EVERFLOW EASTERN PARTNERS, L. P.

CONSOLIDATED FINANCIAL REPORT

MARCH 31, 2020

See notes to unaudited consolidated financial statements.

See notes to unaudited consolidated financial statements.

See notes to unaudited consolidated financial statements.

See notes to unaudited consolidated financial statements.

See notes to unaudited consolidated financial statements.

EVERFLOW EASTERN PARTNERS, L.P.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

The following discussion is intended to assist in the understanding of the Company’s liquidity, capital resources and results of operations. It is suggested that this information be read in conjunction with the Company’s interim consolidated financial statements, the related notes to consolidated financial statements and the Company’s 20182019 Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 27, 2019.26, 2020.

On March 11, 2020, the World Health Organization declared the outbreak of the novel strain of the coronavirus (“COVID-19”) a global pandemic. COVID-19 has led to global shutdowns as governments imposed regulations in efforts to control the spread of COVID-19. As a result, physical and economic uncertainties have arisen which have negatively impacted the Company’s operations, cash flows and financial condition.

Liquidity and Capital Resources

The following table summarizes the Company's financial position at September 30, 2019March 31, 2020 and December 31, 2018:2019:

Working capital of $29.8$28.9 million as of September 30, 2019March 31, 2020 represented an increasea decrease of $1.4 million$667,000 from December 31, 2018,2019, due primarily to an increase in investments and a decrease in accrued expenses; offset somewhat by decreases in cash and equivalents, investments and production accounts receivable, and an increase in accounts payable.payable, offset somewhat by a decrease in accrued expenses. The increasedecrease in investments wascash and equivalents is primarily the result of cash provided by operating activities and existing cash and equivalents being used in investing activities. The decrease in investments is primarily the result of unrealized market losses, offset somewhat by additional purchases of shares in a mutual fund during the nine months ended September 30, 2019 that invests primarily in investment grade, short-term fixed and floating rate debt securities. The decrease in accrued expenses wasproduction accounts receivable is primarily the result of all payrolldecreases in average crude oil and retirement contributions accrued at December 31, 2018 being paid during the nine months ended September 30, 2019. The decrease in production accounts receivable was primarily the result of lower average natural gas and crude oil prices received on production, as well as less natural gas volumes produced, during the current receivable period as compared to the prior comparable receivable period. The effect of lower average natural gas and crude oil prices received and less natural gas volumes produced wasperiod, offset somewhat by additional natural gas and crude oil volumes recognized from third party operators during the current receivable period as compared to the prior comparable receivable period. The decreasean increase in natural gas volumes produced was primarily the result of more Company operated properties being voluntarily shut-inand decreases in production costs incurred during the current receivable period as compared to the prior comparable receivable period. The increase in accounts payable wasvolumes produced is primarily the result of additional Company operated wells producing during the current receivable period that were otherwise voluntarily shut-in during the prior comparable receivable period. The decrease in production and relatedcosts incurred is primarily associated with production reported by third party operators. The increase in accounts payable is primarily the result of additional other payables outstandingrecognized at September 30,March 31, 2020 in association with the disposal of various oil and gas properties made during the three month period ending March 31, 2020. The decrease in accrued expenses is primarily the result of all payroll and retirement contributions accrued at December 31, 2019 being paid during the three months ended March 31, 2020, as well as less asset retirement obligations being classified as current liabilities at March 31, 2020 as compared to the prior comparable reporting date.December 31, 2019.

The Company generally funds its operations with cash generated by operations and/or existing cash and equivalent balances. In April 2020, the Company was approved for a $327,000 loan associated with the United States Small Business Administration’s Paycheck Protection Program. The Company has had no other borrowings since 2003 and no other principal indebtedness wasis outstanding as of NovemberMay 10, 2019. The Company used cash provided by operating activities and existing cash and equivalents to fund the purchase of $2.9 million of investments during the nine month period ending September 30, 2019, the payment of a distribution amounting to approximately $1.7 million in April 2019, and $130,000 in payments in July 2019 associated with the repurchase of Units tendered in conjunction with the Company’s 2019 Repurchase Right.2020.

The Company’s cash flow provided by operations before the change in working capital was $3.3 million$208,000 during the ninethree months ended September 30, 2019,March 31, 2020, a decrease of $748,000$1.4 million as compared to $4.0$1.6 million of cash flow provided by operations before the change in working capital during the prior comparable period. Changes in working capital from operations other than cash and equivalents increaseddecreased cash by $604,000$153,000 during the ninethree months ended September 30, 2019.March 31, 2020. Cash flows provided by operating activities was $3.9 million$54,000 for the ninethree months ended September 30, 2019.March 31, 2020. The Company used existing cash and equivalents to fund the payment of a Unitholder distribution amounting to approximately $1.4 million in April 2020.

Management of the Company believes cash flows and existing cash and equivalents should be sufficient to meet the current funding requirements of ongoing operations, capital investments to develop and/or purchase oil and gas properties and the repurchase of Units pursuant to the 2020 Repurchase Right.repurchase right.

The Company has multiple contracts with Dominion Field Services (“Dominion”) which obligate Dominion to purchase, and the Company to sell and deliver, certain quantities of natural gas production from the Company’s oil and gas properties throughout the contract periods. Management believes the Company can meet its delivery commitments based on estimated production.

Results of Operations

The following table and discussion is a review of the results of operations of the Company for the three and nine month periods ended September 30, 2019March 31, 2020 and 2018.2019. All items in the table are calculated as a percentage of total revenues. This table should be read in conjunction with the discussions of select items below:

Revenues for the three month period ended September 30, 2019March 31, 2020 decreased $1.3$1.5 million, or 48%52%, as compared to the prior comparable period. Revenues for the nine month period ended September 30, 2019 decreased $1.2 million, or 16%, as compared to the prior comparable period. Both revenue variances wereThe decrease was primarily the result of variancesa decrease in crude oil and natural gas sales from the current period in comparison to the prior comparable periods.sales.

Crude oil and natural gas sales decreased $1.3$1.5 million, or 50%55%, during the three months ended September 30, 2019March 31, 2020 as compared to the prior comparable period. The decrease was primarily the result of less natural gas and crude oil volumes produced, andas well as lower average natural gas and crude oil and natural gas prices received, during the three month periodmonths ended September 30, 2019March 31, 2020 as compared to the prior comparable period. Crude oil and natural gas salesThe decrease in volumes produced was primarily the result of less reported volumes recognized from third party operated properties, during the three months ended March 31, 2020 as compared to the prior comparable period.

Production costs decreased $1.2 million,$177,000, or 16%21%, during the ninethree months ended September 30, 2019March 31, 2020 as compared to the prior comparable period. The decrease was primarily the result of less natural gas and crude oil volumes produced and lower average crude oil prices received, offset somewhat by the effect of higher average natural gas prices received,costs recognized in association with third party operated properties during the ninethree month period ended September 30, 2019March 31, 2020, as well as decreases in various repairs and maintenance expenses associated with Company operated properties during the three month period ended March 31, 2020, each as compared to the prior comparable period. The decreases in natural gas and crude oil volumes produced during the three and nine month periods ended September 30, 2019 as compared to the prior comparable periods were primarily the result of more Company operated properties being voluntarily shut-in. Another contributing factor to the decreases in crude oil and natural gas sales for the three and nine month periods ended September 30, 2019 as compared to the prior comparable periods was the recognition of $956,000 of crude oil and natural gas sales reported by a third party operator significantly in arrears during the three and nine month periods ended September 30, 2018.

Production costs decreased $581,000,Depreciation, depletion and amortization (“DD&A”) increased $70,000, or 51%61%, during the three months ended September 30, 2019 as compared to the prior comparable period. Production costs decreased $435,000, or 18%, during the nine months ended September 30, 2019 as compared to the prior comparable period. The decreases were primarily the result of one-time recognition of $637,000 of production costs reported by a third party operator significantly in arrears during the three and nine months ended September 30, 2018, respectively, offset somewhat by additional costs associated with third party operated wells during the three and nine month periods ended September 30, 2019 as compared to the prior comparable periods.

Other income decreased $67,000, or 33%, during the three month period ended September 30, 2019 as compared to the prior comparable period. Other income decreased $414,000, or 45%, during the nine month period ended September 30, 2019March 31, 2020 as compared to the prior comparable period. The primary reasonreasons for the decreases was the result of less gain recognized on the disposal of propertyincrease are lower projected crude oil and equipment. The Company had a substantial decrease in the number of properties disposednatural gas reserves during the three and nine month periodsperiod ended September 30, 2019March 31, 2020 as compared to the prior comparable periods.period. The majoritydecrease in projected crude oil and natural gas reserves is primarily the result of lower benchmark crude oil and natural gas prices indexed throughout the first three months of 2020 as compared to the benchmark prices indexed throughout the prior comparable period. The lower 2020 benchmark prices project to decrease reserves at December 31, 2020, the next scheduled valuation date, which will decrease the average economic life of the gainsCompany’s oil and gas properties as compared to December 31, 2019, the prior valuation date. The effect that lower projected crude oil and natural gas reserves had on DD&A was offset somewhat by less crude oil and natural gas volumes produced during the three month period ended March 31, 2020 as compared to the prior comparable period.

Other income increased $128,000, or 59%, during the three months ended March 31, 2020 as compared to prior comparable period. The primary reason for the increase was the result of an increase in gain on disposal of property and equipment recognized during the three and nine month periodsmonths ended September 2018 were associated with settlements ofMarch 31, 2020 as compared to the properties’ related asset retirement obligations. Theprior comparable period, offset somewhat by the effect of lessinvestment loss recognized during the three months ended March 31, 2020 as compared to investment gain recognized during the prior comparable period. The increase in gain on the disposal of property and equipment was offset somewhat by additional interestprimarily the result of the Company selling substantially all of its interests in 190 oil and dividend income recognizedgas properties during the three and nine month periodsperiod ended September 30, 2019March 31, 2020 as compared to the sale of 1 oil and gas property during the prior comparable periods.period. The increase in interest and dividend income was primarily the resultCompany recognized $261,000 of additional investments held and the related dividends yieldedunrealized loss on investments during the three and nine month periodsperiod ended September 30, 2019March 31, 2020, as compared to $51,000 of unrealized gain on investments recognized during the prior comparable periods.period.        

The Company reported net income of $178,000$145,000 and $1.0$1.4 million during the three months ended September 30,March 31, 2020 and 2019, and 2018, respectively, representing 12%11% and 38%47% of total revenues during the three month periods ended September 30,March 31, 2020 and 2019, and 2018, respectively. The Company reported net income of $2.4 million and $3.4 million during the nine months ended September 30, 2019 and 2018, respectively, representing 38% and 47% of total revenues during the nine month periods ended September 30, 2019 and 2018, respectively. The decreasesdecrease in net income werewas primarily the result of decreasesa decrease in crude oil and natural gas sales, and other income, offset somewhat by decreases in production costs.costs and an increase in other income.

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, 2018.2019.

Forward-Looking Statements

Except for historical financial information contained in this Form 10-Q, the statements made in this report are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (“Exchange Act”). In addition, words such as “expects,” “anticipate,” “intends,” “plans,” “believes,” “estimates,” variations of such words and similar expressions are intended to identify forward-looking statements. Factors that may cause actual results to differ materially from those in the forward-looking statements include price fluctuations in the gas market in the Appalachian Basin, actual oil and gas production, and the ability to locate economically productive oil and gas prospects for development by the Company.Company and the impact of COVID-19 on the Company’s business and the global economy generally. 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.

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

(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, 2018,2019, 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.

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.