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 June 30, 2013

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 incorporation or organization)		(I.R.S. Employer 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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this Chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer		¨		Accelerated filer		¨
Non-accelerated filer		¨  (Do not check if a smaller reporting company)		Smaller reporting company		x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

There were 5,606,985 Units of limited partnership interest of the registrant as of August 10, 2013. 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 June 30, 2013.

 

 

 

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EVERFLOW EASTERN PARTNERS, L.P.

INDEX

 

		DESCRIPTION						PAGE NO.
Part I.			Financial Information
			Item 1.			Financial Statements
						Consolidated Balance Sheets June 30, 2013 and December 31, 2012			F-1
						Consolidated Statements of Income Three and Six Months Ended June 30, 2013 and 2012			F-3
						Consolidated Statements of Partners’ Equity Six Months Ended June 30, 2013 and 2012			F-4
						Consolidated Statements of Cash Flows Six Months Ended June 30, 2013 and 2012			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			8
			Item 4.			Controls and Procedures			8
Part II.			Other Information
			Item 6.			Exhibits			9
						Signature			10

 

2

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EVERFLOW EASTERN PARTNERS, L.P.

CONSOLIDATED BALANCE SHEETS

June 30, 2013 and December 31, 2012

 

		June 30,				December 31,
		2013				2012
		(Unaudited)				(Audited)
ASSETS
CURRENT ASSETS
Cash and equivalents		$	23,363,455			$	25,397,117
Accounts and notes receivable:
Production			2,538,003				2,260,340
Employees (including notes receivable)			90,000				95,349
Joint venture partners			16,707				22,150
Deferred income taxes			—				509,000
Other			96,344				126,531
Total current assets			26,104,509				28,410,487
PROPERTY AND EQUIPMENT
Proved properties (successful efforts accounting method)			174,297,612				174,044,579
Pipeline and support equipment			666,667				666,667
Corporate and other			2,092,582				2,049,315
			177,056,861				176,760,561
Less accumulated depreciation, depletion, amortization and write down			144,915,624				142,187,705
			32,141,237				34,572,856
OTHER ASSETS
Employees’ accounts and notes receivable			145,467				176,118
Other			162,631				159,599
			308,098				335,717
		$	58,553,844			$	63,319,060

 

See notes to unaudited consolidated financial statements.

F-1

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EVERFLOW EASTERN PARTNERS, L.P.

CONSOLIDATED BALANCE SHEETS

June 30, 2013 and December 31, 2012

 

		June 30,				December 31,
		2013				2012
		(Unaudited)				(Audited)
LIABILITIES AND PARTNERS’ EQUITY
CURRENT LIABILITIES
Accounts payable		$	2,061,581			$	2,225,433
Accrued expenses			643,370				1,432,232
Deferred revenue			—				2,705,135
Total current liabilities			2,704,951				6,362,800
DEFERRED INCOME TAXES			204,000				234,000
JOINT VENTURE PARTNER ADVANCES			768,166				725,760
ASSET RETIREMENT OBLIGATIONS			6,851,744				6,692,744
COMMITMENTS AND CONTINGENCIES
LIMITED PARTNERS’ EQUITY, SUBJECT TO REPURCHASE RIGHT
Authorized - 8,000,000 Units Issued and outstanding - 5,606,985 and 5,611,715 Units, respectively			47,457,071				48,721,208
GENERAL PARTNER’S EQUITY			567,912				582,548
Total partners’ equity			48,024,983				49,303,756
		$	58,553,844			$	63,319,060

See notes to unaudited consolidated financial statements.

 

F-2

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EVERFLOW EASTERN PARTNERS, L.P.

CONSOLIDATED STATEMENTS OF INCOME

Three and Six Months Ended June 30, 2013 and 2012

(Unaudited)

 

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2013				2012				2013				2012
REVENUES
Oil and gas sales		$	4,178,516			$	3,270,237			$	8,327,675			$	7,966,095
Well management and operating			157,376				134,868				313,908				291,001
Other			2,698				4,425				6,040				7,853
Total revenues			4,338,590				3,409,530				8,647,623				8,264,949
DIRECT COST OF REVENUES
Production costs			897,080				1,166,095				2,156,114				2,351,361
Well management and operating			94,995				60,877				189,505				139,888
Depreciation, depletion and amortization			1,434,918				1,280,399				2,736,694				2,517,244
Accretion expense			78,300				113,300				156,600				224,700
Total direct cost of revenues			2,505,293				2,620,671				5,238,913				5,233,193
GENERAL AND ADMINISTRATIVE EXPENSE			525,557				520,519				1,213,177				1,296,647
Total cost of revenues			3,030,850				3,141,190				6,452,090				6,529,840
INCOME FROM OPERATIONS BEFORE GAIN ON SALE OF DEEP RIGHTS			1,307,740				268,340				2,195,533				1,735,109
GAIN ON SALE OF DEEP RIGHTS			—				56,431				2,761,705				32,116,963
INCOME FROM OPERATIONS			1,307,740				324,771				4,957,238				33,852,072
INTEREST INCOME			12,252				33,771				25,073				63,282
INCOME BEFORE INCOME TAXES			1,319,992				358,542				4,982,311				33,915,354
INCOME TAX EXPENSE (BENEFIT)
Current			40,000				30,000				80,000				3,392,000
Deferred			(15,000	)			(5,000	)			479,000				(10,000	)
			25,000				25,000				559,000				3,382,000
NET INCOME		$	1,294,992			$	333,542			$	4,423,311			$	30,533,354
Allocation of Partnership Net Income
Limited Partners		$	1,279,691			$	329,604			$	4,371,047			$	30,172,886
General Partner			15,301				3,938				52,264				360,468
		$	1,294,992			$	333,542			$	4,423,311			$	30,533,354
Net income per unit		$	0.23			$	0.06			$	0.78			$	5.37

See notes to unaudited consolidated financial statements.

 

F-3

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EVERFLOW EASTERN PARTNERS, L.P.

CONSOLIDATED STATEMENTS OF PARTNERS’ EQUITY

Six Months Ended June 30, 2013 and 2012

(Unaudited)

 

		2013				2012
PARTNERS’ EQUITY - JANUARY 1		$	49,303,756			$	56,159,497
Net income			4,423,311				30,533,354
Quarterly cash distributions ($1.00 per unit in 2013 and $0.88 per unit in 2012)			(5,678,813	)			(5,001,498	)
Special Distribution (see Note 8)			—				(28,417,600	)
Repurchase Right - Units tendered			(46,543	)			(78,042	)
Option Repurchase Plan - options exercised			23,272				39,021
PARTNERS’ EQUITY - JUNE 30		$	48,024,983			$	53,234,732

See notes to unaudited consolidated financial statements.

 

F-4

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EVERFLOW EASTERN PARTNERS, L.P.

CONSOLIDATED STATEMENTS OF CASH FLOWS

Six Months Ended June 30, 2013 and 2012

(Unaudited)

 

		2013				2012
CASH FLOWS FROM OPERATING ACTIVITIES
Net income		$	4,423,311			$	30,533,354
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, depletion and amortization			2,781,094				2,559,244
Accretion expense			156,600				224,700
Gain on sale of deep rights			(2,761,705	)			(32,116,963	)
Deferred income taxes			479,000				(10,000	)
Changes in assets and liabilities:
Accounts receivable			(272,220	)			1,649,843
Other current assets			30,187				—
Other assets			(3,032	)			—
Accounts payable			(153,825	)			577,245
Accrued expenses			(788,862	)			2,923,865
Joint venture partner advances			42,406				657,178
Total adjustments			(490,357	)			(23,534,888	)
Net cash provided by operating activities			3,932,954				6,998,466
CASH FLOWS FROM INVESTING ACTIVITIES
Payments received on receivables from employees			56,477				134,599
Advances disbursed to employees			(20,477	)			(17,215	)
Proceeds from deferred revenue			—				2,690,682
Proceeds from sale of deep rights and property and equipment			—				31,250,054
Purchase of property and equipment			(347,075	)			(162,066	)
Net cash (used) provided by investing activities			(311,075	)			33,896,054
CASH FLOWS FROM FINANCING ACTIVITIES
Distributions			(5,678,813	)			(33,419,098	)
Proceeds from options exercised			23,272				39,021
Net cash used by financing activities			(5,655,541	)			(33,380,077	)
NET (DECREASE) INCREASE IN CASH AND EQUIVALENTS			(2,033,662	)			7,514,443
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD			25,397,117				21,257,450
CASH AND EQUIVALENTS AT END OF PERIOD		$	23,363,455			$	28,771,893
Supplemental disclosures of cash flow information and non-cash activities:
Cash paid during the period for:
Income taxes		$	177,932			$	114,635

Additions to proved properties reflect changes in asset retirement obligations (see Note 1.F). The repurchase of Units is included in accounts payable (See Notes 2 and 3). Gain on sale of deep rights reflects recognition of previously deferred revenue (see Note 8).

See notes to unaudited consolidated financial statements.

 

F-5

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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.

The accompanying condensed consolidated financial statements are presented in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 8-03 of Regulation S-X. Accordingly, they do not include all of the disclosures normally required by GAAP, or those normally made in an Annual Report on Form 10-K, although the Company believes that the disclosures made are adequate to make the information not misleading. 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 (“SEC”) on March 28, 2013.

The results of operations for the interim periods may not necessarily be indicative of the results to be expected for the full year.

 

B.

Use of Estimates - The preparation of financial statements in conformity with GAAP 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. Significant estimates impacting the Company’s financial statements include revenue and expense accruals and oil and gas reserve quantities. In the oil and gas industry, and especially as related to the Company’s natural gas sales, the processing of actual transactions generally occurs 60-90 days after the month of delivery of its product. Consequently, accounts receivable from production and oil and gas sales are recorded using estimated production volumes and market or contract prices. Differences between estimated and actual amounts are recorded in subsequent period’s financial results. As is typical in the oil and gas industry, a significant portion of the Company’s accounts receivable from production and oil and gas sales consists of unbilled receivables. Oil and gas reserve quantities are utilized in the calculation of depreciation, depletion and amortization and the impairment of oil and gas wells and also impact the timing and costs associated with asset retirement obligations. The Company’s estimates, especially those related to oil and gas reserves, could change in the near term and could significantly impact the Company’s results of operations and financial position.

 

F-6

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EVERFLOW EASTERN PARTNERS, L.P.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

Note 1.

Organization and Summary of Significant Accounting Policies

 

C.

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 acquisition, exploration, development and production. 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 (“EML”), 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 EML are Everflow Management Corporation (“EMC”); two individuals who are officers and directors of EEI and employees of Everflow; one individual who is the Chairman of the Board of EEI; one individual who is an employee of Everflow; and one private limited liability company founded by an individual who is a director of EEI. EMC is an Ohio corporation formed in September 1990 and is the managing member of EML. EML holds no assets other than its general partner’s interest in Everflow. In addition, EML has no separate operations or role apart from its role as the Company’s general partner.

 

D.

Principles of Consolidation - The consolidated financial statements include the accounts of Everflow, its wholly-owned subsidiaries, including EEI, and interests with joint venture partners (collectively, the “Company”), which are accounted for under the proportional consolidation method. All significant accounts and transactions between the consolidated entities have been eliminated.

 

E.

Cash and Equivalents - The Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents. The Company maintains, at various financial institutions, cash and equivalents which may exceed federally insured amounts and which may, at times, significantly exceed balance sheet amounts due to float. As of June 30, 2013 and December 31, 2012, cash and equivalents include $768,166 and $725,760, respectively, of joint venture partner advances, which are funds collected and held on behalf of joint venture partners for their anticipated share of future plugging and abandonment costs, including interest earned.

 

F-7

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EVERFLOW EASTERN PARTNERS, L.P.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

Note 1.

Organization and Summary of Significant Accounting Policies

 

F.

Asset Retirement Obligations - GAAP 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 dismantlement, 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 liability is accreted to its then present value each period, and the capitalized cost is depleted over the estimated useful life of the related asset.

The estimated liability is based on historical experience in dismantling, plugging and abandoning wells, estimated remaining lives of those wells based on reserves estimates, estimates of the external cost to dismantle, plug and abandon the wells in the future and federal and state regulatory requirements. The liability is discounted using an assumed credit-adjusted, risk-free interest rate. Revisions to the liability will likely occur due to: changes in estimates of dismantlement, plugging and abandonment costs; changes in estimated remaining lives of the wells; changes in federal or state regulations regarding plugging and abandonment requirements; and other factors.

The Company has no assets legally restricted for purposes of settling its asset retirement obligations. The Company has determined that there are no other material retirement obligations associated with tangible long-lived assets.

The schedule below is a reconciliation of the Company’s liability for the six months ended June 30, 2013 and 2012:

 

		Asset Retirement Obligations
		Six Months Ended June 30,
		2013				2012
Beginning of period		$	6,996,744			$	6,116,467
Liabilities incurred			2,400				—
Accretion expense			156,600				224,700
End of period		$	7,155,744			$	6,341,167

 

F-8

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EVERFLOW EASTERN PARTNERS, L.P.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

Note 1.

Organization and Summary of Significant Accounting Policies

 

G.

Revenue Recognition - The Company recognizes oil and gas revenues when production is sold to a purchaser at a fixed or determinable price, when delivery has occurred, title and risk of loss have transferred to the purchaser, and collectability of the revenue is reasonably assured. The Company utilizes the sales method to account for gas production volume imbalances. Under this method, revenue is recognized only when gas is produced and sold on the Company’s behalf. The Company had no material gas imbalances at June 30, 2013 and December 31, 2012. Other revenue is recognized at the time services are rendered, the Company has a contractual right to such revenue and collection is reasonably assured.

The Company participates (and may act as drilling contractor) with unaffiliated joint venture partners and employees in the drilling, development and operation of jointly owned oil and gas properties.

Each owner, including the Company, has an undivided interest in the jointly owned properties. Generally, the joint venture partners and employees participate on the same drilling/development cost basis as the Company and, therefore, no revenue, expense or income is recognized on the drilling and development of the properties. Accounts and notes receivable from joint venture partners and employees consist principally of drilling and development costs the Company has advanced or incurred on behalf of joint venture partners and employees (see Note 6). The Company earns and receives monthly management and operating fees from certain joint venture partners and employees after the properties are completed and placed into production.

 

H.

Income Taxes - Everflow is not a tax-paying entity and the net taxable income or loss, other than the taxable income or loss allocable to EEI, which is a C corporation owned by Everflow, will be allocated directly to its respective partners. The Company is not able to determine the net difference between the tax bases and the reported amounts of Everflow’s assets and liabilities due to separate elections that were made by owners of the working interests and limited partnership interests that comprised the Programs.

 

F-9

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EVERFLOW EASTERN PARTNERS, L.P.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

Note 1.

Organization and Summary of Significant Accounting Policies

 

H.

Income Taxes (continued)

 

The Company believes that it has appropriate support for any tax positions taken and, as such, does not have any uncertain tax positions that are material to the financial statements. The Company’s tax returns are subject to examination by the Internal Revenue Service, as well as various state and local taxing authorities, generally for three years after they are filed.

 

I.

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) and select officers and employees electing to exercise options (see Note 7).

Earnings per limited partner Unit have been computed based on the weighted average number of Units outstanding during each period presented. Average outstanding Units for earnings per limited partner Unit calculations amounted to 5,611,715 and 5,616,422 for the three and six months ended June 30, 2013 and 2012, respectively.

 

J.

Subsequent Events - Everflow paid a cash distribution in July 2013 of $0.50 per Unit. The distribution amounted to approximately $2,837,000.

 

K.

New Accounting Standards – The Company has reviewed all recently issued accounting standards in order to determine their effects, if any, on the consolidated financial statements. Based on that review, the Company believes that none of these standards will have a significant effect on current or future earnings or results of operations.

 

F-10

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EVERFLOW EASTERN PARTNERS, L.P.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

Note 2.

Current Liabilities

The Company’s current liabilities consist of the following at June 30, 2013 and December 31, 2012:

 

		June 30,				December 31,
		2013				2012
Accounts Payable:
Production and related other		$	1,571,611			$	1,434,657
Other			322,097				385,495
Joint venture partner deposits			121,330				44,407
Repurchase of Units			46,543				—
Outside Working Interests (see Note 8)			—				360,874
		$	2,061,581			$	2,225,433
Accrued Expenses:
Current portion of asset retirement obligations		$	304,000			$	304,000
Payroll and retirement plan contributions			291,170				1,019,532
Federal, state and local taxes			48,200				108,700
		$	643,370			$	1,432,232

The Company recognized $2,705,135 as deferred revenue in the consolidated balance sheet at December 31, 2012 in association with funds held for Contingent Leases as further described in Note 8.

 

F-11

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EVERFLOW EASTERN PARTNERS, L.P.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

Note 3.

Partners’ Equity

Units represent limited partnership interests in Everflow. The Units are transferable subject to the approval of any transfer by EML 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 and select officers and employees electing to exercise options (see Note 7).

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 the Unitholder elects to exercise the Repurchase Right and have Everflow acquire certain or all 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 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 2013 Repurchase Right, based upon the December 31, 2012 calculation, was $4.92 per Unit, net of the distributions made in January 2013 ($0.50 per Unit) and April 2013 ($0.50 per Unit).

 

F-12

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EVERFLOW EASTERN PARTNERS, L.P.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

Note 3.

Partners’ Equity (continued)

 

Units repurchased pursuant to the Repurchase Right for each of the last three years are as follows:

 

		Per Unit
		Calculated								Units Out-
		Price for		Less		Net		# of		standing
		Repurchase		Interim		Price		Units		Following
Year		Right		Distributions		Paid		Repurchased		Repurchase
2011		$9.23		$1.00		$8.23		4,890		5,613,977
2012		$9.17		$0.88		$8.29		9,414		5,607,008
2013		$5.92		$1.00		$4.92		9,460		5,602,255

At June 28, 2013 and June 29, 2012, the Company granted a total of 4,730 and 4,707 options, respectively, to two officers and one employee, of which all were exercised on the same date. There were 5,606,985 and 5,611,715 Units outstanding on June 30, 2013 and 2012, respectively, after the exercise of these options.

In June 2012, the Company paid a Special Distribution as further described in Note 8. The Special Distribution was not considered an interim distribution for purposes of calculating the 2012 Repurchase Right price.

There were no instruments outstanding at June 30, 2013 or 2012 that would potentially dilute net income per Unit.

 

Note 4.

Gas Purchase Agreements

The Company has multiple annual contracts with Dominion Field Services and Interstate Gas Supply (collectively, the “Major Gas Purchasers”), many of which were entered into during the six month period ended June 30, 2013, which obligate the Major Gas Purchasers to purchase, and the Company to sell and deliver, certain quantities of natural gas production from the Company’s oil and gas properties throughout the contract periods. The Company may elect to lock-in specific volumes of natural gas to be sold in specific months at a mutually agreeable price. The Company has elected to lock-in various monthly quantities of natural gas which total 1.64 BCF through October 2014 at various monthly weighted-average pricing provisions averaging $3.86 per MCF. Pricing provisions with the Major Gas Purchasers apply to certain fixed quantities on a monthly basis with excess monthly quantities being priced based on the current spot market price. The impact of these contracts on the Company’s future oil and gas sales cannot fully be measured until actual production volumes and prices have been determined.

 

F-13

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EVERFLOW EASTERN PARTNERS, L.P.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

Note 5.

Commitments and Contingencies

The Company operates exclusively in the United States, almost entirely in Ohio and Pennsylvania, in the business of oil and gas acquisition, exploration, development and production. 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, borrowings or equity offerings. 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.

The Company has significant natural gas delivery commitments to its Major Gas Purchasers. Management believes the Company can meet its delivery commitments based on estimated production. If, however, the Company cannot meet its delivery commitments, it will purchase gas at market prices to meet such commitments which will result in a gain or loss for the difference between the delivery commitment price and the price at which the Company is able to purchase the gas for redelivery (resale) to its customers.

The Company held funds at December 31, 2012 in conjunction with Contingent Leases as further described in Note 8.

 

Note 6.

Related Party Transactions

The Company’s officers, directors, affiliates and certain employees have frequently participated, and will likely continue to participate in the future, as working interest owners in wells in which the Company has an interest. Frequently, the Company has loaned the funds necessary for certain employees to participate in the drilling and development of such wells. Initial terms of the unsecured loans call for repayment of all principal and accrued interest at the end of four years, however, the loan amounts are reduced as production proceeds attributable to the employees’ working interests are not remitted to the employees but rather used to reduce the amounts owed by the employees to the Company. If an outstanding balance remains after the initial four-year term, the Company and employee shall, acting in good faith, agree upon further repayment terms.

Employees remain obligated for the entire loan amount regardless of a dry-hole event or otherwise insufficient production. The loans carry no loan forgiveness provisions, and no loans have ever been forgiven. The loans accrue interest at the prime rate, which was 3.25% at June 30, 2013.

 

F-14

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EVERFLOW EASTERN PARTNERS, L.P.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

Note 6.

Related Party Transactions (continued)

 

In accordance with the Sarbanes-Oxley Act of 2002, the Company has not extended any loans to officers or directors since 2002. At June 30, 2013 and December 31, 2012, the Company has extended various loans, evidenced by notes, to two employees with origination dates ranging from December 2009 to December 2011. Subsequent addenda have been made to extend additional one-year payment terms to certain notes since their original date of issuance. Employee receivables, including the notes, accrued interest, and additional amounts loaned during the current period (which will be termed in December 2013), amounted to $235,467 and $271,467 at June 30, 2013 and December 31, 2012, respectively.

 

Note 7.

Option Repurchase Plan

The Company has an Option Repurchase Plan (the “Plan”) which permits the grant of options to repurchase certain Units to select officers and employees. The purpose of the Plan is to assist the Company to attract and retain officers and other key employees and to enable those individuals to acquire or increase their ownership interest in the Company in order to encourage them to promote the growth and profitability of the Company. The Plan is designed to align directly the financial interests of the participants with the financial interests of the Unitholders. At June 28, 2013 and June 29, 2012, the Company granted a total of 4,730 and 4,707 options, respectively, to two officers and one employee, of which all were exercised on the same date. Compensation expense associated with these grants was not material to the financial statements.

 

Note 8.

Sale of Deep Rights

In recent years, the Company had agreed to sell its deep rights in certain Ohio and Pennsylvania properties for cash consideration as part of various agreements with more than one purchaser that closed at various times throughout 2012 (the “Dispositions”). The Dispositions included no producing reserves, and the Company retained the rights to the shallow portion of all acreage sold in addition to some of the rights to a portion of the deep acreage sold, subject to the agreements. During the six months ended June 30, 2012, the Company sold approximately 28,000 acres in conjunction with one of the Dispositions, resulting in a gain on sale of deep rights of $32,116,963.

Included in the acreage sold as part of one of the Dispositions, the Company sold approximately 2,200 acres with leases that contained terms and conditions which would have required the Company to repurchase the acreage if certain claims were made by February 2013 (the “Contingent Leases”). The Company did not recognize gain on sale of the Contingent Leases until the claim period ending February 2013 had expired, with no claims having been made. Deferred revenue of $2,705,135 is recognized in the Company’s consolidated balance sheet at December 31, 2012 in association with the funds held for Contingent Leases.

 

F-15

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EVERFLOW EASTERN PARTNERS, L.P.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

Note 8.

Sale of Deep Rights (continued)

 

Gain on sale of deep rights of $2,761,705 recognized during the six month period ended June 30, 2013 includes funds previously recognized as deferred revenue. Deferred income tax expense of $509,000 was also recognized during the six months ended June 30, 2013 in conjunction with revenues recognized from expired contingencies.

A condition of one of the Dispositions is that the Company perpetuate the producing leases, for a minimum period of five years, from which approximately 28,800 acres of the total 2012 acreage was sold. If the Company fails to perpetuate the producing leases during such five-year period, it shall refund to the purchaser the portion of the purchase price attributable to the affected properties based on an allocated value of $1,250 per acre (the “Refund Price”), provided however, that should the Company revive or otherwise renew such expired leases within three months of their expiration, the purchaser shall have the right to acquire the deep rights on such revived or renewed leases for the Refund Price. The Company has assessed the shallow operations of all properties from which deep acreage was sold and does not believe a reserve for potential refunded acreage to be necessary at June 30, 2013 or December 31, 2012.

The Company also served as an agent for the sale of deep rights acreage owned by other affiliated and non-affiliated parties (the “Working Interest Parties”). Generally, the Working Interest Parties sold their acreage to the purchasers under the same terms and conditions as the Company’s Dispositions. The Company has recognized accounts payable to outside working interests of $360,874 at December 31, 2012 in association with the funds held for the Working Interest Parties, including funds held for their share of Contingent Leases (see Note 2).

In association with the proceeds received from the Dispositions, the Company paid a special cash distribution in June 2012 of $5.00 per Unit (the “Special Distribution”). The Special Distribution amounted to $28,417,600.

 

F-16

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Part I: Financial Information

 

Item 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Sale of Deep Rights

In recent years, the Company had agreed to sell its deep rights in certain Ohio and Pennsylvania properties for cash consideration as part of various agreements with more than one purchaser (the “Dispositions”). The Dispositions included no producing reserves, and the Company retained the rights to the shallow portion of all acreage sold in addition to some of the rights to a portion of the deep acreage sold, subject to the agreements. During the six months ended June 30, 2012, the Company sold approximately 28,000 acres in conjunction with the Dispositions, resulting in a gain on sale of deep rights of approximately $32.1 million.

Included in the acreage sold as part of one of the Dispositions, the Company sold approximately 2,200 acres with leases that contained terms and conditions which would have required the Company to repurchase the acreage if certain claims were made by February 2013 (the “Contingent Leases”). The Company did not recognize gain on sale of the Contingent Leases until the claim period ending February 2013 had expired, with no claims having been made. Deferred revenue of $2.7 million as recognized in the Company’s consolidated balance sheet at December 31, 2012 in conjunction with the Contingent Leases was recognized as gain on sale of deep rights during the six month period ending June 30, 2013.

The gains from the Dispositions significantly affected the Company’s results for the six month period ending June 30, 2012 and to a lesser extent the six month period ending June 30, 2013. The majority of the proceeds received from the Dispositions during the six months ended June 30, 2012 were used to pay a special distribution to the Unitholders in June 2012 of approximately $28.4 million, or $5.00 per unit.

The Company’s sales of deep rights are further described in Note 8 of the Company’s consolidated financial statements included herein.

 

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Liquidity and Capital Resources

The following table summarizes the Company’s financial position at June 30, 2013 and December 31, 2012:

 

		June 30, 2013								December 31, 2012
		Amount				%				Amount				%
		(Amounts in Thousands)								(Amounts in Thousands)
Working capital		$	23,400				42	%		$	22,048				39	%
Property and equipment (net)			32,141				58				34,573				61
Other			308				—				336				—
Total		$	55,849				100	%		$	56,957				100	%
Deferred income taxes		$	204				—	%		$	234				—	%
Long-term liabilities			7,620				14				7,419				13
Partners’ equity			48,025				86				49,304				87
Total		$	55,849				100	%		$	56,957				100	%

Working capital of $23.4 million as of June 30, 2013 represented an increase of $1.4 million from December 31, 2012, due primarily to an increase in accounts receivable from production and decreases in deferred revenue and accrued expenses, offset somewhat by decreases to cash and equivalents and deferred income tax assets. The increase in accounts receivable from production is primarily due to higher natural gas prices received. The decrease in deferred revenue is the result of no claims having been made on the Contingent Leases by the expiration date. The decrease in accrued expenses is primarily the result of all payroll and retirement contributions accrued at December 31, 2012 having been paid during the six months ended June 30, 2013. The decrease in cash and equivalents is primarily the result of cash used by investing and financing activities exceeding cash provided by operating activities during the six months ended June 30, 2013. The decrease in deferred income tax assets is primarily the result of a deferred income tax asset being exhausted in conjunction with the revenue recognition of the Contingent Leases.

The Company funds its operation with cash generated by operations and existing cash and equivalent balances. The Company has had no borrowings since 2003 and no principal indebtedness was outstanding as of August 10, 2013. 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 distribution amounting to approximately $2.8 million in July 2013.

 

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The Company’s cash flow from operations before the change in regular operational working capital, which excludes the effects of the Dispositions, was $4.9 million, a decrease of $912,000, or 16%, during the six months ended June 30, 2013, as compared to the comparable period in 2012. Changes in regular operational working capital other than cash and equivalents decreased cash by $900,000 during the six months ended June 30, 2013 due primarily to an increase in accounts receivable from production and a decrease in accrued expenses, offset somewhat by an increase to accounts payable.

Cash flows provided by operating activities was $3.9 million for the six months ended June 30, 2013. Cash flows provided by operating activities and existing cash and equivalents were used primarily to pay two quarterly distributions.

Management of the Company believes cash flows and existing cash and equivalents should be sufficient to meet the current funding requirements of ongoing operations, capital investments to develop oil and gas properties, the repurchase of Units pursuant to the 2014 repurchase right and the payment of quarterly distributions.

The Company has multiple annual contracts with Dominion Field Services and Interstate Gas Supply (collectively, the “Major Gas Purchasers”), many of which were entered into during the six month period ended June 30, 2013, which obligate the Major Gas Purchasers to purchase, and the Company to sell and deliver, certain quantities of natural gas production from the Company’s oil and gas properties throughout the contract periods. The Company may elect to lock-in specific volumes of natural gas to be sold in specific months at a mutually agreeable price. The Company has elected to lock-in various monthly quantities of natural gas which total 1.64 BCF through October 2014 at various monthly weighted-average pricing provisions averaging $3.86 per MCF. Pricing provisions with the Major Gas Purchasers apply to certain fixed quantities on a monthly basis with excess monthly quantities being priced based on the current spot market price. The impact of these contracts on the Company’s future oil and gas sales cannot fully be measured until actual production volumes and prices have been determined.

 

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Results of Operations

The following table and discussion is a review of the results of operations of the Company for the three and six month periods ended June 30, 2013 and 2012. 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 June  30,								Six Months Ended June 30,
		2013				2012				2013				2012
Revenues:
Oil and gas sales			96	%			96	%			96	%			96	%
Well management and operating			4				4				4				4
Total revenues			100	%			100	%			100	%			100	%
Expenses:
Production costs			21	%			34	%			25	%			28	%
Well management and operating			2				2				2				2
Depreciation, depletion and amortization			33				38				32				31
Accretion expense			2				3				2				3
General and administrative			12				15				14				16
Total expenses			70	%			92	%			75	%			80	%
Gain on sale of deep rights			—				2				32				389
Other income			—				1				—				1
Income taxes			—				(1	)			(6	)			(41	)
Net income			30	%			10	%			51	%			369	%

Revenues for the three and six month periods ended June 30, 2013 increased $929,000 and $383,000, respectively, as compared to the prior comparable periods. The increases were primarily due to increases in oil and gas sales during the three and six month periods ended June 30, 2013, as compared to the prior comparable periods.

Oil and gas sales increased $908,000, or 28%, during the three month period ended June 30, 2013 as compared to the prior comparable period. Oil and gas sales increased $362,000, or 5%, during the six month period ended June 30, 2013 as compared to the prior comparable period. The primary reasons for these increases were higher natural gas prices received and more natural gas volumes produced during the three and six month periods ended June 30, 2013 as compared to the prior comparable periods. The effect of higher natural gas prices and more natural gas volumes produced were offset somewhat by lower crude oil prices received and less crude oil volumes produced. More natural gas volumes produced during the three and six month periods ended June 30, 2013 as compared to the prior comparable periods were primarily the result of operated properties being voluntarily shut-in during the three and six month periods ended June 30, 2012 that were not shut-in during the current comparable periods.

 

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Production costs decreased $269,000, or 23%, during the three month period ended June 30, 2013 compared to the prior comparable period. Production costs decreased $195,000, or 8%, during the six month period ended June 30, 2013 compared to the prior comparable period. The primary reason for these decreases was due to a one-time charge by a third party operator during the three month period ended June 30, 2012 in association with cumulative costs incurred relative to their operations of various oil and gas properties of which the Company participates as a joint venture partner.

Depreciation, depletion and amortization increased $155,000, or 12%, during the three month period ended June 30, 2013 as compared to the prior comparable period. Depreciation, depletion and amortization increased $219,000, or 9%, during the six month period ended June 30, 2013 as compared to the prior comparable period. The primary reasons for these increases are the result of increased natural gas volumes produced during the three and six month periods ended June 30, 2013 as compared to the prior comparable periods and the result of lower crude oil and natural gas reserves. The decrease in crude oil and natural gas reserves is primarily the result of lower benchmark crude oil and natural gas prices indexed throughout 2012 as compared to benchmark prices indexed throughout 2011. The lower 2012 benchmark prices were used to value reserves at December 31, 2012, the most recent valuation date, which reduced the average economic life of the Company’s wells as compared to December 31, 2011, the prior valuation date.

Accretion expense decreased $35,000, or 31%, during the three month period ended June 30, 2013 as compared to the prior comparable period. Accretion expense decreased $68,000, or 30%, during the six month period ended June 30, 2013 as compared to the prior comparable period. The primary reasons for these decreases was the result of more asset retirement obligations being fully accreted at January 1, 2013 as compared to January 1, 2012, which resulted in less discounted asset retirement obligations available to accrete during the three and six month periods ended June 30, 2013 as compared to the prior comparable periods.

General and administrative expenses decreased $83,000, or 6%, during the six month period ended June 30, 2013 as compared to the prior comparable period. The primary reason for this decrease is due to decreases in various administrative costs incurred relative to the Dispositions during the six month period ended June 30, 2013 as compared to the prior comparable period.

The Company recognized a gain on sale of deep rights of $2.8 million and $32.1 million during the six month periods ended June 30, 2013 and 2012, respectively, in association with the Dispositions as further described under “Sale of Deep Rights”, herein.

Income tax expenses were $559,000 and $3.4 million during the six month periods ended June 30, 2013 and 2012, respectively. Income tax expenses incurred during the six month period ended June 30, 2013 consisted primarily of deferred income taxes associated with revenue recognized in conjunction with the Contingent Leases. Income tax expenses incurred during the six month period ended June 30, 2012 consisted primarily of federal income taxes due in relation to Everflow Eastern, Inc.’s interest in the Dispositions.

The Company reported net income of $1.3 million during the three month period ended June 30, 2013, an increase of $961,000 from the prior comparable period amount of $334,000. The primary reason for the increase is the result of higher oil and gas sales and

 

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less production costs, offset somewhat by the increase in depreciation, depletion and amortization. The Company reported net income of $4.4 million during the six month period ended June 30, 2013, a decrease of $26.1 million from the prior comparable period amount of $30.5 million. The primary reason for the decrease is the result of the $29.4 million decrease in gain on sale of deep rights, offset somewhat by the decrease in income tax expenses. Net income represented 30% and 10% of total revenues during the three month periods ended June 30, 2013 and 2012, respectively, and 51% and 369% of total revenues during the six month periods ended June 30, 2013 and 2012, respectively.

Critical Accounting Policies

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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, 2012.

Forward-Looking Statements

Except for historical financial information contained in this Form 10-Q, the statements made in this report are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (“Exchange Act”). In addition, words such as “expects,” “anticipate,” “intends,” “plans,” “believes,” “estimates,” variations of such words and similar expressions are intended to identify 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

This information has been omitted, as the Company qualifies as a smaller reporting company.

 

Item 4.

CONTROLS AND PROCEDURES

(a) Disclosure Controls and Procedures. As of the end of the period covered by this report, management performed, with the participation of our Principal Executive Officer (the “CEO”) and Principal Financial and Accounting Officer (the “CFO”), an evaluation of the effectiveness of our disclosure controls and procedures as defined in Exchange Act Rules 13a-15 (the “evaluation”). Our disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is

 

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accumulated and communicated to our management, including our CEO and CFO, to allow timely decisions regarding required disclosures. Based on the evaluation, management, including our CEO and CFO, concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.

The certifications of the Company’s CEO and CFO are attached as Exhibits 31.1 and 31.2 to this Quarterly Report on Form 10-Q and include, in paragraph 4 of such certifications, information concerning the Company’s disclosure controls and procedures and internal control over financial reporting. Such certifications should be read in conjunction with the information contained in this Item 4., including the information incorporated by reference to our filing on Form 10-K for the year ended December 31, 2012, for a more complete understanding of the matters covered by such certifications.

(b) Changes in internal control over financial reporting. No change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) occurred during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Part II. Other Information

 

Item 6.

EXHIBITS

 

 

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

		EVERFLOW EASTERN PARTNERS, L.P.
		By:		EVERFLOW MANAGEMENT LIMITED, LLC
				General Partner
		By:		EVERFLOW MANAGEMENT CORPORATION
				Managing Member
August 13, 2013		By:		/s/ Brian A. Staebler
				Brian A. Staebler
				Vice President, Secretary-Treasurer and
				Principal Financial and Accounting Officer
				(Duly Authorized Officer)

 

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