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EX-31.2 - EXHIBIT 31.2 - Harvest Oil & Gas Corp.v344408_ex31-2.htm
EX-31.1 - EXHIBIT 31.1 - Harvest Oil & Gas Corp.v344408_ex31-1.htm

 

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION  

Washington, D.C. 20549 

 

Form 10-Q 

 

þQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 

 

For the quarterly period ended March 31, 2013 

OR 

 

oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 

 

Commission File Number 

001-33024  

 

EV Energy Partners, L.P. 

(Exact name of registrant as specified in its charter) 

 

Delaware   20–4745690
(State or other jurisdiction    (I.R.S. Employer Identification No.)
of incorporation or organization)    
     
1001 Fannin, Suite 800, Houston, Texas   77002
 (Address of principal executive offices)    (Zip Code)

 

Registrant’s telephone number, including area code: (713) 651-1144 

 

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 þ 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 þ 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 definition of “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b–2 of the Exchange Act. Check one: 

 

Large accelerated filer þ   Accelerated filer ¨   Non-accelerated filer ¨   Smaller reporting company ¨

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b–2 of the Exchange Act).  

YES o NO þ 

 

As of May 6, 2013, the registrant had 42,599,080 common units outstanding.

 

 

 

 
 

 

Table of Contents   

 

  PART I.  FINANCIAL INFORMATION  
     
Item 1. Condensed Consolidated Financial Statements (Unaudited) 2
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk 20
Item 4. Controls and Procedures 20
     
  PART II.  OTHER INFORMATION  
     
Item 1. Legal Proceedings 22
Item 1A. Risk Factors 22
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 22
Item 3. Defaults Upon Senior Securities 22
Item 4. Mine Safety Disclosures 22
Item 5. Other Information 22
Item 6. Exhibits  
     
Signatures 23

 

1
 

 

PART I. FINANCIAL INFORMATION 

 

ITEM 1. FINANCIAL STATEMENTS 

 

EV Energy Partners, L.P. 

Condensed Consolidated Balance Sheets 

(In thousands, except number of units) 

(Unaudited) 

 

   March 31,   December 31, 
   2013   2012 
ASSETS          
Current assets:          
Cash and cash equivalents  $18,907   $7,486 
Accounts receivable:          
Oil, natural gas and natural gas liquids revenues   35,967    34,909 
Related party   4,138    1,422 
Other   4,047    11,263 
Derivative asset   14,132    40,771 
Other current assets   1,777    1,750 
Total current assets   78,968    97,601 
           
Oil and natural gas properties, net of accumulated depreciation, depletion and amortization;
March 31, 2013, $420,005; December 31, 2012, $389,206
   1,863,584    1,875,890 
Other property, net of accumulated depreciation and amortization; March 31, 2013, $636;
December 31, 2012, $598
   1,317    1,325 
Long–term derivative asset   36,268    45,839 
Investments in unconsolidated affiliates   103,018    34,545 
Other assets   9,631    10,214 
Total assets  $2,092,786   $2,065,414 
           
LIABILITIES AND OWNERS’ EQUITY          
Current liabilities:          
Accounts payable and accrued liabilities  $53,852   $40,171 
Derivative liability   1,554     
Total current liabilities   55,406    40,171 
           
Asset retirement obligations   104,103    102,707 
Long–term debt   944,237    859,218 
Long–term derivative liability   1,189     
Other long–term liabilities   1,444    3,494 
           
Commitments and contingencies          
           
Owners’ equity:          
Common unitholders – 42,599,080 units and 42,320,707 units issued and outstanding as of March 31, 2013 and December 31, 2012, respectively   999,937    1,072,175 
General partner interest   (13,530)   (12,351)
Total owners’ equity   986,407    1,059,824 
Total liabilities and owners’ equity  $2,092,786   $2,065,414 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

2
 

 

EV Energy Partners, L.P. 

Condensed Consolidated Statements of Operations 

(In thousands, except per unit data) 

(Unaudited) 

 

   Three Months Ended 
   March 31, 
   2013   2012 
Revenues:          
Oil, natural gas and natural gas liquids revenues  $72,669   $76,801 
Transportation and marketing–related revenues   1,033    930 
Total revenues   73,702    77,731 
           
Operating costs and expenses:          
Lease operating expenses   26,094    28,600 
Cost of purchased natural gas   743    645 
Dry hole and exploration costs   417    2,173 
Production taxes   2,916    3,282 
Asset retirement obligations accretion expense   1,354    1,208 
Depreciation, depletion and amortization   30,833    24,591 
General and administrative expenses   12,622    12,117 
Impairment of oil and natural gas properties   5,169    635 
Total operating costs and expenses   80,148    73,251 
           
Operating (loss) income   (6,446)   4,480 
           
Other (expense) income, net:          
Realized gains on derivatives, net   10,759    24,190 
Unrealized (losses) gains on derivatives, net   (38,273)   11,661 
Interest expense   (12,829)   (11,084)
Other income, net   187    4 
Total other (expense) income, net   (40,156)   24,771 
           
(Loss) income before income taxes and equity in income of unconsolidated affiliates   (46,602)   29,251 
           
Income taxes   (177)   (658)
           
(Loss) income before equity in income of unconsolidated affiliates   (46,779)   28,593 
           
Equity in income of unconsolidated affiliates   198     
           
Net (loss) income  $(46,581)  $28,593 
           
Net (loss) income per limited partner unit:          
Basic  $(1.08)  $0.69 
Diluted  $(1.08)  $0.69 
           
Weighted average limited partner units outstanding:          
Basic   42,556    40,440 
Diluted   42,556    40,760 
           
Distributions declared per unit  $0.768   $0.764 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

3
 

 

EV Energy Partners, L.P. 

Condensed Consolidated Statements of Changes in Owners’ Equity 

(In thousands, except number of units) 

(Unaudited) 

 

       General   Total 
   Common   Partner   Owners’ 
   Unitholders   Interest   Equity 
             
Balance, December 31, 2012  $1,072,175   $(12,351)  $1,059,824 
Conversion of 40,264 vested phantom units   2,365        2,365 
Contribution from general partner       334    334 
Distributions   (33,171)   (667)   (33,838)
Equity–based compensation   4,217    86    4,303 
Net loss   (45,649)   (932)   (46,581)
Balance, March 31, 2013  $999,937   $(13,530)  $986,407 

 

           General   Total 
   Common   Class B   Partner   Owners’ 
   Unitholders   Unitholders   Interest   Equity 
                 
Balance, December 31, 2011  $935,425   $232   $(15,618)  $920,039 
Conversion of 41,075 vested phantom units   2,836            2,836 
Proceeds from public equity offering, net of offering costs of $157   262,676            262,676 
Contributions from general partner           5,714    5,714 
Distributions   (26,264)   (2,955)   (596)   (29,815)
Equity–based compensation   3,458            3,458 
Net income   25,333    2,688    572    28,593 
Balance, March 31, 2012  $1,203,464   $(35)  $(9,928)  $1,193,501 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

4
 

 

EV Energy Partners, L.P. 

Condensed Consolidated Statements of Cash Flows 

(In thousands) 

(Unaudited) 

 

   Three Months Ended 
   March 31, 
   2013   2012 
         
Cash flows from operating activities:          
Net (loss) income  $(46,581)  $28,593 
Adjustments to reconcile net (loss) income to net cash flows provided by operating activities:          
Dry hole costs   51    225 
Asset retirement obligations accretion expense   1,354    1,208 
Depreciation, depletion and amortization   30,833    24,591 
Equity–based compensation cost   4,485    4,280 
Impairment of oil and natural gas properties   5,169    635 
Noncash derivative activity   38,953    (11,661)
Equity in income of unconsolidated affiliates   (198)    
Distributions from unconsolidated affiliates   48     
Other   593    2,295 
Changes in operating assets and liabilities:          
Accounts receivable   (4,527)   (11,150)
Other current assets   (27)   245 
Accounts payable and accrued liabilities   11,351    20,382 
Other, net   (119)   (1,144)
Net cash flows provided by operating activities   41,385    58,499 
           
Cash flows from investing activities:          
Acquisitions of oil and natural gas properties       (36,544)
Final settlement of purchase price of oil and natural gas properties   7,998     
Additions to oil and natural gas properties   (21,136)   (29,067)
Proceeds from sale of oil and natural gas properties       5,489 
Investments in unconsolidated affiliates   (68,345)   (11,597)
Distributions from unconsolidated affiliates   23     
Settlements from acquired derivatives       1,687 
Net cash flows used in investing activities   (81,460)   (70,032)
           
Cash flows from financing activities:          
Long–term debt borrowings   85,000    35,000 
Repayment of long–term debt borrowings       (460,000)
Proceeds from debt offering       206,000 
Loan costs incurred       (3,929)
Proceeds from public equity offering       262,833 
Offering costs       (157)
Contributions from general partner   334    5,714 
Distributions paid   (33,838)   (29,815)
Net cash flows provided by financing activities   51,496    15,646 
           
Increase in cash and cash equivalents   11,421    4,113 
Cash and cash equivalents – beginning of period   7,486    30,312 
Cash and cash equivalents – end of period  $18,907   $34,425 

 

See accompanying notes to unaudited condensed consolidated financial statements.

  

5
 

 

EV Energy Partners, L.P. 

Notes to Unaudited Condensed Consolidated Financial Statements

 

NOTE 1. ORGANIZATION AND NATURE OF BUSINESS 

 

Nature of Operations 

 

EV Energy Partners, L.P. (“we,” “our” or “us”) is a publicly held limited partnership that engages in the acquisition, development and production of oil and natural gas properties. Our general partner is EV Energy GP, L.P. (“EV Energy GP”), a Delaware limited partnership, and the general partner of our general partner is EV Management, LLC (“EV Management”), a Delaware limited liability company. EV Management is a wholly owned subsidiary of EnerVest, Ltd. (“EnerVest”), a Texas limited partnership. EnerVest and its affiliates also have a significant interest in us through their 71.25% ownership of EV Energy GP which, in turn, owns a 2% general partner interest in us and all of our incentive distribution rights.  

 

We operate in one reportable segment engaged in the exploration, development and production of oil and natural gas properties and all of our operations are located in the United States.

 

Basis of Presentation 

 

Our unaudited condensed consolidated financial statements included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Accordingly, certain information and disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. We believe that the presentations and disclosures herein are adequate to make the information not misleading. The unaudited condensed consolidated financial statements reflect all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the interim periods. The results of operations for the interim periods are not necessarily indicative of the results of operations to be expected for the full year. These interim financial statements should be read in conjunction with our Annual Report on Form 10–K for the year ended December 31, 2012. 

 

All intercompany accounts and transactions have been eliminated in consolidation. In the Notes to Unaudited Condensed Consolidated Financial Statements, all dollar and unit amounts in tabulations are in thousands of dollars and units, respectively, unless otherwise indicated.

 

Subsequent Events

 

We evaluated subsequent events for appropriate accounting and disclosure through the date these unaudited condensed consolidated financial statements were issued.

  

NOTE 2. EQUITY–BASED COMPENSATION  

 

We grant various forms of equity–based awards to employees, consultants and directors of EV Management and its affiliates who perform services for us. These equity–based awards consist primarily of phantom units and performance units.  

 

We accounted for the phantom units issued prior to 2009 as liability awards, and the fair value of these phantom units was remeasured at the end of each reporting period based on the current market price of our common units until settlement. Prior to settlement, compensation cost was recognized for these phantom units based on the proportionate amount of the requisite service period that has been rendered to date. The last of these phantom units vested in January 2013.

 

We account for the phantom units issued beginning in 2009 as equity awards, and we estimated the fair value of these phantom units using the Black–Scholes option pricing model. We account for the performance units as equity awards, and we estimated the fair value of these market condition performance units using the Monte Carlo simulation model.  

  

6
 

 

EV Energy Partners, L.P. 

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

 

The following table presents the compensation costs recognized in our unaudited condensed consolidated statements of operations: 

 

   Three Months Ended 
   March 31, 
   2013   2012 
         
Liability awards  $182   $822 
Equity awards   4,303    3,458 
Total  $4,485   $4,280 

 

These costs are included in “General and administrative expenses” in our unaudited condensed consolidated statements of operations.  

 

As of March 31, 2013, there was $39.6 million of unrecognized compensation costs related to our unvested phantom units and performance units which is expected to be recognized over a weighted average period of 2.70 years.

  

NOTE 3. INVESTMENTS IN UNCONSOLIDATED AFFILIATES 

 

The most significant of our investments in unconsolidated affiliates are Cardinal Gas Services, LLC (“Cardinal”) and Utica East Ohio Midstream LLC (“UEO”). We own 9% of Cardinal and 21% of UEO, which are constructing natural gas processing, natural gas liquids fractionation and connecting pipeline facilities to serve anticipated production in the Utica Shale in Ohio.

  

NOTE 4. RISK MANAGEMENT 

 

Our business activities expose us to risks associated with changes in the market price of oil, natural gas and natural gas liquids. In addition, our floating rate credit facility exposes us to risks associated with changes in interest rates. As such, future earnings are subject to fluctuation due to changes in the market prices of oil, natural gas and natural gas liquids and interest rates. We use derivatives to reduce our risk of volatility in the prices of oil, natural gas and natural gas liquids and interest rates. Our policies do not permit the use of derivatives for speculative purposes.  

 

We have elected not to designate any of our derivatives as hedging instruments. Accordingly, changes in the fair value of our derivatives are recorded immediately to operations as “Unrealized (losses) gains on derivatives, net” in our unaudited condensed consolidated statements of operations.  

 

As of March 31, 2013, we had entered into commodity contracts with the following terms: 

 

Period Covered  Hedged
Volume
   Weighted
Average Fixed
Price
 
Oil (MBbls):          
Swaps – April 2013 to December 2013   1,148.1   $89.03 
Swaps – 2014   1,517.7    91.19 
Swaps – 2015   730.0    90.09 
           
Natural Gas (MmmBtus):          
Swaps – April 2013 to December 2013   27,032.5    4.95 
Swaps – 2014   26,134.0    4.99 
Swaps – 2015   26,097.5    5.22 

  

7
 

 

EV Energy Partners, L.P. 

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

 

As of March 31, 2013, we had entered into interest rate swaps with the following terms: 

 

   Notional   Floating  Fixed 
Period Covered  Amount   Rate  Rate 
April 2013 – July 2015  $110,000   1 Month LIBOR   3.315%

 

The following table sets forth the fair values and classification of our outstanding derivatives:

 

           Net Amounts 
       Gross Amounts   of Assets 
       Offset in the   Presented in the 
   Gross   Unaudited   Unaudited 
   Amounts of   Condensed   Condensed 
   Recognized   Consolidated   Consolidated 
   Assets   Balance Sheet   Balance Sheet 
Derivatives:               
As of March 31, 2013:               
Derivative asset  $29,553   $(15,421)  $14,132 
Long–term derivative asset   44,952    (8,684)   36,268 
Total  $74,505   $(24,105)  $50,400 
                
As of December 31, 2012:               
Derivative asset  $44,173   $(3,402)  $40,771 
Long–term derivative asset   50,692    (4,853)   45,839 
Total  $94,865   $(8,255)  $86,610 

 

           Net Amounts 
       Gross Amounts   of Liabilities 
       Offset in the   Presented in the 
   Gross   Unaudited   Unaudited 
   Amounts of   Condensed   Condensed 
   Recognized   Consolidated   Consolidated 
   Liabilities   Balance Sheet   Balance Sheet 
Derivatives:               
As of March 31, 2013:               
Derivative liability  $16,975   $(15,421)  $1,554 
Long–term derivative liability   9,873    (8,684)   1,189 
Total  $26,848   $(24,105)  $2,743 
                
As of December 31, 2012:               
Derivative liability  $3,402   $(3,402)  $ 
Long–term derivative liability   4,853    (4,853)    
Total  $8,255   $(8,255)  $ 

 

We have entered into master netting arrangements with our counterparties. The amounts above are presented on a net basis in our unaudited condensed consolidated balance sheets when such amounts are with the same counterparty. In addition, we have recorded accounts payable and receivable balances related to our settled derivatives that are subject to our master netting agreements. These amounts are not included in the above table; however, under our master netting agreements, we have the right to offset these positions against our forward exposure related to outstanding derivatives.

 

Should our credit facility become due and payable because of an event of default, our derivatives that are in a net liability position could also become due and payable. We could also be required to post cash collateral related to these derivatives under certain circumstances. As of March 31, 2013 and December 31, 2012, we were not required to post any collateral nor did we hold any collateral associated with our derivatives. 

 

8
 

 

EV Energy Partners, L.P. 

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

 

The following table presents the impact of derivatives and their location within the unaudited condensed consolidated statements of operations: 

 

   Three Months Ended 
   March 31, 
   2013   2012 
Realized gains on derivatives, net:          
Commodity contracts  $12,304   $25,306 
Interest rate swaps   (1,545)   (1,116)
Total  $10,759   $24,190 
           
Unrealized (losses) gains on derivatives, net:          
Commodity contracts  $(39,720)  $11,154 
Interest rate swaps   1,447    507 
Total  $(38,273)  $11,661 

 

NOTE 5. FAIR VALUE MEASUREMENTS 

 

Recurring Basis 

 

The following table presents the fair value hierarchy for our assets and liabilities that are required to be measured at fair value on a recurring basis: 

 

       Fair Value Measurements at the End of the 
       Reporting Period 
       Quoted         
       Prices in         
       Active         
       Markets   Significant     
       for   Other   Significant 
       Identical   Observable   Unobservable 
       Assets   Inputs   Inputs 
   Fair Value   (Level 1)   (Level 2)   (Level 3) 
As of March 31, 2013:                    
Assets – Commodity contracts  $74,505   $   $74,505   $ 
                     
Liabilities:                    
Commodity contracts  $19,350   $   $19,350   $ 
Interest rate swaps   7,498        7,498     
Total  $26,848   $   $26,848   $ 
                     
As of December 31, 2012:                    
Assets – Commodity contracts  $94,865   $   $94,865   $ 
                     
Liabilities – Interest rate swaps  $8,255   $   $8,255   $ 

 

 Our derivatives consist of over–the–counter (“OTC”) contracts which are not traded on a public exchange.  As the fair value of these derivatives is based on inputs using market prices obtained from independent brokers or determined using quantitative models that use as their basis readily observable market parameters that are actively quoted and can be validated through external sources, including third party pricing services, brokers and market transactions, we have categorized these derivatives as Level 2. We value these derivatives based on observable market data for similar instruments. This observable data includes the forward curve for commodity prices based on quoted market prices and prospective volatility factors related to changes in the forward curves and yield curves based on money market rates and interest rate swap data, such as forward LIBOR curves. Our estimates of fair value have been determined at discrete points in time based on relevant market data. There were no changes in valuation techniques or related inputs in the three months ended March 31, 2013. 

 

9
 

 

EV Energy Partners, L.P. 

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

 

Nonrecurring Basis 

 

In March 2012, in conjunction with the sale of assets held for sale at December 31, 2011, we incurred $0.4 million of additional impairment charges to write down these assets to their fair value of $6.1 million. The impairment charge was included in earnings for the three months ended March 31, 2012. The fair value was determined using Level 2 inputs consisting of the mutually agreed upon selling price we received upon the sale of these oil and natural gas properties.  

  

Impairment of Oil and Natural Gas Properties

 

In the three months ended March 31, 2013 and 2012, we incurred leasehold impairment charges of $5.2 million and $0.2 million, respectively, primarily related to expired leases.

 

Financial Instruments 

 

The estimated fair values of our financial instruments have been determined at discrete points in time based on relevant market information. Our financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities, derivatives and long–term debt. The carrying amounts of our financial instruments other than derivatives and long–term debt approximate fair value because of the short–term nature of the items. Derivatives are recorded at fair value (see above).  

 

The carrying value of debt outstanding under our credit facility approximates fair value because the credit facility’s variable interest rate resets frequently and approximates current market rates available to us. As of March 31, 2013 and December 31, 2012, the estimated fair value of our senior notes due 2019 was $528.7 million and $531.2 million, respectively, which differs from the carrying value of $499.2 million. The fair value of the senior notes due 2019 was determined using Level 2 inputs consisting of quoted market prices.

   

NOTE 6. ASSET RETIREMENT OBLIGATIONS 

 

We record an asset retirement obligation (“ARO”) and capitalize the asset retirement cost in oil and natural gas properties in the period in which the retirement obligation is incurred based upon the fair value of an obligation to perform site reclamation, dismantle facilities or plug and abandon wells. After recording these amounts, the ARO is accreted to its future estimated value using an assumed cost of funds and the additional capitalized costs are depreciated on a unit–of–production basis. The changes in the aggregate ARO are as follows: 

 

   2013   2012 
Balance as of January 1  $104,684   $93,225 
Liabilities incurred   320    375 
Accretion expense   1,354    1,208 
Revisions in estimated cash flows       1,056 
Settlements and divestitures   (278)   (112)
Balance as of March 31  $106,080   $95,752 

 

As of both March 31, 2013 and December 31, 2012, $2.0 million of our ARO is classified as current and is included in “Accounts payable and accrued liabilities” in our unaudited condensed consolidated balance sheets.

 

NOTE 7. LONG–TERM DEBT 

 

Credit Facility 

 

As of March 31, 2013, we have a $1.0 billion credit facility that expires in April 2016. Borrowings under the facility are secured by a first priority lien on substantially all of our assets and the assets of our subsidiaries. We may use borrowings under the facility for acquiring and developing oil and natural gas properties, for working capital purposes, for general corporate purposes and for funding distributions to partners. We also may use up to $100.0 million of available borrowing capacity for letters of credit. The facility requires the maintenance of a current ratio (as defined in the facility) of greater than 1.0 and a ratio of senior secured debt to earnings plus interest expense, taxes, depreciation, depletion and amortization expense and exploration expense of no greater than 3.0 to 1.0. As of March 31, 2013, we were in compliance with these financial covenants. 

 

10
 

 

EV Energy Partners, L.P. 

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

 

Borrowings under the facility bear interest at a floating rate based on, at our election, a base rate or the London Inter–Bank Offered Rate plus applicable premiums based on the percent of the borrowing base that we have outstanding (weighted average effective interest rate of 3.22% at March 31, 2013).  

 

Borrowings under the facility may not exceed a “borrowing base” determined by the lenders under the facility based on our oil and natural gas reserves. As of March 31, 2013, the borrowing base under the facility was $750.0 million. The borrowing base is subject to scheduled redeterminations as of April 1 and October 1 of each year with an additional redetermination once per calendar year at our request or at the request of the lenders and with one calculation that may be made at our request during each calendar year in connection with material acquisitions or divestitures of properties. In April 2013, the borrowing base under the facility was reduced to $710.0 million.  

 

We had $445.0 million and $360.0 million outstanding under the facility at March 31, 2013 and December 31, 2012, respectively. 

 

8.0% Senior Notes due 2019 

 

Our senior notes due 2019 are fully and unconditionally guaranteed, jointly and severally, on a senior unsecured basis, by all of our existing subsidiaries other than EV Energy Finance Corp. (“Finance”), which is a co–issuer of the Notes. Neither we nor Finance have independent assets or operations apart from the assets and operations of our subsidiaries.  

 

The aggregate carrying amount of our senior notes due 2019 was $499.2 million at both March 31, 2013 and December 31, 2012, respectively.

  

NOTE 8. COMMITMENTS AND CONTINGENCIES 

 

We are involved in disputes or legal actions arising in the ordinary course of business. We do not believe the outcome of such disputes or legal actions will have a material effect on our unaudited condensed consolidated financial statements, and no amounts have been accrued at March 31, 2013 or December 31, 2012. 

 

NOTE 9. OWNERS’ EQUITY 

 

Units Outstanding 

 

At March 31, 2013, owners’ equity consists of 42,599,080 common units, representing a 98% limited partnership interest in us, and a 2% general partnership interest. 

 

Issuance of Units 

 

In January 2013, we issued 0.3 million common units related to the vesting of equity–based awards. Of this amount, 0.04 million were phantom units accounted for as liability awards, and these phantom units vested at a fair value of $2.4 million. In conjunction with the vesting of these units, we received a contribution of $0.3 million by our general partner to maintain its 2% interest in us.  

 

Cash Distributions 

 

On January 31, 2013, the board of directors of EV Management declared a $0.767 per unit distribution for the fourth quarter of 2012 on all common units. The distribution of $33.8 million was paid on February 14, 2013 to unitholders of record at the close of business on February 11, 2013.

 

On April 29, 2013, the board of directors of EV Management declared a $0.768 per unit distribution for the first quarter of 2013 on all common units. The distribution of $33.9 million is to be paid on May 15, 2013 to unitholders of record at the close of business on May 9, 2013.

 

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EV Energy Partners, L.P. 

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

 

NOTE 10. NET (LOSS) INCOME PER LIMITED PARTNER UNIT 

 

The following sets forth the calculation of net (loss) income per limited partner unit: 

 

 

   Three Months Ended 
   March 31, 
   2013   2012 
Net (loss) income  $(46,581)  $28,593 
General partner’s 2% interest in net loss (income)   932    (572)
Net loss (income) attributable to participating securities   (498)    
Limited partners’ interest in net (loss) income  $(46,147)  $28,021 
           
Weighted average limited partner units outstanding:          
Common units   42,556    36,425 
Class B units       3,873 
Performance units       142 
Denominator for basic net (loss) income per limited partner unit   42,556    40,440 
Dilutive units (1)       320 
Total   42,556    40,760 
           
Net (loss) income per limited partner unit:          
Basic  $(1.08)  $0.69 
Diluted  $(1.08)  $0.69 

 

 
(1)Phantom units totaling 0.6 million units were not included in the computation of diluted net (loss) income per limited partner unit for the three months ended March 31, 2013 because the effect would have been anti–dilutive.

 

NOTE 11. RELATED PARTY TRANSACTIONS 

 

Pursuant to an omnibus agreement, we paid EnerVest $2.5 million and $3.3 million in the three months ended March 31, 2013 and 2012, respectively, in monthly administrative fees for providing us general and administrative services. These fees are based on an allocation of charges between EnerVest and us based on the estimated use of such services by each party, and we believe that the allocation method employed by EnerVest is reasonable and reflective of the estimated level of costs we would have incurred on a standalone basis. These fees are included in general and administrative expenses in our unaudited condensed consolidated statements of operations.  

 

We have entered into operating agreements with EnerVest whereby a wholly owned subsidiary of EnerVest acts as contract operator of the oil and natural gas wells and related gathering systems and production facilities in which we own an interest. We reimbursed EnerVest approximately $4.3 million and $4.0 million in the three months ended March 31, 2013 and 2012, respectively, for direct expenses incurred in the operation of our wells and related gathering systems and production facilities and for the allocable share of the costs of EnerVest employees who performed services on our properties. As the vast majority of such expenses are charged to us on an actual basis (i.e., no mark–up or subsidy is charged or received by EnerVest), we believe that the aforementioned services were provided to us at fair and reasonable rates relative to the prevailing market and are representative of the costs that would have been incurred on a standalone basis. These costs are included in lease operating expenses in our unaudited condensed consolidated statements of operations. Additionally, in its role as contract operator, this EnerVest subsidiary also collects proceeds from oil and natural gas sales and distributes them to us and other working interest owners.

  

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EV Energy Partners, L.P. 

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

 

NOTE 12. OTHER SUPPLEMENTAL INFORMATION  

 

Supplemental cash flows and noncash transactions were as follows: 

 

   Three Months Ended 
   March 31, 
   2013   2012 
         
Supplemental cash flows information – cash paid for interest, net of capitalized interest of $798 at March 31, 2013  $1,643   $3,801 
           
Noncash transaction – costs for additions to oil and natural gas properties in accounts payable and accrued liabilities  $16,281   $12,555 

 

Accounts payable and accrued liabilities consisted of the following:

 

   March 31,   December 31, 
   2013   2012 
Costs for additions to oil and natural gas properties  $16,281   $13,951 
Lease operating expenses   9,903    7,309 
Interest   18,746    8,566 
Production and ad valorem taxes   3,496    4,379 
General and administrative expenses   1,981    2,596 
Current portion of ARO   1,977    1,977 
Derivative settlements   855    364 
Other   613    1,029 
Total  $53,852   $40,171 

 

NOTE 13. NEW ACCOUNTING STANDARDS  

 

In December 2011, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) No. 2011–11, Disclosures about Offsetting Assets and Liabilities. This ASU affects all entities that have financial instruments and derivative instruments that are either offset or subject to an enforceable master netting arrangement or similar agreement. ASU 2011–11 requires an entity to disclose information about offsetting and related arrangements to enable user of its financial statements to understand the effect of those arrangements on its financial position. In January 2013, the FASB issued ASU 2013–01, Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities, to clarify the scope of ASU 2011–11. The provisions of both ASU 2011–11 and ASU 2013–01 are applicable to annual reporting periods beginning on or after January 1, 2013 and interim periods within those annual periods. We adopted ASU 2011–11 and 2013–01 on January 1, 2013, and the adoption did not impact our operating results, financial position or cash flows, but did impact our disclosures on offsetting arrangements (see Note 4).

 

No other new accounting pronouncements issued or effective during the three months ended March 31, 2013 have had or are expected to have a material impact on our unaudited condensed consolidated financial statements.

 

 

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

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our unaudited condensed consolidated financial statements and the related notes thereto, as well as our Annual Report on Form 10–K for the year ended December 31, 2012. 

 

OVERVIEW  

 

We are a Delaware limited partnership formed in April 2006 by EnerVest to acquire, produce and develop oil and natural gas properties. Our general partner is EV Energy GP, a Delaware limited partnership, and the general partner of our general partner is EV Management, a Delaware limited liability company. 

 

As of December 31, 2012, our properties were located in the Barnett Shale, the Appalachian Basin (which includes the Utica Shale), the Mid-Continent area in Oklahoma, Texas, Arkansas, Kansas and Louisiana, the San Juan Basin, Central and East Texas (which includes the Austin Chalk area), the Permian Basin, the Monroe Field in Louisiana, and Michigan. As of December 31, 2012, we had estimated net proved reserves of 13.5 MMBbls of oil, 609.5 Bcf of natural gas and 35.7 MMBbls of natural gas liquids, or 904.7 Bcfe, and a standardized measure of $866.9 million.

 

CURRENT DEVELOPMENTS 

 

In the three months ended March 31, 2013, we invested $68.3 million in our unconsolidated affiliates, which included $33.3 million to increase our ownership in UEO from 8% to 21%.

 

BUSINESS ENVIRONMENT

 

Our primary business objective is to provide stability and growth in cash distributions per unit over time. The amount of cash we can distribute on our units principally depends upon the amount of cash generated from our operations, which will fluctuate from quarter to quarter based on, among other things:

 

·the prices at which we will sell our oil, natural gas liquids and natural gas production;

 

·our ability to hedge commodity prices;

 

·the amount of oil, natural gas liquids and natural gas we produce; and

 

·the level of our operating and administrative costs.

 

Oil, natural gas and natural gas liquids prices have been and are expected to continue to be volatile in the future. Factors affecting the price of oil include worldwide economic conditions, geopolitical activities, worldwide supply disruptions, weather conditions, actions taken by the Organization of Petroleum Exporting Countries and the value of the U.S. dollar in international currency markets. Factors affecting the price of natural gas and natural gas liquids include the discovery of substantial accumulations of natural gas in unconventional reservoirs due to technological advancements necessary to commercially produce these unconventional reserves, North American weather conditions, industrial and consumer demand for natural gas and natural gas liquids, storage levels of natural gas and natural gas liquids and the availability and accessibility of natural gas deposits in North America.

 

In order to mitigate the impact of changes in prices on our cash flows, we are a party to derivatives, and we intend to enter into derivatives in the future to reduce the impact of price volatility on our cash flows. By removing a significant portion of this price volatility on our future production through December 2015, we have mitigated, but not eliminated, the potential effects of changing prices on our cash flows from operations for those periods. If commodity prices are depressed for an extended period of time, it could alter our acquisition and development plans, and adversely affect our growth strategy and ability to access additional capital in the capital markets.

 

The primary factors affecting our production levels are capital availability, our ability to make accretive acquisitions, the success of our drilling program and our inventory of drilling prospects. In addition, as initial reservoir pressures are depleted, production from our wells decreases. We attempt to overcome this natural decline through a combination of drilling and acquisitions. Our future growth will depend on our ability to continue to add reserves through drilling and acquisitions in excess of production. We will maintain our focus on the costs to add reserves through drilling and acquisitions as well as the costs necessary to produce such reserves. Our ability to add reserves through drilling is dependent on our capital resources and can be limited by many factors, including our ability to timely obtain drilling permits and regulatory approvals. Any delays in drilling, completion or connection to gathering lines of our new wells will negatively impact our production, which may have an adverse effect on our revenues and, as a result, cash available for distribution.

 

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We focus our efforts on increasing our reserves and production while controlling costs at a level that is appropriate for long–term operations. Our future cash flows from operations are dependent upon our ability to manage our overall cost structure.

 

Utica Shale

 

Primarily through acquisitions completed in 2009 and 2010, we hold over 170,000 net working interest acres in Pennsylvania and Ohio and an approximate 2% average overriding royalty interest in 880,000 gross acres in Ohio which we believe may be prospective for the Utica Shale. In addition, partnerships managed by EnerVest own acreage which may be prospective for the Utica Shale. At March 31, 2013, our estimated net proved reserves in the Utica Shale were not material to us. Exploration and development activities targeting the Utica Shale are in the early stages, and it is possible that our estimates of the acreage in Ohio that we believe is prospective for the Utica Shale may change, perhaps materially, as additional exploration and development activities are conducted in the area. We do not expect to fully develop our Utica Shale properties for our account.

 

In mid–2012, we initiated the process for the monetization of a majority of our working interest acres related to the Utica Shale. Such monetization could take many forms, and we cannot at this time predict the type of transaction or transactions we may enter into or the type or amount of consideration we may receive. We may not be successful in our efforts to monetize the Utica Shale properties, it may take longer to complete a transaction than we expect, or we may decide to delay the monetization of all or a portion of the Utica Shale properties.

 

RESULTS OF OPERATIONS 

 

   Three Months Ended
March 31,
 
   2013   2012 
Production data:          
Oil (MBbls)   263    285 
Natural gas liquids (MBbls)   503    423 
Natural gas (MMcf)   10,267    10,263 
Net production (MMcfe)   14,864    14,513 
Average sales price per unit:          
Oil (Bbl)  $93.47   $100.05 
Natural gas liquids (Bbl)   30.38    46.42 
Natural gas (Mcf)   3.20    2.79 
Mcfe   4.89    5.29 
Average unit cost per Mcfe:          
Production costs:          
Lease operating expenses  $1.76   $1.97 
Production taxes   0.20    0.23 
Total   1.96    2.20 
Depreciation, depletion and amortization   2.07    1.69 
General and administrative expenses   0.85    0.83 

 

Net (loss) income for the three months ended March 31, 2013 was $(46.6) million compared with $28.6 million for the three months ended March 31, 2012. This change reflects (i) a $49.9 million adverse change in non–cash changes in the fair value of our derivatives, (ii) a $13.4 million adverse change in realized gains on our derivatives, (iii) a $6.2 million increase in depreciation, depletion and amortization (“DD&A”) expense, (iv) a $4.5 million increase in impairments of our oil and natural gas properties, (v) a $4.0 million decrease in total revenues, and (vi) a $1.7 million increase in interest expense, partially offset by a $2.5 million decrease in lease operating expenses.  

  

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Oil, natural gas and natural gas liquids revenues for the three months ended March 31, 2013 totaled $72.7 million, a decrease of $4.1 million compared with the three months ended March 31, 2012. This was the result of decreases of $8.7 million related to lower prices for oil and natural gas liquids and $2.1 million related to decreased oil production offset by increases of $4.2 million related to higher prices for natural gas and $2.5 million related to increased natural gas liquids production. 

 

Lease operating expenses for the three months ended March 31, 2013 decreased $2.5 million compared with the three months ended March 31, 2012 as the result of $1.2 million ($0.08 per Mcfe) of costs in the three months ended March 31, 2012 associated with the sales of oil in tanks acquired in certain of our 2011 acquisitions and $1.9 million from a lower unit cost per Mcfe, primarily at our Barnett Shale oil and natural gas properties, offset by $0.6 million related to our expanded development drilling program. Lease operating expenses per Mcfe were $1.76 in the three months ended March 31, 2013 compared with $1.97 in the three months ended March 31, 2012.  

 

Dry hole and exploration costs for the three months ended March 31, 2013 decreased $1.8 million compared with the three months ended March 31, 2012 primarily as a result of decreased seismic costs at certain of our oil and natural gas properties in the Appalachian Basin. 

 

Production taxes, which are generally based on a percentage of our oil, natural gas and natural gas liquids revenues, for the three months ended March 31, 2013 decreased $0.4 million compared with the three months ended March 31, 2012 primarily due to decreased oil, natural gas and natural gas liquids revenues. Production taxes for the three months ended March 31, 2013 were $0.20 per Mcfe compared with $0.23 per Mcfe for the three months ended March 31, 2012.  

 

Depreciation, depletion and amortization (“DD&A”) for the three months ended March 31, 2013 increased $6.2 million compared with the three months ended March 31, 2012 due to $5.5 million from a higher DD&A rate and $0.7 million from increased production. The higher average DD&A rate per unit reflects the change that decreased prices for natural gas and natural gas liquids had on our reserves estimates. Depreciation, depletion and amortization for the three months ended March 31, 2013 was $2.07 per Mcfe compared with $1.69 per Mcfe for the three months ended March 31, 2012.  

 

General and administrative expenses for the three months ended March 31, 2013 totaled $12.6 million, an increase of $0.5 million compared with the three months ended March 31, 2012. This increase is primarily the result of $1.3 million of higher compensation costs primarily related to our equity–based compensation plans offset by $0.8 million of lower fees paid to EnerVest under the omnibus agreement. General and administrative expenses were $0.85 per Mcfe in the three months ended March 31, 2013 compared with $0.83 per Mcfe in the three months ended March 31, 2012.  

 

In the three months ended March 31, 2013, we incurred leasehold impairment charges of $5.2 million, primarily related to expired leases. In the three months ended March 31, 2012, we incurred $0.4 million of additional impairment charges to write down assets held for sale to their fair value and $0.2 million of leasehold impairment charges.

 

Realized gains on derivatives, net consisted of the following for the three months ended March 31:

 

   2013   2012 
         
Cash settlements  $11,439   $24,774 
Non–cash realized loss related to acquired derivatives       (584)
Non–cash realized loss related to terminated interest rate swaps   (680)    
Realized gains on derivatives, net  $10,759   $24,190 

 

The $13.3 million decrease in cash settlements is due to the impact of derivative contracts with more favorable terms that expired as of December 31, 2012.

 

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Unrealized (losses) gains on derivatives, net consisted of the following for the three months ended March 31:

 

   2013   2012 
         
Change in the fair value of open derivatives  $(38,953)  $11,077 
Change in value of acquired derivatives from the beginning of the period       584 
Change in value of terminated interest rate swaps   680     
Unrealized (losses) gains on derivatives, net  $(38,273)  $11,661 

 

Interest expense for the three months ended March 31, 2013 increased $1.7 million compared with the three months ended March 31, 2012 due to increases of $1.3 million from a higher weighted average long–term debt balance and $1.2 million due to a higher weighted average effective interest rate offset by an increase in capitalized interest in the three months ended March 31, 2013 of $0.8 million.

 

LIQUIDITY AND CAPITAL RESOURCES

 

Historically, our primary sources of liquidity and capital have been issuances of equity and debt securities, borrowings under our credit facility and cash flows from operations. Our primary uses of cash have been acquisitions of oil and natural gas properties and related assets, development of our oil and natural gas properties, distributions to our unitholders and general partner and working capital needs. For 2013, we believe that cash on hand, proceeds from sales of assets, net cash flows generated from operations and borrowings under our credit facility will be adequate to fund our capital budget, pay distributions to our unitholders and general partner and satisfy our short–term liquidity needs. We may also utilize borrowings under our credit facility and various financing sources available to us, including the issuance of equity or debt securities through public offerings or private placements, to fund our acquisitions and long–term liquidity needs. Our ability to complete future offerings of equity or debt securities and the timing of these offerings will depend upon various factors including prevailing market conditions and our financial condition.

 

In the past we accessed the equity and debt markets to finance our significant acquisitions. While we have been successful in accessing the public equity and debt markets in 2012 and in prior years, any disruptions in the financial markets may limit our ability to access the public equity or debt markets in the future.

 

Long–term Debt

 

As of March 31, 2013, we have a $1.0 billion credit facility that expires in April 2016. Borrowings under the facility may not exceed a “borrowing base” determined by the lenders based on our oil and natural gas reserves. As of March 31, 2013, the borrowing base was $750.0 million, and we had $445.0 million outstanding. In April 2013, the borrowing base under the facility was reduced to $710.0 million.  

 

As of March 31, 2013, we have $500.0 million in aggregate principal amount outstanding of 8.0% senior notes due 2019. As of March 31, 2013, the aggregate carrying amount of the senior notes due 2019 was $499.2 million.

 

For additional information about our long–term debt, such as interest rates and covenants, please see “Item 1. Condensed Consolidated Financial Statements (unaudited)” contained herein for additional information.

 

Cash and Short–term Investments

 

At March 31, 2013, we had $18.9 million of cash and short–term investments, which included $6.6 million of short–term investments.  With regard to our short–term investments, we invest in money market accounts with a major financial institution.  

 

Counterparty Exposure

 

All of our derivative contracts are with major financial institutions who are also lenders under our credit facility.  Should one of these financial counterparties not perform, we may not realize the benefit of some of our derivative contracts and we could incur a loss. As of March 31, 2013, all of our counterparties have performed pursuant to their derivative contracts.

 

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Cash Flows

 

Cash flows provided by (used in) type of activity were as follows:

 

   Three Months Ended
March 31,
 
   2013   2012 
Operating activities  $41,385   $58,499 
Investing activities   (81,460)   (70,032)
Financing activities   51,496    15,646 

 

Operating Activities

 

Cash flows from operating activities provided $41.4 million and $58.5 million in the three months ended March 31, 2013 and 2012, respectively. The significant factors in the decrease were $13.4 million of decreased cash settlements from our derivatives and $4.0 million of lower total revenues offset by $2.8 million of lower cash operating expenses and $1.4 million of decreased cash paid for interest.

 

Investing Activities

 

Our principal recurring investing activity is the acquisition and development of oil and natural gas properties. During the three months ended March 31, 2013, we spent $21.1 for additions to our oil and natural gas properties and increased our investment in unconsolidated affiliates by $68.3 million. In addition, we received $8.0 million in final purchase price settlements related to our August 2012 acquisition of additional working interests in acreage in Ohio.

 

During the three months ended March 31, 2012, we spent $36.5 million for acquisitions of oil and natural gas properties and $29.1 million for additions to our oil and natural gas properties. We also increased our investment in unconsolidated affiliates by $11.6 million. In addition, we received $5.5 million from the sale of oil and natural gas properties and $1.7 million from the settlements of acquired derivatives.

 

Financing Activities

 

During the three months ended March 31, 2013, we received $85.0 million from borrowings under our credit facility and paid distributions of $33.8 million to holders of our common units and our general partner.

 

During the three months ended March 31, 2012, we received proceeds of $262.7 million, after payment of offering costs of $0.2 million, from our public equity offering in February 2012 and $202.1 million, after payment of offering costs of $3.9 million, from our debt offering in March 2012. We used the proceeds to repay $460.0 million of indebtedness outstanding under our credit facility. We also received $35.0 million from borrowings under our credit facility and contributions of $5.7 million from our general partner in order to maintain its 2% interest in us. In addition, we paid distributions of $29.8 million to holders of our common units, Class B units and our general partner.

 

FORWARD–LOOKING STATEMENTS

 

This Form 10–Q contains forward–looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act (each a “forward–looking statement”). These forward–looking statements relate to, among other things, the following:

 

·our future financial and operating performance and results;

 

·our business strategy and plans, including plans for the sale of acreage in the Utica Shale;

 

·our estimated net proved reserves, PV–10 value and standardized measure;

 

·market prices;

 

·our future derivative activities; and

 

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·our plans and forecasts.

 

We have based these forward–looking statements on our current assumptions, expectations and projections about future events.

 

The words “anticipate,” “believe,” “ensure,” “expect,” “if,” “intend,” “estimate,” “project,” “forecasts,” “predict,” “outlook,” “aim,” “will,” “could,” “should,” “would,” “may,” “likely” and similar expressions, and the negative thereof, are intended to identify forward–looking statements. These statements discuss future expectations, contain projections of results of operations or of financial condition or state other “forward–looking” information. We do not undertake any obligation to update or revise publicly any forward–looking statements, except as required by law. These statements also involve risks and uncertainties that could cause our actual results or financial condition to materially differ from our expectations in this Form 10–Q including, but not limited to:

 

·fluctuations in prices of oil, natural gas and natural gas liquids;

 

·significant disruptions in the financial markets;

 

·future capital requirements and availability of financing;

 

·uncertainty inherent in estimating our reserves;

 

·risks associated with drilling and operating wells;

 

·discovery, acquisition, development and replacement of reserves;

 

·cash flows and liquidity;

 

·timing and amount of future production of oil, natural gas and natural gas liquids;

 

·availability of drilling and production equipment;

 

·marketing of oil, natural gas and natural gas liquids;

 

·developments in oil and natural gas producing countries;

 

·competition;

 

·general economic conditions;

 

·governmental regulations;

 

·receipt of amounts owed to us by purchasers of our production and counterparties to our derivative financial instrument contracts;

 

·hedging decisions, including whether or not to enter into derivative financial instruments;

 

·events similar to those of September 11, 2001;

 

·actions of third party co–owners of interest in properties in which we also own an interest;

 

·fluctuations in interest rates and the value of the U.S. dollar in international currency markets; and

 

·our ability to effectively integrate companies and properties that we acquire.

 

All of our forward–looking information is subject to risks and uncertainties that could cause actual results to differ materially from the results expected. Although it is not possible to identify all factors, these risks and uncertainties include the risk factors and the timing of any of those risk factors identified in the “Risk Factors” section included in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2012. This document is available through our website or through the SEC’s Electronic Data Gathering and Analysis Retrieval System at http://www.sec.gov

 

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Our revenues, operating results, financial condition and ability to borrow funds or obtain additional capital depend substantially on prevailing prices for oil, natural gas and natural gas liquids. Declines in prices may materially adversely affect our financial condition, liquidity, ability to obtain financing and operating results. Lower prices also may reduce the amount of oil, natural gas or natural gas liquids that we can produce economically. A decline in prices could have a material adverse effect on the estimated value and estimated quantities of our reserves, our ability to fund our operations and our financial condition, cash flows, results of operations and access to capital. Historically, prices and markets have been volatile, with prices fluctuating widely, and they are likely to continue to be volatile.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

We are exposed to certain market risks that are inherent in our financial statements that arise in the normal course of business. We may enter into derivative instruments to manage or reduce market risk, but do not enter into derivative agreements for speculative purposes.

 

We do not designate these or plan to designate future derivative instruments as hedges for accounting purposes. Accordingly, the changes in the fair value of these instruments are recognized currently in earnings.

 

Commodity Price Risk

 

Our major market risk exposure is to prices for oil, natural gas and natural gas liquids. These prices have historically been volatile. As such, future earnings are subject to change due to changes in these prices. Realized prices are primarily driven by the prevailing worldwide price for oil and regional spot prices for natural gas production. We have used, and expect to continue to use, oil, natural gas and natural gas liquids commodity contracts to reduce our risk of changes in the prices of oil, natural gas and natural gas liquids. Pursuant to our risk management policy, we engage in these activities as a hedging mechanism against price volatility associated with pre–existing or anticipated sales of oil, natural gas and natural gas liquids.

 

We have entered into commodity contracts to hedge a portion of our anticipated oil and natural gas production through December 2015. As of March 31, 2013, we have commodity contracts covering approximately 66% of our production attributable to our estimated net proved reserves from April 2013 through December 2015, as estimated in our reserve report prepared by third party engineers using prices, costs and other assumptions required by SEC rules. Our actual production will vary from the amounts estimated in our reserve reports, perhaps materially.

The fair value of our oil and natural gas commodity contracts at March 31, 2013 was a net asset of $55.2 million. A 10% change in oil and natural gas prices with all other factors held constant would result in a change in the fair value (generally correlated to our estimated future net cash flows from such instruments) of our oil and natural gas commodity contracts of approximately $64.8 million. Please see “Item 1. Condensed Consolidated Financial Statements (unaudited)” contained herein for additional information.

 

Interest Rate Risk

 

Our floating rate credit facility and interest rate swaps also expose us to risks associated with changes in interest rates and as such, future earnings are subject to change due to changes in these interest rates. If interest rates on our facility increased by 1%, interest expense for the three months ended March 31, 2013 would have increased by approximately $1.1 million. The fair value of our interest rate swaps at March 31, 2013 was a liability of $7.5 million. A 1% change in interest rates with all other factors held constant would result in a change in the fair value (generally correlated to our estimated future net cash flows from such interest rate swaps) of our interest rate swaps of approximately $2.7 million. Please see “Item 1. Condensed Consolidated Financial Statements (unaudited)” contained herein for additional information.

 

ITEM 4. CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

In accordance with Exchange Act Rule 13a–15 and 15d–15, we carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of March 31, 2013 to provide reasonable assurance that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Our disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

 

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Change in Internal Controls Over Financial Reporting

 

There have not been any changes in our internal controls over financial reporting that occurred during the quarterly period ended March 31, 2013 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

 

 

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PART II. OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

We are involved in disputes or legal actions arising in the ordinary course of business. We do not believe the outcome of such disputes or legal actions will have a material adverse effect on our unaudited condensed consolidated financial statements.

 

ITEM 1A. RISK FACTORS

 

There have been no material changes with respect to the risk factors disclosed in our Annual Report on Form 10–K for the year ended December 31, 2012.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

None.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

ITEM 5. OTHER INFORMATION

 

None.

 

ITEM 6. EXHIBITS 

 

The exhibits listed below are filed or furnished as part of this report: 

 

+31.1Rule 13a-14(a)/15d–14(a) Certification of Chief Executive Officer. 

 

+31.2Rule 13a-14(a)/15d–14(a) Certification of Chief Financial Officer. 

 

+32.1Section 1350 Certification of Chief Executive Officer.  

 

+32.2Section 1350 Certification of Chief Financial Officer. 

 

+101Interactive Data Files. 

 

 
+Filed herewith 

 

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SIGNATURES 

 

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.  

 

  EV Energy Partners, L.P.
  (Registrant)
   
Date:  May 10, 2013 By: /s/ MICHAEL E. MERCER
    Michael E. Mercer
    Senior Vice President and Chief Financial Officer

 

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EXHIBIT INDEX 

 

+31.1Rule 13a-14(a)/15d–14(a) Certification of Chief Executive Officer. 

 

+31.2Rule 13a-14(a)/15d–14(a) Certification of Chief Financial Officer. 

 

+32.1Section 1350 Certification of Chief Executive Officer.  

 

+32.2Section 1350 Certification of Chief Financial Officer. 

 

+101Interactive Data Files. 

 

 

+ Filed herewith 

 

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