors to work closely with management to implement
the sale process.
On May 3, 2004, the Managing General Partner entered into a cash
merger agreement to sell all of its stock to Clayton Williams
Energy, Inc. The cash merger price is being negotiated, but is
expected to be approximately $45 per share. The transaction,
which is subject to approval by the Managing General Partner's
shareholders, is expected to close no later than May 21, 2004.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
General
Southwest Royalties, Inc. Income Fund V was organized as a Tennessee
limited partnership on May 1, 1986, after receipt from investors of
$1,000,000 in limited partner capital contributions. The offering
of limited partnership interests began on January 22, 1986 and
concluded on July 22, 1986, with total limited partner contributions
of $7,500,000.
The Partnership was formed to acquire royalty and net profits
interests in producing oil and gas properties, to produce and market
crude oil and natural gas produced from such properties and to
distribute the net proceeds from operations to the limited and
general partners. Net revenues from producing oil and gas
properties are not reinvested in other revenue producing assets
except to the extent that production facilities and wells are
improved or reworked or where methods are employed to improve or
enable more efficient recovery of oil and gas reserves. The
economic life of the Partnership thus depends on the period over
which the Partnership's oil and gas reserves are economically
recoverable.
Increases or decreases in Partnership revenues and, therefore,
distributions to partners will depend primarily on changes in the
prices received for production, changes in volumes of production
sold, increases and decreases in lease operating expenses, enhanced
recovery projects, offset drilling activities pursuant to farm-out
arrangements, sales of properties, and the depletion of wells.
Since wells deplete over time, production can generally be expected
to decline from year to year.
Well operating costs and general and administrative costs usually
decrease with production declines; however, these costs may not
decrease proportionately. Net income available for distribution to
the partners is therefore expected to decline in later years based
on these factors.
Based on current conditions, management anticipates performing no
workovers during 2004 to enhance production. The partnership will
most likely continue to experience the historical production
decline, which has approximated 19% per year. Accordingly, if
commodity prices remain unchanged, the Partnership expects future
earnings to decline due to anticipated production declines.
Oil and Gas Properties
Oil and gas properties are accounted for at cost under the full-cost
method. Under this method, all productive and nonproductive costs
incurred in connection with the acquisition, exploration and
development of oil and gas reserves are capitalized. Gain or loss
on the sale of oil and gas properties is not recognized unless
significant oil and gas reserves are sold.
In 2002, the Partnership changed methods of accounting for depletion
of capitalized costs from the units-of-revenue method to the units-
of-production method. The newly adopted accounting principle is
preferable in the circumstances because the units-of-production
method results in a better matching of the costs of oil and gas
production against the related revenue received in periods of
volatile prices for production as have been experienced in recent
periods. Additionally, the units-of-production method is the
predominant method used by full cost companies in the oil and gas
industry, accordingly, the change improves the comparability of the
Partnership's financial statements with its peer group.
Should the net capitalized costs exceed the estimated present value
of oil and gas reserves, discounted at 10%, such excess costs would
be changed to current expense. As of March 31, 2004, the net
capitalized costs did not exceed the estimated present value of oil
and gas reserves.
The Partnership's interest in oil and gas properties consists of net
profits interests in proved properties located within the
continental United States. A net profits interest is created when
the owner of a working interest in a property enters into an
arrangement providing that the net profits interest owner will
receive a stated percentage of the net profit from the property.
The net profits interest owner will not otherwise participate in
additional costs and expenses of the property.
The Partnership recognizes income from its net profits interest in
oil and gas property on an accrual basis, while the quarterly cash
distributions of the net profits interest are based on a calculation
of actual cash received from oil and gas sales, net of expenses
incurred during that quarterly period. If the net profits interest
calculation results in expenses incurred exceeding the oil and gas
income received during a quarter, no cash distribution is due to the
Partnership's net profits interest until the deficit is recovered
from future net profits. The Partnership accrues a quarterly loss
on its net profits interest provided there is a cumulative net
amount due for accrued revenue as of the balance sheet date. As of
March 31, 2004, there were no timing differences, which resulted in
a deficit net profit interest.
Critical Accounting Policies
Full cost ceiling calculations The Partnership follows the full cost
method of accounting for its oil and gas properties. The full cost
method subjects companies to quarterly calculations of a "ceiling",
or limitation on the amount of properties that can be capitalized on
the balance sheet. If the Partnership's capitalized costs are in
excess of the calculated ceiling, the excess must be written off as
an expense.
The Partnership's discounted present value of its proved oil and
natural gas reserves is a major component of the ceiling
calculation, and represents the component that requires the most
subjective judgments. Estimates of reserves are forecasts based on
engineering data, projected future rates of production and the
timing of future expenditures. The process of estimating oil and
natural gas reserves requires substantial judgment, resulting in
imprecise determinations, particularly for new discoveries.
Different reserve engineers may make different estimates of reserve
quantities based on the same data. The Partnership's reserve
estimates are prepared by outside consultants. Quarterly reserve
estimates are prepared by the Managing General Partner's internal
staff of engineers.
The passage of time provides more qualitative information regarding
estimates of reserves, and revisions are made to prior estimates to
reflect updated information. However, there can be no assurance
that more significant revisions will not be necessary in the future.
If future significant revisions are necessary that reduce previously
estimated reserve quantities, it could result in a full cost
property writedown. In addition to the impact of these estimates of
proved reserves on calculation of the ceiling, estimates of proved
reserves are also a significant component of the calculation of
DD&A.
While the quantities of proved reserves require substantial
judgment, the associated prices of oil and natural gas reserves that
are included in the discounted present value of the reserves do not
require judgment. The ceiling calculation dictates that prices and
costs in effect as of the last day of the period are generally held
constant indefinitely. Because the ceiling calculation dictates that
prices in effect as of the last day of the applicable quarter are
held constant indefinitely, the resulting value is not indicative of
the true fair value of the reserves. Oil and natural gas prices
have historically been cyclical and, on any particular day at the
end of a quarter, can be either substantially higher or lower than
the Partnership's long-term price forecast that is a barometer for
true fair value.
In 2002, the Partnership changed methods of accounting for depletion
of capitalized costs from the units-of-revenue method to the units-
of-production method. The newly adopted accounting principle is
preferable in the circumstances because the units-of-production
method results in a better matching of the costs of oil and gas
production against the related revenue received in periods of
volatile prices for production as have been experienced in recent
periods. Additionally, the units-of-production method is the
predominant method used by full cost companies in the oil and gas
industry, accordingly, the change improves the comparability of the
Partnership's financial statements with its peer group.
Results of Operations
A. General Comparison of the Quarters Ended March 31, 2004 and 2003
The following table provides certain information regarding
performance factors for the quarters ended March 31, 2004 and 2003:
Three Months Percenta
ge
March 31, Increase
2004 2003 (Decreas
e)
------ ------ --------
--
Average price per $ 32.85 -
barrel of oil 32.91
Average price per mcf $ 6.09 (8%)
of gas 6.61
Oil production in 2,620 3,000 (13%)
barrels
Gas production in mcf 16,190 16,600 (2%)
Income from net profits $ 96,839 92,510 5%
interests
Partnership $ 65,000 - 100%
distributions
Limited partner $ 58,500 - 100%
distributions
Per unit distribution $ 7.80 - 100%
to limited partners
Number of limited 7,499 7,499
partner units
Revenues
The Partnership's income from net profits interests increased to
$96,839 from $92,510 for the quarters ended March 31, 2004 and 2003,
respectively, an increase of 5%. The principal factors affecting
the comparison of the quarters ended March 31, 2004 and 2003 are as
follows:
1. The average price for a barrel of oil received by the
Partnership decreased during the quarter ended March 31, 2004 as
compared to the quarter ended March 31, 2003 by less than 1%, or
$.06 per barrel, resulting in a decrease of approximately $200
in income from net profits interests. Oil sales represented 47%
of total oil and gas sales during the quarter ended March 31,
2004 as compared to 47% during the quarter ended March 31, 2003.
The average price for an mcf of gas received by the Partnership
decreased during the same period by 8%, or $.52 per mcf,
resulting in a decrease of approximately $8,400 in income from
net profits interests.
The total decrease in income from net profits interests due to
the change in prices received from oil and gas production is
approximately $8,600. The market price for oil and gas has been
extremely volatile over the past decade, and management expects
a certain amount of volatility to continue in the foreseeable
future.
2. Oil production decreased approximately 380 barrels or 13% during
the quarter ended March 31, 2004 as compared to the quarter
ended March 31, 2003, resulting in a decrease of approximately
$12,500 in income from net profits interests.
Gas production decreased approximately 410 mcf or 2% during the
same period, resulting in a decrease of approximately $2,700 in
income from net profits interests.
The total decrease in income from net profits interests due to
the change in production is approximately $15,200. The decrease
in oil volumes is the result of the sale of three properties in
2003.
3. Lease operating costs and production taxes were 24% lower, or
approximately $28,200 less during the quarter ended March 31,
2004 as compared to the quarter ended March 31, 2003. The
larger lease operating costs in 2003 were related to three
properties sold and well work preformed on three other wells.
Costs and Expenses
Total costs and expenses increased to $44,029 from $40,481 for the
quarters ended March 31, 2004 and 2003, respectively, an increase of
9%. The increase is a direct result of the increase in accretion
expense associated with our long term liability related to expected
abandonment costs of our oil and natural gas properties, general and
administrative expense and depletion expense.
1. General and administrative costs consists of independent
accounting and engineering fees, computer services, postage, and
Managing General Partner personnel costs. General and
administrative costs increased 8% or approximately $2,200 during
the quarter ended March 31, 2004 as compared to the quarter
ended March 31, 2003. The increase in general and
administrative costs is due primarily to an increase of
approximately $1,660 in quarterly accounting review fees.
2. Depletion expense increased to $8,000 for the quarter ended
March 31, 2004 from $7,000 for the same period in 2003. This
represents an increase of 14%. The contributing factor to the
increase in depletion expense is in relation to the BOE
depletion rate for the quarter ended March 31, 2004, which was
$1.50 applied to 5,318 BOE as compared to $1.21 applied to 5,767
BOE for the same period in 2003.
Cumulative effect of change in accounting principle - SFAS No. 143
On January 1, 2003, the Partnership adopted Statement of Financial
Accounting Standards No. 143, Accounting for Asset Retirement
Obligations ("SFAS No. 143"). Adoption of SFAS No. 143 is required
for all companies with fiscal years beginning after June 15, 2002.
The new standard requires the Partnership to recognize a liability
for the present value of all legal obligations associated with the
retirement of tangible long-lived assets and to capitalize an equal
amount as a cost of the asset and depreciate the additional cost
over the estimated useful life of the asset. On January 1, 2003,
the Partnership recorded additional costs, net of accumulated
depreciation, of approximately $366,254, a long term liability of
approximately $236,759 and a gain of approximately $129,495 for the
cumulative effect on depreciation of the additional costs and
accretion expense on the liability related to expected abandonment
costs of its oil and natural gas producing properties. At March 31,
2004, the asset retirement obligation was $260,285. The increase in
the asset retirement obligation from January 1, 2004 is due to
accretion expense of $5,104.
Liquidity and Capital Resources
The primary source of cash is from operations, the receipt of income
from interests in oil and gas properties. The Partnership knows of
no material change, nor does it anticipate any such change.
Cash flows provided by operating activities were approximately
$45,900 in the quarter ended March 31, 2004 as compared to
approximately $8,600 in the quarter ended March 31, 2003.
There were no cash flows provided by investing activities in the
quarter ended March 31, 2004. Cash flows provided by investing
activities were approximately $1,200 in the quarter ended March 31,
2003.
Cash flows used in financing activities were approximately $65,000
in the quarter ended March 31, 2004 as compared to approximately
$300 in the quarter ended March 31, 2003. The only use in financing
activities was the distributions to partners.
Total distributions during the quarter ended March 31, 2004 were
$65,000 of which $58,500 was distributed to the limited partners and
$6,500 to the general partner. The per unit distribution to limited
partners during the quarter ended March 31, 2004 was $7.80. There
were no distributions during the quarter ended March 31, 2003.
The source for the 2004 distributions of $65,000 was oil and gas
operations of approximately $45,900, with the balance from available
cash on hand at the beginning of the period.
Cumulative cash distributions of $8,006,841 have been made to the
general and limited partners. As of March 31, 2004, $7,190,618 or
$958.88 per limited partner unit has been distributed to the limited
partners, representing a 96% return of the capital contributed.
As of March 31, 2004, the Partnership had approximately $102,400 in
working capital. The Managing General Partner knows of no unusual
contractual commitments. Although the partnership held many long-
lived properties at inception, because of the restrictions on
property development imposed by the partnership agreement, the
Partnership cannot develop its non-producing properties, if any.
Without continued development, the producing reserves continue to
deplete. Accordingly, as the Partnership's properties have matured
and depleted, the net cash flows from operations for the partnership
has steadily declined, except in periods of substantially increased
commodity pricing. Maintenance of properties and administrative
expenses for the Partnership are increasing relative to production.
As the properties continue to deplete, maintenance of properties and
administrative costs as a percentage of production are expected to
continue to increase.
Liquidity - Managing General Partner
As of December 31, 2003, the Managing General Partner is in
violation of several covenants pertaining to their Amended and
Restated Revolving Credit Agreement due June 1, 2006 and their
Senior Second Lien Secured Credit Agreement due October 15, 2008.
Due to the covenant violations, the Managing General Partner is in
default under their Amended and Restated Revolving Credit Agreement
and the Senior Second Lien Secured Credit Agreement, and all amounts
due under these agreements have been classified as a current
liability on the Managing General Partner's balance sheet at
December 31, 2003. The significant working capital deficit and debt
being in default at December 31, 2003, raise substantial doubt about
the Managing General Partner's ability to continue as a going
concern.
Subsequent to December 31, 2003, the Board of Directors of the
Managing General Partner announced its decision to explore a merger,
sale of the stock or other transaction involving the Managing
General Partner. The Board has formed a Special Committee of
independent directors to oversee the sales process. The Special
Committee has retained independent financial and legal advisors to
work closely with the management of the Managing General Partner to
implement the sales process. There can be no assurance that a sale
of the Managing General Partner will be consummated or what terms,
if consummated, the sale will be on.
On May 3, 2004, the Managing General Partner entered into a cash
merger agreement to sell all of its stock to Clayton Williams
Energy, Inc. The cash merger price is being negotiated, but is
expected to be approximately $45 per share. The transaction, which
is subject to approval by the Managing General Partner's
shareholders, is expected to close no later than May 21, 2004.
Recent Accounting Pronouncements
The EITF is considering two issues related to the reporting of oil
and gas mineral rights. Issue No. 03-O, "Whether Mineral Rights Are
Tangible or Intangible Assets," is whether or not mineral rights are
intangible assets pursuant to SFAS No. 141, "Business Combinations."
Issue No. 03-S, "Application of SFAS No. 142, Goodwill and Other
Intangible Assets, to Oil and Gas Companies," is, if oil and gas
drilling rights are intangible assets, whether those assets are
subject to the classification and disclosure provisions of SFAS No.
142. The Partnership classifies the cost of oil and gas mineral
rights as properties and equipment and believes that this is
consistent with oil and gas accounting and industry practice. The
disclosures required by SFAS Nos. 141 and 142 would be made in the
notes to the financial statements. There would be no effect on the
statement of income or cash flows as the intangible assets related
to oil and gas mineral rights would continue to be amortized under
the full cost method of accounting.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Partnership is not a party to any derivative or embedded
derivative instruments.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
As of the three months ended March 31, 2004, H.H. Wommack, III,
President and Chief Executive Officer of the Managing General
Partner, and Bill E. Coggin, Executive Vice President and Chief
Financial Officer of the Managing General Partner, evaluated the
effectiveness of the Partnership's disclosure controls and
procedures. Based on their evaluation, they believe that:
The disclosure controls and procedures of the Partnership were
effective in ensuring that information required to be disclosed
by the Partnership in the reports it files or submits under the
Exchange Act was recorded, processed, summarized and reported
within the time periods specified in the SEC's rules and forms;
and
The disclosure controls and procedures of the Partnership were
effective in ensuring that material information required to be
disclosed by the Partnership in the report it filed or
submitted under the Exchange Act was accumulated and
communicated to the Managing General Partner's management,
including its President and Chief Executive Officer and Chief
Financial Officer, as appropriate to allow timely decisions
regarding required disclosure.
Internal Control Over Financial Reporting
There has not been any change in the Partnership's internal control
over financial reporting that occurred during the three months ended
March 31, 2004 that has materially affected, or is reasonably likely
to materially affect, it internal control over financial reporting.
PART II. - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matter to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
31.1 Rule 13a-14(a)/15d-14(a) Certification
31.2 Rule 13a-14(a)/15d-14(a) Certification
32.1 Certification of Chief Executive Officer
Pursuant to 18 U.S.C. Section 1350, as
adopted Pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002
32.2 Certification of Chief Financial Officer
Pursuant to 18 U.S.C. Section 1350, as
adopted Pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the
quarter for which this report is filed.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
SOUTHWEST ROYALTIES, INC.
INCOME FUND V,
a Tennessee limited partnership
By: Southwest Royalties, Inc.
Managing General Partner
By: /s/ Bill E. Coggin
---------------------------------
- ---------
Bill E. Coggin, Vice President
and Chief Financial Officer
Date: May 14, 2004
SECTION 302 CERTIFICATION Exhibit 31.1
I, H.H. Wommack, III, certify that:
1.I have reviewed this quarterly report on Form 10-Q of Southwest
Royalties, Inc. Income Fund V, L.P.,
2.Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other
financial information included in this report, fairly present in
all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the
periods presented in this report;
4.The registrant's other certifying officer(s) and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15-
15(e)) and internal control over financial reporting (as defined
in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant
and have:
a)Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating
to the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly
during the period in which this report is being prepared;
b)Designed such internal control over financial reporting, or
caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
c)Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
d)Disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during
the registrant's most recent fiscal quarter (the registrant's
fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting; and
5.The registrant's other certifying officer(s) and I have disclosed,
based on our most recent evaluation of internal control over
financial reporting, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons
performing the equivalent functions):
a)All significant deficiencies and material weaknesses in the
design or operation of internal controls over financial
reporting which reasonably likely to adversely affect the
registrant's ability to record, process, summarize and report
financial information; and
b)Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls over financial reporting.
Date: May 14, 2004 /s/ H. H. Wommack, III
H. H. Wommack, III
Chairman, President and Chief
Executive Officer
of Southwest Royalties, Inc., the
Managing General Partner of
Southwest Royalties, Inc. Income
Fund V
SECTION 302 CERTIFICATION Exhibit 31.2
I, Bill E. Coggin, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Southwest
Royalties, Inc. Income Fund V, L.P.,
2.Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other
financial information included in this report, fairly present in
all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the
periods presented in this report;
4.The registrant's other certifying officer(s) and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15-
15(e)) and internal control over financial reporting (as defined
in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant
and have:
a)Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating
to the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly
during the period in which this report is being prepared;
b)Designed such internal control over financial reporting, or
caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
c)Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
d)Disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during
the registrant's most recent fiscal quarter (the registrant's
fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting; and
5.The registrant's other certifying officer(s) and I have disclosed,
based on our most recent evaluation of internal control over
financial reporting, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons
performing the equivalent functions):
a)All significant deficiencies and material weaknesses in the
design or operation of internal controls over financial
reporting which reasonably likely to adversely affect the
registrant's ability to record, process, summarize and report
financial information; and
b)Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls over financial reporting.
Date: May 14, 2004 /s/ Bill E. Coggin
Bill E. Coggin
Executive Vice President
and Chief Financial Officer of
Southwest Royalties, Inc., the
Managing General Partner of
Southwest Royalties, Inc. Income
Fund V
CERTIFICATION PURSUANT TOExhibit 32.1
19 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Southwest Royalties,
Inc. Income Fund V, L.P. (the "Company") on Form 10-Q for the period
ending March 31, 2004 as filed with the Securities and Exchange
Commission on the date hereof (the "Report"), I, H.H. Wommack, III,
Chief Executive Officer of the Managing General Partner of the
Company, certify, pursuant to 18 U.S.C. 1350, as adopted pursuant
to 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section
13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operation
of the Company.
Date: May 14, 2004
/s/ H. H. Wommack, III
H. H. Wommack, III
Chairman, President, Director and Chief Executive Officer
of Southwest Royalties, Inc., the
Managing General Partner of
Southwest Royalties, Inc. Income Fund V
CERTIFICATION PURSUANT TOExhibit 32.2
19 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Southwest Royalties,
Inc. Income Fund V, L.P. (the "Company") on Form 10-Q for the period
ending March 31, 2004 as filed with the Securities and Exchange
Commission on the date hereof (the "Report"), I, Bill E. Coggin,
Chief Financial Officer of the Managing General Partner of the
Company, certify, pursuant to 18 U.S.C. 1350, as adopted pursuant
to 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section
13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operation
of the Company.
Date: May 14, 2004
/s/ Bill E. Coggin
Bill E. Coggin
Executive Vice President
and Chief Financial Officer of
Southwest Royalties, Inc., the
Managing General Partner of
Southwest Royalties, Inc. Income Fund V