Everflow Eastern Partners 10-Q 2010 Q1 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2010

OR

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

For the transition period from                    to                    .

Commission File Number 0-19279

EVERFLOW EASTERN PARTNERS, L.P.

(Exact name of registrant as specified in its charter)

Delaware	34-1659910
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
585 West Main Street
P.O. Box 629
Canfield, Ohio	44406
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: 330-533-2692

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesþ Noo

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). Yeso Noo

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 filero	Accelerated filero	Non-accelerated filero	Smaller reporting companyþ
		(Do not check if a smaller reporting company)

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

There were 5,621,851 Units of limited partnership interest of the registrant as of May 5, 2010. 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, 2010.

EVERFLOW EASTERN PARTNERS, L.P.

INDEX

DESCRIPTION	PAGE NO.
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets March 31, 2010 and December 31, 2009		F-1
Consolidated Statements of Income Three Months Ended March 31, 2010 and 2009		F-3
Consolidated Statements of Partners’ Equity Three Months Ended March 31, 2010 and 2009		F-4
Consolidated Statements of Cash Flows Three Months Ended March 31, 2010 and 2009		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		6
Item 4. Controls and Procedures		7
Part II. Other Information
Item 6. Exhibits		8
Signature		9
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1

2

EVERFLOW EASTERN PARTNERS, L.P.

CONSOLIDATED BALANCE SHEETS

March 31, 2010 and December 31, 2009

	March 31,		December 31,
	2010		2009
	(Unaudited)		(Audited)
ASSETS
CURRENT ASSETS
Cash and equivalents	$	17,780,470	$	16,610,772
Accounts and notes receivable:
Production		6,003,791		5,143,587
Employees (including notes receivable)		127,321		544,909
Joint venture partners		76,135		62,365
Other		514,147		88,980
Total current assets		24,501,864		22,450,613
PROPERTY AND EQUIPMENT
Proved properties (successful efforts accounting method)		171,763,233		169,904,570
Pipeline and support equipment		573,775		555,564
Corporate and other		1,987,709		2,037,170
		174,324,717		172,497,304
Less accumulated depreciation, depletion, amortization and write down		127,009,683		124,791,532
		47,315,034		47,705,772
OTHER ASSETS
Employees’ accounts and notes receivable		409,916		396,700
Other		77,546		77,546
		487,462		474,246
	$	72,304,360	$	70,630,631

See notes to unaudited consolidated financial statements.

F-1

EVERFLOW EASTERN PARTNERS, L.P.

CONSOLIDATED BALANCE SHEETS

March 31, 2010 and December 31, 2009

	March 31,		December 31,
	2010		2009
	(Unaudited)		(Audited)
LIABILITIES AND PARTNERS’ EQUITY
CURRENT LIABILITIES
Accounts payable	$	1,826,001	$	1,555,798
Accrued expenses		560,668		1,112,290
Total current liabilities		2,386,669		2,668,088
DEFERRED INCOME TAXES		311,000		320,000
ASSET RETIREMENT OBLIGATIONS		5,198,968		5,069,368
COMMITMENTS AND CONTINGENCIES		—		—
LIMITED PARTNERS’ EQUITY, SUBJECT TO REPURCHASE RIGHT
Authorized - 8,000,000 Units
Issued and outstanding - 5,621,851		63,648,070		61,835,159
GENERAL PARTNER’S EQUITY		759,653		738,016
Total partners’ equity		64,407,723		62,573,175
	$	72,304,360	$	70,630,631

See notes to unaudited consolidated financial statements.

F-2

EVERFLOW EASTERN PARTNERS, L.P.

CONSOLIDATED STATEMENTS OF INCOME

Three Months Ended March 31, 2010 and 2009
(Unaudited)

	2010			2009
REVENUES
Oil and gas sales	$	9,037,760		$	6,904,100
Well management and operating		156,685			146,587
Other		311			1,186
		9,194,756			7,051,873
DIRECT COST OF REVENUES
Production costs		1,349,512			1,343,292
Well management and operating		69,667			60,159
Depreciation, depletion and amortization		2,247,680			1,924,694
Accretion expense		107,500			89,900
Total direct cost of revenues		3,774,359			3,418,045
GENERAL AND ADMINISTRATIVE EXPENSE		712,808			639,861
Total cost of revenues		4,487,167			4,057,906
INCOME FROM OPERATIONS		4,707,589			2,993,967
INTEREST INCOME		22,434			24,557
INCOME BEFORE INCOME TAXES		4,730,023			3,018,524
INCOME TAX EXPENSE (BENEFIT)
Current		60,000			100,000
Deferred		(9,000	)		(10,000	)
		51,000			90,000
NET INCOME	$	4,679,023		$	2,928,524
Allocation of Partnership Net Income
Limited Partners	$	4,623,837		$	2,893,999
General Partner		55,186			34,525
	$	4,679,023		$	2,928,524
Net income per Unit	$	0.82		$	0.51

See notes to unaudited consolidated financial statements.

F-3

EVERFLOW EASTERN PARTNERS, L.P.

CONSOLIDATED STATEMENTS OF PARTNERS’ EQUITY

Three Months Ended March 31, 2010 and 2009
(Unaudited)

	2010			2009
PARTNERS’ EQUITY — JANUARY 1	$	62,573,175		$	75,757,349
Net income		4,679,023			2,928,524
Cash distributions ($0.50 per unit in 2010 and $1.00 per unit in 2009)		(2,844,475	)		(5,691,391	)
PARTNERS’ EQUITY — MARCH 31	$	64,407,723		$	72,994,482

See notes to unaudited consolidated financial statements.

F-4

EVERFLOW EASTERN PARTNERS, L.P.

CONSOLIDATED STATEMENTS OF CASH FLOWS

Three Months Ended March 31, 2010 and 2009

(Unaudited)

	2010			2009
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	4,679,023		$	2,928,524
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, depletion and amortization		2,267,880			1,946,306
Accretion expense		107,500			89,900
Deferred income taxes		(9,000	)		(10,000	)
Changes in assets and liabilities:
Accounts receivable		(873,974	)		2,191,387
Other current assets		(425,167	)		4,000
Accounts payable		163,114			131,695
Accrued expenses		(551,622	)		(518,996	)
Total adjustments		678,731			3,834,292
Net cash provided by operating activities		5,357,754			6,762,816
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds received on receivables from employees		445,548			94,244
Advances disbursed to employees		(41,176	)		(55,592	)
Purchase of property and equipment		(1,747,953	)		(1,017,256	)
Net cash used by investing activities		(1,343,581	)		(978,604	)
CASH FLOWS FROM FINANCING ACTIVITIES
Distributions		(2,844,475	)		(5,691,391	)
Net cash used by financing activities		(2,844,475	)		(5,691,391	)
NET INCREASE IN CASH AND EQUIVALENTS		1,169,698			92,821
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD		16,610,772			14,451,825
CASH AND EQUIVALENTS AT END OF PERIOD	$	17,780,470		$	14,544,646
Supplemental disclosures of cash flow information and non-cash activities:
Cash paid during the period for:
Income taxes	$	87,081		$	110,703
Additions to proved properties reflect changes in accounts payable (see Note 2) and asset retirement obligations (see Note 1.E).

See notes to unaudited consolidated financial statements.

F-5

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 generally accepted accounting principles (“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 accounting principles generally accepted in the United States of America, or those normally made in an Annual Report on Form 10-K. It is suggested that these financial statements be read in conjunction with the financial statements and notes thereto which are incorporated in Everflow Eastern Partners, L.P.’s annual report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 31, 2010.

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

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.

In February 2010, EML entered into an Amended and Restated Agreement of Limited Partnership, which amended the prior Partnership Agreement to authorize the Company to grant options to repurchase certain Units to select officers and employees. No options have been granted as of May 14, 2010.

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.

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

F-7

EVERFLOW EASTERN PARTNERS, L.P.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Organization and Summary of Significant Accounting Policies

E. Asset Retirement Obligations (continued)

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

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

The schedule below is a reconciliation of the Company’s liability for the three months ended March 31, 2010 and 2009:

	Asset Retirement Obligations
	Three Months Ended March 31,
	2010		2009
Beginning of period	$	5,379,368	$	4,767,665
Liabilities incurred		22,100		5,000
Accretion expense		107,500		89,900
End of period	$	5,508,968	$	4,862,565

At March 31, 2010 and December 31, 2009, asset retirement obligations of $5,508,968 and $5,379,368 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 $310,000 at March 31, 2010 and December 31, 2009.

F-8

EVERFLOW EASTERN PARTNERS, L.P.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Organization and Summary of Significant Accounting Policies

F. Revenue Recognition — The Company recognizes oil and gas revenues when production is sold to a purchaser at a fixed or determinable price, when delivery has occurred, title and risk of loss have transferred to the purchaser, and collectibility of the revenue is reasonably assured. The Company utilizes the sales method to account for gas production volume imbalances. Under this method, revenue is recognized only when gas is produced and sold on the Company’s behalf. The Company had no material gas imbalances at March 31, 2010 and December 31, 2009. Other revenue is recognized at the time services are rendered, the Company has a contractual right to such revenue and collection is reasonably assured.

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

Each owner, including the Company, has an undivided interest in the jointly owned property(ies). Generally, the joint venture partners and employees participate on the same drilling/development cost basis as the Company and, therefore, no revenue, expense or income is recognized on the drilling and development of the properties. Accounts 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.

G. 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.

As of March 31, 2010, the Company’s income tax years from 2006 and thereafter remain subject to examination by the Internal Revenue Service, as well as various state and local taxing authorities.

F-9

EVERFLOW EASTERN PARTNERS, L.P.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Organization and Summary of Significant Accounting Policies

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

Earnings per limited partner Unit have been computed based on the weighted average number of Units outstanding, during the period for each period presented. Average outstanding Units for earnings per limited partner Unit calculations amounted to 5,621,851 and 5,624,293 for the three months ended March 31, 2010 and 2009, respectively.

I. Subsequent Events — Everflow paid a cash distribution in April 2010 of $0.50 per Unit. The distribution amounted to approximately $2,844,000.

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

F-10

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, 2010, and December 31, 2009:

	March 31,		December 31,
	2010		2009
Accounts Payable:
Production and related other	$	1,127,622	$	1,094,026
Other		426,270		380,832
Drilling		188,029		80,940
Joint venture partners		84,080		—
	$	1,826,001	$	1,555,798
Accrued Expenses:
Current portion of asset retirement obligations	$	310,000	$	310,000
Payroll and retirement plan contributions		130,110		663,270
Federal, state and local taxes		120,558		139,020
	$	560,668	$	1,112,290

Note 3. Credit Facilities and Long-Term Debt

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

F-11

EVERFLOW EASTERN PARTNERS, L.P.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Note 4. Partners’ Equity

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

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

The partnership agreement provides that Everflow will repurchase for cash up to 10% of the then outstanding Units, to the extent Unitholders offer Units to Everflow for repurchase pursuant to the Repurchase Right. The Repurchase Right entitles any Unitholder, between May 1 and June 30 of each year, to notify Everflow that the Unitholder elects to exercise the Repurchase Right and have Everflow acquire certain or all Units. The price to be paid for any such Units is calculated based upon the audited financial statements of the Company as of December 31 of the year prior to the year in which the Repurchase Right is to be effective and independently prepared reserve reports. The price per Unit equals 66% of the adjusted book value of the Company allocable to the Units, divided by the number of Units outstanding at the beginning of the year in which the applicable Repurchase Right is to be effective less all Interim Cash Distributions received by a Unitholder. The adjusted book value is calculated by adding partners’ equity, the Standardized Measure of Discounted Future Net Cash Flows and the tax effect included in the Standardized Measure and subtracting from that sum the carrying value of oil and gas properties (net of undeveloped lease costs). If more than 10% of the then outstanding Units are tendered during any period during which the Repurchase Right is to be effective, the Investors’ Units tendered shall be prorated for purposes of calculating the actual number of Units to be acquired during any such period. The price associated with the repurchase right, based upon the December 31, 2009 calculation, is $6.86 per Unit, net of the distributions made in January 2010 ($0.50 per Unit) and April 2010 ($0.50 per Unit).

F-12

EVERFLOW EASTERN PARTNERS, L.P.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Note 4. Partners’ Equity (continued)

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

	Calculated								Units Out-
	Price for		Less		Net		# of		standing
	Repurchase		Interim		Price		Units		Following
Year	Right		Distributions		Paid		Repurchased		Repurchase
2006	$	24.37	$	1.50	$	22.87		30,584		5,644,094
2007	$	14.88	$	2.00	$	12.88		826		5,643,268
2008	$	17.75	$	1.50	$	16.25		18,975		5,624,293
2009	$	12.57	$	1.50	$	11.07		2,442		5,621,851

There were no instruments outstanding at March 31, 2010 or March 31, 2009 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 2011. The agreements with Dominion provide for fixed pricing with current monthly weighted average pricing provisions ranging from $7.95 to $9.01 per MCF. The Company also has two annual contracts with Interstate Gas Supply, Inc. (“IGS”), which obligates IGS to purchase, and the Company to sell and deliver certain quantities of natural gas production on a monthly basis through October 2011. The agreements with IGS provide for fixed pricing with current monthly weighted average pricing provisions ranging from $8.05 to $8.67 per MCF. Fixed pricing with both Dominion and IGS applies to certain fixed quantities on a monthly basis with excess monthly quantities being priced based on the current spot market price. The impact on the Company cannot fully be measured until actual production volumes and prices are determined. The Company entered into no new contracts with Dominion or IGS during the three months ended March 31, 2010.

F-13

EVERFLOW EASTERN PARTNERS, L.P.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Note 6. Commitments and Contingencies

The Company operates exclusively in the United States, almost entirely in Ohio and Pennsylvania, in the business of oil and gas acquisition, exploration, development and production. The Company operates in an environment with many financial risks, including, but not limited to, the ability to acquire additional economically recoverable oil and gas reserves, the inherent risks of the search for, development of and production of oil and gas, the ability to sell oil and gas at prices which will provide attractive rates of return, the volatility and seasonality of oil and gas production and prices, and the highly competitive and, at times, seasonal nature of the industry and worldwide economic conditions. The Company’s ability to expand its reserve base and diversify its operations is also dependent upon the Company’s ability to obtain the necessary capital through operating cash flow, borrowings or equity offerings. Various federal, state and governmental agencies are considering, and some have adopted, laws and regulations regarding environmental protection which could adversely affect the proposed business activities of the Company. The Company cannot predict what effect, if any, current and future regulations may have on the operations of the Company.

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

Note 7. Related Party Transactions

The Company’s officers, directors, affiliates and certain employees have frequently participated, and will likely continue to participate in the future, as working interest owners in wells in which the Company has an interest. Frequently, the Company has loaned the funds necessary for certain employees to participate in the drilling and development of such wells. Initial terms of the unsecured loans call for repayment of all principal and accrued interest at the end of four years, however, the loan amounts are reduced as production proceeds attributable to the employees’ working interests are not remitted to the employees but rather used to reduce the amounts owed by the employees to the Company. If an outstanding balance remains after the initial four-year term, the Company and employee shall, acting in good faith, agree upon further repayment terms.

Employees remain obligated for the entire loan amount regardless of a dry-hole event or otherwise insufficient production. The loans carry no loan forgiveness provisions, and no loans have ever been forgiven. The loans accrue interest at the prime rate, which was 3.25% at March 31, 2010.

F-14

EVERFLOW EASTERN PARTNERS, L.P.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Note 7. Related Party Transactions (continued)

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, 2010 and December 31, 2009, the Company has extended various loans, evidenced by notes, to two and three employees, respectively, with origination dates ranging from December 2007 to December 2009. 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 2010), amounted to $537,237 and $941,609 at March 31, 2010 and December 31, 2009, respectively.

In January 2010, one employee repaid his entire loan balance in full by selling working interests in well properties he owned to the Company for a total purchase price of $270,000 and by paying cash of $141,700. The Company believes the price and other terms and conditions relating to the purchase of such well properties were at least as favorable to the Company as if they had been negotiated on an arm’s-length basis with unrelated third parties.

F-15

Part I: Financial Information

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

Liquidity and Capital Resources

The following table summarizes the Company’s financial position at March 31, 2010 and December 31, 2009:

	March 31, 2010					December 31, 2009
	Amount		%			Amount		%
	(Amounts in Thousands)					(Amounts in Thousands)
Working capital	$	22,115		31	%	$	19,782		29	%
Property and equipment (net)		47,315		68			47,706		70
Other		488		1			474		1
Total	$	69,918		100	%	$	67,962		100	%
Deferred income taxes	$	311		—	%	$	320		—	%
Long-term liabilities		5,199		8			5,069		8
Partners’ equity		64,408		92			62,573		92
Total	$	69,918		100	%	$	67,962		100	%

Working capital of $22.1 million as of March 31, 2010 represented an increase of $2.3 million from December 31, 2009, due primarily to increases in cash and equivalents, accounts receivable from production and other current assets, as well as a decrease in accrued expenses, offset somewhat by a decrease in accounts and notes receivable from employees and an increase in accounts payable. The increase in cash and equivalents was primarily the result of cash provided by operating activities and from proceeds received on receivables from employees, less purchases of property and equipment and a distribution. The increase in accounts receivable from production was primarily attributed to increases in natural gas and crude oil volumes produced, as well as increases to crude oil prices. The increase in other current assets was primarily the result of increased well equipment inventory acquired for wells scheduled to be drilled in the current year. The decrease in accrued expenses was primarily the result of less payroll and retirement plan contributions accrued. The decrease in accounts and notes receivable from employees was primarily the result of an employee repaying his entire balance in January 2010. The increase in accounts payable was primarily the result of increased drilling payables and joint venture payables related to the current year’s drilling program.

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 5, 2010. The Company anticipates, although there is no assurance it will be able to, entering into a new credit agreement for the purpose, if necessary, of funding future annual repurchase rights. The Company has no current alternate financing plan, nor does it anticipate that one will be necessary. The Company used cash on hand to fund the payment of a distribution amounting to approximately $2.8 million in April 2010.

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The Company’s cash flow from operations before the change in working capital was $7.0 million, an increase of $2.1 million, or 42%, during the three months ended March 31, 2010, as compared to the same period in 2009. Changes in working capital from operations other than cash and cash equivalents decreased cash by $1.7 million during the three months ended March 31, 2010, due primarily to increases in accounts receivable from production and other current assets, as well as a decrease in accrued expenses. These effects were offset somewhat by an increase in accounts payable.

Cash flows provided by operating activities was $5.4 million for the three months ended March 31, 2010. Cash was primarily used in investing and financing activities to purchase property and equipment and pay a quarterly distribution.

Management of the Company believes existing cash flows should be sufficient to meet the 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 2011. The agreements with Dominion provide for fixed pricing with current monthly weighted average pricing provisions ranging from $7.95 to $9.01 per MCF. The Company also has two annual contracts with Interstate Gas Supply, Inc. (“IGS”), which obligates IGS to purchase, and the Company to sell and deliver certain quantities of natural gas production on a monthly basis through October 2011. The agreements with IGS provide for fixed pricing with current monthly weighted average pricing provisions ranging from $8.05 to $8.67 per MCF. Fixed pricing with both Dominion and IGS applies to certain fixed quantities on a monthly basis with excess monthly quantities being priced based on the current spot market price. The impact on the Company cannot fully be measured until actual production volumes and prices are determined. The Company entered into no new contracts with Dominion or IGS during the three months ended March 31, 2010.

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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, 2010 and 2009. All items in the table are calculated as a percentage of total revenues. This table should be read in conjunction with the discussions of each item below:

	Three Months
	Ended March 31,
	2010			2009
Revenues:
Oil and gas sales		98	%		98	%
Well management and operating		2			2
Total Revenues		100	%		100	%
Expenses:
Production costs		15	%		19	%
Well management and operating		1			1
Depreciation, depletion and amortization		24			27
Accretion		1			1
General and administrative		8			9
Income tax		—			1
Total Expenses		49	%		58	%
Net income		51	%		42	%

Revenues for the three months ended March 31, 2010 increased $2.1 million, or 30%, compared to the same period in 2009. This increase was primarily due to an increase in oil and gas sales during the first three months of 2010, as compared to the same period in 2009.

Oil and gas sales increased $2.1 million, or 31%, during the three months ended March 31, 2010 compared to the same period in 2009. Higher natural gas and crude oil prices, as well as higher natural gas volumes produced, during the first quarter of 2010 were primarily responsible for this increase compared to the same period in 2009.

Depreciation, depletion and amortization increased $323,000, or 17%, during the three months ended March 31, 2010 compared to the same period in 2009. The primary reasons for this increase are the result of lower oil and gas reserves and higher natural gas volumes produced. The decrease in oil and gas reserves was primarily the result of lower crude oil and natural gas prices at December 31, 2009, the most recent valuation date, which reduced the average economic life of the Company’s wells as compared to December 31, 2008, the prior valuation date.

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Accretion expense increased $18,000, or 20%, during the three months ended March 31, 2010 compared to the same period in 2009. This increase was primarily the result of larger obligations being accreted combined with shorter discount periods.

General and administrative expenses increased $73,000, or 11%, during the three months ended March 31, 2010 compared to the same period in 2009. The primary reason for this increase is due to higher overhead expenses associated with ongoing administration.

Income tax expenses decreased $39,000, or 43%, during the three months ended March 31, 2010 compared to the same period in 2009. The primary reason for this decrease is due to lesser income taxes projected due for the current period.

The Company reported net income of $4.7 million, an increase of $1.8 million, or 60%, during the three months ended March 31, 2010 compared to the same period in 2009. The increase in oil and gas sales was primarily responsible for this increase in net income. Net income represented 51% and 42% of total revenue during the three months ended March 31, 2010 and 2009, respectively.

Critical Accounting Policies

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The critical accounting policies that affect the Company’s more complex judgments and estimates are described in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2009.

Forward-Looking Statements

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

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

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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, 2009, 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

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SIGNATURE

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

	EVERFLOW EASTERN PARTNERS, L.P.
	By:	everflow management limited, llc General Partner
	By:	everflow management corporation Managing Member
May 14, 2010	By:	/s/ Brian A. Staebler
		Brian A. Staebler
		Vice President and Principal Financial and
		Accounting Officer
		(Duly Authorized Officer)

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