10-Q 1 q7.txt Page 14 of 14 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 September 30, 2001 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) ________(915) 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 _____ The total number of pages contained in this report is 14. 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 note thereto for the year ended December 31, 2000, which are found in the Registrant's Form 10-K Report for 2000 filed with the Securities and Exchange Commission. The December 31, 2000 balance sheet included herein has been taken from the Registrant's 2000 Form 10-K Report. Operating results for the three and nine month periods ended September 30, 2001 are not necessarily indicative of the results that may be expected for the full year. Southwest Royalties, Inc. Income Fund V Balance Sheets September 30, December 31, 2001 2000 ------------- ------------ (unaudited) Assets ------ Cash and equivalents $ 64,557 43,322 Receivable from Managing General Partner 28,340 115,255 --------- --------- Total current assets 92,897 158,577 --------- --------- Oil and gas properties - using the full-cost method of accounting 6,159,438 6,159,438 Less accumulated depreciation, depletion and amortization 5,844,800 5,772,800 --------- --------- Net oil and gas properties 314,638 386,638 --------- --------- $ 407,535 545,215 ========= ========= Liabilities and Partners' Equity -------------------------------- Current liability - Distributions payable $ 103 188 --------- --------- Partners' equity: General partners (635,450) (621,690) Limited partners 1,042,882 1,166,717 --------- --------- Total partners' equity 407,432 545,027 --------- --------- $ 407,535 545,215 ========= ========= Southwest Royalties, Inc. Income Fund V Statements of Operations (unaudited) Three Months Ended Nine Months Ended September 30, September 30, 2001 2000 2001 2000 ---- ---- ---- ---- Revenues -------- Income from net profits interests $ (45,452) 92,641 243,822 315,325 Interest 417 665 2,068 2,106 ------- ------- ------- ------- (45,035) 93,306 245,890 317,431 ------- ------- ------- ------- Expenses -------- General and administrative 29,176 28,298 86,485 90,045 Depreciation, depletion and amortization 38,000 9,000 72,000 24,000 ------- ------- ------- ------- 67,176 37,298 158,485 114,045 ------- ------- ------- ------- Net income (loss) $(112,211) 56,008 87,405 203,386 ======= ======= ======= ======= Net income (loss) allocated to: Managing General Partner $ (10,098) 5,042 7,866 18,305 ======= ======= ======= ======= General Partner $ (1,123) 559 874 2,034 ======= ======= ======= ======= Limited Partners $(100,990) 50,407 78,665 183,047 ======= ======= ======= ======= Per limited partner unit $ (13.47) 6.72 10.49 24.41 ======= ======= ======= ======= Southwest Royalties, Inc. Income Fund V Statements of Cash Flows (unaudited) Nine Months Ended September 30, 2001 2000 ---- ---- Cash flows from operating activities Cash received from income from net profits interests $ 330,282 236,460 Cash paid to suppliers (86,030) (73,185) Interest received 2,068 2,106 ------- ------- Net cash provided by operating activities 246,320 165,381 ------- ------- Cash flows used in financing activities Distributions to partners (225,085) (164,896) ------- ------- Net increase in cash and cash equivalents 21,235 485 Beginning of period 43,322 44,339 ------- ------- End of period $ 64,557 44,824 ======= ======= Reconciliation of net income to net cash provided by operating activities Net income $ 87,405 203,386 Adjustments to reconcile net income to net cash provided by operating activities Depreciation, depletion and amortization 72,000 24,000 Decrease (increase) in receivables 86,460 (78,865) Increase in payable 455 16,860 ------- ------- Net cash provided by operating activities $ 246,320 165,381 ======= ======= 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 and H. H. Wommack, III, as the individual general partner. Revenues, costs and expenses are allocated as follows: Limited General Partners Partners -------- -------- Interest income on capital contributions 100% - Oil and gas sales 90% 10% All other revenues 90% 10% Organization and offering costs (1) 100% - Amortization of organization costs 100% - Property acquisition costs 100% - Gain/loss on property disposition 90% 10% Operating and administrative costs (2) 90% 10% 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 September 30, 2001, and for the three and nine months ended September 30, 2001, 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 audited financial statements for the year ended December 31, 2000. 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. 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 fluctuate in later years based on these factors. Based on current conditions, management does not anticipate performing workovers during the next twelve months. The Partnership could possibly experience a normal decline of 8% to 10% a year. 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 involved. The Partnership's policy for depreciation, depletion and amortization of oil and gas properties is computed under the units of revenue method. Under the units of revenue method, depreciation, depletion and amortization is computed on the basis of current gross revenues from production in relation to future gross revenues, based on current prices, from estimated production of proved oil and gas reserves. Should the net capitalized costs exceed the estimated present value of oil and gas reserves, discounted at 10%, such excess costs would be charged to current expense. As of September 30, 2001, the net capitalized costs did not exceed the estimated present value of oil and gas reserves. Results of Operations A. General Comparison of the Quarters Ended September 30, 2001 and 2000 The following table provides certain information regarding performance factors for the quarters ended September 30, 2001 and 2000: Three Months Ended Percentage September 30, Increase 2001 2000 (Decrease) ---- ---- ---------- Average price per barrel of oil $ 25.26 29.95 (16%) Average price per mcf of gas $ 2.80 5.40 (48%) Oil production in barrels 3,450 5,000 (31%) Gas production in mcf 24,700 26,800 (8%) Income from net profits interests $(45,452) 92,641 (149%) Partnership distributions $ - 65,000 (100%) Limited partner distributions $ - 58,500 (100%) Per unit distribution to limited partners $ - 7.80 (100%) Number of limited partner units 7,499 7,499 Revenues The Partnership's income from net profits interests decreased to $(45,452) from $92,641 for the quarters ended September 30, 2001 and 2000, respectively, a decrease of 149%. The principal factors affecting the comparison of the quarters ended September 30, 2001 and 2000 are as follows: 1. The average price for a barrel of oil received by the Partnership decreased during the quarter ended September 30, 2001 as compared to the quarter ended September 30, 2000 by 16%, or $4.69 per barrel, resulting in a decrease of approximately $16,200 in income from net profits interests. Oil sales represented 56% of total oil and gas sales during the quarter ended September 30, 2001 as compared to 51% during the quarter ended September 30, 2000. The average price for an mcf of gas received by the Partnership decreased during the same period by 48%, or $2.60 per mcf, resulting in a decrease of approximately $64,200 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 $80,400. 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 1,550 barrels or 31% during the quarter ended September 30, 2001 as compared to the quarter ended September 30, 2000, resulting in a decrease of approximately $46,400 in income from net profits interests. Gas production decreased approximately 2,100 mcf or 8% during the same period, resulting in a decrease of approximately $11,300 in income from net profits interests. The total decrease in income from net profits interests due to the change in production is approximately $57,700. The decrease in oil production is due to several small wells experiencing steep declines. 3. Lease operating costs and production taxes was 2% higher, or approximately $2,900 more during the quarter ended September 30, 2001 as compared to the quarter ended September 30, 2000. Costs and Expenses Total costs and expenses increased to $67,176 from $37,298 for the quarters ended September 30, 2001 and 2000, respectively, an increase of 80%. The increase is the result of higher depletion expense and general and administrative 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 3% or approximately $900 during the quarter ended September 30, 2001 as compared to the quarter ended September 30, 2000. 2. Depletion expense increased to $38,000 for the quarter ended September 30, 2001 from $9,000 for the same period in 2000. This represents an increase of 322%. Depletion is calculated using the units of revenue method of amortization based on a percentage of current period gross revenues to total future gross oil and gas revenues, as estimated by the Partnership's independent petroleum consultants. Contributing factors to the increase in depletion expense between the comparative periods were the decrease in the price of oil and gas used to determine the Partnership's reserves for October 1, 2001 as compared to 2000, and the decrease in oil and gas revenues received by the Partnership during 2001 as compared to 2000. B. General Comparison of the Nine Month Periods Ended September 30, 2001 and 2000 The following table provides certain information regarding performance factors for the nine month periods ended September 30, 2001 and 2000: Nine Months Ended Percentage September 30, Increase 2001 2000 (Decrease) ---- ---- --------- Average price per barrel of oil $ 26.91 28.54 (6%) Average price per mcf of gas $ 4.64 4.28 8% Oil production in barrels 11,700 14,200 (18%) Gas production in mcf 73,500 77,200 (5%) Income from net profits interests $ 243,822 315,325 (23%) Partnership distributions $ 225,000 165,000 36% Limited partner distributions $ 202,500 148,500 36% Per unit distribution to limited partners $ 27.00 19.80 36% Number of limited partner units 7,499 7,499 Revenues The Partnership's income from net profits interests decreased to $243,822 from $315,325 for the nine months ended September 30, 2001 and 2000, respectively, a decrease of 23%. The principal factors affecting the comparison of the nine months ended September 30, 2001 and 2000 are as follows: 1. The average price for a barrel of oil received by the Partnership decreased during the nine months ended September 30, 2001 as compared to the nine months ended September 30, 2000 by 6%, or $1.63 per barrel, resulting in a decrease of approximately $19,100 in income from net profits interests. Oil sales represented 48% of total oil and gas sales during the nine months ended September 30, 2001 as compared to 55% during the nine months ended September 30, 2000. The average price for an mcf of gas received by the Partnership increased during the same period by 8%, or $.36 per mcf, resulting in an increase of approximately $26,500 in income from net profits interests. The net total increase in income from net profits interests due to the change in prices received from oil and gas production is approximately $7,400. 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 2,500 barrels or 18% during the nine months ended September 30, 2001 as compared to the nine months ended September 30, 2000, resulting in a decrease of approximately $71,400 in income from net profits interests. Gas production decreased approximately 3,700 mcf or 5% during the same period, resulting in a decrease of approximately $15,800 in income from net profits interests. The total decrease in income from net profits interests due to the change in production is approximately $87,200. The decrease in oil production is due to several small well experiencing steep declines. 3. Lease operating costs and production taxes were 2% lower, or approximately $8,100 less during the nine months ended September 30, 2001 as compared to the nine months ended September 30, 2000. Costs and Expenses Total costs and expenses increased to $158,485 from $114,045 for the nine months ended September 30, 2001 and 2000, respectively, an increase of 39%. The increase is the result of higher depletion expense, partially offset by a decrease in general and administrative 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 decreased 4% or approximately $3,600 during the nine months ended September 30, 2001 as compared to the nine months ended September 30, 2000. 2. Depletion expense increased to $72,000 for the nine months ended September 30, 2001 from $24,000 for the same period in 2000. This represents an increase of 200%. Depletion is calculated using the units of revenue method of amortization based on a percentage of current period gross revenues to total future gross oil and gas revenues, as estimated by the Partnership's independent petroleum consultants. Contributing factors to the increase in depletion expense between the comparative periods were the decrease in the price of oil and gas used to determine the Partnership's reserves for October 1, 2001 as compared to 2000, and the decrease in oil and gas revenues received by the Partnership during 2001 as compared to 2000. 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 $246,300 in the nine months ended September 30, 2001 as compared to approximately $165,400 in the nine months ended September 30, 2000. The primary source of the 2001 cash flow from operating activities was operations. Cash flows used in financing activities were approximately $225,100 in the nine months ended September 30, 2001 as compared to approximately $165,000 in the nine months ended September 30, 2000. The only use in financing activities was the distributions to partners. Total distributions during the nine months ended September 30, 2001 were $225,000 of which $202,500 was distributed to the limited partners and $22,500 to the general partners. The per unit distribution to limited partners during the nine months ended September 30, 2001 was $27.00. Total distributions during the nine months ended September 30, 2000 were $165,000 of which $148,500 was distributed to the limited partners and $16,500 to the general partners. The per unit distribution to limited partners during the nine months ended September 30, 2000 was $19.80. The sources for the 2001 distributions of $225,000 were oil and gas operations of approximately $246,300, resulting in excess cash for contingencies or subsequent distributions. The sources for the 2000 distributions of $165,000 were oil and gas operations of approximately $165,400, resulting in excess cash for contingencies or subsequent distributions. Since inception of the Partnership, cumulative monthly cash distributions of $7,863,543 have been made to the partners. As of September 30, 2001, $7,060,820 or $941.57 per limited partner unit has been distributed to the limited partners, representing an 94% return of the capital contributed. As of September 30, 2001, the Partnership had approximately $92,800 in working capital. The Managing General Partner knows of no unusual contractual commitments and believes the revenues generated from operations are adequate to meet the needs of the Partnership. Item 3. Quantitative and Qualitative Disclosures About Market Risk The Partnership is not a party to any derivative or embedded derivative instruments. 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) 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: November 14, 2001