EVERFLOW EASTERN PARTNERS LP - FORM 10-Q

Attached files

file	filename
EX-31.2 - EXHIBIT 31.2 - EVERFLOW EASTERN PARTNERS LP	ex31_2.htm
EX-32.1 - EXHIBIT 32.1 - EVERFLOW EASTERN PARTNERS LP	ex32_1.htm
EX-31.1 - EXHIBIT 31.1 - EVERFLOW EASTERN PARTNERS LP	ex31_1.htm

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, 2011

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 o

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 o No o

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 o	Accelerated filer o
Non-accelerated filer o (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 o No x

There were 5,618,867 Units of limited partnership interest of the registrant as of May 10, 2011. 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, 2011.

EVERFLOW EASTERN PARTNERS, L.P.

INDEX

	DESCRIPTION		PAGE NO.

Part I.	Financial Information

	Item 1.	Financial Statements

		Consolidated Balance Sheets March 31, 2011 and December 31, 2010	F-1

		Consolidated Statements of Income Three Months Ended March 31, 2011 and 2010	F-3

		Consolidated Statements of Partners’ Equity Three Months Ended March 31, 2011 and 2010	F-4

		Consolidated Statements of Cash Flows Three Months Ended March 31, 2011 and 2010	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

Index

EVERFLOW EASTERN PARTNERS, L.P.

CONSOLIDATED BALANCE SHEETS

March 31, 2011 and December 31, 2010

	March 31, 2011 (Unaudited)		December 31, 2010 (Audited)
ASSETS

CURRENT ASSETS
Cash and equivalents	$	19,531,821	$	19,661,106
Accounts and notes receivable:
Production		4,335,333		4,435,457
Employees (including notes receivable)		146,300		242,240
Joint venture partners		38,422		36,416
Other		366,655		370,260
Total current assets		24,418,531		24,745,479

PROPERTY AND EQUIPMENT
Proved properties (successful efforts accounting method)		173,456,763		173,134,659
Pipeline and support equipment		573,775		573,775
Corporate and other		2,020,760		2,009,485
		176,051,298		175,717,919

Less accumulated depreciation, depletion, amortization and write down		133,535,240		131,922,795
		42,516,058		43,795,124

OTHER ASSETS
Employees' accounts and notes receivable		389,625		409,230
Other		77,546		77,546
		467,171		486,776

	$	67,401,760	$	69,027,379

See notes to unaudited consolidated financial statements.

F-1

Index

EVERFLOW EASTERN PARTNERS, L.P.

CONSOLIDATED BALANCE SHEETS

March 31, 2011 and December 31, 2010

	March 31, 2011 (Unaudited)		December 31, 2010 (Audited)
LIABILITIES AND PARTNERS' EQUITY

CURRENT LIABILITIES
Accounts payable	$	1,845,976	$	2,772,561
Deferred revenue		1,000,000		1,000,000
Accrued expenses		353,008		886,590
Total current liabilities		3,198,984		4,659,151

DEFERRED INCOME TAXES		272,000		284,000

ASSET RETIREMENT OBLIGATIONS		5,585,640		5,498,740

COMMITMENTS AND CONTINGENCIES		-		-

LIMITED PARTNERS' EQUITY, SUBJECT TO REPURCHASE RIGHT
Authorized - 8,000,000 Units
Issued and outstanding - 5,618,867		57,656,626		57,894,142

GENERAL PARTNER'S EQUITY		688,510		691,346
Total partners' equity		58,345,136		58,585,488

	$	67,401,760	$	69,027,379

See notes to unaudited consolidated financial statements.

F-2

Index

EVERFLOW EASTERN PARTNERS, L.P.

CONSOLIDATED STATEMENTS OF INCOME

Three Months Ended March 31, 2011 and 2010

(Unaudited)

	2011			2010
REVENUES
Oil and gas sales	$	6,165,850		$	9,037,760
Well management and operating		164,309			156,685
Other		1,233			311
		6,331,392			9,194,756

DIRECT COST OF REVENUES
Production costs		1,277,971			1,349,512
Well management and operating		78,923			69,667
Depreciation, depletion and amortization		1,618,014			2,247,680
Accretion expense		84,200			107,500
Total direct cost of revenues		3,059,108			3,774,359

GENERAL AND ADMINISTRATIVE EXPENSE		657,684			712,808
Total cost of revenues		3,716,792			4,487,167

INCOME FROM OPERATIONS		2,614,600			4,707,589

OTHER INCOME
Interest income		18,848			22,434
Gain on sale of property and equipment		2,183			-
		21,031			22,434

INCOME BEFORE INCOME TAXES		2,635,631			4,730,023

INCOME TAX EXPENSE (BENEFIT)
Current		45,000			60,000
Deferred		(12,000	)		(9,000	)
		33,000			51,000

NET INCOME	$	2,602,631		$	4,679,023

Allocation of Partnership Net Income
Limited Partners	$	2,571,918		$	4,623,837
General Partner		30,713			55,186

	$	2,602,631		$	4,679,023

Net income per Unit	$	0.46		$	0.82

See notes to unaudited consolidated financial statements.

F-3

Index

EVERFLOW EASTERN PARTNERS, L.P.

CONSOLIDATED STATEMENTS OF PARTNERS' EQUITY

Three Months Ended March 31, 2011 and 2010

(Unaudited)

	2011			2010

PARTNERS' EQUITY - JANUARY 1	$	58,585,488		$	62,573,175

Net income		2,602,631			4,679,023

Cash distributions ($0.50 per unit in 2011 and 2010)		(2,842,983	)		(2,844,475	)

PARTNERS' EQUITY - MARCH 31	$	58,345,136		$	64,407,723

See notes to unaudited consolidated financial statements.

F-4

Index

EVERFLOW EASTERN PARTNERS, L.P.

CONSOLIDATED STATEMENTS OF CASH FLOWS

Three Months Ended March 31, 2011 and 2010

(Unaudited)

	2011			2010
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	2,602,631		$	4,679,023
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, depletion and amortization		1,638,714			2,267,880
Accretion expense		84,200			107,500
Gain on sale of property and equipment		(2,183	)		-
Deferred income taxes		(12,000	)		(9,000	)
Changes in assets and liabilities:
Accounts receivable		98,118			(873,974	)
Other current assets		3,605			(425,167	)
Accounts payable		(560,285	)		163,114
Accrued expenses		(533,582	)		(551,622	)
Total adjustments		716,587			678,731
Net cash provided by operating activities		3,319,218			5,357,754

CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds received on receivables from employees		209,961			445,548
Advances disbursed to employees		(94,416	)		(41,176	)
Proceeds from sale of property and equipment		13,000			-
Purchase of property and equipment		(734,065	)		(1,747,953	)
Net cash used by investing activities		(605,520	)		(1,343,581	)

CASH FLOWS FROM FINANCING ACTIVITIES
Distributions		(2,842,983	)		(2,844,475	)
Net cash used by financing activities		(2,842,983	)		(2,844,475	)

NET (DECREASE) INCREASE IN CASH AND EQUIVALENTS		(129,285	)		1,169,698

CASH AND EQUIVALENTS AT BEGINNING OF PERIOD		19,661,106			16,610,772


CASH AND EQUIVALENTS AT END OF PERIOD
	$	19,531,821		$	17,780,470
Supplemental disclosures of cash flow information and non-cash activities:
Cash paid during the period for: income taxes	$	26,625		$	87,081

Additions to proved properties reflect changes in accounts payable (see Note 2) and asset retirement obligations (see Note 1.E).

See notes to unaudited consolidated financial statements.

F-5

Index

EVERFLOW EASTERN PARTNERS, L.P.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Note 1.

Organization and Summary of Significant Accounting Policies

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. 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 29, 2011.

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

F-6

Index

EVERFLOW EASTERN PARTNERS, L.P.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Note 1.

Organization and Summary of Significant Accounting Policies

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 co-managed by an individual who is a director of EEI. EMC is an Ohio corporation formed in September 1990 and is the managing member of EML. EML holds no assets other than its general partner’s interest in Everflow. In addition, EML has no separate operations or role apart from its role as the Company’s general partner.

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.

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.

F-7

Index

EVERFLOW EASTERN PARTNERS, L.P.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Note 1.

Organization and Summary of Significant Accounting Policies

Asset Retirement Obligations (continued)

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

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

The schedule below is a reconciliation of the Company’s liability for the three months ended March 31, 2011 and 2010:

	Asset Retirement Obligations Three Months Ended March 31,

	2011		2010

Beginning of period	$	5,661,740	$	5,379,368
Liabilities incurred		2,700		22,100
Accretion expense		84,200		107,500

End of period	$	5,748,640	$	5,508,968

At March 31, 2011 and December 31, 2010, asset retirement obligations of $5,748,640 and $5,661,740 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 $163,000 at March 31, 2011 and December 31, 2010.

F-8

Index

EVERFLOW EASTERN PARTNERS, L.P.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Note 1.

Organization and Summary of Significant Accounting Policies

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, 2011 and December 31, 2010. Other revenue is recognized at the time services are rendered, the Company has a contractual right to such revenue and collection is reasonably assured.

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

Each owner, including the Company, has an undivided interest in the jointly owned properties. Generally, the joint venture partners and employees participate on the same drilling/development cost basis as the Company and, therefore, no revenue, expense or income is recognized on the drilling and development of the properties. Accounts and notes receivable from joint venture partners and employees consist principally of drilling and development costs the Company has advanced or incurred on behalf of joint venture partners and employees (see Note 7). 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.

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.

F-9

Index

EVERFLOW EASTERN PARTNERS, L.P.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Note 1.

Organization and Summary of Significant Accounting Policies

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) and select officers and employees electing to exercise options.

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 5,618,867 and 5,621,851 for the three months ended March 31, 2011 and 2010, respectively.

Subsequent Events - Everflow paid a cash distribution in April 2011 of $0.50 per Unit. The distribution amounted to approximately $2,843,000.

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

F-10

Index

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, 2011 and December 31, 2010:

	March 31, 2011		December 31, 2010

Accounts Payable:
Production and related other	$	1,289,366	$	1,281,624
Other		365,361		342,961
Joint venture partners		177,249		767,676
Drilling		14,000		380,300
	$	1,845,976	$	2,772,561

Accrued Expenses:
Current portion of asset retirement obligations	$	163,000	$	163,000
Payroll and retirement plan contributions		95,008		645,233
Federal, state and local taxes		95,000		78,357
	$	353,008	$	886,590

The Company received a $1 million deposit (the “Deposit”) related to the Disposition described in Note 6. The Deposit is recognized as deferred revenue in the Company’s consolidated balance sheets at March 31, 2011 and December 31, 2010.

Note 3.

Credit Facilities and Long-Term Debt

The Company had a revolving line of credit that expired in 2003, and 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 the annual Repurchase Right (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.

F-11

Index

EVERFLOW EASTERN PARTNERS, L.P.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Note 4.

Partners’ Equity

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

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

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, 2010 calculation, is $8.23 per Unit, net of the distributions made in January 2011 ($0.50 per Unit) and April 2011 ($0.50 per Unit).

F-12

Index

EVERFLOW EASTERN PARTNERS, L.P.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Note 4.

Partners’ Equity (continued)

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

	Per Unit
Year	Calculated Price for Repurchase Right		Less Interim Distributions		Net Price Paid		# of Units Repurchased		Units Outstanding Following Repurchase


2008	$	17.75	$	1.50	$	16.25		18,975		5,624,293
2009	$	12.57	$	1.50	$	11.07		2,442		5,621,851
2010	$	7.86	$	1.00	$	6.86		5,968		5,615,883

At June 30, 2010, the Company granted a total of 2,984 options to two officers and one employee, of which all were exercised on the same date. There were 5,618,867 Units outstanding on June 30, 2010 after the exercise of these options.

There were no instruments outstanding at March 31, 2011 or 2010 that would potentially dilute net income per Unit.

Note 5.

Gas Purchase Agreements

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 2012. The agreements with Dominion provide for fixed pricing with current monthly weighted average pricing provisions ranging from $5.37 to $6.70 per MCF. The Company also has two annual contracts with Interstate Gas Supply, Inc. (“IGS”), which obligate IGS to purchase and the Company to sell and deliver certain quantities of natural gas production on a monthly basis through October 2012. The agreements with IGS provide for fixed pricing with current monthly weighted average pricing provisions ranging from $5.23 to $6.88 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 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. The Company entered into no new contracts with Dominion or IGS during the three months ended March 31, 2011.

F-13

Index

EVERFLOW EASTERN PARTNERS, L.P.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Note 6.

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 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 at which the Company is able to purchase the gas for redelivery (resale) to its customers.

In November 2010, the Company agreed to sell their deep rights in certain Ohio properties for cash consideration net to the Company not expected to exceed $35 million, subject to acreage and closing adjustments (the "Disposition"). The Disposition includes no producing reserves, and the Company will retain the rights to the shallow portion of the acreage subject to the agreement. The Company anticipates closing the Disposition during the second half of 2011, subject to fulfillment of closing conditions, though there can be no assurance that all of the conditions to closing the Disposition will be satisfied and that the transaction will actually be consumated. The Company received a $1 million deposit from the purchaser (the "Deposit") that is to be credited to the purchaser upon closing of the Disposition. The Deposit is recognized as deferred revenue in the Company's consolidated balance sheets at March 31, 2011 and December 31, 2010.

F-14

Index

EVERFLOW EASTERN PARTNERS, L.P.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Note 7.

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 March 31, 2011.

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, 2011 and December 31, 2010, the Company has extended various loans, evidenced by notes, to two employees with origination dates ranging from December 2007 to December 2010. 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 2011), amounted to $535,925 and $651,470 at March 31, 2011 and December 31, 2010, respectively.

In January 2010, one employee settled his entire loan balance in full by selling working interests in well properties he owned to the Company for a total purchase price of $270,000 and by paying cash of $141,700.

F-15

Index

Part I: Financial Information

Item 2.

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

Liquidity and Capital Resources

The following table summarizes the Company's financial position at March 31, 2011 and December 31, 2010:

	March 31, 2011					December 31, 2010
	Amount		%			Amount		%
	(Amounts in Thousands)					(Amounts in Thousands)

Working capital	$	21,220		33	%	$	20,086		31	%
Property and equipment (net)		42,516		66			43,795		68
Other		467		1			487		1
Total	$	64,203		100	%	$	64,368		100	%

Deferred income taxes	$	272		-	%	$	284		-	%
Long-term liabilities		5,586		9			5,499		9
Partners' equity		58,345		91			58,585		91
Total	$	64,203		100	%	$	64,368		100	%

Working capital of $21.2 million as of March 31, 2011 represented an increase of $1.1 million from December 31, 2010, due primarily to decreases in accounts payable and accrued expenses. The decrease in accounts payable was primarily the result of lesser payables associated with joint venture partners and drilling costs. The decrease in accrued expenses was primarily the result of less payroll and retirement plan contributions accrued. The effect of the decreases in accounts payable and accrued expenses was offset somewhat by decreases to cash and equivalents and accounts and notes receivable from production and employees. The decrease in cash and equivalents was primarily the result of cash used for distributions and purchase of property and equipment exceeding cash provided by operating activities. The decrease in accounts receivable from production is primarily the result of a decrease in natural gas volumes produced, offset somewhat by increases in crude oil volumes produced and crude oil prices. The decrease in accounts and notes receivable from employees is primarily the result of proceeds received from employees exceeding advances disbursed to employees for their participation in the drilling and development of wells in which the Company has an interest.

Index

The Company funds its operation with cash generated by operations and existing cash and equivalent balances. The Company has had no borrowings since 2003 and no principal indebtedness was outstanding as of May 10, 2011. The Company anticipates, although there is no assurance it will be able to, entering into a new credit agreement for the purpose, if necessary, of funding future annual repurchase rights. The Company has no current alternate financing plan, nor does it anticipate that one will be necessary. The Company used cash on hand to fund the payment of a distribution amounting to approximately $2.8 million in April 2011.

The Company’s cash flow from operations before the change in working capital was $4.3 million, a decrease of $2.7 million, or 39%, during the three months ended March 31, 2011, as compared to the same period in 2010. Changes in working capital from operations other than cash and cash equivalents decreased cash by $1.0 million during the three months ended March 31, 2011, due primarily to decreases in accounts payable and accrued expenses. These effects were offset somewhat by an increase in accounts receivable.

Cash flows provided by operating activities was $3.3 million for the three months ended March 31, 2011. Cash was primarily used in investing and financing activities to purchase property and equipment and pay a quarterly distribution.

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

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 2012. The agreements with Dominion provide for fixed pricing with current monthly weighted average pricing provisions ranging from $5.37 to $6.70 per MCF. The Company also has two 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 2012. The agreements with IGS provide for fixed pricing with current monthly weighted average pricing provisions ranging from $5.23 to $6.88 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 three months ended March 31, 2011.

Index

Results of Operations

The following table and discussion is a review of the results of operations of the Company for the three months ended March 31, 2011 and 2010. 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,
	2011			2010

Revenues:
Oil and gas sales		97	%		98	%
Well management and operating		3			2
Total Revenues		100	%		100	%

Expenses:
Production costs		20	%		15	%
Well management and operating		1			1
Depreciation, depletion and amortization		26			24
Accretion		1			1
General and administrative		10			8
Income tax		1			-
Total Expenses		59	%		49	%

Net income		41	%		51	%

Revenues for the three months ended March 31, 2011 decreased $2.9 million, or 31%, compared to the same period in 2010. This decrease was primarily due to a decrease in oil and gas sales during the first three months of 2011, as compared to the same period in 2010.

Oil and gas sales decreased $2.9 million, or 32%, during the three months ended March 31, 2011 compared to the same period in 2010. Lower natural gas prices and lesser natural gas volumes produced during the first quarter of 2011 were primarily responsible for this decrease as compared to the same period in 2010. The effect of the lower natural gas prices and lesser natural gas volumes produced was offset somewhat by higher crude oil prices received during the first quarter of 2011 as compared to the same period in 2010.

Production costs decreased $72,000, or 5%, during the three months ended March 31, 2011 compared to the same period in 2010. The primary reason for this decrease was due to lesser costs charged by third party operators in association with their operations of oil and gas properties of which the Company participates as a joint venture partner.

Index

Depreciation, depletion and amortization decreased $630,000, or 28%, during the three months ended March 31, 2011 compared to the same period in 2010. The primary reasons for this decrease are the result of higher oil and gas reserves and lesser natural gas volumes produced during the first quarter of 2011 as compared to the same period in 2010. The increase in oil and gas reserves was primarily the result of higher crude oil and natural gas prices at December 31, 2010, the most recent valuation date, which increased the average economic life of the Company’s wells as compared to December 31, 2009, the prior valuation date.

Accretion expense decreased $23,000, or 22%, during the three months ended March 31, 2011 compared to the same period in 2010. This decrease was primarily due to many liabilities on certain properties being fully accreted as of December 31, 2010.

General and administrative expenses decreased $55,000, or 8%, during the three months ended March 31, 2011 compared to the same period in 2010. The primary reason for this decrease is due to lesser miscellaneous overhead expenses associated with ongoing administration.

Income tax expenses decreased $18,000, or 35%, during the three months ended March 31, 2011 compared to the same period in 2010. The primary reason for this decrease is due to lesser income taxes projected due for the current period.

The Company reported net income of $2.6 million, a decrease of $2.1 million, or 44%, during the three months ended March 31, 2011 compared to the same period in 2010. The decrease in oil and gas sales was primarily responsible for this decrease in net income. Net income represented 41% and 51% of total revenue during the three months ended March 31, 2011 and 2010, respectively.

Critical Accounting Policies

The preparation of financial statements in conformity with generally accepted accounting principles 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, 2010.

Forward-Looking Statements

Except for historical financial information contained in this Form 10-Q, the statements made in this report are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (“Exchange Act”). In addition, words such as “expects,” “anticipate,” “intends,” “plans,” “believes,” “estimates,” variations of such words and similar expressions are intended to identify forward-looking statements. Factors that may cause actual results to differ materially from those in the forward-looking statements include price fluctuations in the gas market in the Appalachian Basin, actual oil and gas production and the weather in the Northeast Ohio area and the ability to locate economically productive oil and gas prospects for development by the Company. In addition, any forward-looking statements speak only as of the date on which such statement is made and the Company does not undertake any obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise.

Index

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, 2010, 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.

Index

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

Index

SIGNATURE

Pursuant to the requirement 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


May 13, 2011	By:	/s/ Brian A. Staebler
		Brian A. Staebler
		Vice President, Secretary-Treasurer and Principal Financial and Accounting Officer
		(Duly Authorized Officer)

EVERFLOW EASTERN PARTNERS LP - FORM 10-Q - May 13, 2011

Attached files

EVERFLOW EASTERN PARTNERS LP Reports