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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, 2014

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 5,601,003 Units of limited partnership interest of the registrant as of November 10, 2014. 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, 2014.

 

 

 

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EVERFLOW EASTERN PARTNERS, L.P.

INDEX

 

		DESCRIPTION				PAGE NO.
Part I.		Financial Information
		Item 1.		Financial Statements
				Consolidated Balance Sheets September 30, 2014 and December 31, 2013			F-1
				Consolidated Statements of Income Three and Nine Months Ended September 30, 2014 and 2013			F-3
				Consolidated Statements of Partners’ Equity Nine Months Ended September 30, 2014 and 2013			F-4
				Consolidated Statements of Cash Flows Nine Months Ended September 30, 2014 and 2013			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			9
				Signature			10

 

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EVERFLOW EASTERN PARTNERS, L.P.

CONSOLIDATED BALANCE SHEETS

September 30, 2014 and December 31, 2013

 

		September 30,				December 31,
		2014				2013
		(Unaudited)				(Audited)
ASSETS
CURRENT ASSETS
Cash and equivalents		$	25,097,345			$	24,461,680
Accounts and notes receivable:
Production			1,860,914				2,195,519
Employees (including notes receivable)			82,000				95,000
Joint venture partners			10,874				10,623
Other			101,438				139,681
Total current assets			27,152,571				26,902,503
PROPERTY AND EQUIPMENT
Proved properties (successful efforts accounting method)			174,229,954				174,811,480
Pipeline and support equipment			631,757				666,667
Corporate and other			2,106,094				2,092,582
			176,967,805				177,570,729
Less accumulated depreciation, depletion, amortization and write down			147,326,022				145,560,225
			29,641,783				32,010,504
OTHER ASSETS
Employees’ accounts and notes receivable			71,582				118,262
Other			188,363				165,279
			259,945				283,541
		$	57,054,299			$	59,196,548

 

See notes to unaudited consolidated financial statements.

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EVERFLOW EASTERN PARTNERS, L.P.

CONSOLIDATED BALANCE SHEETS

September 30, 2014 and December 31, 2013

 

		September 30,				December 31,
		2014				2013
		(Unaudited)				(Audited)
LIABILITIES AND PARTNERS’ EQUITY
CURRENT LIABILITIES
Accounts payable		$	1,835,132			$	1,684,610
Accrued expenses			725,775				1,364,183
Total current liabilities			2,560,907				3,048,793
DEFERRED INCOME TAXES			199,000				214,000
JOINT VENTURE PARTNER ADVANCES			949,718				880,270
ASSET RETIREMENT OBLIGATIONS			7,337,541				7,095,841
COMMITMENTS AND CONTINGENCIES
LIMITED PARTNERS’ EQUITY, SUBJECT TO REPURCHASE RIGHT
Authorized - 8,000,000 Units
Issued and outstanding - 5,601,003 and 5,606,985 Units, respectively			45,462,509				47,390,528
GENERAL PARTNER’S EQUITY			544,624				567,116
Total partners’ equity			46,007,133				47,957,644
		$	57,054,299			$	59,196,548

 

See notes to unaudited consolidated financial statements.

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EVERFLOW EASTERN PARTNERS, L.P.

CONSOLIDATED STATEMENTS OF INCOME

Three and Nine Months Ended September 30, 2014 and 2013

(Unaudited)

 

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2014				2013				2014				2013
REVENUES
Crude oil and natural gas sales		$	3,310,032			$	4,216,533			$	10,904,086			$	12,544,208
Well management and operating			139,554				157,187				443,692				471,095
Other			2,722				2,991				7,979				9,031
Total revenues			3,452,308				4,376,711				11,355,757				13,024,334
DIRECT COST OF REVENUES
Production costs			858,370				847,988				2,839,282				3,004,102
Well management and operating			63,508				94,675				244,786				284,180
Depreciation, depletion and amortization			700,774				1,371,845				2,523,746				4,108,539
Accretion expense			81,100				80,000				241,700				236,600
Total direct cost of revenues			1,703,752				2,394,508				5,849,514				7,633,421
GENERAL AND ADMINISTRATIVE EXPENSE			521,432				554,608				1,781,781				1,767,785
Total cost of revenues			2,225,184				2,949,116				7,631,295				9,401,206
INCOME FROM OPERATIONS BEFORE GAIN ON SALE OF DEEP RIGHTS			1,227,124				1,427,595				3,724,462				3,623,128
GAIN ON SALE OF DEEP RIGHTS			—				—				—				2,761,705
INCOME FROM OPERATIONS			1,227,124				1,427,595				3,724,462				6,384,833
INTEREST INCOME			11,026				12,273				35,062				37,347
INCOME BEFORE INCOME TAXES			1,238,150				1,439,868				3,759,524				6,422,180
INCOME TAX EXPENSE (BENEFIT)
Current			5,000				40,000				15,000				120,000
Deferred			(5,000	)			(15,000	)			(15,000	)			464,000
			—				25,000				—				584,000
NET INCOME		$	1,238,150			$	1,414,868			$	3,759,524			$	5,838,180
Allocation of Partnership Net Income
Limited Partners		$	1,223,493			$	1,398,132			$	3,715,051			$	5,769,180
General Partner			14,657				16,736				44,473				69,000
		$	1,238,150			$	1,414,868			$	3,759,524			$	5,838,180
Net income per unit		$	0.22			$	0.25			$	0.66			$	1.03

 

See notes to unaudited consolidated financial statements.

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EVERFLOW EASTERN PARTNERS, L.P.

CONSOLIDATED STATEMENTS OF PARTNERS’ EQUITY

Nine Months Ended September 30, 2014 and 2013

(Unaudited)

 

		2014				2013
PARTNERS’ EQUITY - JANUARY 1		$	47,957,644			$	49,303,756
Net income			3,759,524				5,838,180
Quarterly cash distributions ($1.00 per unit in 2014 and $1.50 per unit in 2013)			(5,671,092	)			(8,515,855	)
Repurchase Right - Units tendered			(77,886	)			(46,543	)
Option Repurchase Plan - options exercised			38,943				23,272
PARTNERS’ EQUITY - SEPTEMBER 30		$	46,007,133			$	46,602,810

 

See notes to unaudited consolidated financial statements.

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EVERFLOW EASTERN PARTNERS, L.P.

CONSOLIDATED STATEMENTS OF CASH FLOWS

Nine Months Ended September 30, 2014 and 2013

(Unaudited)

 

		2014				2013
CASH FLOWS FROM OPERATING ACTIVITIES
Net income		$	3,759,524			$	5,838,180
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, depletion and amortization			2,591,046				4,175,139
Accretion expense			241,700				236,600
Gain on sale of deep rights			—				(2,761,705	)
Deferred income taxes			(15,000	)			464,000
Changes in assets and liabilities:
Accounts receivable			334,354				(164,085	)
Other current assets			38,243				32,243
Other assets			(23,084	)			(4,020	)
Accounts payable			150,522				13,170
Accrued expenses			(638,408	)			(683,797	)
Joint venture partner advances			69,448				41,231
Total adjustments			2,748,821				1,348,776
Net cash provided by operating activities			6,508,345				7,186,956
CASH FLOWS FROM INVESTING ACTIVITIES
Payments received on receivables from employees			67,523				80,336
Advances disbursed to employees			(7,843	)			(36,062	)
Purchase of property and equipment			(222,325	)			(843,436	)
Net cash used in investing activities			(162,645	)			(799,162	)
CASH FLOWS FROM FINANCING ACTIVITIES
Distributions			(5,671,092	)			(8,515,855	)
Proceeds from options exercised			38,943				23,272
Repurchase of Units			(77,886	)			(46,543	)
Net cash used in financing activities			(5,710,035	)			(8,539,126	)
NET CHANGE IN CASH AND EQUIVALENTS			635,665				(2,151,332	)
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD			24,461,680				25,397,117
CASH AND EQUIVALENTS AT END OF PERIOD		$	25,097,345			$	23,245,785
Supplemental disclosures of cash flow information and non-cash activities:
Cash paid during the period for:
Income taxes		$	11,131			$	247,932

Gain on sale of deep rights reflects recognition of previously deferred revenue.

 

See notes to unaudited consolidated financial statements.

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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 26, 2014.

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.

 

 

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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, nor does it have any liabilities. 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 September 30, 2014 and December 31, 2013, cash and equivalents include $949,718 and $880,270, 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.

 

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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 nine months ended September 30, 2014 and 2013:

 

		Asset Retirement Obligations
		Nine Months Ended September 30,
		2014				2013
Beginning of period		$	7,395,841			$	6,996,744
Liabilities incurred			—				9,900
Accretion expense			241,700				236,600
End of period		$	7,637,541			$	7,243,244

 

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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 September 30, 2014 and December 31, 2013. Other revenue is recognized at the time services are rendered, the Company has a contractual right to such revenue and collection is reasonably assured. Gain on sale of deep rights is recognized when title to deep mineral interests has been transferred and all terms and conditions to the sale have been met.

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.

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.

 

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EVERFLOW EASTERN PARTNERS, L.P.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

Note 1.

Organization and Summary of Significant Accounting Policies

 

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 and select officers and employees electing to exercise options (see Note 3).

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 5,601,003 and 5,604,991 for the three and nine months ended September 30, 2014, respectively, and 5,606,985 and 5,610,138 for the three and nine months ended September 30, 2013, respectively.

 

J.

Subsequent Events - Everflow paid a cash distribution in October 2014 of $0.25 per Unit. The distribution amounted to approximately $1,417,000.

 

K.

New Accounting Standards – In May 2014, the Financial Accounting Standards Board issued Accounting Standards Update No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”). ASU 2014-09 is intended to improve the financial reporting requirements for revenue from contracts with customers by providing a principle based approach. The core principle of the standard is that revenue should be recognized when the transfer of promised goods or services is made in an amount that the entity expects to be entitled to in exchange for the transfer of goods and services. ASU 2014-09 also requires disclosures enabling users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. This standard will be effective for financial statements issued by public companies for annual reporting periods beginning after December 15, 2016. Early adoption is not permitted. The Company is currently evaluating the potential impact of ASU 2014-09 on the financial statements.

The Company has reviewed all other 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.

 

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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 September 30, 2014 and December 31, 2013:

 

		September 30,				December 31,
		2014				2013
Accounts Payable:
Production and related other		$	1,428,266			$	1,274,763
Other			295,843				287,460
Joint venture partner deposits			111,023				122,387
		$	1,835,132			$	1,684,610
Accrued Expenses:
Payroll and retirement plan contributions		$	402,243			$	963,783
Current portion of asset retirement obligations			300,000				300,000
Federal, state and local taxes			23,532				28,200
Other			—				72,200
		$	725,775			$	1,364,183

 

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.

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

 

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EVERFLOW EASTERN PARTNERS, L.P.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

Note 3.

Partners’ Equity (continued)

 

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 2014 Repurchase Right, based upon the December 31, 2013 calculation, was $6.51 per Unit, net of the distributions made in January 2014 ($0.25 per Unit) and April 2014 ($0.25 per Unit).

The Company has an Option Repurchase Plan (the “Plan”) which permits the grant of options to purchase 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. In June 2014 and 2013, the Company granted options to officers and an employee. All options granted were exercised on the same date.

Units repurchased pursuant to the Repurchase Right and Units issued through the exercise of options pursuant to the Option Repurchase Plan (collectively the “Units Activity”) for each of the last three years are as follows:

 

		Per Unit																				Units
		Calculated																				Outstanding
		Price for				Less				Net												Following
		Repurchase				Interim				Price				Units				Units				Units
Year		Right				Distributions				Paid				Repurchased				Issued				Activity
2012		$	9.17			$	0.88			$	8.29				9,414				4,707				5,611,715
2013		$	5.92			$	1.00			$	4.92				9,460				4,730				5,606,985
2014		$	7.01			$	0.50			$	6.51				11,964				5,982				5,601,003

There were no instruments outstanding at September 30, 2014 or 2013 that would potentially dilute net income per Unit.

 

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EVERFLOW EASTERN PARTNERS, L.P.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

Note 4.

Gas Purchase Agreements

The Company has multiple annual contracts with Dominion Field Services and Interstate Gas Supply (collectively, the “Major Gas Purchasers”), some of which were entered into during the nine month period ended September 30, 2014, 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 1.17 BCF through October 2015 at various monthly weighted-average pricing provisions averaging $3.10 per MCF, net of estimated regional basis adjustments. 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, plus or minus a current regional basis adjustment. 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.

 

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 may be required to purchase natural gas at market prices to meet such commitments which may 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 natural gas for redelivery (resale) to its customers.

In conjunction with the sale of approximately 28,800 acres of deep rights made in 2012, the Company agreed to perpetuate the producing leases for a minimum

 

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EVERFLOW EASTERN PARTNERS, L.P.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

Note 5.

Commitments and Contingencies (continued)

 

period of five years. 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 September 30, 2014.

The Company is party to various legal proceedings and claims in the ordinary course of its business. The Company believes certain of these matters will be covered by insurance and that the outcome of other matters will not have a material adverse effect on its consolidated financial position, results of operations, or liquidity.

 

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 September 30, 2014.

In accordance with the Sarbanes-Oxley Act of 2002, the Company has not extended any loans to officers or directors since 2002. At September 30, 2014 and December 31, 2013, the Company has extended various loans, evidenced by notes, to two employees with origination dates ranging from December 2009 to December 2013. One subsequent addendum extending an additional two-year payment term to a certain note is outstanding at September 30, 2014 and December 31, 2013. Employee receivables, including the notes, accrued interest, and additional amounts loaned during the current period (which will be termed in December 2014), amounted to $153,582 and $213,262 at September 30, 2014 and December 31, 2013, respectively.

 

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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, 2014 and December 31, 2013:

 

		September 30, 2014								December 31, 2013
		Amount				%				Amount				%
		(Amounts in Thousands)								(Amounts in Thousands)
Working capital		$	24,591				45	%		$	23,853				42	%
Property and equipment (net)			29,642				54				32,011				57
Other			260				1				284				1
Total		$	54,493				100	%		$	56,148				100	%
Deferred income taxes		$	199				—	%		$	214				—	%
Long-term liabilities			8,287				15				7,976				14
Partners’ equity			46,007				85				47,958				86
Total		$	54,493				100	%		$	56,148				100	%

Working capital of $24.6 million as of September 30, 2014 represented an increase of $738,000 from December 31, 2013, due primarily to an increase in cash and equivalents and decrease in accrued expenses, offset somewhat by a decrease in accounts receivable from production and an increase in accounts payable. The increase in cash and equivalents is primarily the result of cash provided by operating activities exceeding cash used in investing and financing activities during the nine months ended September 30, 2014. The decrease in accrued expenses is primarily the result of all payroll and retirement contributions accrued at December 31, 2013 having been paid during the nine months ended September 30, 2014. The decrease in accounts receivable from production is primarily the result of decreases in natural gas volumes produced and natural gas prices received during the current receivable production period as compared to the prior comparable receivable production period. The primary reason for the decrease in natural gas volumes produced during the current receivable production period as compared to the prior comparable receivable production period is the result of additional operated oil and gas properties being voluntarily shut-in. The increase in accounts payable is primarily the result of timing associated with the receipt of invoices associated with production expenses.

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 November 10, 2014. The Company anticipates, although there is no assurance it will be able to, entering into a new credit agreement for the purpose,

 

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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 $1.4 million in October 2014.

The Company’s cash flow from operations before the change in working capital was $6.6 million, a decrease of $1.1 million, or 14%, during the nine months ended September 30, 2014 as compared to the prior comparable period. Changes in working capital from operations other than cash and equivalents decreased cash by $115,000 during the nine months ended September 30, 2014 due primarily to a decrease in accrued expenses, offset somewhat by a decrease in accounts receivable and an increase in accounts payable.

Cash flows provided by operating activities was $6.5 million for the nine months ended September 30, 2014 and was used primarily to pay 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 and/or purchase oil and gas properties, the repurchase of Units pursuant to the 2015 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”), some of which were entered into during the nine month period ended September 30, 2014, 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 1.17 BCF through October 2015 at various monthly weighted-average pricing provisions averaging $3.10 per MCF, net of estimated regional basis adjustments. 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, plus or minus a current regional basis adjustment. 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 nine month periods ended September 30, 2014 and 2013. 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,
		2014				2013				2014				2013
Revenues:
Crude oil and natural gas sales			96	%			96	%			96	%			96	%
Well management and operating			4				4				4				4
Total revenues			100	%			100	%			100	%			100	%
Expenses:
Production costs			25				19				25				23
Well management and operating			2				2				2				2
Depreciation, depletion and amortization			20				31				22				32
Accretion expense			2				2				2				2
General and administrative			15				13				16				13
Total expenses			64	%			67	%			67	%			72	%
Gain on sale of deep rights			—				—				—				21
Income taxes			—				(1	)			—				(4	)
Net income			36	%			32	%			33	%			45	%

Revenues for the three and nine month periods ended September 30, 2014 decreased $924,000 and $1.7 million, respectively, as compared to the prior comparable periods. The decreases were primarily the result of decreases in crude oil and natural gas sales during the three and nine month periods ended September 30, 2014 as compared to the prior comparable periods.

Crude oil and natural gas sales decreased $907,000, or 21%, during the three months ended September 30, 2014 as compared to the prior comparable period. The decrease was primarily the result of lower natural gas and crude oil volumes produced and lower average natural gas and crude oil prices received during the three month period ended September 30, 2014 as compared to the prior comparable period. Crude oil and natural gas sales decreased $1.6 million, or 13%, during the nine months ended September 30, 2014 as compared to the prior comparable period. The primary reason for this decrease was lower natural gas and crude oil volumes produced during the nine month period ended September 30, 2014 as compared to the prior comparable period. The decreases in natural gas and crude oil volumes produced during the three and nine month periods ended September 30, 2014 as compared to their prior comparable periods were primarily the result of operated properties being voluntarily shut-in during the three and nine month periods ended September 30, 2014 that were not shut-in during the prior comparable periods.

 

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Production costs decreased $165,000, or 5%, during the nine month period ended September 30, 2014 as compared to the prior comparable period. This decrease was primarily the result of decreases to ad valorem taxes, repairs and maintenance expenses, and other expenses associated with third party operated properties incurred during the nine month period ending September 30, 2014 as compared to the prior comparable period.

Depreciation, depletion and amortization (“DD&A”) decreased $671,000, or 49%, during the three months ended September 30, 2014 as compared to the prior comparable period. DD&A decreased $1.6 million, or 39%, during the nine months ended September 30, 2014 as compared to the prior comparable period. The primary reasons for these decreases are lower natural gas and crude oil volumes produced during the three and nine month periods ended September 30, 2014 as compared to the prior comparable periods, and higher natural gas and crude oil reserves. The increase in natural gas and crude oil reserves is primarily the result of higher benchmark natural gas and crude oil prices indexed throughout 2013 as compared to benchmark prices indexed throughout 2012. The higher 2013 benchmark prices were used to value reserves at December 31, 2013, the most recent valuation date, which increased the average economic life of the Company’s oil and gas properties as compared to December 31, 2012, the prior valuation date.

The Company recognized a gain on sale of deep rights of $2.8 million during the nine month period ended September 30, 2013 in association with the sale of deep mineral interests in certain Ohio properties (the “Disposition”). The Disposition included no producing reserves, and the Company retained the rights to the shallow portion of all acreage sold.

All current income tax expenses incurred by the Company during the three and nine month periods ended September 30, 2014 were offset by deferred income tax benefits. Income tax expenses were $584,000 during the nine month period ended September 30, 2013, and consisted primarily of deferred income taxes associated with revenue recognized in conjunction with the Disposition.

The Company reported net income of $1.2 million during the three months ended September 30, 2014, a decrease of $177,000, or 12%, from the prior comparable period amount of $1.4 million. The decrease in net income is primarily the result of a decrease in crude oil and natural gas sales, offset somewhat by a decrease in DD&A. The Company reported net income of $3.8 million during the nine months ended September 30, 2014, a decrease of $2.1 million, or 36%, from the prior comparable period amount of $5.8 million. The decrease in net income is primarily the result of decreases in gain on sale of deep rights and crude oil and natural gas sales, offset somewhat by decreases in production costs, DD&A, and income tax expenses. Net income represented 36% and 32% of total revenues during the three month periods ended September 30, 2014 and 2013, respectively, and 33% and 45% of total revenue during the nine month periods ended September 30, 2014 and 2013, respectively.

 

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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, 2013.

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 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.

 

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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, 2013, 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.

 

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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
Dated: November 12, 2014				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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