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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 MARCH 31, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _________TO________.
Commission File Number 0-19279
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 May 10, 2004. 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 March 31, 2004.
EVERFLOW EASTERN PARTNERS, L.P.
INDEX
DESCRIPTION PAGE NO.
----------- --------
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets
March 31, 2004 and December 31, 2003 F-1
Consolidated Statements of Income
Three Months Ended March 31, 2004 and 2003 F-3
Consolidated Statements of Partners' Equity
Three Months Ended March 31, 2004 and 2003 F-4
Consolidated Statements of Cash Flows
Three Months Ended March 31, 2004 and 2003 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 6
Item 4. Controls and Procedures 6
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
March 31, 2004 and December 31, 2003
March 31, December 31,
2004 2003
(Unaudited) (Audited)
-------------- --------------
ASSETS
CURRENT ASSETS
Cash and equivalents $ 9,557,487 $ 9,598,801
Accounts receivable:
Production 2,855,606 3,976,909
Officers and employees 46,643 40,666
Joint venture partners 6,603 59,982
Other 65,413 87,881
-------------- --------------
Total current assets 12,531,752 13,764,239
PROPERTY AND EQUIPMENT
Proved properties (successful efforts
accounting method) 124,421,529 122,422,677
Pipeline and support equipment 522,166 498,179
Corporate and other 1,708,140 1,708,140
-------------- --------------
126,651,835 124,628,996
Less accumulated depreciation, depletion,
amortization and write down (81,623,958) (80,377,333)
-------------- --------------
45,027,877 44,251,663
OTHER ASSETS 102,546 120,676
-------------- --------------
$ 57,662,175 $ 58,136,578
============== ==============
See notes to unaudited consolidated financial statements.
F-1
EVERFLOW EASTERN PARTNERS, L.P.
CONSOLIDATED BALANCE SHEETS
March 31, 2004 and December 31, 2003
March 31, December 31,
2004 2003
(Unaudited) (Audited)
----------- -----------
LIABILITIES AND PARTNERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 718,331 $ 721,728
Accrued expenses 474,859 452,169
----------- -----------
Total current liabilities 1,193,190 1,173,897
ASSET RETIREMENT OBLIGATIONS 1,070,185 1,034,685
COMMITMENTS AND CONTINGENCIES - -
LIMITED PARTNERS' EQUITY, SUBJECT TO
REPURCHASE RIGHT
Authorized - 8,000,000 Units
Issued and outstanding - 5,714,739 54,755,899 55,278,954
GENERAL PARTNER'S EQUITY 642,901 649,042
----------- -----------
Total partners' equity 55,398,800 55,927,996
----------- -----------
$57,662,175 $58,136,578
=========== ===========
See notes to unaudited consolidated financial statements.
F-2
EVERFLOW EASTERN PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended March 31, 2004 and 2003
(Unaudited)
2003
2004 Restated
------------ ------------
REVENUES
Oil and gas sales $ 4,646,869 $ 4,444,538
Well management and operating 132,180 141,542
Other 100 651
------------ ------------
4,779,149 4,586,731
DIRECT COST OF REVENUES
Production costs 736,750 711,103
Well management and operating 53,565 55,240
Depreciation, depletion and amortization 1,260,064 1,226,026
Abandonment of oil and gas properties 10,000 25,000
------------ ------------
Total direct cost of revenues 2,060,379 2,017,369
GENERAL AND ADMINISTRATIVE EXPENSE 383,773 371,808
------------ ------------
Total cost of revenues 2,444,152 2,389,177
------------ ------------
INCOME FROM OPERATIONS 2,334,997 2,197,554
OTHER INCOME
Interest 26,725 24,986
------------ ------------
INCOME BEFORE INCOME TAXES AND
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE 2,361,722 2,222,540
INCOME TAXES - -
------------ ------------
INCOME BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE 2,361,722 2,222,540
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE - 471,545
------------ ------------
NET INCOME $ 2,361,722 $ 1,750,995
============ ============
Allocation of Partnership Net Income
Limited Partners $ 2,334,314 $ 1,730,794
General Partner 27,408 20,201
------------ ------------
$ 2,361,722 $ 1,750,995
============ ============
Net income per unit:
Before cumulative effect of change in accounting $ 0.41 $ 0.38
principle
Cumulative effect of change in accounting principle - (0.08)
------------ ------------
Net income per unit $ 0.41 $ 0.30
============ ============
See notes to unaudited consolidated financial statements.
F-3
EVERFLOW EASTERN PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF PARTNERS' EQUITY
Three Months Ended March 31, 2004 and 2003
(Unaudited)
2003
2004 Restated
----------- -----------
PARTNERS' EQUITY - JANUARY 1 $55,927,996 $51,508,256
Net income 2,361,722 1,750,995
Cash distributions ($.50 per unit in 2004
and $.25 per unit in 2003) (2,890,918) (1,453,968)
----------- -----------
PARTNERS' EQUITY - MARCH 31 $55,398,800 $51,805,283
=========== ===========
See notes to unaudited consolidated financial statements.
F-4
EVERFLOW EASTERN PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31, 2004 and 2003
(Unaudited)
2003
2004 Restated
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 2,361,722 $ 1,750,995
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation, depletion and amortization 1,272,125 1,237,377
Abandonment of oil and gas properties 10,000 25,000
Cumulative effect of change in accounting principle - 471,545
Changes in assets and liabilities:
Accounts receivable 1,174,682 938,490
Other current assets 22,468 3,386
Other assets 18,130 -
Accounts payable (3,397) 53,225
Accrued expenses 22,690 14,934
------------ ------------
Total adjustments 2,516,698 2,743,957
------------ ------------
Net cash provided by operating activities 4,878,420 4,494,952
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds received on receivables from officers
and employees 22,335 73,605
Advances disbursed to officers and employees (28,312) (83,074)
Purchase of property and equipment (2,022,839) (1,428,205)
------------ ------------
Net cash used by investing activities (2,028,816) (1,437,674)
CASH FLOWS FROM FINANCING ACTIVITIES
Distributions (2,890,918) (1,453,968)
------------ ------------
Net cash used by financing activities (2,890,918) (1,453,968)
------------ ------------
NET (DECREASE) INCREASE IN CASH AND
EQUIVALENTS (41,314) 1,603,310
CASH AND EQUIVALENTS AT BEGINNING
OF YEAR 9,598,801 4,689,831
------------ ------------
CASH AND EQUIVALENTS AT END OF
FIRST QUARTER $ 9,557,487 $ 6,293,141
============ ============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ - $ -
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 report on Form
10-K filed with the Securities and Exchange Commission on March 30,
2004.
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 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
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 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. Asset Retirement Obligations - In 2003, the Company adopted SFAS No.
143, "Accounting for Asset Retirement Obligations." SFAS No. 143
requires the fair value of a liability for an asset retirement
obligation to be recognized in the period in which it is incurred if
a reasonable estimate of fair value can be made. For the Company,
these obligations include plugging and abandonment of oil and gas
wells and associated pipelines and equipment. The associated asset
retirement costs are capitalized as part of the carrying amount of
the long-lived asset. The Company recorded a non-cash charge of
approximately $500,000 as the cumulative effect of a change in
accounting principle, an increase to oil and gas properties of
approximately $400,000 and a non-current liability of approximately
$900,000 in connection with the adoption of SFAS No. 143.
The schedule below is a reconciliation of the Company's liability
for the three months ended March 31, 2003 and 2004:
Asset Retirement Obligations
Three Months Ended March 31,
2003 2004
------------ -------------
Beginning of period $ - $ 1,134,685
Upon adoption 942,419 -
Liabilities incurred 24,000 10,000
Liabilities settled - -
Accretion 23,000 25,500
------------ ------------
Total ($100,000 current) $ 989,419 $ 1,170,185
============ ============
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. 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 amounted to 5,714,739 and 5,748,773 for the three
months ended March 31, 2004 and 2003, respectively.
F. New Accounting Standard - In January 2003, the FASB issued
Interpretation No. 46 ("FIN 46"), "Consolidation of Variable
Interest Entities," an interpretation of Accounting Research
Bulletin No. 51. FIN 46 requires certain variable interest entities,
or VIEs, to be consolidated by the primary beneficiary of the entity
if the equity investors in the entity do not have the
characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities
without additional subordinated financial support from other
parties. FIN 46 is effective for all VIEs created or acquired after
January 31, 2003. VIE's created or acquired prior to February 1,
2003, the provisions of FIN 46 must be applied for the first interim
or annual period beginning after June 15, 2003. The Company
currently has no contractual relationship or other business
relationship with a variable interest entity.
The adoption of the new standard did not, or is not expected to,
materially affect the Company's financial position and results of
operations.
G. Restatement - The 2003 amounts have been restated for the cumulative
effect of change in accounting principle of $471,545 related to the
adoption of SFAS No. 143 as of January 1, 2003.
F-8
EVERFLOW EASTERN PARTNERS, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Note 2. Credit Facilities and Long-Term Debt
The Company had a revolving line of credit that expired on May 31,
2003. The Company anticipates, although there is no assurance it
will be able to, entering into a new credit agreement for the
purpose, if necessary, of funding the annual repurchase right (see
Note 3). The new line of credit would be utilized in the event the
Company receives tenders pursuant to the repurchase right in excess
of cash on hand.
There were no borrowings outstanding on the revolving line of credit
during 2003 or 2004. The Company would be exposed to market risk
from changes in interest rates if it funds its future operations
through long-term or short-term borrowings.
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.
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 equals 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
F-9
EVERFLOW EASTERN PARTNERS, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Note 3. Partners' Equity (Continued)
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, 2003 calculation, is
$12.44 per Unit, net of the distributions ($1.00 per Unit in total)
made in January and April 2004.
Units repurchased pursuant to the Repurchase Right for each of the
last four years in the period ended December 31, 2003, are as
follows:
Calculated Units
Price for Less # of Out-standing
Repurchase Interim Net Units Following
Year Right Distributions Price Paid Repurchased Repurchase
- ---- ---------- ------------- ---------- ----------- ------------
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
Due to recent increased volatility in oil and gas prices, the
Company is evaluating the possibility of proposing an amendment to
the Partnership Agreement provisions which determine the price per
Unit for future repurchase offers. The current formula (described
above) uses the prices in effect at December 31 of the applicable
year end. Management's concern is that price volatility at year end
potentially could distort the calculation of fair and reasonable
repurchase prices. Management intends to monitor and further study
this question and no determination has been made as to what change,
if any, might be proposed.
Note 4. Commitments and Contingencies
Everflow paid a quarterly dividend in April 2004 of $.50 per Unit to
Unitholders of record on March 31, 2004. The distribution amounted
to approximately $2,891,000.
The Company operates exclusively in the United States, almost
entirely in Ohio and Pennsylvania, in the exploration, development
and production of oil and gas.
F-10
EVERFLOW EASTERN PARTNERS, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Note 4. Commitments and Contingencies (Continued)
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 and
deliver certain quantities of natural gas production on a monthly
basis through October 2005. The agreement with Dominion provides for
fixed pricing with current monthly weighted average pricing
provisions ranging from $4.96 to $5.76 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 2005. The agreement with IGS provides for fixed
pricing with current monthly weighted average pricing provisions
ranging from $4.83 to $6.20 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-11
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 March
31, 2004 and December 31, 2003:
March 31, 2004 December 31, 2003
---------------- ----------------
(Amounts in Thousands) Amount % Amount %
---------- --- ---------- ---
Working capital $ 11,339 20% $ 12,590 22%
Property and equipment (net) 45,028 80 44,252 78
Other 102 - 121 -
---------- --- ---------- ---
Total $ 56,469 100% $ 56,963 100%
========== === ========== ===
Long-term liabilities $ 1,070 2% 1,035 2%
Deferred income taxes - - - -
Partners' equity 55,399 98 55,928 98
---------- --- ---------- ---
Total $ 56,469 100% $ 56,963 100%
========== === ========== ===
Working capital surplus of $11.3 million as of March 31, 2004 represented
a decrease of $1.3 million from December 31, 2003 due primarily to a decrease in
production receivable resulting primarily 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 2003 or 2004 and no
principal indebtedness was outstanding as of May 10, 2004. The Company
anticipates, although there is no assurance it will be able to, entering into a
new credit agreement for the purpose, if necessary, of funding future annual
repurchase rights. The Company has no current 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 April 2004.
The Company's cash flow from operations before the change in working
capital increased $159,000, or 5%, during the three months ended March 31, 2004
as compared to the same period in 2003. Changes in working capital other than
cash and cash equivalents increased cash by $1.2 million during the three months
ended March 31, 2004.
Cash flows provided by operating activities was $4.9 million for the three
months ended March 31, 2004. Cash was primarily used in investing and financing
activities to purchase property and equipment and pay a quarterly distribution,
respectively.
3
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 and deliver certain quantities of natural
gas production on a monthly basis through October 2005. The agreement with
Dominion provides for fixed pricing with current monthly weighted average
pricing provisions ranging from $4.96 to $5.76 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 2005. The agreement with IGS
provides for fixed pricing with current monthly weighted average pricing
provisions ranging from $4.83 to $6.20 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.
RESULTS OF OPERATIONS
The following table and discussion is a review of the results of
operations of the Company for the three months ended March 31, 2004 and 2003.
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
Ended March 31,
2004 2003
---- ----
Revenues:
Oil and gas sales 97% 97%
Well management and operating 3 3
--- ---
Total Revenues 100 100
Expenses:
Production costs 16 16
Well management and operating 1 1
Depreciation, depletion and amortization 27 27
Abandonment of oil and gas properties - 1
General and administrative 8 8
Other expense (income) (1) (1)
Cumulative effect of accounting change - 10
--- ---
Total Expenses 51 62
--- ---
Net income 49% 38%
=== ===
4
Revenues for the three months ended March 31, 2004 increased $192,000, or
4%, compared to the same period in 2003. This increase was due to an increase in
oil and gas sales during the first three months of 2004, as compared to the same
period in 2003.
Oil and gas sales increased $202,000, or 5%, during the three months ended
March 31, 2004 compared to the same period in 2003. Higher natural gas and crude
oil prices during the first quarter of 2004 were responsible for this increase
compared to this same period in 2003.
Production costs increased $26,000, or 4%, during the three months ended
March 31, 2004 compared to the same period in 2003. An increase in the number of
producing properties was responsible for this increase between 2003 and 2004.
Depreciation, depletion and amortization increased $34,000, or 3%, during
the three months ended March 31, 2004 compared to the same period in 2003. The
primary reason for the increase in depreciation, depletion and amortization is
the result of an increase in oil and gas sales and purchased property and
equipment during the first three months of 2004.
Abandonment of oil and gas properties decreased $15,000, or 60%, during
the first three months of 2004 compared to the same period in 2003. A reduction
in leasehold abandonments is responsible for this decrease.
General and administrative expenses increased $12,000, or 3%, during the
first quarter of 2004 compared to the first quarter of 2003. The primary reason
for this increase is due to higher overhead expenses associated with ongoing
administration.
Net other income increased $2,000 during the three months ended March 31,
2004 compared to the same period in 2003. This increase is the result of an
increase in interest income earned on cash and equivalent balances.
The Company reported net income of $2.4 million, an increase of $611,000,
or 35%, during the three months ended March 31, 2004 compared to the same period
in 2003 (after reduction for cumulative effect of change in accounting principle
of $471,545). The increase in oil and gas sales and the adoption of SFAS No.
143, "Accounting for Asset Retirement Obligations" in the prior year, was
primarily responsible for this increase in net income. Net income represented
49% and 38% of total revenue during the three months ended March 31, 2004 and
2003, respectively.
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
5
complex judgments and estimates are described in the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 2003.
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.
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 March 31, 2004, the
Company had no long-term debt outstanding.
The Company is also 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
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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 Chief Executive Officer
Exhibit 31.2 Certification of Chief Financial Officer
Exhibit 32.1 Certification of Chief Executive Officer Pursuant To
18 U.S.C. Section 1350, As Adopted Pursuant To Section
906 Of The Sarbanes-Oxley Act of 2002
Exhibit 32.2 Certification of Chief Financial Officer Pursuant To
18 U.S.C. Section 1350, As Adopted Pursuant To Section
906 Of The Sarbanes-Oxley Act of 2002
(b) No reports on Form 8-K were filed with the Commission during the
Company's first 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
May 13, 2004 By: /s/William A. Siskovic
-----------------------------------
William A. Siskovic
Vice President and Principal Financial and
Accounting Officer
(Duly Authorized Officer)
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