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UNITED STATES
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, 2003
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
------- -------
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Exchange Act Rule 12b-2). Yes No X
------ ------
There were 5,714,739 Units of limited partnership interest of the
Registrant as of November 12, 2003. 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, 2003.
EVERFLOW EASTERN PARTNERS, L.P.
INDEX
DESCRIPTION PAGE NO.
----------- --------
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets
September 30, 2003 and December 31, 2002 F-1
Consolidated Statements of Income
Three and Nine Months Ended
September 30, 2003 and 2002 F-3
Consolidated Statements of Partners' Equity
Nine Months Ended September 30, 2003 and 2002 F-4
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 2003 and 2002 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, 2003 and December 31, 2002
September 30, December 31,
2003 2002
ASSETS (Unaudited) (Audited)
- ------ ----------- ---------
CURRENT ASSETS
Cash and equivalents $8,267,819 $4,689,831
Accounts receivable:
Production 2,515,219 3,557,396
Officers and employees 192,779 220,764
Joint venture partners 4,192 30,630
Other 91,809 102,245
--------------- ---------------
Total current assets 11,071,818 8,600,866
PROPERTY AND EQUIPMENT
Proved properties (successful efforts
accounting method) 121,614,827 118,513,983
Pipeline and support equipment 551,410 514,060
Corporate and other 1,711,788 1,587,219
--------------- ---------------
123,878,025 120,615,262
Less accumulated depreciation, depletion,
amortization and write down (80,426,143) (76,766,803)
--------------- ---------------
43,451,882 43,848,459
OTHER ASSETS 104,979 129,979
--------------- ---------------
$54,628,679 $52,579,304
=============== ===============
See notes to unaudited consolidated financial statements.
F-1
EVERFLOW EASTERN PARTNERS, L.P.
CONSOLIDATED BALANCE SHEETS
September 30, 2003 and December 31, 2002
September 30, December 31,
2003 2002
LIABILITIES AND PARTNERS' EQUITY (Unaudited) (Audited)
- -------------------------------- ----------- ---------
CURRENT LIABILITIES
Accounts payable $ 674,841 $ 746,421
Accrued expenses 220,710 324,627
--------------- ---------------
Total current liabilities 895,551 1,071,048
COMMITMENTS AND CONTINGENCIES - -
LIMITED PARTNERS' EQUITY, SUBJECT TO
REPURCHASE RIGHT
Authorized - 8,000,000 Units
Issued and outstanding - 5,714,739 and
5,748,773 Units, respectively 53,109,557 50,914,003
GENERAL PARTNER'S EQUITY 623,571 594,253
--------------- ---------------
Total partners' equity 53,733,128 51,508,256
--------------- ---------------
$54,628,679 $52,579,304
=============== ===============
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, 2003 and 2002
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------- -----------------------------
2003 2002 2003 2002
------------- -------------- ------------- --------------
REVENUES
Oil and gas sales $ 5,987,278 $ 3,725,819 $ 14,992,512 $ 11,162,467
Well management and operating 139,978 112,520 417,458 364,167
Other 661 92 1,511 942
------------- -------------- ------------- --------------
6,127,917 3,838,431 15,411,481 11,527,576
DIRECT COST OF REVENUES
Production costs 880,466 579,176 2,221,456 1,854,663
Well management and operating 55,814 47,300 173,705 154,579
Depreciation, depletion and amortization 1,410,373 1,068,289 3,707,837 3,336,378
Abandonment and write down
of oil and gas properties 25,000 50,000 75,000 150,000
------------- -------------- ------------- --------------
Total direct cost of revenues 2,371,653 1,744,765 6,177,998 5,495,620
GENERAL AND ADMINISTRATIVE
EXPENSE 303,398 309,070 982,456 1,000,471
------------- -------------- ------------- --------------
Total cost of revenues 2,675,051 2,053,835 7,160,454 6,496,091
------------- -------------- ------------- --------------
INCOME FROM OPERATIONS 3,452,866 1,784,596 8,251,027 5,031,485
OTHER INCOME (EXPENSE)
Interest income 24,710 13,134 75,232 47,479
Interest expense - (7,934) - (24,205)
Gain on sale of property and equipment 49,714 - 49,714 4,380
------------- -------------- ------------- --------------
74,424 5,200 124,946 27,654
------------- -------------- ------------- --------------
INCOME BEFORE INCOME TAXES 3,527,290 1,789,796 8,375,973 5,059,139
PROVISION FOR INCOME TAXES
Current 65,000 - 65,000 -
Deferred - - - (50,000)
------------- -------------- ------------- --------------
65,000 - 65,000 (50,000)
NET INCOME $ 3,462,290 $ 1,789,796 $ 8,310,973 $ 5,109,139
============= ============== ============= ==============
Allocation of Partnership Net Income
Limited Partners $ 3,422,110 $ 1,769,147 $ 8,214,853 $ 5,050,342
General Partner 40,180 20,649 96,120 58,797
------------- -------------- ------------- -------------
$ 3,462,290 $ 1,789,796 $ 8,310,973 $ 5,109,139
Net Income per unit $ 0.60 $ 0.31 $ 1.43 $ 0.88
============= ============== ============= ==============
See notes to unaudited consolidated financial statements.
F-3
EVERFLOW EASTERN PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF PARTNERS' EQUITY
Nine Months Ended September 30, 2003 and 2002
(Unaudited)
2003 2002
--------------- ---------------
PARTNERS' EQUITY - JANUARY 1 $51,508,256 $50,911,995
Net income 8,310,973 5,109,139
Cash distributions (5,798,854) (5,827,072)
Repurchase Right - Units tendered (287,247) (126,790)
--------------- ---------------
PARTNERS' EQUITY - SEPTEMBER 30 $53,733,128 $50,067,272
=============== ===============
See notes to unaudited consolidated financial statements.
F-4
EVERFLOW EASTERN PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, 2003 and 2002
(Unaudited)
2003 2002
--------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 8,310,973 $ 5,109,139
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, depletion and amortization 3,742,058 3,356,990
Abandonment and write down of oil and gas properties 75,000 150,000
Gain on sale of property and equipment (49,714) (4,380)
Deferred income taxes - (50,000)
Changes in assets and liabilities:
Accounts receivable 1,068,615 418,010
Short-term investments - 1,465,982
Other current assets 10,436 (69,284)
Other assets 25,000 (58,200)
Accounts payable (71,580) 102,290
Accrued expenses (103,917) (31,302)
--------------- ---------------
Total adjustments 4,695,898 5,280,106
--------------- ---------------
Net cash provided by operating activities 13,006,871 10,389,245
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds received on receivables from officers
and employees 222,068 145,742
Advances disbursed to officers and employees (194,083) (198,574)
Purchase of property and equipment (3,427,560) (3,425,702)
Proceeds on sale of property and equipment and other assets 56,793 27,500
--------------- ---------------
Net cash used by investing activities (3,342,782) (3,451,034)
CASH FLOWS FROM FINANCING ACTIVITIES
Repurchase of Units (287,247) (126,790)
Distributions (5,798,854) (5,827,072)
Payments on debt, including revolver activity - (43,714)
--------------- ---------------
Net cash used by financing activities (6,086,101) (5,997,576)
--------------- ---------------
NET INCREASE IN CASH AND EQUIVALENTS 3,577,988 940,635
CASH AND EQUIVALENTS AT BEGINNING
OF YEAR 4,689,831 1,128,835
--------------- ---------------
CASH AND EQUIVALENTS AT END OF
THIRD QUARTER $ 8,267,819 $ 2,069,470
=============== ===============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ - $ 24,205
Income taxes 40,000 -
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 of America
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 31, 2003.
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").
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
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)
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 3).
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 5,714,739 and 5,737,428 for
the three and nine months ended September 30, 2003,
respectively, and 5,748,773 and 5,763,707 for the three and nine
months ended September 30, 2002, respectively.
E. New Accounting Standards - In August 2001, the 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 tangible long-lived assets and
the associated asset retirement cost.
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 (Continued)
In June 2002, the FASB issued SFAS No. 146, "Accounting for
Costs Associated with Exit or Disposal Activities," which is
effective for exit or disposal activities initiated after
December 31, 2002. SFAS No. 146 nullifies Emerging Issues Task
Force Issue No. 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)."
Under SFAS No. 146, a liability is required to be recognized for
costs, including certain lease termination costs and employee
termination benefits, associated with an exit or disposal
activity when the liability is incurred. SFAS No. 146 applies to
costs associated with an exit activity that does not involve an
entity newly acquired in a business combination or with a
retirement or disposal activity covered by SFAS Nos. 143 and
144.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based, Compensation - Transition and Disclosure," that
amends SFAS No. 123, "Accounting for Stock-Based Compensation,"
to provide alternative methods of transition to the fair value
method of accounting for stock-based employee compensation. SFAS
No. 148 also amends the disclosure provisions of SFAS No. 123
and APB Opinion No. 28, "Interim Financial Reporting," to
require disclosure in the summary of significant accounting
policies of the effects of an entity's accounting policy with
respect to stock-based employee compensation on reported net
income and earnings per share in annual and interim financial
statements. The Statement does not amend SFAS No. 123 to require
companies to account for employee stock options using the fair
value method. The Statement is effective for fiscal years
beginning after December 15, 2002.
In April 2003, the FASB issued SFAS No. 149, "Amendment of
Statement 133 on Derivative Instruments and Hedging Activities."
SFAS No. 149 amends and clarifies financial reporting for
derivative instruments, including certain derivative instruments
embedded in other contracts and for hedging activities under
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities." This statement is effective for contracts entered
into or modified after June 30, 2003, and for hedging
relationships designated after June 30, 2003.
F-8
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 (Continued)
In May 2003, the FASB issued SFAS No. 150, "Accounting for
Certain Financial Instruments with Characteristics of both
Liabilities and Equity." SFAS No. 150 establishes standards for
how an issuer classifies and measures certain financial
instruments with characteristics of both liabilities and equity.
SFAS No. 150 is effective for financial instruments entered into
or modified after May 31, 2003, and must be applied to the
Company's existing financial instruments effective July 1, 2003,
the beginning of the first interim period after June 15, 2003.
The adoption of the effective new standards did not, or is not
expected to, materially affect the Company's financial position
and results of operations.
Note 2. Credit Facilities and Long-Term Debt
The Company's revolving line of credit expired on May 31, 2003.
The Company does not anticipate needing financing in the near
future and has therefore chosen not to renew the line at this
time. There were no borrowings outstanding on the revolving
credit facility during 2003 and 2002.
Note 3. 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 3. Partners' Equity (Continued)
The partnership agreement provides that the Company annually offers to
repurchase for cash up to 10% of the then outstanding Units, to the
extent unitholders offer Units to the Company for repurchase pursuant to
repurchase right. The repurchase right entitles any unitholder, between
May 1 and June 30 of each year, to notify the Company of his or her
election to exercise the repurchase right and have the Company acquire
such 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 to 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, 2002 calculation, is $8.44 per Unit, net of the
distributions ($.50 per Unit in total) made in January and April 2003.
Units repurchased pursuant to the repurchase right for each of the last
five years are as follows:
Calculated Units
Price for Less # of Outstanding
Repurchase Interim Net Units Following
Year Right Distributions Price Paid Repurchased Repurchase
---- ----- ------------- ---------- ----------- ----------
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
2003 $8.94 $.500 $8.44 34,034 5,714,739
F-10
EVERFLOW EASTERN PARTNERS, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Note 4. Commitments and Contingencies
Everflow paid a quarterly dividend in October 2003 of $.25 per Unit to
unitholders of record on September 30, 2003. The distribution amounted
to approximately $1,400,000.
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, the volatility and seasonality of oil and gas production and
prices, and the highly competitive and, at times, seasonal 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 5. 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 Dominion provides for fixed pricing with
current weighted average pricing provisions ranging from $4.37 to $4.82
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 with current weighted average pricing
F-11
EVERFLOW EASTERN PARTNERS, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Note 5. Gas Purchase Agreements (Continued)
provisions ranging from $4.34 to $4.53 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, 2003 and December 31, 2002:
September 30,2003 December 31, 2002
(Amounts in Thousands) Amount % Amount %
- ---------------------- ------ - ------ -
Working capital $ 10,176 19% $ 7,530 15%
Property and equipment (net) 43,452 81 43,848 85
Other 105 - 130 -
------ ------ ------ ------
Total $ 53,733 100% $ 51,508 100%
====== ====== ====== ======
Partners' equity $ 53,733 100% 51,508 100
------ ------ ------ ------
Total $ 53,733 100% $ 51,508 100%
======= ====== ====== ======
Working capital of $10.2 million as of September 30, 2003 represented an
increase of $2.6 million from December 31, 2002 due primarily to an increase in
cash and equivalents. The increase in cash and equivalents was partially offset
by a decrease in production receivable resulting from timing differences between
the periods in the receipt of production revenues.
The Company had a revolving credit facility with Bank One, N.A. that
expired May 31, 2003. The Company had no borrowings in 2002 or 2003. The Company
has no alternate financing plan, nor does it anticipate that one will be
necessary. The Company used cash on hand to fund the payment of a quarterly
distribution amounting to $2.9 million in July 2003 and $1.4 million in October
2003 and the repurchase of Units pursuant to the Repurchase Right amounting to
$287,000 in July 2003.
The Company's cash flow from operations before the change in working
capital increased $3.5 million, or 41%, during the nine months ended September
30, 2003 as compared to the same period in 2002. Changes in working capital
other than cash and equivalents increased cash by $929,000 during the nine
months ended September 30, 2003 primarily due to a decrease in accounts
receivable resulting from timing differences in the receipt of production
revenues.
3
Cash flows provided by operating activities was $13.0 million for the
nine months ended September 30, 2003. Cash was used to purchase property and
equipment, repurchase Units and pay quarterly distributions.
Management of the Company believes existing cash flows 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 with current weighted average pricing provisions ranging from
$4.37 to $4.82 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 with
current weighted average pricing provisions ranging from $4.34 to $4.53 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, 2003
and 2002. 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,
------------------- -------------------
2003 2002 2003 2002
---- ---- ---- ----
Revenues:
Oil and gas sales 98% 97% 97% 97%
Well management and operating 2 3 3 3
Other - - - -
--- --- --- ---
Total Revenues 100 100 100 100
Expenses:
Production costs 14 15 15 16
Well management and operating 1 1 1 1
Depreciation, depletion and amortization 23 28 24 29
Abandonment and write down
of oil and gas properties - 1 - 1
General and administrative 5 8 6 9
Other - - - -
Income taxes - - - -
--- --- --- ---
Total Expenses 43 53 46 56
=== === === ===
Net Income 57% 47% 54% 44%
=== === === ===
Revenues for the three and nine months ended September 30, 2003
increased $2.3 million and $3.9 million, respectively, compared to the same
periods in 2002. These increases were due primarily to increases in oil and gas
sales during the three and nine months ended September 30, 2003 compared to the
same periods in 2002.
Oil and gas sales increased $2.3 million, or 61%, during the three
months ended September 30, 2003 compared to the same period in 2002. Oil and gas
sales increased $3.8 million, or 34%, during the nine months ended September 30,
2003 compared to the same period in 2002. These increases are the result of
higher natural gas and crude oil prices and increased production volumes during
the three and nine months ended September 30, 2003 compared to the same periods
in 2002.
Production costs increased $301,000, or 52%, during the three months
ended September 30, 2003 compared to the same period in 2002. Production costs
increased $367,000, or 20%, during the nine months ended September 30, 2003
compared to the same period in 2002. The increases are the result of higher
operating costs during the three and nine months ended September 30, 2003.
Depreciation, depletion and amortization increased $342,000, or 32%,
during the three months ended September 30, 2003 compared to the same period in
2002. Depreciation, depletion and amortization increased $371,000, or 11%,
during the nine months ended
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September 30, 2003 compared to the same period in 2002. The primary reason for
these increases is the result of the Company's decision to increase production
because of higher natural gas prices during the summer months.
General and administrative expenses decreased $6,000, or 2%, during the
three months ended September 30, 2003 compared with the same period in 2002.
General and administrative expenses decreased $18,000, or 2%, during the nine
months ended September 30, 2003 compared to the same period in 2002. The primary
reasons for these decreases are due to lower overhead expenses associated with
ongoing administration.
Net other income increased $69,000 during the three months ended
September 30, 2003 compared to the same period in 2002. Net other income
increased $97,000 during the nine months ended September 30, 2003 compared to
the same period in 2002. These increases are the result of increases in interest
income earned on cash and equivalent balances and the gain on sale of an oil and
gas property and decreases in interest expense due to the elimination of debt.
The Company reported net income of $3.5 million, an increase of $1.7
million, or 93%, during the three months ended September 30, 2003 compared to
the same period in 2002. The Company reported net income of $8.3 million, an
increase of $3.2 million, or 63%, during the nine months ended September 30,
2003 compared to the same period in 2002. The primary reason for the increases
in net income was increased oil and gas sales during the three and nine months
ended September 30, 2003.
CRITICAL ACCOUNTING POLICIES
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. The critical accounting policies that affect the Company's
more complex judgments and estimates are described in the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 2002.
FORWARD-LOOKING STATEMENTS
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.
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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk from changes in commodity prices.
Realized pricing is primarily driven by the prevailing worldwide prices for
crude oil and spot market prices applicable to United States natural gas
production. Pricing for gas and oil production has been volatile and
unpredictable for many years. These market risks can impact the Company's
results of operations, cash flows and financial position. The Company's primary
commodity price risk exposure results from contractual delivery commitments with
respect to the Company's gas purchase contracts. The Company periodically makes
commitments to sell certain quantities of natural gas to be delivered in future
months at certain contract prices. This affords the Company the opportunity to
"lock in" the sale price for those quantities of natural gas. Failure to meet
these delivery commitments would result in the Company being forced to purchase
any short fall at current market prices. The Company's risk management objective
is to lock in a range of pricing for no more than 80% to 90% of expected
production volumes. This allows the Company to forecast future cash flows and
earnings within a predictable range.
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.
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Part II. Other Information
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 31.1 Certification of CEO
Exhibit 31.2 Certification of CFO
Exhibit 32 Certifications 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.
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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.
EVERFLOW EASTERN PARTNERS, L.P.
By: EVERFLOW MANAGEMENT LIMITED, LLC,
General Partner
By: EVERFLOW MANAGEMENT CORPORATION
Managing Member
By: /s/William A. Siskovic
---------------------------------------
November 12, 2003 William A. Siskovic
Vice President and
Principal Financial Accounting Officer
(Duly Authorized Officer)
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