Chapter 11 Proceedings

On December 31, 2015, the Company and eight of its subsidiaries including Swift Energy International, Inc., Swift Energy Group, Inc., Swift Energy USA, Inc., Swift Energy Alaska, Inc., Swift Energy Operating, LLC, GASRS LLC, SWENCO-Western, LLC and Swift Energy Exploration Services, Inc. (the “Chapter 11 Subsidiaries”) filed voluntary petitions seeking relief under Chapter 11 of Title 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the district of Delaware (In re Swift Energy Company, et al, Case No. 15-12670). The Chapter 11 bankruptcy proceedings do not include our international subsidiaries, which are 100% owned by our domestic subsidiary Swift Energy International, Inc.

Debtor-In-Possession. The Company and the Chapter 11 Subsidiaries are currently operating our business as debtors in possession in accordance with the applicable provisions of the Bankruptcy Code. The Bankruptcy Court has granted all motions filed by the Company and the Chapter 11 Subsidiaries that were designed primarily to minimize the impact of the Chapter 11 proceedings on the Company’s operations, customers and employees. As a result, the Company is not only able to conduct normal business activities and pay all associated obligations for the period following its bankruptcy filing, it is also authorized to pay and has paid (subject to caps applicable to payments of certain pre-petition obligations) pre-petition employee wages and benefits, pre-petition amounts owed to certain lienholders and critical vendors, pre-petition amounts owed to pipeline owners that transport the Company's production, and funds belonging to third parties, including royalty holders and partners. During the pendency of the Chapter 11 case, all transactions outside the ordinary course of our business require the prior approval of the Bankruptcy Court.

Automatic Stay. Subject to certain specific exceptions under the Bankruptcy Code, the Chapter 11 filings automatically stayed most judicial or administrative actions against the Company and efforts by creditors to collect on or otherwise exercise rights or remedies with respect to pre-petition claims. As a result, for example, most creditor actions to obtain possession of property from the Company or any of the Chapter 11 Subsidiaries, or to create, perfect or enforce any lien against the property of the Company or any of the Chapter 11 Subsidiaries, or to collect on or otherwise exercise rights or remedies with respect to a pre-petition claim are stayed.

Restructuring Support Agreement. Immediately prior to the Chapter 11 filings, a majority of the holders of the Company’s senior notes agreed, pursuant to a restructuring support agreement (the “RSA”), to support a plan under which all of the Company’s senior notes are converted to equity. Under the RSA, holders of the senior notes, and certain unsecured creditors and lenders under the DIP Credit Agreement (see below “Debtor-in-Possession Financing”) are to receive ninety-six percent (96%) of the reorganized company's common stock in exchange for the senior notes, and the existing equity holders are entitled to receive the remaining four percent (4%) of the reorganized company's common stock on a fully diluted basis, subject only to dilution as a result of a proposed new management incentive program. Existing equity holders are also entitled to receive warrants for up to 30% of the reorganized company's equity. Under the RSA, Dean Swick, Managing Director at Alvarez & Marsal North America, LLC, has been appointed to act as Chief Restructuring Officer during the reorganization process.

The RSA includes an agreed timeline for the Chapter 11 proceedings that, if met, would result in the Company emerging from bankruptcy within 110 days of the date the Chapter 11 cases were filed.

Plan of Reorganization. On February 5, 2016, the Company and the Chapter 11 Subsidiaries filed with the Bankruptcy Court a joint plan of reorganization (the “Plan”), which is supported by an ad hoc committee of the Company’s noteholders, and a related disclosure statement. The Plan is subject to approval by the Bankruptcy Court. The Bankruptcy Court has approved the Company’s disclosure statement with respect to the Plan, and the Company is in the process of soliciting votes with respect to the Plan. A confirmation hearing on the Plan is scheduled on March 30, 2016 in the Bankruptcy Court.

If the Plan is ultimately approved by the Bankruptcy Court, the Company and the Chapter 11 Subsidiaries would exit bankruptcy pursuant to the terms of the Plan. Under the Plan, the claims against and interests in the Company and the Chapter 11 Subsidiaries are grouped into classes based, in part, on their respective priority. The Plan provides that, upon emergence from bankruptcy:


•	the approximately $906 million of indebtedness outstanding on account of the Company’s senior notes and certain other unsecured claims will be exchanged for 88.5% of the post-emergence Company’s common stock;


•	the lenders under the DIP Credit Agreement (as more fully described below under “Debtor-In-Possession Financing”) will receive a backstop fee consisting of 7.5% of the post-emergence Company’s common stock;


•	the Company’s current common stock will be canceled and the current shareholders will be entitled to receive the remaining 4% of the post-emergence Company’s common stock and certain warrants; and


•	claims of other creditors will be paid in full in cash, reinstated or otherwise treated in a manner acceptable to the creditors.

The Plan also provides that the post-emergence Company’s new board of directors will be made up of seven directors consisting of the Chief Executive Officer of the post-emergence Company, two directors appointed by Strategic Value Partners LLC, a current holder of the Company’s senior notes, two directors appointed by other current holders of the Company’s senior notes, and two independent directors (one of whom will be the new Chairman of the Board).

The Plan is subject to acceptance by certain holders of claims against the Company and the Chapter 11 Subsidiaries and confirmation by the Bankruptcy Court. The Plan is deemed accepted by a class of claims entitled to vote if at least one-half in number and two-thirds in dollar amount of claims actually voting in the class has voted to accept the Plan.

Under certain circumstances set forth in the Bankruptcy Code, the Bankruptcy Court may confirm a plan even if such plan has not been accepted by all impaired classes of claims and equity interests. In particular, a plan may be compelled on a rejecting class if the proponent of the plan demonstrates that (1) no class junior to the rejecting class is receiving or retaining property under the plan and (2) no class of claims or interests senior to the rejecting class is being paid more than in full.

Executory Contracts. Subject to certain exceptions, under the Bankruptcy Code, the Company and the Chapter 11 Subsidiaries may assume, assign, or reject certain executory contracts and unexpired leases subject to the approval of the Bankruptcy Court and certain other conditions. The rejection of an executory contract or unexpired lease is generally treated as a pre-petition breach of such executory contract or unexpired lease and, subject to certain exceptions, relieves the Company and the Chapter 11 Subsidiaries of performing their future obligations under such executory contract or unexpired lease but may give rise to a pre-petition general unsecured claim for damages caused by such deemed breach. Counterparties to rejected contracts or leases may assert claims against the Company or any of the Chapter 11 Subsidiaries, as applicable, for such damages. The assumption of an executory contract or unexpired lease generally requires the Company and the Chapter 11 Subsidiaries to cure existing monetary defaults under such executory contract or unexpired lease and provide adequate assurance of future performance. Any description of the treatment of an executory contract or unexpired lease with the Company or any of the Chapter 11 Subsidiaries, including any description of the obligations under any such executory contract or unexpired lease of the Company or any of the Chapter 11 Subsidiaries, is qualified by and subject to any rights we have with respect to executory contacts and unexpired leases under the Bankruptcy Code.

Potential Claims. The Company and the Chapter 11 Subsidiaries have filed with the Bankruptcy Court Schedules and Statements setting forth, among other things, the assets and liabilities of the Company and each of the Chapter 11 Subsidiaries, subject to the assumptions filed in connection therewith. The Schedules and Statements may be subject to further amendment or modification after filing. Certain holders of pre-petition claims are required to file proofs of claim by the Bar Date.

Differences between amounts scheduled by the Company and the Chapter 11 Subsidiaries and claims by creditors will be investigated and resolved in connection with the claims resolution process. In light of the expected number of creditors, the claims resolution process may take considerable time to complete and will likely continue after our emergence from bankruptcy. Accordingly, the ultimate number and amount of allowed claims is not presently known, nor can the ultimate recovery with respect to allowed claims be presently ascertained.

Chapter 11 Filing Impact on Creditors and Stockholders. Under the priority requirements established by the Bankruptcy Code, unless creditors agree otherwise, pre-petition liabilities to creditors and post-petition liabilities must be satisfied in full before the holders of our existing common stock are entitled to receive any distribution or retain any property under a plan of reorganization. The ultimate recovery to creditors and/or stockholders, if any, will not be determined until confirmation and implementation of a plan or plans of reorganization. The outcome of the Chapter 11 case remains uncertain at this time and, as a result, we cannot accurately estimate the amounts or value of distributions that creditors and stockholders may receive. It is possible that stockholders will receive no distribution on account of their interests.

Debtor-In-Possession Financing. In connection with the pre-petition negotiations of the RSA, certain holders of the Company’s senior notes agreed to provide the Company and the Chapter 11 Subsidiaries a debtor in possession facility (the “DIP Facility”) pursuant to the terms of a Debtor-in-Possession (“DIP”) Credit Agreement. The DIP Facility has been approved by the Bankruptcy Court. The DIP Credit Agreement provides for a multi-draw term loan in the aggregate amount of up to $75.0 million, of which the Company has $30.0 million currently available. The remaining $45 million under the DIP Facility will become available to the Company, upon the satisfaction of certain contingencies, including our ability to amend and restate or refinance the indebtedness under the Company’s current first lien credit facility and obtain exit financing. Pursuant to the Plan, the DIP Facility will be either paid in full in cash or, at the option of the lenders under the DIP Credit Agreement, converted, in full or in part, into the post-emergence Company’s common stock, which common stock will only come from the 88.5% of the common stock to be distributed to the current holders of the senior notes and certain unsecured creditors. For more information refer to Note 4 of these consolidated financial statements.

Creditors Committee. On January 14, 2016, the United States Trustee for the District of Delaware appointed pursuant to section 1102 of the Bankruptcy Code, the Official Committee of Unsecured Creditors (the "Creditors' Committee"). There can be no assurance that the Creditors' Committee and its legal representatives will support the Company’s and the Chapter 11 Subsidiaries’ positions on matters presented to the Bankruptcy Court, including the Plan. Disagreements between the Company and the Chapter 11 Subsidiaries and the Creditors' Committee could protract the Chapter 11 proceedings and delay the Company’s and the Chapter 11 Subsidiaries’ emergence from the Chapter 11 proceedings.

Financial Statement Classification of Liabilities Subject to Compromise. Our financial statements include amounts classified as Liabilities Subject to Compromise (see “Liabilities Subject to Compromise” below), which represent liabilities that we anticipate will be allowed as claims in our bankruptcy case. These amounts include amounts related to the anticipated rejection of various executory contracts and unexpired leases. Additional amounts may be included in Liabilities Subject to Compromise in future periods if additional executory contracts and unexpired leases are rejected. Conversely, to the extent that such executory contracts or unexpired leases are not rejected and are instead assumed, certain liabilities characterized as subject to compromise may be converted to post-petition liabilities. Because the uncertain nature of many of the potential claims has not been determined at this time, the magnitude of such claims is not reasonably estimable at this time. Such claims may be material.

Reorganization Expenses. The Company and the Chapter 11 Subsidiaries have incurred and will continue to incur significant costs associated with the reorganization, principally professional fees. The amount of these costs, which are being expensed as incurred, are expected to significantly affect our results of operations. In accordance with ASC 852, we have recorded certain costs associated with the bankruptcy proceedings as Reorganization Items within our Consolidated Statement of Operations. For additional information, see “Reorganization Items” below.

Restrictions on Trading of Our Equity Securities to Protect Our Use of Net Operating Losses. The Bankruptcy Court has issued a final order pursuant to Sections 105(a), 362(a)(3) and 541 of the Bankruptcy Code enabling the Company and the Chapter 11 Subsidiaries to avoid limitations on the use of their tax net operating loss carryforwards and certain other tax attributes by imposing certain notice procedures and transfer restrictions on the trading of our equity securities. In general, the order applies to any person that, directly or indirectly, beneficially owns (or would beneficially own as a result of a proposed transfer) at least 4.99% of our outstanding equity securities (a “Substantial Stockholder”), and requires that each Substantial Stockholder files with the Bankruptcy Court and serves us with notice of such status. Under the order, prior to any proposed acquisition or disposition of equity securities that would result in an increase or decrease in the amount of our equity securities owned by a Substantial Stockholder, or that would result in a person or entity becoming a Substantial Stockholder, such person is required to file with the Bankruptcy Court and notify the Company of such acquisition or disposition. We have the right to seek an injunction from the Bankruptcy Court to prevent certain acquisitions or sales of our common stock if the acquisition or sale would pose a material risk of adversely affecting our ability to utilize such tax attributes.

Risks Associated with Chapter 11 Proceedings. For the duration of our Chapter 11 proceedings, our operations and our ability to develop and execute our business plan are subject to the risks and uncertainties associated with the Chapter 11 process as described in Item 1A, “Risk Factors”. Because of these risks and uncertainties, the description of our operations, properties and capital plans may not accurately reflect our operations, properties and capital plans following the Chapter 11 process.

Liabilities Subject to Compromise. Liabilities Subject to Compromise refers to pre-petition obligations that may be impacted by the Chapter 11 reorganization process. The amounts represent our current estimate of known or potential obligations to be resolved in connection with our Chapter 11 proceedings.

Differences between liabilities we have estimated and the claims filed, or to be filed, will be investigated and resolved in connection with the claims resolution process. We will continue to evaluate these liabilities throughout the Chapter 11 process and adjust amounts as necessary. Such adjustments may be material.

The following table summarizes the components of liabilities subject to compromise included on our Consolidated Balance Sheet as of December 31, 2015 (in thousands):



	December 31, 2015
Accounts payable and accrued liabilities	55,587
Accrued capital costs	7,225
Undistributed oil and gas revenues	11,989
Senior notes and accrued interest	905,629
Other long-term liabilities	3,958
Liabilities Subject to Compromise	984,388

Reorganization Items. The Debtors have incurred and will continue to incur significant costs associated with the reorganization. The amount of these costs, which are being expensed as incurred, are expected to significantly affect our results of operations.

The following table summarizes the components included in Reorganization items in our Consolidated Statements of Operations for the year ended December 31, 2015 (in thousands):



	December 31, 2015
Non-cash expense for write-off of debt issuance costs on senior notes	8,662
Non-cash expense for write-off of debt discount on senior notes due 2020	1,864
Non-cash gain for write-off of debt premium on senior notes due 2022	(3,961	)
Reorganization Items	6,565

A non-cash charge to write-off all of the unamortized debt issuance costs and associated discounts and premiums related to the Company's Senior Notes due 2017, Senior Notes due 2020 and Senior Notes due 2022 is included in "Reorganization Items" as these debt instruments are expected to be impacted by the bankruptcy reorganization process.