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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

	☒	Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

  

For the quarterly period ended March 31, 2017

 

OR

 

☐

Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

     

For the transition period from                      to                     .

 

Commission File Number 0-19279

 

EVERFLOW EASTERN PARTNERS, L.P.

(Exact name of registrant as specified in its charter)

 

	Delaware		34-1659910
	(State or other jurisdiction of		(I.R.S. Employer
	incorporation or organization)		Identification No.)
	585 West Main Street
	P.O. Box 629
	Canfield, Ohio		44406
	(Address of principal executive offices)		(Zip Code)

      

Registrant’s telephone number, including area code: (330) 533-2692

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes    X        No            

 

Indicate by check mark whether the registrant 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, a smaller reporting company, or an emerging growth 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
	Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ______

 

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 May 10, 2017. The Units generally do not have any voting rights, but, in certain circumstances, the Units are entitled to one vote per Unit.

 

Except as otherwise indicated, the information contained in this report is as of March 31, 2017.

 

 

EVERFLOW EASTERN PARTNERS, L.P.

 

INDEX

 

	DESCRIPTION			PAGE NO.
Part I.	Financial Information
	Item 1.	Financial Statements
		Consolidated Balance Sheets March 31, 2017 and December 31, 2016		F-1
		Consolidated Statements of Operations Three Months Ended March 31, 2017 and 2016		F-3
		Consolidated Statements of Partners’ Equity Three Months Ended March 31, 2017 and 2016		F-4
		Consolidated Statements of Cash Flows Three Months Ended March 31, 2017 and 2016		F-5
		Notes to Unaudited Consolidated Financial Statements		F-6
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		3
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk		6
	Item 4.	Controls and Procedures		7
Part II.	Other Information
	Item 6.	Exhibits		8
		Signature		9

 

 

 

EVERFLOW EASTERN PARTNERS, L.P.

 

CONSOLIDATED BALANCE SHEETS

 

March 31, 2017 and December 31, 2016

 

		March 31,				December 31,
		2017				2016
		(Unaudited)				(Audited)
ASSETS
CURRENT ASSETS
Cash and equivalents		$	11,685,824			$	11,224,865
Investments			10,109,615				10,080,608
Accounts receivable:
Production			1,342,975				1,014,946
Joint venture partners			-				3,366
Employees' notes receivable			42,000				41,000
Other			10,850				52,831
Total current assets			23,191,264				22,417,616
PROPERTY AND EQUIPMENT
Proved properties (successful efforts accounting method)			181,223,101				181,447,571
Pipeline and support equipment			682,135				682,135
Corporate and other			2,116,482				2,116,482
Gross property and equipment			184,021,718				184,246,188
Less accumulated depreciation, depletion, amortization and write down			173,967,370				173,979,881
Net property and equipment			10,054,348				10,266,307
OTHER ASSETS
Employees' notes receivable			6,328				46,045
Other			184,398				176,558
Total other assets			190,726				222,603
TOTAL ASSETS		$	33,436,338			$	32,906,526

 

See notes to unaudited consolidated financial statements.

 

 

EVERFLOW EASTERN PARTNERS, L.P.

 

CONSOLIDATED BALANCE SHEETS

 

March 31, 2017 and December 31, 2016

 

		March 31,				December 31,
		2017				2016
		(Unaudited)				(Audited)
LIABILITIES AND PARTNERS' EQUITY
CURRENT LIABILITIES
Accounts payable		$	1,695,307			$	1,703,441
Accrued expenses			613,652				1,137,290
Total current liabilities			2,308,959				2,840,731
DEFERRED INCOME TAXES			74,000				74,000
JOINT VENTURE PARTNER ADVANCES			1,258,024				1,053,582
ASSET RETIREMENT OBLIGATIONS			16,838,430				16,740,630
COMMITMENTS AND CONTINGENCIES
LIMITED PARTNERS' EQUITY, SUBJECT TO REPURCHASE RIGHT
Authorized - 8,000,000 Units
Issued and outstanding - 5,587,616 Units			12,803,180				12,052,848
GENERAL PARTNER'S EQUITY			153,745				144,735
Total partners' equity			12,956,925				12,197,583
TOTAL LIABILITIES AND PARTNERS' EQUITY		$	33,436,338			$	32,906,526

 

See notes to unaudited consolidated financial statements.

 

 

EVERFLOW EASTERN PARTNERS, L.P.

 

CONSOLIDATED STATEMENTS OF OPERATIONS

 

Three Months Ended March 31, 2017 and 2016

 

(Unaudited) 

 

		2017				2016
REVENUES
Crude oil and natural gas sales		$	2,200,622			$	653,530
Well management and operating			143,303				105,313
Other			10,441				2,200
Total revenues			2,354,366				761,043
DIRECT COST OF REVENUES
Production costs			674,983				703,015
Well management and operating			84,274				62,287
Depreciation, depletion and amortization			190,859				1,069,895
Accretion expense			97,800				110,400
Total direct cost of revenues			1,047,916				1,945,597
GENERAL AND ADMINISTRATIVE EXPENSE			580,123				608,211
Total cost of revenues			1,628,039				2,553,808
INCOME (LOSS) FROM OPERATIONS			726,327				(1,792,765	)
INTEREST AND DIVIDEND INCOME			33,015				12,063
INCOME (LOSS) BEFORE INCOME TAXES			759,342				(1,780,702	)
INCOME TAX EXPENSE (BENEFIT)
Current			-				500
Deferred			-				(1,000	)
Total income tax benefit			-				(500	)
NET INCOME (LOSS)		$	759,342			$	(1,780,202	)
Allocation of Partnership Net Income (Loss):
Limited Partners		$	750,332			$	(1,759,078	)
General Partner			9,010				(21,124	)
Net income (loss)		$	759,342			$	(1,780,202	)
Net income (loss) per unit		$	0.13			$	(0.31	)

 

See notes to unaudited consolidated financial statements.

 

 

EVERFLOW EASTERN PARTNERS, L.P.

 

CONSOLIDATED STATEMENTS OF PARTNERS' EQUITY

 

Three Months Ended March 31, 2017 and 2016

 

(Unaudited)

 

		2017				2016
PARTNERS' EQUITY - BEGINNING OF PERIOD		$	12,197,583			$	18,160,096
Net income (loss)			759,342				(1,780,202	)
PARTNERS' EQUITY - END OF PERIOD		$	12,956,925			$	16,379,894

 

See notes to unaudited consolidated financial statements.

 

 

EVERFLOW EASTERN PARTNERS, L.P.

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

Three Months Ended March 31, 2017 and 2016

 

(Unaudited)

 

		2017				2016
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)		$	759,342			$	(1,780,202	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation, depletion and amortization			211,959				1,091,795
Accretion expense			97,800				110,400
Deferred income taxes			-				(1,000	)
Changes in assets and liabilities:
Accounts receivable			(324,663	)			31,100
Other current assets			41,981				500
Other assets			(7,840	)			-
Accounts payable			(8,134	)			(39,430	)
Accrued expenses			(523,638	)			(546,692	)
Joint venture partner advances			204,442				6,049
Total adjustments			(308,093	)			652,722
Net cash provided by (used in) operating activities			451,249				(1,127,480	)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of investments			(29,007	)			-
Payments received on receivables from employees			38,717				35,097
Purchase of property and equipment			-				(195	)
Net cash provided by investing activities			9,710				34,902
NET CHANGE IN CASH AND EQUIVALENTS			460,959				(1,092,578	)
CASH AND EQUIVALENTS - BEGINNING OF PERIOD			11,224,865				22,734,047
CASH AND EQUIVALENTS - END OF PERIOD		$	11,685,824			$	21,641,469
Supplemental disclosures of cash flow information and non-cash activities:
Cash paid during the period for:
Income taxes		$	499			$	390

 

See notes to unaudited consolidated financial statements.

 

 

EVERFLOW EASTERN PARTNERS, L.P.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

Note 1.

Organization and Summary of Significant Accounting Policies.

  

A.

Interim Financial Statements - The interim consolidated financial statements included herein have been prepared by the management of Everflow Eastern Partners, L.P., without audit. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position and results of operations have been made.

 

The accompanying condensed consolidated financial statements are presented in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 8-03 of Regulation S-X. Accordingly, they do not include all of the disclosures normally required by GAAP, or those normally made in an Annual Report on Form 10-K, although the Company believes that the disclosures made are adequate to make the information not misleading. It is suggested that these financial statements be read in conjunction with the financial statements and notes thereto which are incorporated in Everflow Eastern Partners, L.P.’s annual report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 28, 2017.

 

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.

 

  

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 March 31, 2017 and December 31, 2016, cash and equivalents include $1,258,024 and $1,053,582, respectively, of joint venture partner advances, which are funds collected and held on behalf of joint venture partners for their anticipated share of future plugging and abandonment costs, including interest earned.

 

F.

Investments – The Company’s investments are classified as available-for-sale securities and consist of shares held in a mutual fund that invests primarily in investment grade, U.S. dollar denominated short-term fixed and floating rate debt securities. The mutual fund seeks current income while seeking to maintain a low volatility of principal.

 

 

EVERFLOW EASTERN PARTNERS, L.P.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

Note 1.

Organization and Summary of Significant Accounting Policies

 

F.

Investments (continued)

 

The Financial Accounting Standards Board established a framework for measuring fair value and expanded disclosures about fair value measurements by establishing a fair value hierarchy that prioritizes the inputs and defines valuation techniques used to measure fair value. The hierarchy gives highest priority to Level I inputs and lowest priority to Level III inputs. The three levels of the fair value hierarchy are described below:

 

Level I – Quoted prices are available in active markets for identical financial instruments as of the reporting date.

 

Level II – Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reporting date, and fair value is determined through the use of models or other valuation methodologies.

 

Level III – Pricing inputs are unobservable for the financial instrument and include situations where there is little, if any, market activity for the financial instrument. The inputs into the determination of fair value require significant management judgment or estimation.

 

The Company’s investments are carried at fair market value based on quoted prices available in active markets and are therefore classified as Level 1.

 

G.

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.

 

  

EVERFLOW EASTERN PARTNERS, L.P.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

Note 1.

Organization and Summary of Significant Accounting Policies

 

H.

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 March 31, 2017 and December 31, 2016. Other revenues consist of miscellaneous revenues that 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.

 

I.

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.

 

 

EVERFLOW EASTERN PARTNERS, L.P.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

Note 1.

Organization and Summary of Significant Accounting Policies

           

J.

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 may 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 5,587,616 for the three months ended March 31, 2017 and 2016, respectively.

 

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. ASU 2014-09, through issuance of ASU 2015-14, is to be effective for financial statements issued for annual periods beginning after December 31, 2017 (including interim reporting periods within those periods). Early adoption is permitted as of the original effective date. The Company is currently evaluating the potential impact of these standards 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.

 

 

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 March 31, 2017 and December 31,2016:

 

		March 31,				December 31,
		2017				2016
Accounts Payable:
Production and related other		$	1,356,866			$	1,364,131
Other			291,207				292,076
Joint venture partner deposits			47,234				47,234
Total accounts payable		$	1,695,307			$	1,703,441
Accrued Expenses:
Current portion of asset retirement obligations		$	384,000			$	384,000
Payroll and retirement plan contributions			144,172				641,326
Other			77,200				79,500
Federal, state and local taxes			8,280				32,464
Total accrued expenses		$	613,652			$	1,137,290

 

 

 

Note 3.

Partners’ Equity

 

Units represent limited partnership interests in Everflow. The Units are transferable subject to the approval of 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 may have an opportunity to require Everflow to repurchase their Units pursuant to the Repurchase Right.

 

 

EVERFLOW EASTERN PARTNERS, L.P.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

Note 3.

Partners’ Equity (continued)

 

The partnership agreement provides that Everflow will repurchase for cash up to 10% of the then outstanding Units, to the extent Unitholders offer Units to Everflow for repurchase pursuant to the Repurchase Right. The Repurchase Right entitles any Unitholder, between May 1 and June 30 of each year, to notify Everflow that the Unitholder elects to exercise the Repurchase Right and have Everflow acquire certain or all Units. The price to be paid for any such Units is calculated based upon the audited financial statements of the Company as of December 31 of the year prior to the year in which the Repurchase Right is to be effective and independently prepared reserve reports. The price per Unit equals 66% of the adjusted book value of the Company allocable to the Units, divided by the number of Units outstanding at the beginning of the year in which the applicable Repurchase Right is to be effective less interim cash distributions received by a Unitholder. The adjusted book value is calculated by adding partners’ equity, the Standardized Measure of Discounted Future Net Cash Flows and the tax effect included in the Standardized Measure and subtracting from that sum the carrying value of oil and gas properties (net of undeveloped lease costs). If more than 10% of the then outstanding Units are tendered during any period during which the Repurchase Right is to be effective, the Investors’ Units tendered shall be prorated for purposes of calculating the actual number of Units to be acquired during any such period. The Company has determined that the price associated with the 2017 Repurchase Right, based upon the December 31, 2016 calculation, is negative, and as such the Company will not be offering to repurchase Units in 2017. Additionally, the Company did not offer to repurchase Units in 2016. The Company has not made a distribution in 2017.

 

The Company has an Option Repurchase Plan (the “Option Plan”) which permits the grant of options to select officers and employees to purchase certain Units acquired by the Company pursuant to the Repurchase Right. 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.

 

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 the years 2014 and 2015 are as follows: 

 

		Per Unit																				Units Out-
		Calculated																				standing
		Price for				Less				Net												Following
		Repurchase				Interim				Price				Units				Units				Units
Year		Right				Distributions				Paid				Repurchased				Issued				Activity
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 are retired except for those Units issued through the exercise of options pursuant to the Option Plan. There were no instruments outstanding at March 31, 2017 or 2016 that would potentially dilute net income per Unit.

 

 

EVERFLOW EASTERN PARTNERS, L.P.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

Note 4.

Gas Purchase Agreements

 

The Company has multiple 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 540,000 MCF from April 2017 through March 2018 at various monthly weighted-average pricing provisions averaging $2.84 per MCF, net of 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 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.

 

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.

 

 

EVERFLOW EASTERN PARTNERS, L.P.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

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 from payments made by employees and 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 4.00% at March 31, 2017.

 

In accordance with the Sarbanes-Oxley Act of 2002, the Company has not extended any loans to officers or directors since 2002. At March 31, 2017 and December 31, 2016, the Company has extended various loans, evidenced by notes, to two employees with origination dates ranging from December 2010 to December 2015. In addition, two subsequent addenda extending additional payment terms to certain notes are outstanding at March 31, 2017. Employees’ notes receivable, including accrued interest, amounted to $48,328 and $87,045 at March 31, 2017 and December 31, 2016, respectively.

 

 

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 2016 Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 28, 2017.

 

Liquidity and Capital Resources

 

The following table summarizes the Company's financial position at March 31, 2017 and December 31, 2016: 

 

		March 31, 2017								December 31, 2016
		Amount				%				Amount				%
		(Amounts in Thousands)								(Amounts in Thousands)
Working capital		$	20,882				67	%		$	19,577				65	%
Property and equipment (net)			10,054				32				10,266				34
Other			191				1				223				1
Total		$	31,127				100	%		$	30,066				100	%
Deferred income taxes		$	74				-	%		$	74				-	%
Long-term liabilities			18,096				58				17,794				59
Partners' equity			12,957				42				12,198				41
Total		$	31,127				100	%		$	30,066				100	%

 

             Working capital of $20.9 million as of March 31, 2017 represented an increase of $1.3 million from December 31, 2016, due primarily to increases in cash and equivalents and accounts receivable from production and a decrease in accrued expenses. The increase in cash and equivalents is primarily the result of cash provided by operating activities during the three months ended March 31, 2017. The increase in accounts receivable from production is primarily the result of increases in natural gas volumes produced and higher natural gas prices received during the current receivable production period as compared to the prior comparable receivable production period. The primary reason for the increase in natural gas volumes produced is the result of less operated oil and gas properties being voluntarily shut-in during the current receivable production period as compared to the prior comparable receivable production period. The decrease in accrued expenses is primarily the result of all payroll and retirement contributions accrued at December 31, 2016 having been paid during the three months ended March 31, 2017.

 

 

                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 May 10, 2017.

 

The Company’s cash flow provided by operating activities before the change in working capital was $1.3 million during the three months ended March 31, 2017, an increase of $1.8 million as compared to $573,000 of cash flow used in operating activities before the change in working capital during the prior comparable period. Changes in working capital from operations other than cash and equivalents decreased cash by $814,000 during the three months ended March 31, 2017 due primarily to an increase in accounts receivable from production and a decrease in accrued expenses. Cash flows provided by operating activities was $451,000 for the three months ended March 31, 2017.

 

Management of the Company believes cash flows and existing cash and equivalents should be sufficient to meet the current funding requirements of ongoing operations and capital investments to develop and/or purchase oil and gas properties. The Company has not paid a quarterly cash distribution since October 2015.

 

The Company has multiple 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 540,000 MCF from April 2017 through March 2018 at various monthly weighted-average pricing provisions averaging $2.84 per MCF, net of 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.

 

 

Results of Operations

 

The following table and discussion is a review of the results of operations of the Company for the three month periods ended March 31, 2017 and 2016. All items in the table are calculated as a percentage of total revenues. This table should be read in conjunction with the discussions of each item below: 

 

		Three Months
		Ended March 31,
		2017				2016
Revenues:
Crude oil and natural gas sales			94	%			86	%
Well management and operating			6				14
Total revenues			100	%			100	%
Expenses:
Production costs			29				92
Well management and operating			3				8
Depreciation, depletion and amortization			8				141
Accretion expense			4				15
General and administrative			25				80
Total expenses			69	%			336	%
Interest and dividend income			1				2
Net income (loss)			32	%			(234	)%

 

Revenues for the three month period ended March 31, 2017 increased $1.6 million, or 209%, as compared to the prior comparable period. The increase is primarily the result of an increase in crude oil and natural gas sales recognized during the three month period ended March 31, 2017 as compared to the prior comparable period.

 

Crude oil and natural gas sales increased $1.5 million, or 237%, during the three months ended March 31, 2017 as compared to the prior comparable period. The increase is the combined result of increases in natural gas and crude oil volumes produced and higher natural gas and crude oil prices received during the three month period ended March 31, 2017 as compared to the prior comparable period. The increase in volumes produced is primarily the result of less Company operated properties being voluntarily shut-in during the three month period ended March 31, 2017 as compared to the prior comparable period.

 

Depreciation, depletion and amortization (“DD&A”) decreased $879,000, or 82%, during the three months ended March 31, 2017 as compared to the prior comparable period. The primary reasons for the decrease are less depletable bases of oil and gas properties available to deplete during the three month period ended March 31, 2017 as compared to the prior comparable period and higher projected natural gas and crude oil reserves, the effects of which are offset somewhat by an increase in natural gas and crude oil volumes produced during the three month period ended March 31, 2017 as compared to the prior comparable period. Less depletable bases of oil and gas properties is primarily the result of $26.8 million of DD&A, write down/impairment and abandonment of properties recognized during the fiscal years ended December 31, 2015 and 2016. The increase in projected natural gas and crude oil reserves is primarily the result of higher benchmark natural gas and crude oil prices indexed throughout the first three months of 2017 as compared to the benchmark prices indexed throughout the prior comparable period. The higher 2017 benchmark prices project to increase reserves at December 31, 2017, the next scheduled valuation date, which will in turn project to increase the average economic life of the Company’s oil and gas properties as compared to December 31, 2016, the prior valuation date.

 

 

The Company reported net income of $759,000 during the three months ended March 31, 2017, an increase of $2.5 million as compared to the Company’s reported net loss of $1.8 million during the three months ended March 31, 2016. The increase in net income was primarily the result of an increase in crude oil and natural gas sales and a decrease in DD&A. The Company’s net income represented 32% of total revenues during the three month period ended March 31, 2017, whereas the Company’s net loss represented 234% of total revenues during the three month period ended March 31, 2016.

 

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, 2016.

 

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, 2016, for a more complete understanding of the matters covered by such certifications.

 

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

 

 

Part II.  Other Information

 

Item 6.          EXHIBITS

 

	Exhibit 31.1	Certification of CEO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
	Exhibit 31.2	Certification of CFO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
	Exhibit 32.1	Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
	101.INS	Instance Document
	101.SCH	XBRL Taxonomy Extension Schema Document
	101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
	101.LAB	XBRL Taxonomy Extension Label Linkbase Document
	101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document
	101.DEF	XBRL Taxonomy Definition Linkbase Document

  

 

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: May 10, 2017	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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