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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, 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 5,690,874 Units of limited partnership interest of the
Registrant as of November 15, 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 September 30, 2004.
EVERFLOW EASTERN PARTNERS, L.P.
INDEX
DESCRIPTION PAGE NO.
----------- --------
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets
September 30, 2004 and December 31, 2003 F-1
Consolidated Statements of Income
Three and Nine Months Ended
September 30, 2004 and 2003 F-3
Consolidated Statements of Partners' Equity
Nine Months Ended September 30, 2004 and 2003 F-4
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 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 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, 2004 and December 31, 2003
September 30, December 31,
2004 2003
ASSETS (Unaudited) (Audited)
------------- ------------
CURRENT ASSETS
Cash and equivalents $ 9,254,419 $ 9,598,801
Accounts receivable:
Production 3,593,621 3,976,909
Officers and employees 12,542 40,666
Joint venture partners 95,393 59,982
Other 51,744 87,881
----------- -----------
Total current assets 13,007,719 13,764,239
PROPERTY AND EQUIPMENT
Proved properties (successful efforts
accounting method) 126,826,739 122,422,677
Pipeline and support equipment 635,022 498,179
Corporate and other 1,784,747 1,708,140
----------- -----------
129,246,508 124,628,996
Less accumulated depreciation, depletion,
amortization and write down 83,976,951 80,377,333
----------- -----------
45,269,557 44,251,663
OTHER ASSETS 112,546 120,676
----------- -----------
$58,389,822 $58,136,578
=========== ===========
See notes to unaudited consolidated financial statements.
F-1
EVERFLOW EASTERN PARTNERS, L.P
CONSOLIDATED BALANCE SHEETS
September 30, 2004 and December 31, 2003
September 30, December 31,
2004 2003
LIABILITIES AND PARTNERS' EQUITY (Unaudited) (Audited)
- -------------------------------------------------------- ------------ -------------
CURRENT LIABILITIES
Accounts payable $ 674,554 $ 721,728
Accrued expenses 376,271 452,169
------------ -------------
Total current liabilities 1,050,825 1,173,897
ASSET RETIREMENT OBLIGATIONS 1,143,685 1,034,685
COMMITMENTS AND CONTINGENCIES - -
LIMITED PARTNERS' EQUITY, SUBJECT TO
REPURCHASE RIGHT
Authorized - 8,000,000 Units
Issued and outstanding - 5,690,874 and
5,714,739 Units, respectively 55,543,168 55,278,954
GENERAL PARTNER'S EQUITY 652,144 649,042
------------ -------------
Total partners' equity 56,195,312 55,927,996
------------ -------------
$ 58,389,822 $ 58,136,578
============ =============
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, 2004 and 2003
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------- -----------------------------
2003
2004 2003 2004 Restated
------------ ------------ ------------ ------------
REVENUES
Oil and gas sales $ 6,677,882 $ 5,987,278 $ 17,443,259 $ 14,992,512
Well management and operating 133,714 139,978 400,391 417,458
Other 547 661 704 1,511
------------ ------------ ------------ ------------
6,812,143 6,127,917 17,844,354 15,411,481
DIRECT COST OF REVENUES
Production costs 861,833 880,466 2,308,902 2,221,456
Well management and operating 57,440 55,814 182,127 173,705
Depreciation, depletion and amortization 1,369,381 1,410,373 3,640,321 3,707,837
Abandonment of oil and gas properties 10,000 25,000 30,000 75,000
------------ ------------ ------------ ------------
Total direct cost of revenues 2,298,654 2,371,653 6,161,350 6,177,998
GENERAL AND ADMINISTRATIVE
EXPENSE 310,712 303,398 1,063,139 982,456
------------ ------------ ------------ ------------
Total cost of revenues 2,609,366 2,675,051 7,224,489 7,160,454
------------ ------------ ------------ ------------
INCOME FROM OPERATIONS 4,202,777 3,452,866 10,619,865 8,251,027
OTHER INCOME
Interest 24,274 24,710 74,648 75,232
Gain on sale of property and equipment - 49,714 - 49,714
------------ ------------ ------------ ------------
24,274 74,424 74,648 124,946
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES
AND CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING
PRINCIPLE 4,227,051 3,527,290 10,694,513 8,375,973
INCOME TAXES 30,000 65,000 30,000 65,000
------------ ------------ ------------ ------------
INCOME BEFORE CUMULATIVE
EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE 4,197,051 3,462,290 10,664,513 8,310,973
CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE - - - 471,545
------------ ------------ ------------ ------------
NET INCOME $ 4,197,051 $ 3,462,290 $ 10,664,513 $ 7,839,428
============ ============ ============ ============
Allocation of Partnership Net Income
Limited Partners $ 4,148,143 $ 3,422,110 $ 10,540,550 $ 7,748,749
General Partner 48,908 40,180 123,963 90,679
------------ ------------ ------------ ------------
$ 4,197,051 $ 3,462,290 $ 10,664,513 $ 7,839,428
============ ============ ============ ============
Net income per unit:
Before cumulative effect of change
in accounting principle $ 0.73 $ 0.60 $ 1.85 $ 1.43
Cumulative effect of change in
accounting principle - - - (0.08)
------------ ------------ ------------ ------------
Net Income per unit $ 0.73 $ 0.60 $ 1.85 $ 1.35
============ ============ ============ ============
See notes to unaudited consolidated financial statements.
F-3
EVERFLOW EASTERN PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF PARTNERS' EQUITY
Nine Months Ended September 30, 2004 and 2003
(Unaudited)
2003
2004 Restated
------------ -------------
PARTNERS' EQUITY - JANUARY 1 $ 55,927,996 $ 51,508,256
Net income 10,664,513 7,839,428
Cash distributions ($1.75 per Unit in 2004 and
$1.00 per Unit in 2003) (10,100,316) (5,798,854)
Repurchase Right - Units tendered (296,881) (287,247)
------------ ------------
PARTNERS' EQUITY - SEPTEMBER 30 $ 56,195,312 $ 53,261,583
============ ============
See notes to unaudited consolidated financial statements.
F-4
EVERFLOW EASTERN PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, 2004 and 2003
(Unaudited)
2003
2004 Restated
------------ --------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 10,664,513 $ 7,839,428
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation, depletion and amortization 3,678,618 3,742,058
Abandonment and write down of oil and gas properties 30,000 75,000
Gain on sale of property and equipment - (49,714)
Cumulative effect of change in accounting principle - 471,545
Changes in assets and liabilities:
Accounts receivable 347,877 1,068,615
Other current assets 36,137 10,436
Other assets 8,130 25,000
Accounts payable (47,174) (71,580)
Accrued expenses (75,898) (103,917)
------------ ------------
Total adjustments 3,977,690 5,167,443
------------ ------------
Net cash provided by operating activities 14,642,203 13,006,871
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds received on receivables from officers
and employees 102,042 222,068
Advances disbursed to officers and employees (73,918) (194,083)
Purchase of property and equipment (4,617,512) (3,427,560)
Proceeds on sale of property and equipment and other assets - 56,793
------------ ------------
Net cash used by investing activities (4,589,388) (3,342,782)
CASH FLOWS FROM FINANCING ACTIVITIES
Distributions (10,100,316) (5,798,854)
Repurchase of units (296,881) (287,247)
------------ ------------
Net cash used by financing activities (10,397,197) (6,086,101)
------------ ------------
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS (344,382) 3,577,988
CASH AND EQUIVALENTS AT BEGINNING
OF YEAR 9,598,801 4,689,831
------------ ------------
CASH AND EQUIVALENTS AT END OF
THIRD QUARTER $ 9,254,419 $ 8,267,819
============ ============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ - -
Income taxes 60,000 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 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 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
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. 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 nine months ended September 30, 2003 and
2004:
Asset Retirement Obligations
Nine Months Ended September 30,
-------------------------------
2003 2004
---- ----
Beginning of period $ - $1,134,685
Upon adoption 942,419 -
Liabilities incurred 50,000 30,000
Liabilities settled - -
Accretion 70,000 79,000
---------- ----------
Total ($100,000 current) $1,062,419 $1,243,685
========== ==========
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 5,690,874 and
5,706,784 for the three and nine months ended September 30,
2004, respectively, and 5,714,739 and 5,737,428 for the three
and nine months ended September 30, 2003, respectively.
F. New Accounting Standard - In December 2003, the Financial
Accounting Standards Board ("FASB") issued Interpretation No.
46 (revised December 2003) ("FIN 46R"), "Consolidation of
Variable Interest Entities," an interpretation of Accounting
Research Bulletin No. 51. FIN 46R 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. This
interpretation is required in financial statements for periods
ending after March 15, 2004 for those companies that have yet
to adopt the provisions of FIN 46. The Company currently has
no contractual relationship or other business relationship
with a variable interest entity.
The adoption of the new standard did not materially affect the
Company's financial position or 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 adjusted book value is
calculated by adding partners' equity, the Standardized Measure of
Discounted Future Net Cash Flows and the tax effect included in
F-9
EVERFLOW EASTERN PARTNERS, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Note 3. Partners' Equity (Continued)
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 five years are as follows:
Calculated Units
Price for Less # of Outstanding
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
2004 $ 13.44 $ 1.000 $ 12.44 23,865 5,690,874
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 October 2004 of $.50 per Unit
to unitholders of record on September 30, 2004. The distribution
amounted to approximately $2,900,000.
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 2006. The agreement with Dominion provides for
fixed pricing with current monthly weighted average pricing
provisions ranging from $5.64 to $7.65 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 2006. The agreement with IGS provides for fixed
pricing with current monthly weighted average pricing provisions
ranging from $5.72 to $7.83 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
September 30, 2004 and December 31, 2003: September 30, 2004 December 31, 2003
September 30, 2004 December 31, 2003
------------------ -----------------
(Amounts in Thousands) Amount % Amount %
---------------------- ------ --- ------ ---
Working capital $11,957 21% $12,590 22%
Property and equipment (net) 45,269 79 44,252 78
Other 113 - 121 -
------- --- ------- ---
Total $57,339 100% $56,963 100%
======= === ======= ===
Long-term liabilities $ 1,144 2% $ 1,035 2%
Partners' equity 56,195 98 55,928 98
------- --- ------- ---
Total $57,339 100% $56,963 100%
======= === ======= ===
Working capital of $12.0 million as of September 30, 2004 represented a
decrease of approximately $633,000 from December 31, 2003 due primarily to a
decrease in cash and equivalents and production receivable. This decrease was
partially offset by decreases in accounts payable and accrued expenses.
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 November 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 October
2004.
The Company's cash flow from operations before the change in working
capital increased $2.3 million, or 19%, during the nine months ended September
30, 2004 as compared to the same period in 2003. Changes in working capital
other than cash and equivalents increased cash by $269,000 during the nine
months ended September 30, 2004 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 $14.6 million for the nine
months ended September 30, 2004. Cash was primarily 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 and deliver certain quantities of natural
gas production on a monthly basis through October 2006. The agreement with
Dominion provides for fixed pricing with current monthly weighted average
pricing provisions ranging from $5.64 to $7.65 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 2006. The agreement with IGS
provides for fixed pricing with current monthly weighted average pricing
provisions ranging from $5.72 to $7.83 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, 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 Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
2003
2004 2003 2004 Restated
---- ---- ---- --------
Revenues:
Oil and gas sales 98% 98% 98% 97%
Well management and operating 2 2 2 3
Other - - - -
--- --- --- ---
Total Revenues 100 100 100 100
Expenses:
Production costs 13 14 13 15
Well management and operating 1 1 1 1
Depreciation, depletion and amortization 20 23 20 24
Abandonment and write down
of oil and gas properties - - - -
General and administrative 5 5 6 6
Cumulative effect of accounting change - - - 3
--- --- --- ---
Total Expenses 39 43 40 49
=== === === ===
Net Income 61% 57% 60% 51%
=== === === ===
Revenues for the three and nine months ended September 30, 2004 increased
$684,000 and $2.4 million, respectively, compared to the same periods in 2003.
These increases were due primarily to increases in oil and gas sales during the
three and nine months ended September 30, 2004 compared to the same periods in
2003.
Oil and gas sales increased $691,000, or 12%, during the three months
ended September 30, 2004 compared to the same period in 2003. Oil and gas sales
increased $2.5 million, or 16%, during the nine months ended September 30, 2004
compared to the same period in 2003. These increases are the result of higher
natural gas and crude oil prices during the three and nine months ended
September 30, 2004 compared to the same periods in 2003.
Production costs decreased $19,000, or 2%, during the three months ended
September 30, 2004 compared to the same period in 2003. Production costs
increased $87,000, or 4%, during the nine months ended September 30, 2004
compared to the same period in 2003. The increase is the result of higher
operating costs during the nine months ended September 30, 2004.
Depreciation, depletion and amortization decreased $41,000, or 3%, during
the three months ended September 30, 2004 compared to the same period in 2003.
Depreciation, depletion and amortization decreased $68,000, or 2%, during the
nine months ended
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September 30, 2004 compared to the same period in 2003. The primary reason for
these decreases is the result of increases in oil and gas reserve estimates
which have been impacted by higher natural gas and oil prices.
General and administrative expenses increased $7,000, or 2%, during the
three months ended September 30, 2004 compared with the same period in 2003.
General and administrative expenses increased $81,000, or 8%, during the nine
months ended September 30, 2004 compared to the same period in 2003. The primary
reasons for these increases is due to higher overhead expenses associated with
ongoing administration.
Net other income decreased $50,000 during the three and nine months ended
September 30, 2004 compared to the same period in 2003. These decreases are the
result of the gain on sale of an oil and gas property in 2003.
The Company reported net income of $4.2 million, an increase of $735,000,
or 21%, during the three months ended September 30, 2004 compared to the same
period in 2003. The Company reported net income of $10.7 million, an increase of
$2.8 million, or 36%, during the nine months ended September 30, 2004 compared
to the same period in 2003. The primary reason for the increases in net income
was increased oil and gas sales during the three and nine months ended September
30, 2004.
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, 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.
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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, 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 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 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 15, 2004 William A. Siskovic
Vice President and
Principal Financial Accounting Officer
(Duly Authorized Officer)
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