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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002
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 0-19279
EVERFLOW EASTERN PARTNERS, L.P.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Delaware 34-1659910
---------------------------------- --------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
585 West Main Street
P.O. Box 629
Canfield, Ohio 44406
---------------------------------------- --------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 330-533-2692
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter 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 [ ]
There were 5,748,773 Units of limited partnership interest of the
Registrant as of November 8, 2002. The Units generally do not have any voting
rights, but, in certain circumstances, the Units are entitled to one vote per
Unit.
Except as otherwise indicated, the information contained in this Report
is as of September 30, 2002.
EVERFLOW EASTERN PARTNERS, L.P.
INDEX
DESCRIPTION PAGE NO.
----------- ---------
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets
September 30, 2002 and December 31, 2001 F-1
Consolidated Statements of Income
Three and Nine Months Ended
September 30, 2002 and 2001 F-3
Consolidated Statements of Partners' Equity
Nine Months Ended September 30, 2002 and 2001 F-4
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 2002 and 2001 F-5
Notes to Unaudited Consolidated Financial Statements F-6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 3
Item 3. Quantitative and Qualitative Disclosures About Market
Risk 7
Item 4. Controls and Procedures 7
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 8
Signature 9
2
EVERFLOW EASTERN PARTNERS, L.P.
CONSOLIDATED BALANCE SHEETS
September 30, 2002 and December 31, 2001
September 30, December 31,
2002 2001
ASSETS (Unaudited) (Audited)
------ ------------- -------------
CURRENT ASSETS
Cash and equivalents $ 2,069,470 $ 1,128,835
Accounts receivable:
Production 2,158,668 2,475,123
Officers and employees 308,280 255,448
Joint venture partners 19,903 121,458
Short-term investments 2,324,580 3,790,562
Other 117,282 47,998
------------ ------------
Total current assets 6,998,183 7,819,424
PROPERTY AND EQUIPMENT
Proved properties (successful efforts
accounting method) 118,170,894 114,964,451
Pipeline and support equipment 509,398 504,222
Corporate and other 1,495,313 1,465,910
------------ ------------
120,175,605 116,934,583
Less accumulated depreciation, depletion,
amortization and write down (75,954,744) (72,609,314)
------------ ------------
44,220,861 44,325,269
OTHER ASSETS 167,772 109,572
------------ ------------
$ 51,386,816 $ 52,254,265
============ ============
See notes to unaudited consolidated financial statements.
F-1
EVERFLOW EASTERN PARTNERS, L.P.
CONSOLIDATED BALANCE SHEETS
September 30, 2002 and December 31, 2001
September 30, December 31,
2002 2001
LIABILITIES AND PARTNERS' EQUITY (Unaudited) (Audited)
- -------------------------------- ------------- ------------
CURRENT LIABILITIES
Current portion of long-term debt $ 52,700 $ 53,900
Accounts payable 607,536 505,246
Accrued expenses 243,708 275,010
------------ ------------
Total current liabilities 903,944 834,156
LONG-TERM DEBT, NET OF CURRENT PORTION 415,600 458,114
DEFERRED INCOME TAXES - 50,000
COMMITMENTS AND CONTINGENCIES - -
LIMITED PARTNERS' EQUITY, SUBJECT TO
REPURCHASE RIGHT
Authorized - 8,000,000 Units
Issued and outstanding - 5,748,773 and
5,771,174 Units, respectively 49,489,643 50,326,874
GENERAL PARTNER'S EQUITY 577,629 585,121
------------ ------------
Total partners' equity 50,067,272 50,911,995
------------ ------------
$ 51,386,816 $ 52,254,265
============ ============
See notes to unaudited consolidated financial statements.
F-2
EVERFLOW EASTERN PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF INCOME
Three and Nine Months Ended September 30, 2002 and 2001
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------------- -------------------------------
2002 2001 2002 2001
------------- ------------- ------------ --------------
REVENUES
Oil and gas sales $ 3,725,819 $ 3,816,514 $11,162,467 $ 12,223,778
Well management and operating 112,520 93,842 364,167 334,528
Other 92 242 942 2,743
----------- ----------- ----------- ------------
3,838,431 3,910,598 11,527,576 12,561,049
DIRECT COST OF REVENUES
Production costs 579,176 580,407 1,854,663 1,934,624
Well management and operating 47,300 26,486 154,579 98,894
Depreciation, depletion and amortization 1,068,289 1,066,455 3,336,378 3,528,842
Abandonment and write down
of oil and gas properties 50,000 50,000 150,000 150,000
----------- ----------- ----------- ------------
Total direct cost of revenues 1,744,765 1,723,348 5,495,620 5,712,360
GENERAL AND ADMINISTRATIVE EXPENSE 309,070 338,773 1,000,471 1,011,006
----------- ----------- ----------- ------------
Total cost of revenues 2,053,835 2,062,121 6,496,091 6,723,366
----------- ----------- ----------- ------------
INCOME FROM OPERATIONS 1,784,596 1,848,477 5,031,485 5,837,683
OTHER INCOME (EXPENSE)
Interest income 13,134 38,797 47,479 186,625
Interest expense (7,934) (11,219) (24,205) (34,544)
Gain on sale of property and equipment - - 4,380 -
----------- ----------- ----------- ------------
5,200 27,578 27,654 152,081
----------- ----------- ----------- ------------
INCOME BEFORE INCOME TAXES 1,789,796 1,876,055 5,059,139 5,989,764
PROVISION FOR INCOME TAXES
Current - - - -
Deferred - - (50,000) -
----------- ----------- ----------- ------------
- - (50,000) -
NET INCOME $ 1,789,796 $ 1,876,055 $ 5,109,139 $ 5,989,764
=========== =========== =========== ============
Allocation of Partnership Net Income
Limited Partners $ 1,769,147 $ 1,854,494 $ 5,050,342 $ 5,921,836
General Partner 20,649 21,561 58,797 67,928
----------- ----------- ----------- ------------
$ 1,789,796 $ 1,876,055 $ 5,109,139 $ 5,989,764
Net Income per unit $ 0.31 $ 0.32 $ 0.88 $ 1.01
=========== =========== =========== ============
See notes to unaudited consolidated financial statements
F-3
EVERFLOW EASTERN PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF PARTNERS' EQUITY
Nine Months Ended September 30, 2002 and 2001
(Unaudited)
2002 2001
-------------- -------------
PARTNERS' EQUITY - JANUARY 1 $ 50,911,995 $ 53,043,829
Net income 5,109,139 5,989,764
Cash distributions (5,827,072) (6,641,486)
Repurchase Right - Units tendered (126,790) (1,143,158)
------------- ------------
PARTNERS' EQUITY - SEPTEMBER 30 $ 50,067,272 $ 51,248,949
============= ============
See notes to unaudited consolidated financial statements
F-4
EVERFLOW EASTERN PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, 2002 and 2001
(Unaudited)
2002 2001
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 5,109,139 $ 5,989,764
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, depletion and amortization 3,356,990 3,573,452
Abandonment and write down of oil and gas properties 150,000 150,000
(Gain) on sale of property and equipment (4,380) -
Deferred income taxes (50,000) -
Changes in assets and liabilities:
Accounts receivable 418,010 1,199,751
Short-term investments 1,465,982 (149,244)
Other current assets (69,284) 21,331
Other assets (58,200) -
Accounts payable 102,290 (483,237)
Accured expenses (31,302) (126,226)
------------ ------------
Total adjustments 5,280,106 4,185,827
------------ ------------
Net cash provided by operating activities 10,389,245 10,175,591
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds received on receivables from officers and employees 145,742 237,967
Advances disbursed to officers and employees (198,574) (131,633)
Purchase of property and equipment (3,425,702) (2,592,548)
Proceeds on sale of property and equipment and other asset 27,500 -
------------ ------------
Net cash used by investing activities (3,451,034) (2,486,214)
CASH FLOWS FROM FINANCING ACTIVITIES
Repurchase of Units (126,790) (1,143,158)
Distributions (5,827,072) (6,641,486)
Payments on debt, including revolver activity (43,714) (47,211)
------------ ------------
Net cash used by financing activities (5,997,576) (7,831,855)
------------ ------------
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS 940,635 (142,478)
CASH AND EQUIVALENTS AT BEGINNING OF YEAR 1,128,835 1,997,978
------------ ------------
CASH AND EQUIVALENTS AT END OF THIRD QUARTER $ 2,069,470 $ 1,855,500
============ ============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 24,205 $ 34,544
Income taxes - -
See notes to unaudited consolidated financial statements
F-5
EVERFLOW EASTERN PARTNERS, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Organization and Summary of Significant Accounting Policies
A. Interim Financial Statements - The interim consolidated
financial statements included herein have been prepared by
the management of Everflow Eastern Partners, L.P., without
audit. In the opinion of management, all adjustments (which
include only normal recurring adjustments) necessary to
present fairly the financial position and results of
operations have been made.
Information and footnote disclosures normally included in
financial statements prepared in accordance with accounting
principles generally accepted in the United States have
been condensed or omitted. It is suggested that these
financial statements be read in conjunction with the
financial statements and notes thereto which are
incorporated in Everflow Eastern Partners, L.P.'s annual
report on Form 10-K filed with the Securities and Exchange
Commission on March 28, 2002.
The results of operations for the interim periods may not
necessarily be indicative of the results to be expected for
the full year.
Use of Estimates - The preparation of financial statements
in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual
results could differ from those estimates.
B. Organization - Everflow Eastern Partners, L.P. ("Everflow")
is a Delaware limited partnership which was organized in
September 1990 to engage in the business of oil and gas
exploration and development. Everflow was formed to
consolidate the business and oil and gas properties of
Everflow Eastern, Inc. ("EEI") and Subsidiaries and the oil
and gas properties owned by certain limited partnership and
working interest programs managed or sponsored by EEI ("EEI
Programs" or "the Programs").
F-6
EVERFLOW EASTERN PARTNERS, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Note 1. Organization and Summary of Significant Accounting Policies
(Continued)
B. Organization (Continued)
Everflow Management Limited, LLC, an Ohio limited liability
company, is the general partner of Everflow, and, as such,
is authorized to perform all acts necessary or desirable to
carry out the purposes and conduct of the business of
Everflow. The members of Everflow Management Limited, LLC
are Everflow Management Corporation ("EMC"), two
individuals who are Officers and Directors of EEI, and
Sykes Associates, a limited partnership controlled by
Robert F. Sykes, the Chairman of the Board of EEI. EMC is
an Ohio corporation formed in September 1990 and is the
managing member of Everflow Management Limited, LLC.
C. Principles of Consolidation - The consolidated financial
statements include the accounts of Everflow, its wholly
owned subsidiaries, including EEI and EEI's wholly owned
subsidiaries, and investments in oil and gas drilling and
income partnerships (collectively, "the Company") which are
accounted for under the proportional consolidation method.
All significant accounts and transactions between the
consolidated entities have been eliminated.
D. Allocation of Income and Per Unit Data - Under the terms of
the limited partnership agreement, initially, 99% of
revenues and costs were allocated to the Unitholders (the
limited partners) and 1% of revenues and costs were
allocated to the General Partner. Such allocation has
changed and will change in the future due to Unitholders
electing to exercise the Repurchase Right (see Note 4).
Earnings per limited partner Unit have been computed based
on the weighted average number of Units outstanding, during
the period for each period presented. Average outstanding
Units for earnings per Unit calculations were 5,748,773 and
5,763,707 for the three and nine months ended September 30,
2002, respectively, and 5,771,174 and 5,849,499 for the
three and nine months ended September 30, 2001,
respectively.
F-7
EVERFLOW EASTERN PARTNERS, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Note 1. Organization and Summary of Significant Accounting Policies
(Continued)
E. New Accounting Standards - In June 2001, FASB issued SFAS
No. 142, "Goodwill and Other Intangible Assets." Under SFAS
No. 142, goodwill and intangible assets deemed to have
indefinite lives will no longer be amortized but will be
subject to periodic impairment tests. Other intangible
assets will continue to be amortized over their useful
lives. SFAS No. 142 is effective for fiscal years beginning
after December 15, 2001. In June 2001, FASB issued SFAS No.
143, "Accounting for Asset Retirement Obligations," which
is effective the first quarter of fiscal year 2003. SFAS
143 addresses financial accounting and reporting for
obligations associated with the retirement of long-lived
assets and the associated asset retirement cost. In August
2001, FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-lived Assets," which is
effective the first quarter of fiscal year 2002. SFAS No.
144 modifies and expands the financial accounting and
reporting for the impairment or disposal of long-lived
assets other than goodwill. The adoption of SFAS Nos. 142
and 144 had no material effect on the Company's financial
statements. The Company is still evaluating the impact of
SFAS No. 143, but at this time does not believe its
adoption will have a significant impact on its financial
position and results of operations.
Note 2. Short-Term Investments
Short-term investments consist of marketable corporate debt
securities which are classified as trading. The fair values of
the investments approximate cost.
Note 3. Credit Facilities and Long-Term Debt
In August 2001, the Company entered into an agreement that
modified the prior credit agreements. The agreement provides for a
revolving line of credit in the amount of $4,000,000, all of which
is available. The revolving line of credit provides for interest
payable quarterly at LIBOR plus 150 basis points with the
principal due at maturity, May 31, 2003. The Company anticipates
renewing the facility every other year to minimize debt
origination, carrying and interest costs associated with long-term
bank commitments. Borrowings under the facility are unsecured;
however, the Company has agreed, if requested by the bank, to
execute any supplements to the agreement including
F-8
EVERFLOW EASTERN PARTNERS, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Note 3. Credit Facilities and Long-Term Debt (Continued)
security and mortgage agreements on the Company's assets. The
agreement contains restrictive covenants requiring the Company to
maintain the following: (i) loan balance not to exceed the
borrowing base of $4,000,000; (ii) tangible net worth of at least
$40,000,000; and (iii) a total debt to tangible net worth ratio of
not more than 0.5 to 1.0. In addition, there are restrictions on
mergers, sales and acquisitions, the incurrence of additional debt
and the pledge or mortgage of the Company's assets.
The Company purchased a building and funded its cost, including
improvements, in part, through mortgage notes. The notes have an
aggregate balance of $468,300 and $512,014 at September 30, 2002
and December 31, 2001, respectively, and at September 30, 2002
bear interest at fixed (with options to adjust or convert to
variable in certain subsequent years) rates ranging from 5.47% -
8.06% and a weighted average rate of 6.51%. The notes at September
30, 2002 require aggregate payments of principal and interest of
$7,175 per month. The Company is exposed to market risk from
changes in interest rates since it, at times, funds its operations
through long-term and short-term borrowings. The Company's primary
interest rate risk exposure results from floating rate debt with
respect to the Company's revolving credit. At September 30, 2002,
none of the Company's total long-term debt consisted of floating
rate debt.
Note 4. Partners' Equity
Units represent limited partnership interests in Everflow. The
Units are transferable subject only to the approval of any
transfer by Everflow Management Limited, LLC and to the laws
governing the transfer of securities. The Units are not listed for
trading on any securities exchange nor are they quoted in the
automated quotation system of a registered securities association.
However, Unitholders have an opportunity to require Everflow to
repurchase their Units pursuant to the Repurchase Right.
Under the terms of the limited partnership agreement, initially,
99% of revenues and costs were allocated to the Unitholders (the
limited partners) and 1% of revenues and costs were allocated to
the General Partner. Such allocation has changed and will change
in the future due to Unitholders electing to exercise the
Repurchase Right.
F-9
EVERFLOW EASTERN PARTNERS, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Note 4. Partners' Equity (Continued)
The partnership agreement provides that Everflow will repurchase
for cash up to 10% of the then outstanding Units, to the extent
Unitholders offer Units to Everflow for repurchase pursuant to the
Repurchase Right. The Repurchase Right entitles any Unitholder,
between May 1 and June 30 of each year, to notify Everflow that he
elects to exercise the Repurchase Right and have Everflow acquire
certain or all of his Units. The price to be paid for any such
Units is calculated based upon the audited financial statements of
the Company as of December 31 of the year prior to the year in
which the Repurchase Right is to be effective and independently
prepared reserve reports. The price per Unit will be equal 66% of
the adjusted book value of the Company allocable to the Units,
divided by the number of Units outstanding at the beginning of the
year in which the applicable Repurchase Right is to be effective
less all Interim Cash Distributions received by a Unitholder. The
adjusted book value is calculated by adding partners' equity, the
Standardized Measure of Discounted Future Net Cash Flows and the
tax effect included in the Standardized Measure and subtracting
from that sum the carrying value of oil and gas properties (net of
undeveloped lease costs). If more than 10% of the then outstanding
Units are tendered during any period during which the Repurchase
Right is to be effective, the Investors' Units tendered shall be
prorated for purposes of calculating the actual number of Units to
be acquired during any such period. The price associated with the
Repurchase Right, based upon the December 31, 2001 calculation,
was $5.66 per Unit, net of the distributions ($.50 per Unit in
total) made in January and April 2002.
Units repurchased pursuant to the Repurchase Right for each of the
last five years are as follows:
Calculated Units
Price for Less # of Out-standing
Repurchase Interim Net Units Following
Year Right Distributions Price Paid Repurchased Repurchase
- ---- ---------- ------------- ---------- ----------- ------------
1998 $ 5.24 $.250 $4.99 35,114 6,172,537
1999 $ 6.16 $.375 $5.79 77,344 6,095,193
2000 $ 6.73 $.625 $6.11 206,531 5,888,662
2001 $10.35 $.625 $9.73 117,488 5,771,174
2002 $ 6.16 $.500 $5.66 22,401 5,748,773
F-10
EVERFLOW EASTERN PARTNERS, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Note 5. Commitments and Contingencies
Everflow paid a quarterly dividend in October 2002 of $.25 per
Unit to Unitholders of record on September 30, 2002. The
distribution amounted to approximately $1,400,000.
EEI is the general partner in certain oil and gas partnerships. As
general partner, EEI shares in unlimited liability to third
parties with respect to the operations of the partnerships and may
be liable to limited partners for losses attributable to breach of
fiduciary obligations.
The Company operates exclusively in the United States, almost
entirely in Ohio and Pennsylvania, in the exploration, development
and production of oil and gas.
The Company operates in an environment with many financial risks,
including, but not limited to, the ability to acquire additional
economically recoverable oil and gas reserves, the inherent risks
of the search for, development of and production of oil and gas,
the ability to sell oil and gas at prices which will provide
attractive rates of return, and the highly competitive nature of
the industry and worldwide economic conditions. The Company's
ability to expand its reserve base and diversify its operations is
also dependent upon the Company's ability to obtain the necessary
capital through operating cash flow, additional borrowings or
additional equity funds. Various federal, state and governmental
agencies are considering, and some have adopted, laws and
regulations regarding environmental protection which could
adversely affect the proposed business activities of the Company.
The Company cannot predict what effect, if any, current and future
regulations may have on the operations of the Company.
Note 6. Gas Purchase Agreements
The Company executed an agreement that replaced certain other
agreements with Dominion Field Services, Inc. and its affiliates
("Dominion") (including The East Ohio Gas Company), to sell
Dominion a significant portion of the Company's natural gas
production through October 2003. The Company has additional
agreements with Dominion, which obligates Dominion to purchase,
and the Company to sell and deliver certain quantities of natural
gas production on a monthly basis through October 2004. The
agreement with
F-11
EVERFLOW EASTERN PARTNERS, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Note 6. Gas Purchase Agreements (Continued)
Dominion provides for fixed pricing ranging from $3.35 to $4.54
per MCF. The Company also has an agreement with Interstate Gas
Supply, Inc. ("IGS"), which obligates IGS to purchase, and the
Company to sell and deliver certain quantities of natural gas
production on a monthly basis through October 2004. The agreement
with IGS provides for fixed pricing ranging from $3.19 to $4.62
per MCF. Fixed pricing with both Dominion and IGS applies to
certain fixed quantities on a monthly basis with excess monthly
quantities being priced based on the current spot market price.
The impact on the Company cannot fully be measured until actual
production volumes and prices are determined.
F-12
Part I: Financial Information
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
The following table summarizes the Company's financial position at
September 30, 2002 and December 31, 2001:
September 30, 2002 December 31, 2001
------------------ ------------------
(Amounts in Thousands) Amount % Amount %
-------- ---- -------- ----
Working capital $ 6,094 12% $ 6,985 14%
Property and equipment (net) 44,221 88 44,325 86
Other 168 - 110 -
------ --- ------ ---
Total $ 50,483 100% $ 51,420 100%
====== === ====== ===
Long-term debt $ 416 1% 458 1%
Deferred income taxes - - 50 -
Partners' equity 50,067 99 50,912 99
------ --- ------ ---
Total $ 50,483 100% $ 51,420 100%
====== === ====== ===
Working capital of $6.1 million as of September 30, 2002 represented a
decrease of $891 thousand from December 31, 2001. The primary reasons for this
decrease in working capital were due to the Company's short-term investments and
accounts receivable being lower at September 30, 2002 versus December 31, 2001.
Lower oil and gas sales during warmer weather are responsible for the decrease
in the Company's production revenues receivable.
In August 2001, the Company entered into an agreement that modified
prior credit agreements. The new agreement provides for a revolving line of
credit in the amount of $4,000,000. Management of the Company believes this line
of credit is sufficient to meet the Company's funding requirements. Management
of the Company believes it can maintain the current level of bank debt until
such time as additional borrowings are required to fund the development and/or
purchase of oil and gas properties. The Company used cash on hand to fund the
payment of a quarterly distribution in October 2002.
The Company's cash flow from operations before the change in working
capital decreased $1,151 thousand, or 12%, during the nine months ended
September 30, 2002 as compared to the same period in 2001. Depreciation,
depletion and amortization decreased $216 thousand during the nine months ended
September 30, 2002 compared to the same period in 2001. Changes in working
capital other than cash and equivalents increased cash
3
by $1,827 thousand and $462 thousand during the nine months ended September 30,
2002 and 2001, respectively. The reductions in accounts receivable of $418
thousand and $1,200 thousand at September 30, 2002 and 2001, respectively,
compared to December 31, 2001 and 2000 are primarily the result of lower
production revenues receivable. Short-term investments decreased $1,466 thousand
and increased $149 thousand during the nine months ended September 30, 2002 and
2001, respectively. Short-term investments decreased as a result of a reduction
in the amount of investments in corporate debt securities at September 30, 2002.
Accounts payable increased $102 thousand and decreased $483 thousand during the
nine months ended September 30, 2002 and 2001, respectively. Accounts payable
increased during the nine months ended September 30, 2002 as a result of
differences in the timing of production revenue receipts and an increase in
advances received from joint venture partners for drilling and completion costs
at September 30, 2002. The reason for the decrease during the nine months ended
September 30, 2001 was the result of lower production revenues payable in the
summer months due to production restrictions.
Cash flows provided by operating activities was $10.4 million for the
nine months ended September 30, 2002. Cash was used to purchase property and
equipment, repurchase Units, pay quarterly distributions and reduce debt.
Management of the Company believes the existing revolving credit
facility of $4,000,000 should be sufficient to meet the funding requirements of
ongoing operations, capital investments to develop oil and gas properties, the
repurchase of Units pursuant to the Repurchase Right and the payment of
quarterly distributions.
The Company executed an agreement that replaced certain other
agreements with Dominion Field Services, Inc. and its affiliates ("Dominion")
(including The East Ohio Gas Company), to sell Dominion a significant portion of
the Company's natural gas production through October 2003. The Company has
additional agreements with Dominion, which obligates Dominion to purchase, and
the Company to sell and deliver certain quantities of natural gas production on
a monthly basis through October 2004. The agreement with Dominion provides for
fixed pricing ranging from $3.35 to $4.54 per MCF. The Company also has an
agreement with Interstate Gas Supply, Inc. ("IGS"), which obligates IGS to
purchase, and the Company to sell and deliver certain quantities of natural gas
production on a monthly basis through October 2004. The agreement with IGS
provides for fixed pricing ranging from $3.19 to $4.62 per MCF. Fixed pricing
with both Dominion and IGS applies to certain fixed quantities on a monthly
basis with excess monthly quantities being priced based on the current spot
market price. The impact on the Company cannot fully be measured until actual
production volumes and prices are determined.
4
RESULTS OF OPERATIONS
The following table and discussion is a review of the results of
operations of the Company for the three and nine months ended September 30, 2002
and 2001. All items in the table are calculated as a percentage of total
revenues. This table should be read in conjunction with the discussions of each
item below:
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
2002 2001 2002 2001
------- ------- ------ -------
Revenues:
Oil and gas sales 97% 98% 97% 97%
Well management and operating 3 2 3 3
Other - - - -
--- --- --- ---
Total Revenues 100 100 100 100
Expenses:
Production costs 15 15 16 15
Well management and operating 1 1 1 1
Depreciation, depletion and amortization 28 27 29 28
Abandonment and write down
of oil and gas properties 1 1 1 1
General and administrative 8 9 9 8
Other - (1) - (1)
Income taxes - - - -
--- --- --- ---
Total Expenses 53 52 56 52
=== === === ===
Net Income 47% 48% 44% 48%
=== === === ===
Revenues for the three and nine months ended September 30, 2002
decreased $72 thousand and $1,033 thousand, respectively, compared to the same
periods in 2001. These decreases were due primarily to decreases in oil and gas
sales during the three and nine months ended September 30, 2002 compared to the
same periods in 2001.
Oil and gas sales decreased $91 thousand, or 2%, during the three
months ended September 30, 2002 compared to the same period in 2001. Oil and gas
sales decreased $1,061 thousand, or 9%, during the nine months ended September
30, 2002 compared to the same period in 2001. These decreases are the result of
lower production volumes and natural gas prices during the three and nine months
ended September 30, 2002 compared to the same periods in 2001. The Company does
not expect these decreases to continue for the rest of this year. The Company
anticipates an increase in production volumes over the next few quarters
assuming gas prices remain at current levels. Increased production volumes and
recent higher gas prices should provide an increase in gas sales over the coming
quarters.
Production costs decreased $1 thousand, or less than 1%, during the
three months ended September 30, 2002 compared to the same period in 2001.
Production costs decreased
5
$80 thousand, or 4%, during the nine months ended September 30, 2002 compared to
the same period in 2001. Lower production costs during the nine months ended
September 30, 2002 were the result of reduced production volumes during the
first half of 2002 as a result of lower gas prices.
Depreciation, depletion and amortization increased $2 thousand, or less
than 1%, during the three months ended September 30, 2002 compared to the same
period in 2001. Depreciation, depletion and amortization decreased $192
thousand, or 5%, during the nine months ended September 30, 2002 compared to the
same period in 2001. The primary reason for the decrease during the nine months
ended September 30, 2002 was due to lower production volumes.
General and administrative expenses decreased $30 thousand, or 9%,
during the three months ended September 30, 2002 compared with the same period
in 2001. General and administrative expenses decreased $11 thousand, or 1%,
during the nine months ended September 30, 2002 compared to the same period in
2001. The primary reasons for these decreases are due to decreasing overhead
costs associated with ongoing operations of the Company.
Net other income decreased $22 thousand during the three months ended
September 30, 2002 compared to the same period in 2001. Net other income
decreased $124 thousand during the nine months ended September 30, 2002 compared
to the same period in 2001. These decreases are the result of decreases in
interest income resulting from reductions in short term investments and lower
interest rates.
The Company reported net income of $1,790 thousand, a decrease of $86
thousand, or 5%, during the three months ended September 30, 2002 compared to
the same period in 2001. The Company reported net income of $5,109 thousand, a
decrease of $881 thousand, or 15%, during the nine months ended September 30,
2002 compared to the same period in 2001. The primary reason for the decreases
in net income was decreased oil and gas sales during the three and nine months
ended September 30, 2002.
Except for historical financial information contained in this Form
10-Q, the statements made in this report are forward-looking statements. Factors
that may cause actual results to differ materially from those in the forward
looking statements include price fluctuations in the gas market in the
Appalachian Basin, actual oil and gas production and the weather in the
Northeast Ohio area and the ability to locate economically productive oil and
gas prospects for development by the Company. In addition, any forward-looking
statements speak only as of the date on which such statement is made and the
Company does not undertake any obligation to update any forward-looking
statements, whether as a result of new information, future events or otherwise.
6
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk from changes in interest rates
since it, at times, funds its operations through long-term and short-term
borrowings. The Company's primary interest rate risk exposure results from
floating rate debt with respect to the Company's revolving credit. At September
30, 2002, none of the Company's long-term debt consisted of floating rate debt.
Item 4. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures. The
Company's Chief Executive Officer and Chief Financial Officer, after evaluating
the effectiveness of the Company's disclosure controls and procedures (as
defined in Exchange Act Rule 13a-14) as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"), have concluded
that as of the Evaluation Date, the Company's disclosure controls and procedures
were effective in ensuring that information required to be disclosed by the
Company in the reports it files or submits under the Exchange Act is recorded,
processed, summarized and reported, within the time periods specified in the
Commission's rules and forms.
(b) Changes in internal controls. There were no significant
changes in the Company's internal controls or in other factors that could
significantly affect these controls subsequent to the Evaluation Date.
7
Part II. Other Information
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 99.1 Certification Pursuant To 18 U.S.C.
Section 1350, As Adopted Pursuant To
Section 906 Of The Sarbanes-Oxley Act of
2002
Exhibit 99.2 Certification Pursuant To 18 U.S.C.
Section 1350, As Adopted Pursuant To
Section 906 Of The Sarbanes-Oxley Act of
2002
(b) No reports on Form 8-K were filed with the Commission
during the Company's third quarter.
8
SIGNATURE
Pursuant to the requirement 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.
Dated: November 8, 2002 EVERFLOW EASTERN PARTNERS, L.P.
By: EVERFLOW MANAGEMENT LIMITED, LLC,
General Partner
By: EVERFLOW MANAGEMENT CORPORATION
Managing Member
By: /s/ William A. Siskovic
----------------------------------------
William A. Siskovic
Vice President and Principal Accounting
Officer
(Duly Authorized Officer)
9
CERTIFICATIONS
I, Thomas L. Korner, Chief Executive Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Everflow
Eastern Partners, L.P.;
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly 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 quarterly
report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures 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 quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the registrant's auditors and
the audit committee of registrant's board of directors (or persons performing
the equivalent function):
a) all significant deficiencies in the design or
operation of internal controls which could adversely affect the
registrant's ability to record, process, summarize and report financial
data and have identified for the registrant's auditors any material
weaknesses in internal controls; 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; and
6. The registrant's other certifying officers and I have
indicated in this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies and
material weaknesses.
Dated: November 8, 2002
/s/ Thomas L. Korner
---------------------------
Thomas L. Korner
Chief Executive Officer
I, William A. Siskovic, Chief Financial Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Everflow
Eastern Partners, L.P.;
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly 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 quarterly
report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures 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 quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the registrant's
auditors and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
a) all significant deficiencies in the design or
operation of internal controls which could adversely affect the
registrant's ability to record, process, summarize and report financial
data and have identified for the registrant's auditors any material
weaknesses in internal controls; 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; and
6. The registrant's other certifying officers and I have
indicated in this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies and
material weaknesses.
Dated: November 8, 2002
/s/ William A. Siskovic
---------------------------
William A. Siskovic
Chief Financial Officer