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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
[ ] FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003
OR
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 (I.R.S. Employer
incorporation or organization) 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. Yes X No
------- ---------
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Exchange Act Rule 12b-2). Yes No X
------- -------
There were 5,748,773 Units of limited partnership interest of the
Registrant as of May 10, 2003. The Units generally do not have any voting
rights, but, in certain circumstances, the Units are entitled to one vote per
Unit.
Except as otherwise indicated, the information contained in this Report
is as of March 31, 2003.
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EVERFLOW EASTERN PARTNERS, L.P.
INDEX
DESCRIPTION PAGE NO.
----------- --------
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets
March 31, 2003 and December 31, 2002 F-1
Consolidated Statements of Income
Three Months Ended March 31, 2003 and 2002 F-3
Consolidated Statements of Partners' Equity
Three Months Ended March 31, 2003 and 2002 F-4
Consolidated Statements of Cash Flows
Three Months Ended March 31, 2003 and 2002 F-5
Notes to Unaudited Consolidated Financial Statements F-6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 3
Item 3. Quantitative and Qualitative Disclosures About Market
Risk 6
Item 4. Controls and Procedures 7
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 8
Signature 9
2
EVERFLOW EASTERN PARTNERS, L.P.
CONSOLIDATED BALANCE SHEETS
March 31, 2003 and December 31, 2002
March 31, December 31,
2003 2002
ASSETS (Unaudited) (Audited)
- ------ ------------- -------------
CURRENT ASSETS
Cash and equivalents $ 6,293,141 $ 4,689,831
Accounts receivable:
Production 2,637,956 3,557,396
Officers and employees 230,233 220,764
Joint venture partners 11,580 30,630
Other 98,859 102,245
------------- -------------
Total current assets 9,271,769 8,600,866
PROPERTY AND EQUIPMENT
Proved properties (successful efforts
accounting method) 119,835,598 118,513,983
Pipeline and support equipment 555,721 514,060
Corporate and other 1,627,148 1,587,219
------------- -------------
122,018,467 120,615,262
Less accumulated depreciation, depletion,
amortization and write down (78,004,180) (76,766,803)
------------- -------------
44,014,287 43,848,459
OTHER ASSETS 129,979 129,979
------------- -------------
$ 53,416,035 $ 52,579,304
============= =============
See notes to unaudited consolidated financial statements.
F-1
EVERFLOW EASTERN PARTNERS, L.P.
CONSOLIDATED BALANCE SHEETS
March 31, 2003 and December 31, 2002
March 31, December 31,
2003 2002
LIABILITIES AND PARTNERS' EQUITY (Unaudited) (Audited)
- -------------------------------- ----------- -----------
CURRENT LIABILITIES
Accounts payable $ 799,646 $ 746,421
Accrued expenses 339,561 324,627
----------- -----------
Total current liabilities 1,139,207 1,071,048
COMMITMENTS AND CONTINGENCIES -- --
LIMITED PARTNERS' EQUITY, SUBJECT TO
REPURCHASE RIGHT
Authorized - 8,000,000 Units
Issued and outstanding - 5,748,773 51,673,708 50,914,003
----------- -----------
GENERAL PARTNER'S EQUITY 603,120 594,253
----------- -----------
Total partners' equity 52,276,828 51,508,256
----------- -----------
$53,416,035 $52,579,304
=========== ===========
See notes to unaudited consolidated financial statements.
F-2
EVERFLOW EASTERN PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended March 31, 2003 and 2002
(Unaudited)
2003 2002
------ ------
REVENUES
Oil and gas sales $ 4,444,538 $ 4,114,006
Well management and operating 141,542 133,549
Other 651 799
----------- -----------
4,586,731 4,248,354
DIRECT COST OF REVENUES
Production costs 711,103 724,009
Well management and operating 55,240 50,259
Depreciation, depletion and amortization 1,226,026 1,311,823
Abandonment and write down
of oil and gas properties 25,000 50,000
----------- -----------
Total direct cost of revenues 2,017,369 2,136,091
GENERAL AND ADMINISTRATIVE
EXPENSE 371,808 381,628
----------- -----------
Total cost of revenues 2,389,177 2,517,719
----------- -----------
INCOME FROM OPERATIONS 2,197,554 1,730,635
OTHER INCOME (EXPENSE)
Interest income 24,986 16,154
Interest expense -- (8,178)
----------- -----------
24,986 7,976
----------- -----------
INCOME BEFORE INCOME TAXES 2,222,540 1,738,611
PROVISION FOR INCOME TAXES
Deferred -- (25,000)
----------- -----------
-- (25,000)
NET INCOME $ 2,222,540 $ 1,763,611
=========== ===========
Allocation of Partnership Net Income
Limited Partners $ 2,196,898 $ 1,743,342
General Partner 25,642 20,269
----------- -----------
$ 2,222,540 $ 1,763,611
=========== ===========
Net Income per unit $ 0.38 $ 0.30
=========== ===========
See notes to unaudited consolidated financial statements.
F-3
EVERFLOW EASTERN PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF PARTNERS' EQUITY
Three Months Ended March 31, 2003 and 2002
(Unaudited)
2003 2002
----------- -----------
PARTNERS' EQUITY - JANUARY 1 $51,508,256 $50,911,995
Net income 2,222,540 1,763,611
Cash distributions ($.25 per Unit) (1,453,968) (1,459,568)
----------- -----------
PARTNERS' EQUITY - MARCH 31 $52,276,828 $51,216,038
=========== ===========
See notes to unaudited consolidated financial statements.
F-4
EVERFLOW EASTERN PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31, 2003 and 2002
(Unaudited)
2003 2002
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 2,222,540 $ 1,763,611
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, depletion and amortization 1,237,377 1,326,158
Abandonment and write down of oil and gas properties 25,000 50,000
Deferred income taxes (25,000)
Changes in assets and liabilities:
Accounts receivable 938,490 34,030
Short-term investments -- (12,412)
Other current assets 3,386 (1,821)
Other assets -- (43,200)
Accounts payable 53,225 42,189
Accured expenses 14,934 (8,007)
----------- ------------
Total adjustments 2,272,412 1,361,937
----------- ------------
Net cash provided by operating activities 4,494,952 3,125,548
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds received on receivables from officers
and employees 73,605 59,332
Advances disbursed to officers and employees (83,074) (32,032)
Purchase of property and equipment (1,428,205) (582,488)
----------- ------------
Net cash used by investing activities (1,437,674) (555,188)
CASH FLOWS FROM FINANCING ACTIVITIES
Distributions (1,453,968) (1,459,568)
Payments on debt, including revolver activity -- (16,675)
----------- ------------
Net cash used by financing activities (1,453,968) (1,476,243)
NET INCREASE IN CASH AND
EQUIVALENTS 1,603,310 1,094,117
CASH AND EQUIVALENTS AT BEGINNING
OF YEAR 4,689,831 1,128,835
----------- ------------
CASH AND EQUIVALENTS AT END OF
FIRST QUARTER $ 6,293,141 $ 2,222,952
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ -- $ 8,178
Income taxes -- 40,000
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.
Information and footnote disclosures normally
included in financial statements prepared in
accordance with accounting principles generally
accepted in the United States have been condensed or
omitted. 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 report on Form
10-K filed with the Securities and Exchange
Commission on March 31, 2003.
The results of operations for the interim periods may
not necessarily be indicative of the results to be
expected for the full year.
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.
B. 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 exploration and development.
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, 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
F-6
EVERFLOW EASTERN PARTNERS, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Note 1. Organization and Summary of Significant Accounting Policies
(Continued)
B. Organization (Continued)
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, a limited partnership
controlled by 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.
C. 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.
D. 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 3).
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 5,748,773 and 5,771,174
for the three months ended March 31, 2003 and 2002,
respectively.
E. New Accounting Standards - In June 2001, the
Financial Accounting Standards Board ("FASB") issued
SFAS No. 142, "Goodwill and Other Intangible Assets."
Under SFAS No. 142, goodwill and intangible assets
deemed to have indefinite lives are no longer
amortized but are subject to periodic impairment
tests. Other intangible assets continue to be
amortized over their useful lives. SFAS No. 142 was
adopted by the Company in 2002.
F-7
Note 1. Organization and Summary of Significant Accounting Policies
(Continued)
E. New Accounting Standards (Continued)
In August 2001, the FASB issued SFAS No. 143,
"Accounting for Asset Retirement Obligations," which
is effective the first quarter of fiscal year 2003.
SFAS 143 addresses financial accounting and reporting
for obligations associated with the retirement of
tangible long-lived assets and the associated asset
retirement cost.
In October 2001, the FASB issued SFAS No. 144,
"Accounting for the Impairment or Disposal of
Long-lived Assets," which was adopted by the Company
in 2002. SFAS No. 144 supercedes SFAS No. 121 and
modifies and expands the financial accounting and
reporting for the impairment or disposal of
long-lived assets other than goodwill.
In April 2002, the FASB issued SFAS No. 145,
"Rescission of FASB Statements No. 4, 44 and 64,
Amendment of FASB Statement No. 13, and Technical
Corrections." Provisions of SFAS No. 145 become
effective in 2002 and 2003. Under SFAS No. 145, gains
and losses from the extinguishment of debt should be
classified as extraordinary items only if they meet
the criteria of Accounting Principles Board Opinion
No. 30. SFAS No. 145 also addresses financial
accounting and reporting for capital leases that are
modified in such a way as to give rise to a new
agreement classified as an operating lease.
In June 2002, the FASB issued SFAS No. 146,
"Accounting for Costs Associated with Exit or
Disposal Activities," which is effective for exit or
disposal activities initiated after December 31,
2002. SFAS No. 146 nullifies Emerging Issues Task
Force Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred
in a Restructuring)." Under SFAS No. 146, a liability
is required to be recognized for costs, including
certain lease termination costs and employee
termination benefits, associated with an exit or
disposal activity when the liability is incurred.
SFAS No. 146 applies to costs associated with an exit
activity that does not involve an entity newly
acquired in a business combination or with a
retirement or disposal activity covered by SFAS Nos.
143 and 144.
F-8
EVERFLOW EASTERN PARTNERS, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Note 1. Organization and Summary of Significant Accounting Policies
(Continued)
E. New Accounting Standards (Continued)
In November 2002, the FASB issued FIN 45, which
expands previously issued accounting guidance and
disclosure requirements for certain guarantees. FIN
45 requires the recognition of an initial liability
for the fair value of an obligation assumed by
issuing a guarantee. The provision for initial
recognition and measurement of the liability will be
applied on a prospective basis to guarantees issued
or modified after December 31, 2002.
In December 2002, the FASB issued SFAS No. 148,
"Accounting for Stock-Based, Compensation -
Transition and Disclosure," that amends SFAS No. 123,
"Accounting for Stock-Based Compensation," to provide
alternative methods of transition to the fair value
method of accounting for stock-based employee
compensation. SFAS No. 148 also amends the disclosure
provisions of SFAS No. 123 and APB Opinion No. 28,
"Interim Financial Reporting," to require disclosure
in the summary of significant accounting policies of
the effects of an entity's accounting policy with
respect to stock-based employee compensation on
reported net income and earnings per share in annual
and interim financial statements. The Statement does
not amend SFAS No. 123 to require companies to
account for employee stock options using the fair
value method. The Statement is effective for fiscal
years beginning after December 15, 2002.
The adoption of the effective new standards did not,
or is not expected to, materially affect the
Company's financial position and results of
operations.
Note 2. Credit Facilities and Long-Term Debt
In August 2001, the Company entered into an agreement that
modified the prior credit agreements. The agreement provides
for a revolving line of credit in the amount of $4,000,000,
all of which is available. The revolving line of credit
provides for interest payable quarterly at LIBOR plus 150
basis points with the principal due at maturity, May 31, 2003.
The Company does not anticipate renewing the facility as it
does not anticipate that any future financing is necessary.
There were no borrowings outstanding on the revolving credit
facility during 2003 and 2002.
F-9
EVERFLOW EASTERN PARTNERS, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Note 3. 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 he elects to exercise the
Repurchase Right and have Everflow acquire certain or all of
his 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, 2002 calculation, is estimated to be $8.44 per
Unit, net of the distributions ($.50 per Unit in total) made
in January and April 2003.
F-10
EVERFLOW EASTERN PARTNERS, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Note 3. Partners' Equity (Continued)
Units repurchased pursuant to the Repurchase Right for each of
the last four years in the period ended December 31, 2002, are
as follows:
Calculated Units
Price for Less # of Out-standing
Repurchase Interim Net Units Following
Year Right Distributions Price Paid Repurchased Repurchase
---- ------ ------------- ---------- ----------- ----------
1999 $ 6.16 $.375 $5.79 77,344 6,095,193
2000 $ 6.73 $.625 $6.11 206,531 5,888,662
2001 $10.35 $.625 $9.73 117,488 5,771,174
2002 $ 6.16 $.500 $5.66 22,401 5,748,773
Note 4. Commitments and Contingencies
Everflow paid a quarterly dividend in April 2003 of $.25 per
Unit to Unitholders of record on March 31, 2003. The
distribution amounted to approximately $1,454,000.
The Company operates exclusively in the United States, almost
entirely in Ohio and Pennsylvania, in the exploration,
development and production of oil and gas.
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,
additional borrowings or additional equity funds. 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.
F-11
EVERFLOW EASTERN PARTNERS, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Note 5. Gas Purchase Agreements
The Company executed an agreement that replaced certain other
agreements with Dominion Field Services, Inc. and its
affiliates ("Dominion") (including The East Ohio Gas Company),
to sell Dominion a significant portion of the Company's
natural gas production through October 2003. The Company has
additional agreements with Dominion, which obligates Dominion
to purchase, and the Company to sell and deliver certain
quantities of natural gas production on a monthly basis
through October 2004. The agreement with Dominion provides for
fixed pricing with current weighted average pricing provisions
ranging from $4.10 to $4.82 per MCF. The Company also has an
agreement 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 2004. The agreement with IGS provides
for fixed pricing with current weighted average pricing
provisions ranging from $4.00 to $5.01 per MCF. Fixed pricing
with both Dominion and IGS applies to certain fixed quantities
on a monthly basis with excess monthly quantities being priced
based on the current spot market price. The impact on the
Company cannot fully be measured until actual production
volumes and prices are determined.
F-12
Part I: Financial Information
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
The following table summarizes the Company's financial position at
March 31, 2003 and December 31, 2002: March 31, 2003 December 31, 2002
(Amounts in Thousands) Amount % Amount %
- --------------------- ------- ------- ------- -------
Working capital $ 8,133 16% $ 7,530 15%
Property and equipment (net) 44,014 84 43,848 85
Other 130 -- 130 --
------- ------- ------- -------
Total $52,277 100% $51,508 100%
======= ======= ======= =======
Long-term debt $ -- -% -- -%
Deferred income taxes -- -- -- --
Partners' equity 52,277 100 51,508 100
------- ------- ------- -------
Total $52,277 100% $51,508 100%
======= ======= ======= =======
Working capital surplus of $8.1 million as of March 31, 2003
represented an increase of $603,000 from December 31, 2002 due primarily to an
increase in cash and equivalents. The increase in cash and equivalents was
partially offset by a decrease in production receivable resulting primarily from
timing differences between the periods in the receipt of production revenues.
The Company has a revolving credit facility with Bank One, N.A. that
expires May 31, 2003. The Company had no borrowings in 2002 or 2003 and no
principal indebtedness was outstanding as of May 10, 2003. The Company has no
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 $1.5 million in April 2003.
The Company's cash flow from operations before the change in working
capital increased $370,000, or 12%, during the three months ended March 31, 2003
as compared to the same period in 2002. Changes in working capital other than
cash and cash equivalents increased cash by $1.0 million during the three months
ended March 31, 2003.
Cash flows provided by operating activities was $4.5 million for the
three months ended March 31, 2003. Cash was primarily used in investing and
financing activities to purchase property and equipment and pay a quarterly
distribution, respectively.
3
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 executed an agreement that replaced certain other
agreements with Dominion Field Services, Inc. and its affiliates ("Dominion")
(including The East Ohio Gas Company), to sell Dominion a significant portion of
the Company's natural gas production through October 2003. The Company has
additional agreements with Dominion, which obligates Dominion to purchase, and
the Company to sell and deliver certain quantities of natural gas production on
a monthly basis through October 2004. The agreement with Dominion provides for
fixed pricing with current weighted average pricing provisions ranging from
$4.10 to $4.82 per MCF. The Company also has an agreement 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 2004. The agreement with IGS provides for fixed pricing with
current weighted average pricing provisions ranging from $4.00 to $5.01 per MCF.
Fixed pricing with both Dominion and IGS applies to certain fixed quantities on
a monthly basis with excess monthly quantities being priced based on the current
spot market price. The impact on the Company cannot fully be measured until
actual production volumes and prices are determined.
4
RESULTS OF OPERATIONS
The following table and discussion is a review of the results of
operations of the Company for the three months ended March 31, 2003 and 2002.
All items in the table are calculated as a percentage of total revenues. This
table should be read in conjunction with the discussions of each item below:
Three Months
Ended March 31,
------------------------
2003 2002
------ ------
Revenues:
Oil and gas sales 97% 97%
Well management and operating 3 3
----- ----
Total Revenues 100 100
Expenses:
Production costs 16 17
Well management and operating 1 1
Depreciation, depletion and amortization 27 30
Abandonment and write down of
oil and gas properties 1 1
General and administrative 8 9
Other (1) --
---- ----
Total Expenses 52 58
----- ----
Net income 48% 42%
===== ====
Revenues for the three months ended March 31, 2003 increased $338,000,
or 8%, compared to the same period in 2002. This increase was due to an increase
in oil and gas sales during the first three months of 2003, as compared to the
same period in 2002.
Oil and gas sales increased $331,000, or 8%, during the three months
ended March 31, 2003 compared to the same period in 2002. Higher natural gas and
crude oil prices during the first quarter of 2003 were responsible for this
increase compared to this same period in 2002.
Production costs decreased $13,000, or 2%, during the three months
ended March 31, 2003 compared to the same period in 2002. Lower operating costs
were responsible for this decrease between 2002 and 2003.
Depreciation, depletion and amortization decreased $86,000, or 7%,
during the three months ended March 31, 2003 compared to the same period in
2002. The primary reason for the decrease in depreciation, depletion and
amortization is the result of higher oil and gas reserve estimates resulting
from higher natural gas and oil prices. The result of higher oil and gas reserve
estimates reduces depletion and amortization rates associated with the Company's
producing oil and gas properties.
5
Abandonment and write down of oil and gas properties decreased $25,000,
or 50%, during the first three months of 2003 compared to the same period in
2002. A reduction in leasehold abandonments is primarily responsible for this
decrease.
General and administrative expenses decreased $10,000, or 3%, during
the first quarter of 2003 compared to the first quarter of 2002. The primary
reason for this decrease is due to lower overhead expenses associated with
ongoing administration.
Net other income increased $17,000 during the three months ended March
31, 2003 compared to the same period in 2002. This increase is the result of an
increase in interest income earned on cash and equivalent balances and a
decrease in interest expense due to the elimination of debt.
The Company reported net income of $2.2 million, an increase of
$459,000, or 26%, during the three months ended March 31, 2003 compared to the
same period in 2002. The increase in oil and gas sales was primarily responsible
for this increase in net income. Net income represented 48% and 42% of total
revenue during the three months ended March 31, 2003 and 2002, 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, 2002.
FORWARD-LOOKING STATEMENTS
Except for historical financial information contained in this Form
10-Q, the statements made in this report are 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
The Company is exposed to market risk from changes in interest rates
since it, at times, funds its operations through long-term and short-term
borrowings. The Company's primary interest rate risk exposure results from
floating rate debt with respect to the Company's revolving credit. At March 31,
2003, the Company had no long-term debt outstanding.
The Company is also exposed to market risk from changes in commodity
prices. Realized pricing is primarily driven by the prevailing worldwide prices
for crude oil and spot market prices applicable to United States natural gas
production. Pricing for gas and oil production has been volatile and
unpredictable for many years. These market risks can impact the Company's
results of operations, cash flows and financial position. The Company's primary
commodity price risk exposure results from contractual delivery commitments with
respect to the
6
Company's gas purchase contracts. The Company periodically makes commitments to
sell certain quantities of natural gas to be delivered in future months at
certain contract prices. This affords the Company the opportunity to "lock in"
the sale price for those quantities of natural gas. Failure to meet these
delivery commitments would result in the Company being forced to purchase any
short fall at current market prices. The Company's risk management objective is
to lock in a range of pricing for no more than 80% to 90% of expected production
volumes. This allows the Company to forecast future cash flows and earnings
within a predictable range.
Item 4. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures. The Company's
Chief Executive Officer and Chief Financial Officer, after evaluating the
effectiveness of the Company's disclosure controls and procedures (as defined in
Exchange Act Rule 13a-14) as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"), have concluded that as of the
Evaluation Date, the Company's disclosure controls and procedures were effective
in ensuring that information required to be disclosed by the Company in the
reports it files or submits under the Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in the Commission's
rules and forms.
(b) Changes in internal controls. There were no significant changes in
the Company's internal controls or in other factors that could significantly
affect these controls subsequent to the Evaluation Date.
7
Part II. Other Information
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 99.1 Certification Pursuant To 18 U.S.C.
Section 1350, As Adopted Pursuant To
Section 906 Of The Sarbanes-Oxley
Act of 2002
Exhibit 99.2 Certification Pursuant To 18 U.S.C.
Section 1350, As Adopted Pursuant To
Section 906 Of The Sarbanes-Oxley
Act of 2002
(b) No reports on Form 8-K were filed with the Commission
during the Company's first quarter.
8
SIGNATURE
Pursuant to the requirement of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EVERFLOW EASTERN PARTNERS, L.P.
By: EVERFLOW MANAGEMENT LIMITED, LLC
General Partner
By: EVERFLOW MANAGEMENT CORPORATION
Managing Member
May 13, 2003 By: /s/William A. Siskovic
------------------------------------------------
William A. Siskovic
Vice President and Principal Financial and
Accounting Officer
(Duly Authorized Officer)
9
CERTIFICATIONS
I, Thomas L. Korner, Chief Executive Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Everflow
Eastern Partners, L.P.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability
to record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Dated: May 13, 2003
/s/Thomas L. Korner
-------------------------------------
Thomas L. Korner
Chief Executive Officer
I, William A. Siskovic, Chief Financial Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Everflow
Eastern Partners, L.P.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability
to record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that
could significantly affect internal controls subsequent to the date of our most
recent evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
Dated: May 13, 2003
/s/William A. Siskovic
-----------------------------------
William A. Siskovic
Chief Financial Officer