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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 June 30, 2015

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 5,587,616 Units of limited partnership interest of the registrant as of August 10, 2015. 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, 2015.

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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, 2015 and December 31, 2014			F-1
						Consolidated Statements of Operations Three and Six Months Ended June 30, 2015 and 2014			F-3
						Consolidated Statements of Partners’ Equity Six Months Ended June 30, 2015 and 2014			F-4
						Consolidated Statements of Cash Flows Six Months Ended June 30, 2015 and 2014			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			8
						Signature			9

 

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EVERFLOW EASTERN PARTNERS, L.P.

CONSOLIDATED BALANCE SHEETS

June 30, 2015 and December 31, 2014

 

		June 30,				December 31,
		2015				2014
		(Unaudited)				(Audited)
ASSETS
CURRENT ASSETS
Cash and equivalents		$	23,848,992			$	25,353,579
Accounts and notes receivable:
Production			905,929				1,461,882
Employees (including notes receivable)			37,000				70,000
Joint venture partners			6,902				6,775
Other			48,438				56,438
Total current assets			24,847,261				26,948,674
PROPERTY AND EQUIPMENT
Proved properties (successful efforts accounting method)			177,323,788				177,223,180
Pipeline and support equipment			631,757				631,757
Corporate and other			2,114,844				2,114,844
			180,070,389				179,969,781
Less accumulated depreciation, depletion, amortization and write down			150,585,543				148,217,198
			29,484,846				31,752,583
OTHER ASSETS
Employees’ accounts and notes receivable			98,239				70,549
Other			188,662				187,302
			286,901				257,851
		$	54,619,008			$	58,959,108

See notes to unaudited consolidated financial statements.

 

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EVERFLOW EASTERN PARTNERS, L.P.

CONSOLIDATED BALANCE SHEETS

June 30, 2015 and December 31, 2014

 

		June 30,				December 31,
		2015				2014
		(Unaudited)				(Audited)
LIABILITIES AND PARTNERS’ EQUITY
CURRENT LIABILITIES
Accounts payable		$	1,893,236			$	1,819,932
Accrued expenses			667,643				1,466,931
Total current liabilities			2,560,879				3,286,863
DEFERRED INCOME TAXES			184,000				194,000
JOINT VENTURE PARTNER ADVANCES			971,143				956,072
ASSET RETIREMENT OBLIGATIONS			11,108,544				10,808,044
COMMITMENTS AND CONTINGENCIES
LIMITED PARTNERS’ EQUITY, SUBJECT TO REPURCHASE RIGHT
Authorized - 8,000,000 Units
Issued and outstanding - 5,587,616 and 5,601,003 Units, respectively			39,322,247				43,196,649
GENERAL PARTNER’S EQUITY			472,195				517,480
Total partners’ equity			39,794,442				43,714,129
		$	54,619,008			$	58,959,108

See notes to unaudited consolidated financial statements.

 

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EVERFLOW EASTERN PARTNERS, L.P.

CONSOLIDATED STATEMENTS OF OPERATIONS

Three and Six Months Ended June 30, 2015 and 2014

(Unaudited)

 

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2015				2014				2015				2014
REVENUES
Crude oil and natural gas sales		$	1,555,638			$	3,976,665			$	3,512,985			$	7,594,054
Well management and operating			130,144				152,252				266,876				304,138
Other			1,933				2,535				104,410				5,257
Total revenues			1,687,715				4,131,452				3,884,271				7,903,449
DIRECT COST OF REVENUES
Production costs			702,556				907,034				1,595,320				1,980,912
Well management and operating			77,417				91,082				158,696				181,278
Depreciation, depletion and amortization			1,202,191				893,018				2,323,645				1,822,972
Accretion expense			151,400				79,600				299,500				160,600
Total direct cost of revenues			2,133,564				1,970,734				4,377,161				4,145,762
GENERAL AND ADMINISTRATIVE EXPENSE			588,203				593,094				1,259,623				1,260,349
Total cost of revenues			2,721,767				2,563,828				5,636,784				5,406,111
(LOSS) INCOME FROM OPERATIONS			(1,034,052	)			1,567,624				(1,752,513	)			2,497,338
INTEREST INCOME			8,447				12,173				17,408				24,037
(LOSS) INCOME BEFORE INCOME TAXES			(1,025,605	)			1,579,797				(1,735,105	)			2,521,375
INCOME TAX EXPENSE (BENEFIT)
Current			4,000				5,000				8,000				10,000
Deferred			(5,000	)			(5,000	)			(10,000	)			(10,000	)
Total income tax benefit			(1,000	)			—				(2,000	)			—
NET (LOSS) INCOME		$	(1,024,605	)		$	1,579,797			$	(1,733,105	)		$	2,521,375
Allocation of Partnership Net (Loss) Income
Limited Partners		$	(1,012,476	)		$	1,561,115			$	(1,712,589	)		$	2,491,559
General Partner			(12,129	)			18,682				(20,516	)			29,816
		$	(1,024,605	)		$	1,579,797			$	(1,733,105	)		$	2,521,375
Net (loss) income per unit		$	(0.18	)		$	0.27			$	(0.30	)		$	0.44

See notes to unaudited consolidated financial statements.

 

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EVERFLOW EASTERN PARTNERS, L.P.

CONSOLIDATED STATEMENTS OF PARTNERS’ EQUITY

Six Months Ended June 30, 2015 and 2014

(Unaudited)

 

		2015				2014
PARTNERS’ EQUITY - JANUARY 1		$	43,714,129			$	47,957,644
Net (loss) income			(1,733,105	)			2,521,375
Cash distributions ($0.375 per unit in 2015 and $0.50 per unit in 2014, respectively)			(2,125,538	)			(2,837,042	)
Repurchase of Units			(122,089	)			(77,886	)
Options exercised			61,045				38,943
PARTNERS’ EQUITY - JUNE 30		$	39,794,442			$	47,603,034

See notes to unaudited consolidated financial statements.

 

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EVERFLOW EASTERN PARTNERS, L.P.

CONSOLIDATED STATEMENTS OF CASH FLOWS

Six Months Ended June 30, 2015 and 2014

(Unaudited)

 

		2015				2014
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) income		$	(1,733,105	)		$	2,521,375
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Depreciation, depletion and amortization			2,368,345				1,867,572
Accretion expense			299,500				160,600
Deferred income taxes			(10,000	)			(10,000	)
Changes in assets and liabilities:
Accounts receivable			555,826				(102,826	)
Other current assets			8,000				33,243
Other assets			(1,360	)			(18,727	)
Accounts payable			(48,785	)			192,633
Accrued expenses			(799,288	)			(744,809	)
Joint venture partner advances			15,071				69,090
Total adjustments			2,387,309				1,446,776
Net cash provided by operating activities			654,204				3,968,151
CASH FLOWS FROM INVESTING ACTIVITIES
Payments received on receivables from employees			17,440				45,338
Advances disbursed to employees			(12,130	)			(4,058	)
Purchase of property and equipment			(99,608	)			(62,184	)
Net cash used in investing activities			(94,298	)			(20,904	)
CASH FLOWS FROM FINANCING ACTIVITIES
Distributions			(2,125,538	)			(2,837,042	)
Proceeds from options exercised			61,045				38,943
Net cash used in financing activities			(2,064,493	)			(2,798,099	)
NET CHANGE IN CASH AND EQUIVALENTS			(1,504,587	)			1,149,148
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD			25,353,579				24,461,680
CASH AND EQUIVALENTS AT END OF PERIOD		$	23,848,992			$	25,610,828
Supplemental disclosures of cash flow information and non-cash activities:
Cash paid during the period for:
Income taxes		$	12,270			$	11,131

Additions to proved properties reflect changes in asset retirement obligations.

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 27, 2015.

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 June 30, 2015 and December 31, 2014, cash and equivalents include $971,143 and $956,072, 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. At December 31, 2014, the Company made revisions in estimates of plugging costs and remaining lives of wells.

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, 2015 and 2014:

 

		Asset Retirement Obligations
		Six Months Ended June 30,
		2015				2014
Beginning of period		$	11,108,044			$	7,395,841
Liabilities incurred			1,000				—
Accretion expense			299,500				160,600
End of period		$	11,408,544			$	7,556,441

 

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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, 2015 and December 31, 2014. Other revenues consist of gain on sale of deep rights and other miscellaneous revenues. 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. Other miscellaneous revenues are 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.

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 5,606,985 for the three and six months ended June 30, 2015 and 2014, respectively.

 

J.

Subsequent Events - Everflow paid a cash distribution in July 2015 of $0.25 per Unit. The distribution amounted to approximately $1,414,000.

In July 2015, the Company received approximately $230,000 in cash and stock as part of the sale of other assets valued at $10,000 in the consolidated balance sheet at June 30, 2015.

 

K.

New Accounting Standards – In May 2014, the Financial Accounting Standards Board (the “FASB”) 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. The original effective date for financial statements issued by public companies was for annual reporting periods beginning after December 15, 2016. In July 2015, the FASB deferred the effective date for annual reporting periods beginning after December 15, 2017 (including interim reporting periods within those periods). Early adoption is permitted to the original effective date. 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 June 30, 2015 and December 31, 2014:

 

		June 30,				December 31,
		2015				2014
Accounts Payable:
Production and related other		$	1,410,372			$	1,420,238
Other			288,448				288,521
Repurchase of Units			122,089				—
Joint venture partner deposits			72,327				111,173
		$	1,893,236			$	1,819,932
Accrued Expenses:
Current portion of asset retirement obligations		$	300,000			$	300,000
Payroll and retirement plan contributions			296,204				1,055,255
Other			38,900				80,300
Federal, state and local taxes			32,539				31,376
		$	667,643			$	1,466,931

 

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 2015 Repurchase Right, based upon the December 31, 2014 calculation, was $4.56 per Unit, net of the interim distributions made in 2015.

The Company has an Option Repurchase Plan (the “Option Plan”) which permits the grant of options to purchase certain Units to select officers and employees. The purpose of the Option 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 Option Plan is designed to align directly the financial interests of the participants with the financial interests of the Unitholders. In June 2015 and 2014, 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 Plan (collectively the “Units Activity”) for each of the last three years are as follows:

 

		Per Unit																				Units Outstanding
		Calculated
		Price for				Less				Net												Following
		Repurchase				Interim				Price				Units				Units				Units
Year		Right				Distributions				Paid				Repurchased				Issued				Activity
2013		$	5.920			$	1.000			$	4.92				9,460				4,730				5,606,985
2014		$	7.010			$	0.500			$	6.51				11,964				5,982				5,601,003
2015		$	4.935			$	0.375			$	4.56				26,774				13,387				5,587,616

All Units repurchased pursuant to the Repurchase Right were retired except for those Units issued through the exercise of options pursuant to the Option Plan. There were no instruments outstanding at June 30, 2015 or 2014 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 “Gas Purchasers”) which obligate the 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 240,000 MCF through October 2015 at various monthly weighted-average pricing provisions averaging $2.72 per MCF, net of estimated regional basis adjustments. Pricing provisions with the 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 the Gas Purchasers (See Note 4). 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.

 

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EVERFLOW EASTERN PARTNERS, L.P.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

Note 5.

Commitments and Contingencies (continued)

 

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 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 June 30, 2015.

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 June 30, 2015.

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, 2015 and December 31, 2014, the Company has extended various loans, evidenced by notes, to two employees with origination dates ranging from December 2010 to December 2014. In addition, two subsequent addenda extending additional two-year payment terms to certain notes are outstanding at June 30, 2015 and December 31, 2014. Employee receivables, including the notes, accrued interest, and additional amounts loaned during the current period (which will be termed in December 2015), amounted to $135,239 and $140,549 at June 30, 2015 and December 31, 2014, respectively.

 

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Part I: Financial Information

 

Item 2.

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

The following discussion is intended to assist in the understanding of the Company’s liquidity, capital resources and results of operations. It is suggested that this information be read in conjunction with the Company’s interim consolidated financial statements, the related notes to consolidated financial statements and the Company’s 2014 Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 27, 2015.

Liquidity and Capital Resources

The following table summarizes the Company’s financial position at June 30, 2015 and December 31, 2014:

 

		June 30, 2015								December 31, 2014
		Amount				%				Amount				%
		(Amounts in Thousands)								(Amounts in Thousands)
Working capital		$	22,286				43	%		$	23,661				43	%
Property and equipment (net)			29,485				57				31,753				57
Other			287				—				258				—
Total		$	52,058				100	%		$	55,672				100	%
Deferred income taxes		$	184				—	%		$	194				—	%
Long-term liabilities			12,080				23				11,764				21
Partners’ equity			39,794				77				43,714				79
Total		$	52,058				100	%		$	55,672				100	%

Working capital of $22.3 million as of June 30, 2015 represented a decrease of $1.4 million from December 31, 2014, due primarily to decreases in cash and equivalents and accounts receivable from production, offset somewhat by a decrease in accrued expenses. The decrease in cash and equivalents was primarily the result of cash held at December 31, 2014 being used in investing and financing activities during the six months ended June 30, 2015. The decrease in accounts receivable from production was primarily the result of a decrease in natural gas volumes produced as well as decreases in natural gas and crude oil 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 was the result of additional operated oil and gas properties being voluntarily shut-in. The decrease in accrued expenses was primarily the result of all payroll and retirement contributions accrued at December 31, 2014 having been paid during the six months ended June 30, 2015.

 

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The Company funds its operation with cash generated by operations and/or existing cash and equivalent balances. The Company has had no borrowings since 2003 and no principal indebtedness was outstanding as of August 10, 2015. 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 $1.4 million in July 2015.

The Company’s cash flow from operations before the change in working capital was $938,000, a decrease of $3.7 million, or 80%, during the six months ended June 30, 2015 as compared to the prior comparable period. Changes in working capital from operations other than cash and equivalents decreased cash by $284,000 during the six months ended June 30, 2015 due primarily to a decrease in accrued expenses, offset somewhat by a decrease in accounts receivable. Cash flows provided by operating activities was $654,000 for the six months ended June 30, 2015.

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 2016 repurchase right and possibly the payment of future quarterly cash distributions. While the Company currently intends to make a quarterly cash distribution in October 2015, no assurances can be provided that this future intended quarterly distribution will actually be made.

The Company has multiple annual contracts with Dominion Field Services and Interstate Gas Supply (collectively, the “Gas Purchasers”) which obligate the 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 240,000 MCF through October 2015 at various monthly weighted-average pricing provisions averaging $2.72 per MCF, net of estimated regional basis adjustments. Pricing provisions with the 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 six month periods ended June 30, 2015 and 2014. 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								Six Months
		Ended June 30,								Ended June 30,
		2015				2014				2015				2014
Revenues:
Crude oil and natural gas sales			92	%			96	%			90	%			96	%
Well management and operating			8				4				7				4
Other			—				—				3				—
Total revenues			100	%			100	%			100	%			100	%
Expenses:
Production costs			42				22				41				25
Well management and operating			5				2				4				2
Depreciation, depletion and amortization			71				22				60				23
Accretion expense			9				2				8				2
General and administrative expense			34				14				32				16
Total expenses			161	%			62	%			145	%			68	%
Net (loss) income			(61	)%			38	%			(45	)%			32	%

Revenues for the three and six month periods ended June 30, 2015 decreased $2.4 million and $4.0 million, respectively, as compared to the prior comparable periods. The decreases were primarily the result of decreases in crude oil and natural gas sales.

Crude oil and natural gas sales decreased $2.4 million, or 61%, during the three months ended June 30, 2015 as compared to the prior comparable period. Crude oil and natural gas sales decreased $4.1 million, or 54%, during the six months ended June 30, 2015 as compared to the prior comparable period. The decreases were primarily the result of less natural gas and crude oil volumes produced and lower average natural gas and crude oil prices received during the three and six month periods ended June 30, 2015 as compared to the prior comparable periods. The decreases in natural gas volumes produced were primarily the result of Company operated properties being voluntarily shut-in during the three and six month periods ended June 30, 2015 that were not shut-in during the prior comparable periods.

The Company recognized $104,000 of other revenues during the six months ended June 30, 2015 primarily as the result of a sale of deep mineral interests associated with 80 acres held by a lease owned by the Company. The Company retained the rights to the shallow portion of the acreage sold.

 

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Production costs decreased $204,000, or 23%, during the three months ended June 30, 2015 as compared to the prior comparable period. Production costs decreased $386,000, or 19%, during the six months ended June 30, 2015 as compared to the prior comparable period. These decreases were primarily the result of less costs associated with oil and gas properties voluntarily shut-in during the three and six month periods ended June 30, 2015 that were not shut-in during the prior comparable periods.

Depreciation, depletion and amortization (“DD&A”) increased $309,000, or 35%, during the three months ended June 30, 2015 as compared to the prior comparable period. DD&A increased $501,000, or 27%, during the six months ended June 30, 2015 as compared to the prior comparable period. The primary reasons for the increases are lower projected natural gas and crude oil reserves and additional oil and gas properties being depleted during the three and six month periods ended June 30, 2015 as compared to the prior comparable periods. The decrease in projected natural gas and crude oil reserves is primarily the result of lower benchmark natural gas and crude oil prices indexed throughout the first six months of 2015 as compared to the benchmark prices indexed throughout the prior comparable period. The lower 2015 benchmark prices project to decrease reserves at December 31, 2015, the next scheduled valuation date, which will decrease the average economic life of the Company’s oil and gas properties as compared to December 31, 2014, the prior valuation date. In addition, the Company recognized $3.1 million of additions to proved properties at December 31, 2014 in association with revisions made to estimates of plugging costs and remaining lives of wells associated with asset retirement obligations. The effect that lower projected natural gas and crude oil reserves and additional oil and gas properties being depleted had on DD&A was offset somewhat by lower natural gas and crude oil volumes produced during the three and six month periods ended June 30, 2015 as compared to the prior comparable periods.

Accretion expense increased $72,000, or 90%, during the three months ended June 30, 2015 as compared to the prior comparable period. Accretion expense increased $139,000, or 86%, during the six months ended June 30, 2015 as compared to the prior comparable period. These increases were primarily due to recognition of additional liabilities at December 31, 2014 resulting from a revision in estimates of plugging costs and remaining lives of wells associated with asset retirement obligations.

The Company reported net losses of $1.0 million and $1.7 million during the three and six months ended June 30, 2015, respectively, whereas the Company reported net income of $1.6 million and $2.5 million during the three and six months ended June 30, 2014, respectively. The decreases in net income were primarily the result of decreases in crude oil and natural gas sales and increases in DD&A and accretion expense, offset somewhat by a decrease in production costs. The Company’s net losses represented 61% and 45% of total revenues during the three and six month periods ended June 30, 2015, respectively. The Company’s net income represented 38% and 32% of total revenues during the three and six month periods ended June 30, 2014, 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, 2014.

 

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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 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.

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, 2014, 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: August 12, 2015				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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