Everflow Eastern Partners 10-Q 2008 Q3 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 September 30, 2008

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 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 5,624,293 Units of limited partnership interest of the Registrant as of November 13, 2008. 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 September 30, 2008.

EVERFLOW EASTERN PARTNERS, L.P.

INDEX

DESCRIPTION	PAGE NO.
Part I.   Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets September 30, 2008 and December 31, 2007		F-1
Consolidated Statements of Income Three and Nine Months Ended September 30, 2008 and 2007		F-3
Consolidated Statements of Partners’ Equity Nine Months Ended September 30, 2008 and 2007		F-4
Consolidated Statements of Cash Flows Nine Months Ended September 30, 2008 and 2007		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		7
Item 4T. Controls and Procedures		7
Part II.   Other Information
Item 6. Exhibits		9
Signature		10
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1

2

EVERFLOW EASTERN PARTNERS, L.P.

CONSOLIDATED BALANCE SHEETS

September 30, 2008 and December 31, 2007

	September 30,		December 31,
	2008		2007
	(Unaudited)		(Audited)
ASSETS
CURRENT ASSETS
Cash and equivalents	$	11,126,485	$	6,014,105
Investments		—		6,074,433
Accounts receivable:
Production		7,887,421		7,805,148
Employees		1,096,866		607,230
Joint venture partners		672,478		42,771
Other		29,083		11,230
Total current assets		20,812,333		20,554,917
PROPERTY AND EQUIPMENT
Proved properties (successful efforts accounting method)		163,315,616		151,057,527
Pipeline and support equipment		518,961		527,227
Corporate and other		2,020,829		1,816,106
		165,855,406		153,400,860
Less accumulated depreciation, depletion, amortization and write down		103,077,181		98,909,416
		62,778,225		54,491,444
OTHER ASSETS		77,546		77,546
	$	83,668,104	$	75,123,907

See notes to unaudited consolidated financial statements.

F-1

EVERFLOW EASTERN PARTNERS, L.P.

CONSOLIDATED BALANCE SHEETS

September 30, 2008 and December 31, 2007

	September 30,		December 31,
	2008		2007
	(Unaudited)		(Audited)
LIABILITIES AND PARTNERS’ EQUITY
CURRENT LIABILITIES
Accounts payable	$	1,605,216	$	2,579,389
Accrued expenses		976,251		1,160,354
Total current liabilities		2,581,467		3,739,743
DEFERRED INCOME TAXES		400,000		400,000
ASSET RETIREMENT OBLIGATIONS		2,143,964		1,933,704
COMMITMENTS AND CONTINGENCIES		—		—
LIMITED PARTNERS’ EQUITY, SUBJECT TO REPURCHASE RIGHT
Authorized — 8,000,000 Units
Issued and outstanding — 5,624,293 and 5,643,268 Units, respectively		77,616,703		68,239,103
GENERAL PARTNER’S EQUITY		925,970		811,357
Total partners’ equity		78,542,673		69,050,460
	$	83,668,104	$	75,123,907

See notes to unaudited consolidated financial statements.

F-2

EVERFLOW EASTERN PARTNERS, L.P.

CONSOLIDATED STATEMENTS OF INCOME

Three and Nine Months Ended September 30, 2008 and 2007
(Unaudited)

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2008		2007		2008		2007
REVENUES
Oil and gas sales	$	11,354,423	$	7,918,189	$	32,716,878	$	25,259,879
Well management and operating		149,252		132,090		445,712		411,454
Other		490		1,791		1,977		2,315
		11,504,165		8,052,070		33,164,567		25,673,648
DIRECT COST OF REVENUES
Production costs		989,784		882,854		3,098,954		2,899,175
Well management and operating		56,105		37,921		177,967		153,059
Depreciation, depletion and amortization		1,377,403		1,369,159		4,144,353		4,080,283
Accretion expense		56,500		57,900		167,500		173,600
Total direct cost of revenues		2,479,792		2,347,834		7,588,774		7,306,117
GENERAL AND ADMINISTRATIVE EXPENSE		458,400		456,745		1,470,117		1,430,935
Total cost of revenues		2,938,192		2,804,579		9,058,891		8,737,052
INCOME FROM OPERATIONS		8,565,973		5,247,491		24,105,676		16,936,596
OTHER INCOME
Interest income and investment earnings		53,652		145,181		248,321		542,951
Gain on sale of property and equipment		—		13,145		3,500		13,145
		53,652		158,326		251,821		556,096
INCOME BEFORE INCOME TAXES		8,619,625		5,405,817		24,357,497		17,492,692
CURRENT INCOME TAXES		100,000		25,000		300,000		300,000
NET INCOME	$	8,519,625	$	5,380,817	$	24,057,497	$	17,192,692
Allocation of Partnership Net Income
Limited Partners	$	8,419,204	$	5,317,591	$	23,774,503	$	16,990,694
General Partner		100,421		63,226		282,994		201,998
	$	8,519,625	$	5,380,817	$	24,057,497	$	17,192,692
Net income per unit	$	1.50	$	0.94	$	4.22	$	3.01

See notes to unaudited consolidated financial statements.

F-3

EVERFLOW EASTERN PARTNERS, L.P.

CONSOLIDATED STATEMENTS OF PARTNERS’ EQUITY

Nine Months Ended September 30, 2008 and 2007
(Unaudited)

	2008			2007
PARTNERS’ EQUITY — JANUARY 1	$	69,050,460		$	68,398,967
Net income		24,057,497			17,192,692
Cash distributions ($2.50 per unit in 2008 and $3.50 per unit in 2007)		(14,256,940	)		(19,987,933	)
Repurchase Right — Units tendered		(308,344	)		(10,639	)
PARTNERS’ EQUITY — September 30	$	78,542,673		$	65,593,087

See notes to unaudited consolidated financial statements.

F-4

EVERFLOW EASTERN PARTNERS, L.P.

CONSOLIDATED STATEMENTS OF CASH FLOWS

Nine Months Ended September 30, 2008 and 2007
(Unaudited)

	2008			2007
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	24,057,497		$	17,192,692
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, depletion and amortization		4,208,583			4,135,338
Accretion expense		167,500			173,600
Gain on disposal of property and equipment		(3,500	)		(13,145	)
Investment earnings		(1,567	)		(311,907	)
Changes in assets and liabilities:
Accounts receivable		(711,980	)		1,443,283
Other current assets		(17,853	)		(14,922	)
Other assets		—			5,356
Accounts payable		(25,123	)		195,122
Accrued expenses		(184,103	)		(182,914	)
Total adjustments		3,431,957			5,429,811
Net cash provided by operating activities		27,489,454			22,622,503
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds received on receivables from employees		166,886			70,390
Advances disbursed to employees		(656,522	)		(219,030	)
Purchase of investments		—			(23,012,176	)
Proceeds on sale of investments		6,076,000			22,801,000
Purchase of property and equipment		(13,401,654	)		(6,868,841	)
Proceeds on disposal of property and equipment		3,500			46,900
Net cash used by investing activities		(7,811,790	)		(7,181,757	)
CASH FLOWS FROM FINANCING ACTIVITIES
Distributions		(14,256,940	)		(19,987,933	)
Repurchase of units		(308,344	)		(10,639	)
Net cash used by financing activities		(14,565,284	)		(19,998,572	)
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS		5,112,380			(4,557,826	)
CASH AND EQUIVALENTS AT BEGINNING OF YEAR		6,014,105			7,424,183
CASH AND EQUIVALENTS AT END OF PERIOD	$	11,126,485		$	2,866,357
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Income taxes	$	333,585		$	369,520

Additions to proved properties include amounts offset by 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 for interim financial information and with the instructions to Form 10Q and Article 10 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 on March 18, 2008.
	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 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. Actual results could differ from those estimates. The Company’s financial statements are based on a number of significant estimates, including oil and gas reserve quantities which are the basis for the calculation of depreciation, depletion and impairment of oil and gas properties, and timing and costs associated with its retirement obligations.
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”).

F-6

EVERFLOW EASTERN PARTNERS, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(CONTINUED)

Note 1. Organization and Summary of Significant Accounting Policies (Continued)

C.	Organization (Continued)
	Everflow Management Limited, LLC, 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 Everflow Management Limited, LLC are Everflow Management Corporation (“EMC”), two individuals who are Officers and Directors of EEI, and Sykes Associates, LLC, a limited liability company owned by four adult children of Robert F. Sykes, the Chairman of the Board of EEI. EMC is an Ohio corporation formed in September 1990 and is the managing member of Everflow Management Limited, LLC.
D.	Principles of Consolidation – The consolidated financial statements include the accounts of Everflow, its wholly owned subsidiaries, including EEI and EEI’s wholly owned subsidiaries, and investments in oil and gas drilling and income partnerships (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 – The Company follows SFAS No. 143, “Accounting for Asset Retirement Obligations,” which 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

(CONTINUED)

Note 1. Organization and Summary of Significant Accounting Policies (Continued)

E.	Asset Retirement Obligations (Continued)
	The schedule below is a reconciliation of the Company’s liability for the nine months ended September 30, 2008 and 2007:

	Asset Retirement Obligations
	Nine Months Ended September 30,
	2008		2007
Beginning of period	$	2,313,704	$	2,103,707
Liabilities incurred		42,760		52,480
Liabilities settled		—		(2,600	)
Accretion expense		167,500		173,600
End of period	$	2,523,964	$	2,327,187

	At September 30, 2008 and December 31, 2007, the asset retirement obligations of $2,523,964 and $2,327,187 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 $380,000 at September 30, 2008 and December 31, 2007.
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, income is recorded based on the Company’s net revenue interest in production taken for delivery. The Company had no material gas imbalances at September 30, 2008 and December 31, 2007. 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.

F-8

EVERFLOW EASTERN PARTNERS, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(CONTINUED)

Note 1. Organization and Summary of Significant Accounting Policies (Continued)

F.	Revenue Recognition (Continued)
	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 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). Accounts payable to joint venture partners consist principally of drilling and development advances the Company has received on behalf of joint venture partners. 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.	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 Unit calculations amounted to 5,624,293 and 5,636,943 for the three and nine months ended September 30, 2008, respectively, and 5,643,268 and 5,643,819 for the three and nine months ended September 30, 2007, respectively.
H.	Income Taxes – In June 2006, the Financial Accounting Standards Board (“FASB”) issued Financial Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes – an Interpretation of FASB Statement No. 109.” FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes.” FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return and also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.

F-9

EVERFLOW EASTERN PARTNERS, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(CONTINUED)

Note 1. Organization and Summary of Significant Accounting Policies (Continued)

H.	Income Taxes (Continued)
	The Company adopted the provisions of FIN 48 on January 1, 2007. The implementation of FIN 48 did not have a material impact on the Company’s financial statements, since EEI is the only tax paying entity and represents less than 10% of the Company’s total taxable income. There were no unrecognized tax benefits as of the date of adoption of FIN 48 and therefore, there is no anticipated effect upon the Company’s effective tax rate. Interest, if any, under FIN 48 will be classified in the financial statements as a component of interest expense and statutory penalties, if any, will be classified as a component of general and administrative expense.
	As of September 30, 2008, the Company’s income tax years from 2004 and thereafter remain subject to examination by the Internal Revenue Service, as well as the Ohio Department of Taxation.
I.	New Accounting Standards – In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” This Statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. This Statement applies under other accounting pronouncements that require or permit fair value measurements, where fair value has been determined to be the relevant measurement attribute. In February 2008, the FASB issued Staff Position No. FAS 157-2 (“FSP No. 157-2”), which delays the effective date of SFAS No. 157 for non-financial assets and non-financial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). The effect of FSP No. 157-2 delays the effective date of SFAS No. 157 to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years for items within the scope of FSP No. 157-2. The Company adopted SFAS No. 157 on January 1, 2008 for items recognized or disclosed at fair value in the financial statements on a recurring basis, and the implementation did not have an impact on the Company’s financial statements. The Company has deferred the application of SFAS No. 157 related to non-financial assets and liabilities in accordance with FSP No. 157-2. Adoption of SFAS No. 157 as it relates to non-financial assets and liabilities is not expected to materially impact the Company’s financial statements.

F-10

EVERFLOW EASTERN PARTNERS, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(CONTINUED)

Note 1. Organization and Summary of Significant Accounting Policies (Continued)

I.	New Accounting Standards (Continued)
	In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities – Including an Amendment of FASB Statement No. 115.” This Statement permits the option to choose to measure selected financial assets and liabilities at fair value. If the fair value option is elected, reporting of unrealized gains and losses on those assets and liabilities occurs in each subsequent reporting date. The Company adopted SFAS No. 159 on January 1, 2008. The implementation of this standard did not have an impact on the company’s financial statements.
	In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles.” This Statement identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements. This Statement is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, “The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles.” The Company does not expect the adoption of SFAS No. 162 to have a material effect on the financial statements.
J.	Reclassification – Certain prior period amounts have been reclassified to conform with the current period’s presentation.

F-11

EVERFLOW EASTERN PARTNERS, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(CONTINUED)

Note 2. Current Liabilities

The Company’s current liabilities consist of the following at September 30, 2008 and December 31, 2007:

	September 30,		December 31,
	2008		2007
Accounts Payable:
Production and related other	$	1,038,530	$	737,284
Other		423,244		366,919
Drilling		141,450		1,090,500
Joint venture partners		1,992		384,686
	$	1,605,216	$	2,579,389
Accrued Expenses:
Payroll and retirement contributions	$	405,201	$	610,229
Current portion of asset retirement obligations		380,000		380,000
Federal, state and local taxes		191,050		170,125
	$	976,251	$	1,160,354

Note 3. Credit Facilities and Long-Term Debt

The Company had a revolving line of credit that expired in May 2003. 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 future annual repurchase rights (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.

There were no borrowings outstanding during 2008 and 2007. 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-12

EVERFLOW EASTERN PARTNERS, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(CONTINUED)

Note 4. Partners’ Equity

Units represent limited partnership interests in Everflow. The Units are transferable subject only to the approval of any transfer by Everflow Management Limited, LLC 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, 2007 calculation, was $16.25 per Unit, net of the distributions ($1.50 per Unit in total) made in January and April 2008. The repurchase of Units in the amount of $308,344 was paid in July 2008.

F-13

EVERFLOW EASTERN PARTNERS, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(CONTINUED)

Note 4. Partners’ Equity (Continued)

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

	Calculated								Units Out-
	Price for		Less				# of		standing
	Repurchase		Interim		Net		Units		Following
Year	Right		Distributions		Price Paid		Repurchased		Repurchase
2004	$	13.44	$	1.00	$	12.44		23,865		5,690,874
2005	$	15.46	$	1.00	$	14.46		16,196		5,674,678
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

Note 5. Gas Purchase Agreements

The Company has numerous annual contracts with Dominion Field Services, Inc. and its affiliates (“Dominion”) to sell and deliver certain quantities of natural gas production on a monthly basis through October 2010. The agreements with Dominion provide for fixed pricing with current monthly weighted average pricing provisions ranging from $9.18 to $9.80 per MCF. The Company also has three 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 2010. The agreement with IGS provides for fixed pricing with current monthly weighted average pricing provisions ranging from $9.18 to $9.80 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 be fully measured until actual production volumes and prices are determined.

Note 6. Commitments and Contingencies

Everflow paid a quarterly dividend in October 2008 of $0.50 per Unit to unitholders of record on September 30, 2008. The distribution amounted to approximately $2,846,000.

F-14

EVERFLOW EASTERN PARTNERS, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(CONTINUED)

Note 6. Commitments and Contingencies (Continued)

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 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. At September 30, 2008 and December 31, 2007, these employee receivables amounted to $1,096,866 and $607,230, respectively. The loans accrue interest at prime (5.0% at September 30, 2008) and are expected to be paid from production revenues attributable to such interests or through joint interest assessments.

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 September 30, 2008 and December 31, 2007:

	September 30, 2008					December 31, 2007
(Amounts in Thousands)	Amount		%			Amount		%
Working capital	$	18,231		23	%	$	16,815		24	%
Property and equipment (net)		62,778		77			54,491		76
Other		78		—			78		—
Total	$	81,087		100	%	$	71,384		100	%
Deferred income taxes	$	400		—	%	$	400		—	%
Long-term liabilities		2,144		3			1,934		3
Partners’ equity		78,543		97			69,050		97
Total	$	81,087		100	%	$	71,384		100	%

Working capital of $18.2 million as of September 30, 2008 represented an increase of approximately $1.4 million from December 31, 2007 due primarily to increases in cash and equivalents, and accounts receivable from production, employees and joint venture partners. This increase was partially offset by a decrease in investments and a decrease in accounts payable.

The Company funds its operation with cash generated by operations and existing cash and equivalent balances and investments. The Company had no borrowings in 2008 or 2007 and no principal indebtedness was outstanding as of November 13, 2008. 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 quarterly distribution amounting to $2.8 million in October 2008.

3

The Company’s cash flow from operations before the change in working capital was $28.4 million, an increase of $7.2 million, or 34%, during the nine months ended September 30, 2008 as compared to the same period in 2007. Changes in working capital from operations other than cash and equivalents decreased cash by $939,000 during the nine months ended September 30, 2008 due primarily to an increase in accounts receivable resulting from an increase in production revenues receivable and an increase in accounts receivable from joint venture partners. Changes in working capital from operations other than cash and equivalents increased cash by $1.4 million during the nine months ended September 30, 2007 primarily due to a decrease in accounts receivable resulting from a decrease in production revenues receivable and a decrease in accounts receivable from joint venture partners.

Cash flows provided by operating activities were $27.5 million for the nine months ended September 30, 2008. Cash was primarily used in investing and financing activities to purchase property and equipment and pay quarterly distributions.

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 Repurchase Right and the payment of quarterly distributions.

The Company has numerous annual contracts with Dominion Field Services, Inc. and its affiliates (“Dominion”) to sell and deliver certain quantities of natural gas production on a monthly basis through October 2010. The agreements with Dominion provide for fixed pricing with current monthly weighted average pricing provisions ranging from $9.18 to $9.80 per MCF. The Company also has three 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 2010. The agreement with IGS provides for fixed pricing with current monthly weighted average pricing provisions ranging from $9.18 to $9.80 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 be fully measured until actual production volumes and prices are determined.

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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 and nine months ended September 30, 2008 and 2007. 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						Nine Months
	Ended September 30,						Ended September 30,
	2008			2007			2008			2007
Revenues:
Oil and gas sales		99	%		98	%		99	%		98	%
Well management and operating		1			2			1			2
Total Revenues		100	%		100	%		100	%		100	%
Expenses:
Production costs		9	%		11	%		9	%		11	%
Well management and operating		—			—			1			1
Depreciation, depletion and amortization		12			17			12			16
Accretion expense		—			1			1			1
General and administrative		4			6			4			5
Other		—			(2	)		(1	)		(2	)
Current income taxes		1			—			1			1
Deferred income taxes		—			—			—			—
Total Expenses		26			33			27			33
Net income		74	%		67	%		73	%		67	%

Revenues for the three and nine months ended September 30, 2008 increased $3.5 million and $7.5 million, respectively, compared to the same periods in 2007. These increases were due primarily to an increase in oil and gas sales during the three and nine months ended September 30, 2008 compared to the same periods in 2007.

Oil and gas sales increased $3.4 million, or 43%, during the three months ended September 30, 2008 compared to the same period in 2007. Oil and gas sales increased $7.5 million, or 30%, during the nine months ended September 30, 2008 compared to the same period in 2007. These increases are primarily the result of higher natural gas and crude oil prices during the three and nine months ended September 30, 2008 compared to the same periods in 2007.

Production costs increased $107,000, or 12%, during the three months ended September 30, 2008 and increased $200,000, or 7%, during the nine months ended September 30, 2008 compared to the same periods in 2007. The increases are the result of higher operating costs resulting from an increase in the number of producing properties and inflationary increases in the costs to operate and manage producing properties during the three and nine months ended September 30, 2008 compared to the same periods in 2007.

5

Depreciation, depletion and amortization expenses increased $8,000, or 1%, and $64,000, or 2%, during the three and nine months ended September 30, 2008, respectively, compared with the same periods in 2007. The primary reason for these increases is an increase in the number of producing properties during the three and nine months ended September 30, 2008 compared to the same periods in 2007.

Accretion expense decreased $1,000, or 2%, and $6,000, or 4%, during three and nine months ended September 30, 2008, respectively, compared to the same periods in 2007. This decrease was due to a number of properties having been fully accreted previously. Many of these properties have not been retired, although their asset retirement obligation remains fully recognized in current liabilities on the balance sheet.

General and administrative expenses increased $2,000, or less than 1%, and $39,000, or 3%, during the three and nine months ended September 30, 2008, respectively, compared with the same periods in 2007. These increases are primarily the result of higher overhead expenses associated with ongoing administration. In particular, administrative overhead increased as a result of the Company’s efforts to develop formalized finance and accounting policies and formalized written policies and procedures governing the financial reporting process as required under Section 404 of the Sarbanes-Oxley Act of 2002.

Interest income decreased $92,000, or 63%, and $295,000, or 54%, during the three and nine months ended September 30, 2008, respectively, compared to the same periods in 2007. These decreases are the result of decreases in interest income earned on cash and equivalent balances and investments.

The Company reported net income of $8.5 million, an increase of $3.1 million, or 58%, during the three months ended September 30, 2008 compared to the same period in 2007. The Company reported net income of $24.1 million, an increase of $6.9 million, or 40%, during the nine months ended September 30, 2008 compared to the same period in 2007. An increase in oil and gas sales was primarily responsible for the increase in net income during the three and nine months ended September 30, 2008. Net income represented 74% and 67% of total revenues during the three months ended September 30, 2008 and 2007, respectively. Net income represented 73% and 67% of total revenues during the nine months ended September 30, 2008 and 2007, 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, 2007.

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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.

Item 4T. CONTROLS AND PROCEDURES

(a) Disclosure Controls and Procedures. The Company’s Chief Executive Officer (the “CEO”) and Chief Financial Officer (the “CFO”) have evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Exchange Act Rule 13a-15) as of September 30, 2008 (the “Evaluation Date”), and have concluded that, as of the Evaluation Date, the Company’s disclosure controls and procedures were not effective. As reported in our annual report on Form 10-K for the year ended December 31, 2007, we have identified material weaknesses in our internal control over financial reporting, which we view as an integral part of our disclosure controls and procedures. See Item 9A.(T) Controls and Procedures of our annual report on Form 10-K for the year ended December 31, 2007, which was filed on March 18, 2008, and which is incorporated by reference into this Item 4T. for a more detailed explanation of these material weaknesses and remedial actions taken and planned which we expect will materially affect such controls.

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 4T., including the information incorporated by reference to our filing on Form 10-K for the year ended December 31, 2007, for a more complete understanding of the matters covered by such certifications.

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(b) Changes in internal control over financial reporting. While we are continuing to develop and implement remediation plans with respect to the identified material weaknesses, there have been no changes in our internal control over financial reporting other than those discussed below that have materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting beyond those identified in our Form 10-K for the year ended December 31, 2007.

Development of formalized finance and accounting policies and formalized written policies and procedures governing the financial reporting process are continuing. The development of these policies and procedures are key to the remediation of our material weaknesses regarding establishing and maintaining an effective control environment and maintaining sufficient, formalized written policies and procedures over financial reporting as disclosed in Item 9A.(T) Controls and Procedures of our annual report on our Form 10-K for the year ended December 31, 2007.

As noted in Item 1A. Risk Factors in our annual report on Form 10-K for the year ended December 31, 2007, failure to achieve and maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act of 2002 could have a material effect on our business and our failure to maintain sustained improvements in our controls or successfully implement compensating controls and procedures as part of our disclosure controls and procedures may further adversely impact our existing internal control structure.

8

Part II. Other Information

Item 6. EXHIBITS

Exhibit 31.1	Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 31.2	Certification of Chief Financial Officer 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

9

SIGNATURE

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

	EVERFLOW EASTERN PARTNERS, L.P.
	By:	EVERFLOW MANAGEMENT LIMITED, LLC, General Partner
	By:	EVERFLOW MANAGEMENT CORPORATION Managing Member
November 13, 2008	By:	/s/ William A. SiskovicWilliam A. Siskovic
		Vice President and Principal Financial Accounting Officer
		(Duly Authorized Officer)

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EXHIBIT INDEX

Exhibit 31.1	Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 31.2	Certification of Chief Financial Officer 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