Part I. Financial Information

 

Item 1. Financial Statements

 

 

 

 

 

 

 

 

 

 

 

 

 

CURRENT ASSETS

Cash and equivalents

Accounts and notes receivable:

Production

Employees (including notes receivable)

Joint venture partners

Other

 

Total current assets

 

PROPERTY AND EQUIPMENT

Proved properties (successful efforts accounting method)

Pipeline and support equipment

Corporate and other

 

 

 

Less accumulated depreciation, depletion, amortization and write down

 

 

 

OTHER ASSETS

 

 

 

 

 

CURRENT LIABILITIES

Accounts payable

Accrued expenses

 

Total current liabilities

 

DEFERRED INCOME TAXES

 

ASSET RETIREMENT OBLIGATIONS

 

COMMITMENTS AND CONTINGENCIES

 

LIMITED PARTNERS’ EQUITY, SUBJECT TO REPURCHASE RIGHT

Authorized — 8,000,000 Units

Issued and outstanding — 5,621,851 and 5,624,293 Units, respectively

 

GENERAL PARTNER’S EQUITY

 

Total partners’ equity

 

 

 

 

REVENUES

Oil and gas sales

Well management and operating

Other

 

 

 

DIRECT COST OF REVENUES

Production costs

Well management and operating

Depreciation, depletion and amortization

Accretion expense

 

Total direct cost of revenues

 

GENERAL AND ADMINISTRATIVE EXPENSE

 

Total cost of revenues

 

 

INCOME FROM OPERATIONS

 

OTHER INCOME

Interest income

Gain on sale of property and equipment

 

 

 

 

INCOME BEFORE INCOME TAXES

 

INCOME TAX EXPENSE (BENEFIT)

Current

Deferred

 

 

 

 

NET INCOME

 

 

Allocation of Partnership Net Income

Limited Partners

General Partner

 

 

 

 

 

Net income per unit

 

 

PARTNERS’ EQUITY — JANUARY 1

 

Net income

 

Cash distributions ($2.50 per unit in 2009 and 2008)

 

Repurchase Right — Units tendered

 

 

PARTNERS’ EQUITY — SEPTEMBER 30

 

CASH FLOWS FROM OPERATING ACTIVITIES

Net income

Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation, depletion and amortization

Accretion expense

Gain on sale of property and equipment

Investment earnings

Deferred income taxes

Changes in assets and liabilities:

Accounts receivable

Other current assets

Accounts payable

Accrued expenses

 

Total adjustments

 

Net cash provided by operating activities

 

CASH FLOWS FROM INVESTING ACTIVITIES

Proceeds received on receivables from employees

Advances disbursed to employees

Proceeds on sale of investments

Purchase of property and equipment

Proceeds on disposal of property and equipment

 

Net cash used by investing activities

 

CASH FLOWS FROM FINANCING ACTIVITIES

Distributions

Repurchase of units

 

Net cash used by financing activities

 

 

NET INCREASE IN CASH AND EQUIVALENTS

 

CASH AND EQUIVALENTS AT BEGINNING OF PERIOD

 

 

CASH AND EQUIVALENTS AT END OF PERIOD

 

 

Supplemental disclosures of cash flow information and non-cash activities:

Cash paid during the period for:

Income taxes

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 generally accepted accounting principles for interim financial information and with the instructions to Form 10Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the disclosures normally required by accounting principles generally accepted in the United States of America, or those normally made in an Annual Report on Form 10-K. 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, 2009.

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

Use of Estimates — The preparation of financial statements in conformity with generally accepted accounting principles (“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. The Company’s financial statements are based on a number of significant estimates, including oil and gas reserve quantities which are utilized in the calculation of depreciation, depletion and impairment of oil and gas properties, and impact the timing and costs associated with its asset retirement obligations.

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”).

Organization (Continued)

Everflow Management Limited, LLC, an Ohio limited liability company, is the general partner of Everflow and, as such, is authorized to perform all acts necessary or desirable to carry out the purposes and conduct of the business of Everflow. The members of Everflow Management Limited, LLC are Everflow Management Corporation (“EMC”), two individuals who are Officers and Directors of EEI and employees of Everflow, two individuals who are employees of Everflow, and Sykes Associates, LLC, a limited liability company managed by Robert F. Sykes, the Chairman of the Board of EEI. EMC is an Ohio corporation formed in September 1990 and is the managing member of Everflow Management Limited, LLC.

Principles of Consolidation — The consolidated financial statements include the accounts of Everflow, its wholly-owned subsidiaries, including EEI and EEI’s wholly owned subsidiaries, and investments in oil and gas drilling and income partnerships (collectively, “the Company”) which are accounted for under the proportional consolidation method. All significant accounts and transactions between the consolidated entities have been eliminated.

Asset Retirement Obligations — Generally accepted accounting principles require 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, 2008, the Company made significant revisions in estimates of plugging costs, discount rate, and remaining lives of wells.

Asset Retirement Obligations (Continued)

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

The schedule below is a reconciliation of the Company’s liability for the nine months ended September 30, 2009 and 2008:

 

Beginning of period

Liabilities incurred

Liabilities settled

Accretion expense

Revisions in estimated cash flows

 

 

End of period

 

At September 30, 2009 and December 31, 2008, asset retirement obligations of $5,056,065 and $4,767,665 are included in accrued expenses (current portion) and asset retirement obligations (non-current portion) in the Company’s consolidated balance sheets. The current portion of the asset retirement obligations was $1,200,000 at September 30, 2009 and December 31, 2008.

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 collectibility of the revenue is reasonably assured. The Company utilizes the sales method to account for gas production volume imbalances. Under this method, revenue is recognized only when gas is produced and sold on the Company’s behalf. The Company had no material gas imbalances at September 30, 2009 and December 31, 2008. Other revenue is recognized at the time services are rendered, the Company has a contractual right to such revenue and collection is reasonably assured.

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

Each owner, including the Company, has an undivided interest in the jointly owned property(ies). 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 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 7). Accounts payable to joint venture partners consist principally of drilling and development advances the Company has received on behalf of joint venture partners. 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.

Allocation of Income and Per Unit Data — Under the terms of the limited partnership agreement, initially, 99% of revenues and costs were allocated to the Unitholders (the limited partners) and 1% of revenues and costs were allocated to the General Partner. Such allocation has changed and will change in the future due to Unitholders electing to exercise the Repurchase Right (see Note 4).

Allocation of Income and Per Unit Data (Continued)

Earnings per limited partner Unit have been computed based on the weighted average number of Units outstanding, during the period for each period presented. Average outstanding Units for earnings per limited partner Unit calculations amounted to 5,621,851 and 5,623,479 for the three and nine months ended September 30, 2009, respectively and 5,624,293 and 5,636,943 for the three and nine months ended September 30, 2008 respectively.

Fair Value of Financial Instruments — Effective January 1, 2008, the Company adopted a new accounting standard related to fair value measurements, which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. The adoption of this standard did not have a material impact on the Company’s financial statements. Reference the Company’s annual report on Form 10-K for the year ended December 31, 2008 for further information regarding the adoption of this standard.

Subsequent Events — Effective April 1, 2009, the Company adopted a new accounting standard related to subsequent events, which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued. The Company evaluated subsequent events through November 10, 2009.

Everflow paid a quarterly dividend in October 2009 of $.50 per Unit to Unitholders of record on September 30, 2009. The distribution amounted to approximately $2,844,000.

New Accounting Standards — In December 2008, the SEC unanimously approved amendments to revise its oil and gas reserves estimation and disclosure requirements. The amendments, among other things:

allows the use of new technologies to determine proved reserves;

permits the optional disclosure of probable and possible reserves;

modifies the prices used to estimate reserves for SEC disclosure purposes to a 12-month average price instead of a period-end price; and

New Accounting Standards (Continued)

requires that if a third party is primarily responsible for preparing or auditing the reserve estimates, the company make disclosures relating to the independence and qualifications of the third party, including filing as an exhibit any report received from the third party.

The Company intends to begin complying with the disclosure requirements in our annual report on Form 10-K for the year ending December 31, 2009. The new rules may not be applied to disclosures in quarterly reports prior to the first annual report in which the revised disclosures are required. The Company is currently in the process of evaluating the new requirements.

Effective April 1, 2009, the Company adopted a new accounting standard on “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions that are Not Orderly,” which provides additional guidance for estimating fair value in accordance with existing GAAP when the volume and level of activity for the asset or liability have significantly decreased. It also includes guidance on identifying circumstances that indicate a transaction is not orderly. Adoption of this standard did not have a material impact on the Company’s financial statements.

Effective April 1, 2009, the Company adopted a new accounting standard on “Interim Disclosures about Fair Value of Financial Instruments,” which requires disclosures about the fair value of financial instruments on an interim basis in addition to the annual disclosure requirements. Adoption of this standard did not have a material impact on the Company’s financial statements.

Effective July 1, 2009, the Company adopted a new accounting standard on “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles,” which established the Financial Accounting Standards Board Accounting Standards Codification as the single source of authoritative accounting principles in the preparation of financial statements in conformity with GAAP. This standard also explicitly recognized rules and interpretive releases of the SEC under federal securities laws as authoritative GAAP for SEC registrants. Adoption of this standard did not have a material impact on the Company’s financial statements.

New Accounting Standards (Continued)

Effective upon its issuance in September 2009, the Company adopted an accounting standards update on “Extractive Activities — Oil and Gas”. This accounting standards update represents a technical correction to an existing SEC Observer comment regarding “Accounting for Gas-Balancing Arrangements”. The adoption of this accounting standards update did not have a material impact on the Company’s 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 operations.

The Company’s current liabilities consist of the following at September 30, 2009 and December 31, 2008:

 

Accounts Payable:

Production and related other

Other

Drilling

 

 

 

 

Accrued Expenses:

Current portion of asset retirement obligations

Payroll and retirement plan contributions

Federal, state and local taxes

 

 

 

The Company had a revolving line of credit that expired in May 2003. The Company has had no borrowings since that time. The Company anticipates entering into a commitment for a new line of credit agreement in the event funds are needed for the purpose of funding future annual repurchase rights (see Note 4). The new line of credit would be utilized in the event the Company receives tenders pursuant to the repurchase right in excess of cash on hand. The Company would be exposed to market risk from changes in interest rates if it funds its future operations through long-term or short-term borrowings.

Units represent limited partnership interests in Everflow. The Units are transferable subject only to the approval of any transfer by Everflow Management Limited, LLC and to the laws governing the transfer of securities. The Units are not listed for trading on any securities exchange nor are they quoted in the automated quotation system of a registered securities association. However, Unitholders have an opportunity to require Everflow to repurchase their Units pursuant to the Repurchase Right.

Under the terms of the limited partnership agreement, initially, 99% of revenues and costs were allocated to the Unitholders (the limited partners) and 1% of revenues and costs were allocated to the General Partner. Such allocation has changed and will change in the future due to Unitholders electing to exercise the Repurchase Right.

The partnership agreement provides that Everflow will repurchase for cash up to 10% of the then outstanding Units, to the extent Unitholders offer Units to Everflow for repurchase pursuant to the Repurchase Right. The Repurchase Right entitles any Unitholder, between May 1 and June 30 of each year, to notify Everflow that 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 all Interim Cash Distributions received by a Unitholder. The adjusted book value is calculated by adding partners’ equity, the Standardized Measure of Discounted Future Net Cash Flows and the tax effect included in the Standardized Measure and subtracting from that sum the carrying value of oil and gas properties (net of undeveloped lease costs). If more than 10% of the then outstanding Units are tendered during any period during which the Repurchase Right is to be effective, the Investors’ Units tendered shall be prorated for purposes of calculating the actual number of Units to be acquired during any such period. The price associated with the Repurchase Right, based upon the December 31, 2008 calculation, was $11.07 per Unit, net of the distributions ($1.50 per Unit in total) made in January and April 2009. The repurchase of Units in the amount of $27,033 was paid in July 2009.

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

 

2005

2006

2007

2008

2009

There were no instruments outstanding at September 30, 2009 or September 30, 2008 that would potentially dilute net income per Unit.

The Company has numerous annual contracts with Dominion Field Services, Inc. and its affiliates (“Dominion”), which obligate Dominion to purchase, and the Company to sell and deliver certain quantities of natural gas production on a monthly basis through October 2011. The agreements with Dominion provide for fixed pricing with current monthly weighted average pricing provisions ranging from $7.95 to $9.75 per MCF. The Company also has three annual contracts with Interstate Gas Supply, Inc. (“IGS”), which obligates IGS to purchase, and the Company to sell and deliver certain quantities of natural gas production on a monthly basis through October 2011. The agreements with IGS provide for fixed pricing with current monthly weighted average pricing provisions ranging from $8.05 to $9.49 per MCF. Fixed pricing with both Dominion and IGS applies to certain fixed quantities on a monthly basis with excess monthly quantities being priced based on the current spot market price. The impact on the Company cannot fully be measured until actual production volumes and prices are determined. The Company entered into no new contracts with Dominion or IGS during the nine months ended September 30, 2009.

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

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 interest 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 (3.25% at September 30, 2009). In accordance with the Sarbanes-Oxley Act of 2002, the Company has not extended any loans to officers or directors since 2002. At September 30, 2009 and December 31, 2008, the Company has extended various loans, evidenced by notes, to three employees, with origination dates ranging from December 2007 to December 2008. There have been no subsequent extensions or modifications to any of these notes since their original date of issuance. Employee receivables, including the notes, accrued interest and additional amounts loaned during the current period (which will be termed in December 2009), amounted to $971,408 and $1,045,515 at September 30, 2009 and December 31, 2008 respectively.

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

 

Working capital

Property and equipment (net)

Other

 

Total

 

 

Deferred income taxes

Long-term liabilities

Partners’ equity

 

Total

 

 

Revenues:

Oil and gas sales

Well management and operating

 

Total Revenues

 

Expenses:

Production costs

Well management and operating

Depreciation, depletion and amortization

Accretion expense

General and administrative

Interest

Income taxes

 

Total Expenses

 

 

Net income

 

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

CONTROLS AND PROCEDURES

EXHIBITS

Certification of CEO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

Certification of CFO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002