CONSOLIDATED STATEMENTS OF PARTNERS' EQUITY
Nine Months Ended September 30, 2010 and 2009
(Unaudited)
| | | 2010 | | | 2009 | |
| | | | | | | |
| PARTNERS' EQUITY - JANUARY 1 | | $ | 62,573,175 | | | $ | 75,757,349 | |
| | | | | | | | | |
| Net income | | | 9,167,052 | | | | 8,752,135 | |
| | | | | | | | | |
| Cash distributions ($2.00 per unit in 2010 and $2.50 per unit in 2009) | | | (11,374,914 | ) | | | (14,226,036 | ) |
| | | | | | | | | |
| Repurchase Right - Units tendered | | | (40,940 | ) | | | (27,033 | ) |
| | | | | | | | | |
| Option Repurchase Plan - options exercised | | | 20,470 | | | | - | |
| | | | | | | | | |
| PARTNERS' EQUITY - SEPTEMBER 30 | | $ | 60,344,843 | | | $ | 70,256,415 | |
See notes to unaudited consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, 2010 and 2009
(Unaudited)
| | | 2010 | | | 2009 | |
| CASH FLOWS FROM OPERATING ACTIVITIES | | | | | | |
| Net income | | $ | 9,167,052 | | | $ | 8,752,135 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | |
| Depreciation, depletion and amortization | | | 6,830,490 | | | | 5,637,556 | |
| Accretion expense | | | 278,000 | | | | 275,800 | |
| Gain on sale of property and equipment | | | (76,194 | ) | | | - | |
| Deferred income taxes | | | (27,000 | ) | | | (30,000 | ) |
| Changes in assets and liabilities: | | | | | | | | |
| Accounts receivable | | | 737,065 | | | | 3,055,597 | |
| Other current assets | | | (285,382 | ) | | | (73,000 | ) |
| Accounts payable | | | 185,104 | | | | 8,451 | |
| Accrued expenses | | | (431,592 | ) | | | (211,140 | ) |
| Total adjustments | | | 7,210,491 | | | | 8,663,264 | |
| Net cash provided by operating activities | | | 16,377,543 | | | | 17,415,399 | |
| | | | | | | | | |
| CASH FLOWS FROM INVESTING ACTIVITIES | | | | | | | | |
| Proceeds received on receivables from employees | | | 522,704 | | | | 174,851 | |
| Advances disbursed to employees | | | (111,609 | ) | | | (100,744 | ) |
| Purchase of property and equipment | | | (3,998,843 | ) | | | (2,573,336 | ) |
| Proceeds on sale of property and equipment | | | 49,472 | | | | - | |
| Net cash used by investing activities | | | (3,538,276 | ) | | | (2,499,229 | ) |
| | | | | | | | | |
| CASH FLOWS FROM FINANCING ACTIVITIES | | | | | | | | |
| Distributions | | | (11,374,914 | ) | | | (14,226,036 | ) |
| Proceeds from options excercised | | | 20,470 | | | | - | |
| Repurchase of units | | | (40,940 | ) | | | (27,033 | ) |
| Net cash used by financing activities | | | (11,395,384 | ) | | | (14,253,069 | ) |
| | | | | | | | | |
| NET INCREASE IN CASH AND EQUIVALENTS | | | 1,443,883 | | | | 663,101 | |
| | | | | | | | | |
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD | | | 16,610,772 | | | | 14,451,825 | |
| | | | | | | | | |
CASH AND EQUIVALENTS AT END OF PERIOD | | $ | 18,054,655 | | | $ | 15,114,926 | |
| | | | | | | | | |
Supplemental disclosures of cash flow information and non-cash activities: | | | | | | | | |
| Cash paid during the period for: | | | | | | | | |
| Income taxes | | $ | 238,581 | | | $ | 220,506 | |
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.
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. |
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 (see Note 8).
| | 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. |
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 nine months ended September 30, 2010 and 2009:
| | | Asset Retirement Obligations Nine Months Ended September 30, | |
| | | | | | | |
| | | 2010 | | | 2009 | |
| | | | | | | |
| Beginning of period | | $ | 5,379,368 | | | $ | 4,767,665 | |
| Liabilities incurred | | | 43,200 | | | | 12,600 | |
| Liabilities settled | | | (106,610 | ) | | | - | |
| Accretion expense | | | 278,000 | | | | 275,800 | |
| | | | | | | | | |
| End of period | | $ | 5,593,958 | | | $ | 5,056,065 | |
At September 30, 2010 and December 31, 2009, asset retirement obligations of $5,593,958 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 September 30, 2010 and December 31, 2009.
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 collectability of the revenue is reasonably assured. The Company utilizes the sales method to account for gas production volume imbalances. Under this method, revenue is recognized only when gas is produced and sold on the Company’s behalf. The Company had no material gas imbalances at September 30, 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 properties. Generally, the joint venture partners and employees participate on the same drilling/development cost basis as the Company and, therefore, no revenue, expense or income is recognized on the drilling and development of the properties. Accounts and notes receivable from joint venture partners and employees consist principally of drilling and development costs the Company has advanced or incurred on behalf of joint venture partners and employees (see Note 7). The Company earns and receives monthly management and operating fees from certain joint venture partners and employees after the properties are completed and placed into production.
| | 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. |
The Company believes that it has appropriate support for any tax positions taken and, as such, does not have any uncertain tax positions that are material to the financial statements. The Company's tax returns are subject to examination by the Internal Revenue Service, as well as various state and local taxing authorities, generally for three years after they are filed.
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) and select officers and employees electing to exercise options (see Note 8). |
| | Earnings per limited partner Unit have been computed based on the weighted average number of Units outstanding during each period presented. Average outstanding Units for earnings per limited partner Unit calculations amounted to 5,618,867 and 5,620,856 for the three and nine months ended September 30, 2010, respectively, and 5,621,851 and 5,623,479 for the three and nine months ended September 30, 2009, respectively. |
| I. | Subsequent Events - Everflow paid a cash distribution in October 2010 of $0.50 per Unit. The distribution amounted to approximately $2,843,000. |
In November 2010, the Company agreed to sell their deep rights in certain Ohio properties for cash consideration net to the Company of approximately $35 million to $36 million, subject to acreage and closing adjustments (the “Disposition”). The Disposition includes no producing reserves, and the Company will retain the rights to the shallow portion of the acreage subject to the agreement. The Company anticipates closing the Disposition during the second quarter of 2011, subject to fulfillment of closing conditions, though there can be no assurance that all of the conditions to closing the Disposition will be satisfied.
| | J. | New Accounting Standards - In July 2010, the Financial Accounting Standards Board issued Accounting Standards Update No. 2010-20, “Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses” (“ASU 2010-20”). ASU 2010-20 requires new disclosures about financing receivables and related credit risk on a disaggregated basis, excluding short-term trade accounts receivables. The disclosures will be effective for financial statements issued for fiscal years ending on or after December 15, 2010. The Company is currently evaluating the potential impact of ASU 2010-20 on the financial statements. |
The Company has reviewed all recently issued accounting standards in order to determine their effects, if any, on the consolidated financial statements. Based on that review, the Company believes that none of these standards will have a significant effect on current or future earnings or results of operations.
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 September 30, 2010, and December 31, 2009:
| | | | | | | |
| | | | | | | |
| Accounts Payable: | | | | | | |
| Production and related other | | $ | 1,233,096 | | | $ | 1,094,026 | |
| Other | | | 382,782 | | | | 380,832 | |
| Drilling | | | 66,345 | | | | 80,940 | |
| Joint venture partners | | | 44,084 | | | | - | |
| | | $ | 1,726,307 | | | $ | 1,555,798 | |
| | | | | | | | | |
| Accrued Expenses: | | | | | | | | |
| Payroll and retirement plan contributions | | $ | 394,191 | | | $ | 663,270 | |
Current portion of asset retirement obligations | | | 310,000 | | | | 310,000 | |
| Federal, state and local taxes | | | 83,117 | | | | 139,020 | |
| | | $ | 787,308 | | | $ | 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.
EVERFLOW EASTERN PARTNERS, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 4. Partners’ Equity
Units represent limited partnership interests in Everflow. The Units are transferable subject only to the approval of any transfer by EML and to the laws governing the transfer of securities. The Units are not listed for trading on any securities exchange nor are they quoted in the automated quotation system of a registered securities association. However, Unitholders have an opportunity to require Everflow to repurchase their Units pursuant to the Repurchase Right.
Under the terms of the limited partnership agreement, initially, 99% of revenues and costs were allocated to the Unitholders (the limited partners) and 1% of revenues and costs were allocated to the General Partner. Such allocation has changed and will change in the future due to Unitholders electing to exercise the Repurchase Right and select officers and employees electing to exercise options (see Note 8).
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 outst anding 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). The repurchase of Units of $40,940 was paid in July 2010.
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: |
Year | | Calculated Price for Repurchase Right | | | Less Interim Distributions | | | Net Price Paid | | | # of Units Repurchased | | Units Outstanding Following Repurchase |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| 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 |
| 2010 | | $ | 7.86 | | | $ | 1.00 | | | $ | 6.86 | | | | 5,968 | | 5,615,883 |
At June 30, 2010, the Company granted a total of 2,984 options to two officers and one employee, of which all were exercised on the same date (see Note 8). There were 5,618,867 Units outstanding on June 30, 2010 after the exercise of these options.
There were no instruments outstanding at September 30, 2010 or September 30, 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 obligate 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 of these contracts on the Company’s future oil and gas sales cannot fully be measured until actual production volumes and prices have been determined. The Company entered into no new contracts with Dominion or IGS during the nine months ended September 30, 2010.
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 t o expand its reserve base and diversify its operations is also dependent upon the Company’s ability to obtain the necessary capital through operating cash flow, borrowings or equity offerings. Various federal, state and governmental agencies are considering, and some have adopted, laws and regulations regarding environmental protection which could adversely affect the proposed business activities of the Company. The Company cannot predict what effect, if any, current and future regulations may have on the operations of the Company.
The Company has significant natural gas delivery commitments to Dominion and IGS, its major customers. Management believes the Company can meet its delivery commitments based on estimated production. If, however, the Company cannot meet its delivery commitments, it will purchase gas at market prices to meet such commitments which will result in a gain or loss for the difference between the delivery commitment price and the price at which the Company is able to purchase the gas for redelivery (resale) to its customers.
| 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 sh all, 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 September 30, 2010. |
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 September 30, 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 $530,514 and $941,609 at September 30, 2010 and December 31, 2009, respectively.
In January 2010, one employee settled his entire loan balance in full by selling working interests in well properties he owned to the Company for a total purchase price of $270,000 and by paying cash of $141,700.
Note 8. Option Repurchase Plan
The Company has an Option Repurchase Plan (the “Plan”) which permits the grant of options to repurchase certain Units to select officers and employees (the “Participants”). The purpose of the Plan is to assist the Company to attract and retain officers and other key employees and to enable those individuals to acquire or increase their ownership interest in the Company in order to encourage them to promote the growth and profitability of the Company. The Plan is designed to align directly the financial interests of the Participants with the financial interests of the Unitholders. On June 30, 2010, the Company granted a total of 2,984 options to two officers and one employee, of which all were exercised on the same date. Compensation expense associated with these grant s was not material to the financial statements.
Part I: Financial Information
| 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 September 30, 2010 and December 31, 2009:
| | | September 30, 2010 | | | December 31, 2009 | |
| | | Amount | | | % | | | Amount | | | % | |
| | | (Amounts in Thousands) | | | (Amounts in Thousands) | |
| | | | | | | | | | | | | |
| Working capital | | $ | 20,511 | | | | 31 | % | | $ | 19,782 | | | | 29 | % |
| Property and equipment (net) | | | 44,929 | | | | 68 | | | | 47,706 | | | | 70 | |
| Other | | | 482 | | | | 1 | | | | 474 | | | | 1 | |
| Total | | $ | 65,922 | | | | 100 | % | | $ | 67,962 | | | | 100 | % |
| | | | | | | | | | | | | | | | | |
| Deferred income taxes | | $ | 293 | | | | - | % | | $ | 320 | | | | - | % |
| Long-term liabilities | | | 5,284 | | | | 8 | | | | 5,069 | | | | 8 | |
| Partners' equity | | | 60,345 | | | | 92 | | | | 62,573 | | | | 92 | |
| Total | | $ | 65,922 | | | | 100 | % | | $ | 67,962 | | | | 100 | % |
Working capital of $20.5 million as of September 30, 2010 represented an increase of $729,000 from December 31, 2009, due primarily to increases in cash and equivalents and other current assets, as well as a decrease in accrued expenses, offset somewhat by decreases in accounts and notes receivable from production and 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 distributions to Unitholders. The increase in other current assets was primarily the result of increased well equipment inventory acquired for wells scheduled to be drilled in the upcoming year. The decrease in accrued expenses was pri marily the result of less payroll and retirement plan contributions accrued. The decrease in accounts receivable from production was primarily due to decreases in natural gas prices, as well as a decrease in production volumes. The decrease in accounts and notes receivable from employees was primarily the result of an employee settling his entire balance in January 2010. The increase in accounts payable was primarily the result of increased joint venture payables related to the current year’s drilling program and additional production and related other payables.
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 November 10, 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 October 2010.
The Company’s cash flow from operations before the change in working capital was $16.2 million, an increase of $1.5 million, or 11%, during the nine months ended September 30, 2010, as compared to the same period in 2009. Changes in working capital from operations other than cash and cash equivalents increased cash by $205,000 during the nine months ended September 30, 2010, due primarily to a decrease in accounts receivable from production and an increase in accounts payable, offset by an increase in other current assets and a decrease in accrued expenses.
Cash flows provided by operating activities was $16.4 million for the nine months ended September 30, 2010. Cash was primarily used in investing and financing activities to purchase property and equipment and pay distributions to Unitholders.
Management of the Company believes existing cash flows should be sufficient to meet the short-term funding requirements of ongoing operations, capital investments to develop oil and gas properties, the repurchase of Units pursuant to the annual Repurchase Right 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 obligate 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 of these contracts on the Company’s future oil and gas sales cannot fully be measured until actual production volumes and prices have been determined. The Company entered into no new contracts with Dominion or IGS during the nine months ended September 30, 2010.
Results of Operations
The following table and discussion is a review of the results of operations of the Company for the three and nine months ended September 30, 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 September 30, | | | Nine Months Ended September 30, | |
| | | 2010 | | | 2009 | | | 2010 | | | 2009 | |
| | | | | | | | | | | | | |
| Revenues: | | | | | | | | | | | | |
| Oil and gas sales | | | 97 | % | | | 98 | % | | | 98 | % | | | 98 | % |
| Well management and operating | | | 3 | | | | 2 | | | | 2 | | | | 2 | |
| Total revenues | | | 100 | % | | | 100 | % | | | 100 | % | | | 100 | % |
| | | | | | | | | | | | | | | | | |
| Expenses: | | | | | | | | | | | | | | | | |
| Production costs | | | 19 | % | | | 16 | % | | | 15 | % | | | 16 | % |
| Well management and operating | | | 1 | | | | 1 | | | | 1 | | | | 1 | |
| Depreciation, depletion and amortization | | | 39 | | | | 24 | | | | 31 | | | | 28 | |
| Accretion expense | | | 1 | | | | 1 | | | | 1 | | | | 1 | |
| General and administrative | | | 9 | | | | 9 | | | | 9 | | | | 9 | |
| Income taxes | | | - | | | | 1 | | | | 1 | | | | 1 | |
| Total expenses | | | 69 | % | | | 52 | % | | | 58 | % | | | 56 | % |
| | | | | | | | | | | | | | | | | |
| Other income | | | 1 | % | | | - | % | | | 1 | % | | | - | % |
| | | | | | | | | | | | | | | | | |
| Net income | | | 32 | % | | | 48 | % | | | 43 | % | | | 44 | % |
Revenues for the three months ended September 30, 2010 decreased $1.0 million compared to the same period in 2009. This decrease was primarily due to a decrease in oil and gas sales during the three month period ended September 30, 2010, as compared to the same period in 2009. Revenues for the nine months ended September 30, 2010 increased $1.4 million compared to the same period in 2009. This increase was primarily due to an increase in oil and gas sales during the nine months ended September 30, 2010, as compared to the same period in 2009.
Oil and gas sales decreased $1.0 million, or 15%, during the three months ended September 30, 2010 compared to the same period in 2009. This decrease was primarily the result of lower natural gas and crude oil volumes produced during the three month period ended September 30, 2010 as compared to the same period in 2009. Lower production volumes were the result of operated properties being shut-in during the three month period ended September 30, 2010 that weren’t shut-in during the comparable period in 2009, as well as less volumes produced by outside operated properties during the three month period ended September 30, 2010 as compared to the comparable period in 2009. Oil and gas sales increased $1.4 million, or 7%, during the nine months ended September 30, 2010 compared to the same perio d in 2009. This increase was primarily the result of both higher natural gas and crude oil prices received, as well as higher natural gas volumes produced, during the nine month period ended September 30, 2010 as compared to the same period in 2009.
Production costs decreased $87,000, or 3%, during the nine months ended September 30, 2010 compared to the same period in 2009. This decrease was primarily the result of decreases in costs to operate and manage the Company’s producing oil and gas properties.
Depreciation, depletion and amortization increased $608,000, or 37%, during the three months ended September 30, 2010 compared to the same period in 2009. Depreciation, depletion and amortization increased $1.2 million, or 21%, during the nine months ended September 30, 2010 compared to the same period in 2009. The primary reason for these increases is the result of lower oil and gas reserves. 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.
General and administrative expenses decreased $89,000, or 15%, during the three months ended September 30, 2010 compared to the same period in 2009. The primary reason for the decrease during this three month period was due to lesser accounting and consulting expenses resulting from the permanent exemption of Section 404(b) of the Sarbanes-Oxley Act of 2002, which was signed into law during July 2010. General and administrative expenses increased $72,000, or 4%, during the nine months ended September 30, 2010 compared to the same period in 2009. The primary reasons for these increases were due to higher overhead expenses associated with ongoing administration and additional costs incurred to comply with regulatory requirements. Specific categories of expenses that have increased during this nine month period include consulting, legal, property and liability insurance, health benefits, and postage.
The Company recognized gain on sale of property and equipment of $56,000 and $76,000 during the three and nine month periods ended September 30, 2010, respectively. These gains were primarily the result of the sale of seven and ten oil and gas properties during the three and nine month periods ended September 30, 2010, respectively. No gain on sale of property and equipment was recognized during 2009.
Income tax expense decreased $19,000, or 48%, during the three month period ended September 30, 2010, compared to the same period in 2009. Income taxes decreased $97,000, or 44%, during the nine months ended September 30, 2010, compared to the same period in 2009. The primary reason for these decreases is due to lesser income taxes projected due for the current period.
The Company reported net income of $1.8 million, a decrease of $1.4 million, or 44%, during the three months ended September 30, 2010 compared to the same period in 2009. The decrease in oil and gas sales and increase to depreciation, depletion and amortization were primarily responsible for this decrease in net income. The Company reported net income of $9.2 million, an increase of $415,000, or 5%, during the nine months ended September 30, 2010 compared to the same period in 2009. The increase in oil and gas sales, which was offset somewhat by the increase to depreciation, depletion and amortization, was primarily responsible for this increase in net income. Net income represented 32% and 48% of total revenue during the three months ended September 30, 2010 and 2009, respectively. 0; Net income represented 43% and 44% of total revenue during the nine months ended September 30, 2010 and 2009, respectively.
Recent Developments
On November 3, 2010, the Company signed a letter agreement with Ohio Buckeye Energy, L.L.C. (the “Purchaser”), whereby the Company has agreed to sell the Company’s deep rights in certain Ohio properties totaling approximately 28,000 acres, which includes the depths below the stratigraphic equivalent of the top of the Queenston Formation (the “Disposition”), to the Purchaser for cash consideration net to the Company of approximately $35 million - $36 million, subject to acreage and closing adjustments. The Disposition includes no producing reserves, and the Company will retain the rights to the shallow portion of the acreage subject to the letter agreement. The Company anticipates closing the Disposition during the second quarter of 2011, subject to fulfillment of closing conditi ons. There can be no assurance that all of the conditions to closing the Disposition will be satisfied.
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 (the “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 economicall y 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.
| QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
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 SECR 17;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.
Part II. Other Information
| | | Certification of CEO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| | | |
| | | Certification of CFO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| | | |
| | | Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | EVERFLOW EASTERN PARTNERS, L.P. | |
| | | | |
| | By: | EVERFLOW MANAGEMENT LIMITED, L.P. | |
| | | General Partner | |
| | | | |
| | By: | EVERFLOW MANAGEMENT CORPORATION | |
| | | Managing Member | |
| | | | |
| November 12, 2010 | By: | /s/ Brian A. Staebler | |
| | | Vice President and Principal Financial and Accounting Officer (Duly Authorized Officer) | |
