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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the quarterly period ended March 31, 2012

OR

 

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

For the transition period from             to             .

Commission File Number 0-19279

 

 

EVERFLOW EASTERN PARTNERS, L.P.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   34-1659910

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

585 West Main Street

P.O. Box 629

Canfield, Ohio

 

44406

(Address of principal executive offices)   (Zip Code)

(330) 533-2692

Registrant’s telephone number, including area code:

 

 

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this Chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

There were 5,616,422 Units of limited partnership interest of the registrant as of May 10, 2012. 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, 2012.

 

 

 


Table of Contents

EVERFLOW EASTERN PARTNERS, L.P.

INDEX

 

         

DESCRIPTION

   PAGE NO.  

Part I.

 

Financial Information

  
 

Item 1.

 

Financial Statements

  
   

Consolidated Balance Sheets March 31, 2012 and December 31, 2011

     F-1   
   

Consolidated Statements of Income Three Months Ended March 31, 2012 and 2011

     F-3   
   

Consolidated Statements of Partners’ Equity Three Months Ended March 31, 2012 and 2011

     F-4   
   

Consolidated Statements of Cash Flows Three Months Ended March 31, 2012 and 2011

     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

     8   
 

Item 4.

 

Controls and Procedures

     8   

Part II.

 

Other Information

  
 

Item 6.

 

Exhibits

     9   
   

Signature

     10   

 

2


Table of Contents

EVERFLOW EASTERN PARTNERS, L.P.

CONSOLIDATED BALANCE SHEETS

March 31, 2012 and December 31, 2011

 

    

March 31,

2012

     December 31,
2011
 
     (Unaudited)      (Audited)  

ASSETS

     

CURRENT ASSETS

     

Cash and equivalents

   $ 60,949,869       $ 21,257,450   

Accounts and notes receivable:

     

Production

     2,317,235         3,301,508   

Employees (including notes receivable)

     121,821         120,226   

Joint venture partners

     27,166         39,548   

Other

     133,312         126,531   
  

 

 

    

 

 

 

Total current assets

     63,549,403         24,845,263   

PROPERTY AND EQUIPMENT

     

Proved properties (successful efforts accounting method)

     174,440,364         174,450,678   

Pipeline and support equipment

     654,273         654,273   

Corporate and other

     2,020,760         2,020,760   
  

 

 

    

 

 

 
     177,115,397         177,125,711   

Less accumulated depreciation, depletion, amortization and write down

     137,481,656         136,224,821   
  

 

 

    

 

 

 
     39,633,741         40,900,890   

OTHER ASSETS

     

Employees’ accounts and notes receivable

     298,039         327,600   

Other

     77,546         77,546   
  

 

 

    

 

 

 
     375,585         405,146   
  

 

 

    

 

 

 
   $ 103,558,729       $ 66,151,299   
  

 

 

    

 

 

 

See notes to unaudited consolidated financial statements.

 

F-1


Table of Contents

EVERFLOW EASTERN PARTNERS, L.P.

CONSOLIDATED BALANCE SHEETS

March 31, 2012 and December 31, 2011

 

    

March 31,

2012

     December 31,
2011
 
     (Unaudited)      (Audited)  

LIABILITIES AND PARTNERS’ EQUITY

     

CURRENT LIABILITIES

     

Accounts payable

   $ 6,469,518       $ 1,886,138   

Accrued expenses

     4,505,153         1,023,197   

Deferred revenue

     2,690,682         1,000,000   
  

 

 

    

 

 

 

Total current liabilities

     13,665,353         3,909,335   

JOINT VENTURE PARTNER ADVANCES

     186,960         —     

DEFERRED INCOME TAXES

     254,000         259,000   

ASSET RETIREMENT OBLIGATIONS

     5,934,867         5,823,467   

COMMITMENTS AND CONTINGENCIES

     —           —     

LIMITED PARTNERS’ EQUITY, SUBJECT TO REPURCHASE RIGHT

     

Authorized—8,000,000 Units

     

Issued and outstanding—5,616,422

     82,531,565         55,496,494   

GENERAL PARTNER’S EQUITY

     985,984         663,003   
  

 

 

    

 

 

 

Total partners’ equity

     83,517,549         56,159,497   
  

 

 

    

 

 

 
   $ 103,558,729       $ 66,151,299   
  

 

 

    

 

 

 

See notes to unaudited consolidated financial statements.

 

F-2


Table of Contents

EVERFLOW EASTERN PARTNERS, L.P.

CONSOLIDATED STATEMENTS OF INCOME

Three Months Ended March 31, 2012 and 2011

(Unaudited)

 

     2012     2011  

REVENUES

    

Oil and gas sales

   $ 4,695,858      $ 6,165,850   

Well management and operating

     156,133        164,309   

Other

     3,428        1,233   
  

 

 

   

 

 

 
     4,855,419        6,331,392   

DIRECT COST OF REVENUES

    

Production costs

     1,185,266        1,277,971   

Well management and operating

     79,011        78,923   

Depreciation, depletion and amortization

     1,236,845        1,618,014   

Accretion expense

     111,400        84,200   
  

 

 

   

 

 

 

Total direct cost of revenues

     2,612,522        3,059,108   

GENERAL AND ADMINISTRATIVE EXPENSE

     776,128        657,684   
  

 

 

   

 

 

 

Total cost of revenues

     3,388,650        3,716,792   
  

 

 

   

 

 

 

INCOME FROM OPERATIONS BEFORE GAIN ON SALE OF DEEP RIGHTS

     1,466,769        2,614,600   

GAIN ON SALE OF DEEP RIGHTS

     32,060,532        —     
  

 

 

   

 

 

 

INCOME FROM OPERATIONS

     33,527,301        2,614,600   

OTHER INCOME

    

Interest income

     29,511        18,848   

Gain on sale of property and equipment

     —          2,183   
  

 

 

   

 

 

 
     29,511        21,031   
  

 

 

   

 

 

 

INCOME BEFORE INCOME TAXES

     33,556,812        2,635,631   

INCOME TAX EXPENSE (BENEFIT)

    

Current

     3,362,000        45,000   

Deferred

     (5,000     (12,000
  

 

 

   

 

 

 
     3,357,000        33,000   
  

 

 

   

 

 

 

NET INCOME

   $ 30,199,812      $ 2,602,631   
  

 

 

   

 

 

 

Allocation of Partnership Net Income

    

Limited Partners

   $ 29,843,282      $ 2,571,918   

General Partner

     356,530        30,713   
  

 

 

   

 

 

 
   $ 30,199,812      $ 2,602,631   
  

 

 

   

 

 

 

Net income per Unit

   $ 5.31      $ 0.46   
  

 

 

   

 

 

 

See notes to unaudited consolidated financial statements.

 

F-3


Table of Contents

EVERFLOW EASTERN PARTNERS, L.P.

CONSOLIDATED STATEMENTS OF PARTNERS’ EQUITY

Three Months Ended March 31, 2012 and 2011

(Unaudited)

 

     2012     2011  

PARTNERS’ EQUITY—JANUARY 1

   $ 56,159,497      $ 58,585,488   

Net income

     30,199,812        2,602,631   

Cash distributions ($0.50 per unit in 2012 and 2011)

     (2,841,760     (2,842,983
  

 

 

   

 

 

 

PARTNERS’ EQUITY—MARCH 31

   $ 83,517,549      $ 58,345,136   
  

 

 

   

 

 

 

See notes to unaudited consolidated financial statements.

 

F-4


Table of Contents

EVERFLOW EASTERN PARTNERS, L.P.

CONSOLIDATED STATEMENTS OF CASH FLOWS

Three Months Ended March 31, 2012 and 2011

(Unaudited)

 

     2012     2011  

CASH FLOWS FROM OPERATING ACTIVITIES

    

Net income

   $ 30,199,812      $ 2,602,631   

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

    

Depreciation, depletion and amortization

     1,257,745        1,638,714   

Accretion expense

     111,400        84,200   

Gain on sale of deep rights

     (32,060,532     —     

Gain on sale of property and equipment

     —          (2,183

Deferred income taxes

     (5,000     (12,000

Changes in assets and liabilities:

    

Accounts receivable

     996,655        98,118   

Other current assets

     (6,781     3,605   

Accounts payable

     4,639,180        (560,285

Joint venture partner advances

     186,960        —     

Accrued expenses

     2,816,956        (533,582
  

 

 

   

 

 

 

Total adjustments

     (22,063,417     716,587   
  

 

 

   

 

 

 

Net cash provided by operating activities

     8,136,395        3,319,218   

CASH FLOWS FROM INVESTING ACTIVITIES

    

Proceeds received on receivables from employees

     34,425        209,961   

Advances disbursed to employees

     (6,459     (94,416

Proceeds from deferred revenue

     2,690,682        —     

Proceeds from sale of deep rights and property and equipment

     31,858,623        13,000   

Purchase of property and equipment

     (179,487     (734,065
  

 

 

   

 

 

 

Net cash provided (used) by investing activities

     34,397,784        (605,520

CASH FLOWS FROM FINANCING ACTIVITIES

    

Distributions

     (2,841,760     (2,842,983
  

 

 

   

 

 

 

Net cash used by financing activities

     (2,841,760     (2,842,983
  

 

 

   

 

 

 

NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS

     39,692,419        (129,285

CASH AND EQUIVALENTS AT BEGINNING OF PERIOD

     21,257,450        19,661,106   
  

 

 

   

 

 

 

CASH AND EQUIVALENTS AT END OF PERIOD

   $ 60,949,869      $ 19,531,821   
  

 

 

   

 

 

 

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

    

Cash paid during the period for:

    

Income taxes

   $ 73,635      $ 26,625   

Additions to proved properties reflect changes in accounts payable (see Note 2) and asset retirement obligations (see Note 1.F). Gain on sale of deep rights reflects changes in accrued expenses (see Note 2).

See notes to unaudited consolidated financial statements.

 

F-5


Table of Contents

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. 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, 2012.

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.

 

F-6


Table of Contents

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 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.

 

  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. Cash and equivalents include $186,960 of joint venture partner advances at March 31, 2012, 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-7


Table of Contents

EVERFLOW EASTERN PARTNERS, L.P.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

Note 1. Organization and Summary of Significant Accounting Policies

 

  F. Asset Retirement Obligations—GAAP requires the fair value of a liability for an asset retirement obligation to be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. For the Company, these obligations include dismantlement, plugging and abandonment of oil and gas wells and associated pipelines and equipment. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. The liability is accreted to its then present value each period, and the capitalized cost is depleted over the estimated useful life of the related asset.

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

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

The schedule below is a reconciliation of the Company’s liability for the three months ended March 31, 2012 and 2011:

 

      Asset Retirement Obligations
Three Months Ended March 31,
 
     2012      2011  

Beginning of period

   $   6,116,467       $   5,661,740   

Liabilities incurred

     —           2,700   

Accretion expense

     111,400         84,200   
  

 

 

    

 

 

 

End of period

   $ 6,227,867       $ 5,748,640   
  

 

 

    

 

 

 

 

F-8


Table of Contents

EVERFLOW EASTERN PARTNERS, L.P.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

Note 1. Organization and Summary of Significant Accounting Policies

 

  F. Asset Retirement Obligations (continued)

 

At March 31, 2012 and December 31, 2011, asset retirement obligations of $6,227,867 and $6,116,467 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 $293,000 at March 31, 2012 and December 31, 2011.

 

  G. Revenue Recognition—The Company recognizes oil and gas revenues when production is sold to a purchaser at a fixed or determinable price, when delivery has occurred, title and risk of loss have transferred to the purchaser, and collectability of the revenue is reasonably assured. The Company utilizes the sales method to account for gas production volume imbalances. Under this method, revenue is recognized only when gas is produced and sold on the Company’s behalf. The Company had no material gas imbalances at March 31, 2012 and December 31, 2011. 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.

 

  H. Income Taxes—Everflow is not a tax-paying entity and the net taxable income or loss, other than the taxable income or loss allocable to EEI, which is a C corporation owned by Everflow, will be allocated directly to its respective partners. The Company is not able to determine the net difference between the tax bases and the reported amounts of Everflow’s assets and liabilities due to separate elections that were made by owners of the working interests and limited partnership interests that comprised the Programs.

 

F-9


Table of Contents

EVERFLOW EASTERN PARTNERS, L.P.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

Note 1. Organization and Summary of Significant Accounting Policies

 

  H. Income Taxes (continued)

 

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.

 

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

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 5,616,422 and 5,618,867 for the three months ended March 31, 2012 and 2011, respectively.

 

  J. Subsequent Events—Everflow paid a cash distribution in April 2012 of $0.38 per Unit. The distribution amounted to approximately $2,160,000.

 

  K. New Accounting Standards—In May 2011, an accounting standard update was issued on “Fair Value Measurement: Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.” The update outlines common requirements for measuring fair value and for disclosing information about fair value measurements, including a consistent meaning of the term “fair value”. The update is effective for interim and annual financial periods beginning after December 15, 2011. The Company adopted this update on January 1, 2012 and it did not have a material impact 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.

 

F-10


Table of Contents

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, 2012 and December 31, 2011:

 

     March 31,
2012
     December 31,
2011
 

Accounts Payable:

     

Outside Working Interests (see Note 8)

   $ 3,341,769       $ —     

Production and related other

     1,421,888         1,410,268   

Affiliates (see Note 8)

     1,295,759         —     

Other

     403,094         325,932   

Joint venture partner deposits

     7,008         94,138   

Drilling

     —           55,800   
  

 

 

    

 

 

 
   $ 6,469,518       $ 1,886,138   
  

 

 

    

 

 

 

Accrued Expenses:

     

Federal, state and local taxes

   $ 3,388,000       $ 76,500   

Payroll and retirement plan contributions

     824,153         653,697   

Current portion of asset retirement obligations

     293,000         293,000   
  

 

 

    

 

 

 
   $ 4,505,153       $ 1,023,197   
  

 

 

    

 

 

 

Accrued payroll and retirement plan contributions at March 31, 2012 include $665,000 of administrative costs associated with the Disposition, which is further described in Note 8.

Also related to the Disposition, the Company recognized a $1 million deposit as deferred revenue in the consolidated balance sheet at December 31, 2011. Deferred revenue of $2,690,682 is recognized in the Company’s consolidated balance sheet at March 31, 2012 in association with funds held for Contingent Leases as further described in Note 8.

 

F-11


Table of Contents

EVERFLOW EASTERN PARTNERS, L.P.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

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.

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 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). Future special distributions, if any, related to the Disposition as further described in Note 8 will not be considered interim distributions for purposes of calculating the Repurchase Right price. If more than 10% of the then outstanding Units are

 

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EVERFLOW EASTERN PARTNERS, L.P.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

Note 4. Partners’ Equity (continued)

 

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, 2011 calculation, is $8.29 per Unit, net of the distributions made in January 2012 ($0.50 per Unit) and April 2012 ($0.38 per Unit).

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 Out-

standing

Following

Repurchase

 

2009

   $ 12.57       $ 1.50       $     11.07         2,442         5,621,851   

2010

   $ 7.86       $ 1.00       $ 6.86         5,968         5,615,883   

2011

   $ 9.23       $ 1.00       $ 8.23         4,890         5,613,977   

At June 30, 2011 and 2010, the Company granted a total of 2,445 and 2,984 options, respectively, to two officers and one employee, of which all were exercised on the same date. There were 5,616,422 and 5,618,867 Units outstanding on June 30, 2011 and 2010, respectively, after the exercise of these options.

There were no instruments outstanding at March 31, 2012 or 2011 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 $5.41 per MCF. The Company also has an annual contract 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 agreement with IGS provides for fixed pricing with current monthly weighted average pricing provisions ranging from $5.23 to $5.26 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

 

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EVERFLOW EASTERN PARTNERS, L.P.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

Note 5. Gas Purchase Agreements (continued)

 

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, 2012.

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.

The Company is holding funds at March 31, 2012 in conjunction with Contingent Leases as further described in Note 8.

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

 

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EVERFLOW EASTERN PARTNERS, L.P.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

Note 7. Related Party Transactions (continued)

 

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, 2012.

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, 2012 and December 31, 2011, the Company has extended various loans, evidenced by notes, to two employees with origination dates ranging from December 2008 to December 2011. 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 2012), amounted to $419,860 and $447,826 at March 31, 2012 and December 31, 2011, respectively.

Note 8. Sale of Deep Rights

In November 2010, the Company agreed to sell their deep rights in certain Ohio properties for cash consideration (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.

In February 2012, the Company closed on the first segment of the Disposition with the sale of approximately 28,000 acres, resulting in a Gain on Sale of Deep Rights of $32,060,532 (the “First Closing”). The Company anticipates holding a second and final closing during the third quarter of 2012 (the “Final Closing”), as additional time is needed to allow the Company to cure various potential defects in the Company’s lease rights in the subject acreage as described in the closing conditions of the agreement. The Company also anticipates that there will be certain defects that it will be unable to cure. By the completion of the Final Closing, the Company does not expect cash consideration net to the Company’s interest to exceed $2 million. There can be no assurance that all of the conditions required to execute the Final Closing will be satisfied or that the Company’s expectations as to cash consideration to be received from the Final Closing will be realized.

The Company also served as an agent for the sale of deep rights acreage owned by other affiliated and non-affiliated parties (the “Working Interest Parties”). Generally, the Working Interest Parties sold their acreage to the purchaser under the same terms and conditions as the Company’s Disposition. The Company has recognized accounts payable to affiliates and outside

 

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EVERFLOW EASTERN PARTNERS, L.P.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

Note 8. Sale of Deep Rights (continued)

 

working interests of $1,295,759 and $3,341,769, respectively, at March 31, 2012 in association with the funds held for the Working Interest Parties (see Note 2). Accounts payable to affiliates includes approximately $627,000 due to officers and directors at March 31, 2012.

Included in the acreage sold as part of the First Closing, the Company sold approximately 2,200 acres with leases that contained terms and conditions which may require the Company to repurchase the acreage if certain claims are made by February 2013 (the “Contingent Leases”). The Company does not anticipate recognizing gain on the sale of the Contingent Leases until the claim period ending February 2013 has expired. Deferred revenue of $2,690,682 is recognized in the Company’s consolidated balance sheet at March 31, 2012 in association with the funds held for Contingent Leases. Funds held on behalf of the Working Interest Parties for their share of Contingent Leases are included in accounts payable to affiliates and outside working interests (see Note 2).

One of the conditions of the Disposition is that the Company perpetuate the producing leases from which the sold acreage is derived for a minimum period of five years. If the Company fails to perpetuate the producing leases during such five-year period, it shall refund to the purchaser the portion of the purchase price attributable to the affected properties based on an allocated value of $1,250 per acre (the “Refund Price”), provided however, that should the Company revive or otherwise renew such expired leases within three months of their expiration, the purchaser shall have the right to acquire the deep rights on such revived or renewed leases for the Refund Price. The Company has assessed the shallow operations of all properties from which deep acreage was sold and does not believe a reserve for potential refunded acreage to be necessary at March 31, 2012.

The Company received a $1 million deposit from the purchaser in November 2010 (the “Deposit”) that was credited to the purchaser upon the First Closing. The Deposit was recognized as deferred revenue in the Company’s consolidated balance sheet at December 31, 2011 and was included in the Gain on Sale of Deep Rights in the Company’s consolidated statement of income for the three months ended March 31, 2012.

 

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Part I: Financial Information

 

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Sale of Deep Rights

In November 2010, the Company agreed to sell their deep rights in certain Ohio properties for cash consideration (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.

In February 2012, the Company closed on the first segment of the Disposition with the sale of approximately 28,000 acres, resulting in a gain on sale of deep rights of $32.1 million (the “First Closing”). The Company anticipates holding a second and final closing during the third quarter of 2012 (the “Final Closing”), as additional time is needed to allow the Company to cure various potential defects in the Company’s lease rights in the subject acreage as described in the closing conditions of the agreement. The Company also anticipates that there will be certain defects that it will be unable to cure. By the completion of the Final Closing, the Company does not expect cash consideration net to the Company’s interest to exceed $2 million. There can be no assurance that all of the conditions required to execute the Final Closing will be satisfied or that the Company’s expectations as to cash consideration to be received from the Final Closing will be realized.

The Company also served as an agent for the sale of deep rights acreage owned by other parties (the “Working Interest Parties”). Generally, the Working Interest Parties sold their acreage to the purchaser under the same terms and conditions as the Company’s Disposition. The Company has recognized accounts payable of $4.6 million at March 31, 2012 in association with the funds held for the Working Interest Parties.

Included in the acreage sold as part of the First Closing, the Company sold approximately 2,200 acres with leases that contained terms and conditions which may require the Company to repurchase the acreage if certain claims are made by February 2013 (the “Contingent Leases”). The Company does not anticipate recognizing gain on the sale of the Contingent Leases until the claim period ending February 2013 has expired. The Company has recognized deferred revenue of $2.7 million at March 31, 2012 in association with the funds held for Contingent Leases.

The Sale of Deep Rights is further described in Note 8 of the Company’s consolidated financial statements included herein.

 

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Liquidity and Capital Resources

The following table summarizes the Company’s financial position at March 31, 2012 and December 31, 2011:

 

     March 31, 2012     December 31, 2011  
     Amount      %     Amount      %  
     (Amounts in Thousands)     (Amounts in Thousands)  

Working capital

   $ 49,884         56   $ 20,936         34

Property and equipment (net)

     39,634         44        40,901         65   

Other

     376         —          405         1   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 89,894         100   $ 62,242         100
  

 

 

    

 

 

   

 

 

    

 

 

 

Deferred income taxes

   $ 254         —     $ 259         —  

Long-term liabilities

     6,122         1        5,823         10   

Partners’ equity

     83,518         93        56,160         90   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 89,894         100   $ 62,242         100 
  

 

 

    

 

 

   

 

 

    

 

 

 

Working capital of $49.9 million as of March 31, 2012 represented an increase of $28.9 million from December 31, 2011, due primarily to an increase in cash and equivalents, offset somewhat by a decrease in accounts receivable from production and increases in accounts payable, deferred revenue and accrued expenses. The increase in cash and equivalents is primarily the result of cash provided by the Disposition and the related agency role that the Company held with the Working Interest Parties. Cash provided by the Disposition and other operating and investing activities was offset somewhat by cash used in financing activities to pay a quarterly distribution. The decrease in accounts receivable from production is primarily the result of decreases in natural gas volumes produced and natural gas prices received. The increase in accounts payable is primarily the result of proceeds received and held on behalf of the Working Interest Parties. The increase in deferred revenue is primarily the result of proceeds received from the Contingent Leases. The increase in accrued expenses is primarily the result of additional federal income taxes due in relation to Everflow Eastern, Inc.’s interest in the Disposition. As further described in Note 2 of the Company’s consolidated financial statements, the Company is not a tax-paying entity and the net taxable income or loss, other than the taxable income or loss allocable to Everflow Eastern, Inc., which is a C corporation owned by Everflow Eastern Partners, L.P., is allocated directly to its respective partners.

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, 2012. 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 $2.2 million in April 2012.

 

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Table of Contents

The Company’s cash flow from operations before the change in regular operational working capital, which excludes the effects of the Disposition, was $7.7 million, an increase of $3.4 million, or 79%, during the three months ended March 31, 2012, as compared to the same period in 2011. Changes in regular operational working capital other than cash and equivalents increased cash by $420,000 during the three months ended March 31, 2012 due primarily to a decrease in accounts receivable from production, offset somewhat by an increase to accrued expenses other than accrued federal income taxes associated with the Disposition.

Cash flows provided by operating activities was $8.1 million for the three months ended March 31, 2012. Cash flows provided by investing activities was $34.4 million for the three months ended March 31, 2012, as the Company received proceeds from the sale of deep rights and deferred revenue in conjunction with the Disposition. Cash was primarily held as accounts payables to the Working Interest Parties and for accrued federal income taxes in conjunction with the Disposition, and was used to 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 $5.41 per MCF. The Company also has an annual contract 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 agreement with IGS provides for fixed pricing with current monthly weighted average pricing provisions ranging from $5.23 to $5.26 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, 2012.

 

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Results of Operations

The following table and discussion is a review of the results of operations of the Company for the three months ended March 31, 2012 and 2011. 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:

 

XXXXX.X XXXXX.X
     Three Months  
     Ended March 31,  
     2012     2011  

Revenues:

    

Oil and gas sales

     97     97

Well management and operating

     3        3   
  

 

 

   

 

 

 

Total revenues

     100     100

Expenses:

    

Production costs

     24        20   

Well management and operating

     2        1   

Depreciation, depletion and amortization

     25        26   

Accretion expense

     2        1   

General and administrative

     16        10   
  

 

 

   

 

 

 

Total expenses

     69     58

Gain on sale of deep rights

     660        —     

Income taxes

     (69     (1
  

 

 

   

 

 

 

Net income

     622     41
  

 

 

   

 

 

 

Revenues for the three months ended March 31, 2012 decreased $1.5 million, or 23%, compared to the same period in 2011. This decrease was primarily due to a decrease in oil and gas sales during the first three months of 2012, as compared to the same period in 2011.

Oil and gas sales decreased $1.5 million, or 24%, during the three months ended March 31, 2012 compared to the same period in 2011. The primary reasons for this decrease were lower natural gas prices received and less natural gas volumes produced during the three month period ended March 31, 2012 as compared to the same period in 2011. Less natural gas production volumes produced during the three month period ended March 31, 2012 as compared to the comparable period in 2011 was primarily the result of operated properties being voluntarily shut-in during the three month period ended March 31, 2012 that were not shut-in during the comparable period in 2011.

Production costs decreased $93,000, or 7%, during the three month period ended March 31, 2012 compared to the same period in 2011. This decrease was primarily the result of less repairs and maintenance costs incurred on operated properties during the three month period ending March 31, 2012 as compared to the same period in 2011.

Depreciation, depletion and amortization decreased $381,000, or 24%, during the three months ended March 31, 2012 compared to the same period in 2011. The primary reason for this decrease is the result of less natural gas volumes produced during the three months ending March 31, 2012 as compared to the prior comparable period.

 

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Accretion expense increased $27,000, or 32%, during the three months ended March 31, 2012 compared to the same period in 2011. The primary reason for this increase was due to the discount factor being applied to larger liabilities during the three month period ended March 31, 2012 as compared to the prior comparable period.

General and administrative expenses increased $118,000, or 18%, during the three months ended March 31, 2012 compared to the same period in 2011. The primary reason for this increase is due to higher overhead expenses associated with ongoing administration. Specific categories of expenses that have increased during this three month period include legal, accounting and auditing, printing, telephone, filing fees, health benefits, recording fees, and state and local taxes.

The Company recognized a gain on sale of deep rights of $32.1 million during the three months ended March 31, 2012 in association with the Disposition as further described under “Sale of Deep Rights”, herein.

Income tax expenses were $3.4 million during the three month period ended March 31, 2012, an increase of $3.3 million over the prior comparable period amount of $33,000. The primary reason for the increase is the result of additional federal income taxes due in relation to Everflow Eastern, Inc.’s interest in the Disposition.

The Company reported net income of $30.2 million during the three months ended March 31, 2012, an increase of $27.6 million over the prior comparable period amount of $2.6 million. The primary reason for the increase is the result of the gain on sale of deep rights, offset somewhat by the decrease in oil and gas sales and increase in income tax expenses. Net income represented 622% and 41% of total revenue during the three months ended March 31, 2012 and 2011, respectively.

Critical Accounting Policies

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The critical accounting policies that affect the Company’s more complex judgments and estimates are described in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011.

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

 

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Table of Contents

Basin, actual oil and gas production and the weather in the Northeast Ohio area and the ability to locate economically productive oil and gas prospects for development by the Company. In addition, any forward-looking statements speak only as of the date on which such statement is made and the Company does not undertake any obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise.

 

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

This information has been omitted, as the Company qualifies as a smaller reporting company.

 

Item 4. CONTROLS AND PROCEDURES

(a) Disclosure Controls and Procedures. As of the end of the period covered by this report, management performed, with the participation of our Principal Executive Officer (the “CEO”) and Principal Financial and Accounting Officer (the “CFO”), an evaluation of the effectiveness of our disclosure controls and procedures as defined in Exchange Act Rules 13a-15 (the “evaluation”). Our disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our CEO and CFO, to allow timely decisions regarding required disclosures. Based on the evaluation, management, including our CEO and CFO, concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.

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, 2011, for a more complete understanding of the matters covered by such certifications.

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

 

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Part II. Other Information

 

Item 6. EXHIBITS

 

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

 

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

    EVERFLOW EASTERN PARTNERS, L.P.
    By:  

EVERFLOW MANAGEMENT LIMITED, LLC

General Partner

    By:   EVERFLOW MANAGEMENT CORPORATION Managing Member

 

May 11, 2012     By:   /s/ Brian A. Staebler
     

Brian A. Staebler

Vice President, Secretary-Treasurer and

Principal Financial and Accounting Officer

(Duly Authorized Officer)

 

10