================================================================================
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 JUNE 30, 2003
OR
/X/ 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 5,714,739 Units of limited partnership interest of the
Registrant as of August 8, 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 June 30, 2003.
EVERFLOW EASTERN PARTNERS, L.P.
INDEX
DESCRIPTION PAGE NO.
----------- --------
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets
June 30, 2003 and December 31, 2002 F-1
Consolidated Statements of Income
Three and Six Months Ended June 30, 2003 and 2002 F-3
Consolidated Statements of Partners' Equity
Six Months Ended June 30, 2003 and 2002 F-4
Consolidated Statements of Cash Flows
Six Months Ended June 30, 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 7
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
June 30, 2003 and December 31, 2002
-----------------------------------
June 30, December 31,
2003 2002
(Unaudited) (Audited)
------------- -------------
ASSETS
------
CURRENT ASSETS
Cash and equivalents $ 7,634,391 $ 4,689,831
Accounts receivable:
Production 2,389,818 3,557,396
Officers and employees 210,875 220,764
Joint venture partners 14,868 30,630
Other 91,809 102,245
------------- -------------
Total current assets 10,341,761 8,600,866
PROPERTY AND EQUIPMENT
Proved properties (successful efforts
accounting method) 120,670,756 118,513,983
Pipeline and support equipment 560,570 514,060
Corporate and other 1,671,856 1,587,219
------------- -------------
122,903,182 120,615,262
Less accumulated depreciation, depletion,
amortization and write down (79,086,915) (76,766,803)
------------- -------------
43,816,267 43,848,459
OTHER ASSETS 149,979 129,979
------------- -------------
$ 54,308,007 $ 52,579,304
============= =============
See notes to unaudited consolidated financial statements.
F-1
EVERFLOW EASTERN PARTNERS, L.P.
CONSOLIDATED BALANCE SHEETS
June 30, 2003 and December 31, 2002
-----------------------------------
June 30, December 31,
2003 2002
(Unaudited) (Audited)
----------- -----------
LIABILITIES AND PARTNERS' EQUITY
--------------------------------
CURRENT LIABILITIES
Accounts payable $ 970,594 $ 746,421
Accrued expenses 175,656 324,627
----------- -----------
Total current liabilities 1,146,250 1,071,048
COMMITMENTS AND CONTINGENCIES -- --
LIMITED PARTNERS' EQUITY, SUBJECT TO
REPURCHASE RIGHT
Authorized - 8,000,000 Units
Issued and outstanding - 5,714,739 and
5,748,773 Units, respectively 52,548,427 50,914,003
GENERAL PARTNER'S EQUITY 613,330 594,253
----------- -----------
Total partners' equity 53,161,757 51,508,256
----------- -----------
$54,308,007 $52,579,304
=========== ===========
See notes to unaudited consolidated financial statements.
F-2
EVERFLOW EASTERN PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF INCOME
Three and Six Months Ended June 30, 2003 and 2002
-------------------------------------------------
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------- -------------------------------
2003 2002 2003 2002
---- ---- ---- ----
REVENUES
Oil and gas sales $ 4,560,696 $ 3,322,642 $ 9,005,234 $ 7,436,648
Well management and operating 135,938 118,098 277,480 251,647
Other 199 51 850 850
----------- ----------- ----------- -----------
4,696,833 3,440,791 9,283,564 7,689,145
DIRECT COST OF REVENUES
Production costs 629,887 551,478 1,340,990 1,275,487
Well management and operating 62,651 57,020 117,891 107,279
Depreciation, depletion and amortization 1,071,438 956,266 2,297,464 2,268,089
Abandonment and write down of
oil and gas properties 25,000 50,000 50,000 100,000
----------- ----------- ----------- -----------
Total direct cost of revenues 1,788,976 1,614,764 3,806,345 3,750,855
GENERAL AND ADMINISTRATIVE
EXPENSE 307,250 309,773 679,058 691,401
----------- ----------- ----------- -----------
Total cost of revenues 2,096,226 1,924,537 4,485,403 4,442,256
----------- ----------- ----------- -----------
INCOME FROM OPERATIONS 2,600,607 1,516,254 4,798,161 3,246,889
OTHER INCOME (EXPENSE)
Interest income 25,536 18,191 50,522 34,345
Interest expense -- (8,093) -- (16,271)
Gain on sale of property and equipment -- 4,380 -- 4,380
----------- ----------- ----------- -----------
25,536 14,478 50,522 22,454
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES 2,626,143 1,530,732 4,848,683 3,269,343
PROVISION FOR INCOME TAXES
Deferred -- (25,000) -- (50,000)
----------- ----------- ----------- -----------
-- (25,000) -- (50,000)
----------- ----------- ----------- -----------
NET INCOME $ 2,626,143 $ 1,555,732 $ 4,848,683 $ 3,319,343
=========== =========== =========== ===========
Allocation of Partnership Net Income
Limited Partners $ 2,595,845 $ 1,537,852 $ 4,792,743 $ 3,281,195
General Partner 30,298 17,880 55,940 38,148
----------- ----------- ----------- -----------
$ 2,626,143 $ 1,555,732 $ 4,848,683 $ 3,319,343
=========== =========== =========== ===========
Net income per unit $.45 $.27 $.83 $.57
==== ==== ==== ====
See notes to unaudited consolidated financial statements.
F-3
EVERFLOW EASTERN PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF PARTNERS' EQUITY
Six Months Ended June 30, 2003 and 2002
---------------------------------------
(Unaudited)
2003 2002
---- ----
PARTNERS' EQUITY - JANUARY 1 $ 51,508,256 $ 50,911,995
Net income 4,848,683 3,319,343
Cash distributions ($.50 per Unit) (2,907,935) (2,919,136)
Repurchase Right - Units tendered (287,247) (126,790)
------------ ------------
PARTNERS' EQUITY - JUNE 30 $ 53,161,757 $ 51,185,412
============ ============
See notes to unaudited consolidated financial statements.
F-4
EVERFLOW EASTERN PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30, 2003 and 2002
---------------------------------------
(Unaudited)
2003 2002
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 4,848,683 $ 3,319,343
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, depletion and amortization 2,320,112 2,276,535
Abandonment and write down of
oil and gas properties 50,000 100,000
Gain on sale of property and equipment -- (4,380)
Deferred income taxes -- (50,000)
Changes in assets and liabilities:
Accounts receivable 1,183,340 340,405
Short-term investments -- (526,154)
Other current assets 10,436 (1,821)
Other assets (20,000) (63,200)
Accounts payable (63,074) 151,508
Accrued expenses (148,971) (123,766)
----------- -----------
Total adjustments 3,331,843 2,099,127
----------- -----------
Net cash provided by operating activities 8,180,526 5,418,470
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds received on receivables from officers and
employees 146,804 105,990
Advances disbursed to officers and employees (136,915) (94,787)
Purchase of property and equipment (2,337,920) (1,549,009)
Proceeds on sale of property and equipment
and other assets -- 27,500
----------- -----------
Net cash used by investing activities (2,328,031) (1,510,306)
CASH FLOWS FROM FINANCING ACTIVITIES
Distributions (2,907,935) (2,919,136)
Payments on debt, including revolver activity -- (30,120)
----------- -----------
Net cash used by financing activities (2,907,935) (2,949,256)
----------- -----------
NET INCREASE IN CASH AND EQUIVALENTS 2,944,560 958,908
----------- -----------
CASH AND EQUIVALENTS AT BEGINNING
OF YEAR 4,689,831 1,128,835
----------- -----------
CASH AND EQUIVALENTS AT END OF
SECOND QUARTER $ 7,634,391 $ 2,087,743
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ -- $ 16,271
Income taxes 20,000 --
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 of America 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 purposes
and conduct of the business of Everflow. The members
of Everflow Management Limited, LLC are Everflow
Management
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)
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 for the three
and six months ended June 30, 2003 and 5,771,174 for
the three and six months ended June 30, 2002.
E. New Accounting Standards - 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 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.
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. New Accounting Standards (Continued)
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.
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.
In April 2003, the FASB issued SFAS No. 149,
"Amendment of Statement 133 on Derivative Instruments
and Hedging Activities." SFAS No. 149 amends and
clarifies financial reporting for derivative
instruments, including certain derivative instruments
embedded in other contracts and for hedging
activities under SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." This
statement is effective for contracts entered into or
modified after June 30, 2003, and for hedging
relationships designated after June 30, 2003.
In May 2003, the FASB issued SFAS No. 150,
"Accounting for Certain Financial Instruments with
Characteristics of both Liabilities
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)
and Equity." SFAS No. 150 establishes standards for
how an issuer classifies and measures certain
financial instruments with characteristics of both
liabilities and equity. SFAS No. 150 is effective for
financial instruments entered into or modified after
May 31, 2003, and must be applied to the Company's
existing financial instruments effective July 1,
2003, the beginning of the first interim period after
June 15, 2003.
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
The Company's revolving line of credit expired on May 31,
2003. The Company does not anticipate that any future
financing is necessary. There were no borrowings outstanding
on the revolving credit facility during 2003 and 2002.
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 the Company annually
offers to repurchase for cash up to 10% of the then
outstanding Units, to the extent unitholders offer Units to
the Company for repurchase pursuant to the
F-9
EVERFLOW EASTERN PARTNERS, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Note 3. Partners' Equity (Continued)
repurchase right. The repurchase right entitles any
unitholder, between May 1 and June 30 of each year, to notify
the Company of his or her election to exercise the repurchase
right and have the Company acquire such 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 will be equal to 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 $8.44
per Unit, net of the distributions ($.50 per Unit in total)
made in January and April 2003.
Units repurchased pursuant to the repurchase right for each of
the last five years 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
2003 $ 8.94 $.500 $8.44 34,034 5,714,739
Everflow paid a quarterly dividend in July 2003 of $.50 per
Unit to unitholders of record on June 30, 2003. The
distribution amounted to approximately $2,900,000.
F-10
EVERFLOW EASTERN PARTNERS, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Note 3. Partners' Equity (Continued)
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.
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 $4.53 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-11
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 June
30, 2003 and December 31, 2002:
June 30, 2003 December 31, 2002
------------------- -------------------
(Amounts in Thousands) Amount % Amount %
------- --- ------- ---
Working capital $ 9,196 17% $ 7,530 15%
Property and equipment (net) 43,816 83 43,848 85
Other 150 -- 130 --
------- --- ------- ---
Total $53,162 100% $51,508 100%
======= === ======= ===
Partners' equity $53,162 100% 51,508 100
------- --- ------- ---
Total $53,162 100% $51,508 100%
======= === ======= ===
Working capital surplus of $9.2 million as of June 30, 2003 represented
an increase of approximately $1.7 million 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 had a revolving credit facility with Bank One, N.A. that
expired May 31, 2003. The Company had no borrowings in 2002 or 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 $2.9 million and the repurchase of Units pursuant to
the Repurchase Right amounting to $287,000 in July 2003.
The Company's cash flow from operations before the change in working
capital increased $1.6 million, or 28%, during the six months ended June 30,
2003 as compared to the same period in 2002. Changes in working capital other
than cash and equivalents increased cash by $1.0 million during the six months
ended June 30, 2003 primarily due to a decrease in accounts receivable resulting
from timing differences in the receipt of production revenues.
3
Cash flows provided by operating activities was $8.2 million for the
six months ended June 30, 2003. Cash was primarily used in investing and
financing activities to purchase property and equipment and pay quarterly
distributions, respectively.
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 $4.53 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 and six months ended June 30, 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 Six Months
Ended June 30, Ended June 30,
---------------- ----------------
2003 2002 2003 2002
---- ---- ---- ----
Revenues:
Oil and gas sales 97% 97% 97% 97%
Well management and operating 3 3 3 3
---- ---- --- ---
Total Revenues 100% 100% 100% 100%
Expenses:
Production costs 13% 16% 15% 17%
Well management and operating 1 2 1 1
Depreciation, depletion and amortization 23 28 25 30
Abandonment and write down of
oil and gas properties 1 1 1 1
General and administrative 7 9 7 9
Other (1) - (1) -
Income taxes - (1) - (1)
---- -- --- ----
Total Expenses 44 55 48 57
==== ==== === ===
Net income 56% 45% 52% 43%
==== ==== === ===
Revenues for the three and six months ended June 30, 2003 increased
$1.3 million and $1.6 million, respectively, compared to the same periods in
2002. These increases were due primarily to an increase in oil and gas sales
during the three and six months ended June 30, 2003 compared to the same periods
in 2002.
Oil and gas sales increased $1.2 million, or 37%, during the three
months ended June 30, 2003 compared to the same period in 2002. Oil and gas
sales increased $1.6 million, or 21%, during the six months ended June 30, 2003
compared to the same six month period in 2002. These increases are the result of
higher natural gas and crude oil prices and increased production volumes during
the three and six months ended June 30, 2003 compared to the same periods in
2002.
Production costs increased $78,000, or 14%, during the three months
ended June 30, 2003 and increased $66,000, or 5%, during the six months ended
June 30, 2003 compared to the same periods in 2002. The increases are the result
of higher operating costs during the three and six months ended June 30, 2003
compared to the same periods in 2002.
Depreciation, depletion and amortization expenses increased $115,000,
or 12%, and $29,000, or 1%, during the three and six months ended June 30, 2003,
respectively, compared with the same periods in 2002. The primary reason for
these increases is the result of the Company's decision to increase production
because of higher natural gas prices during the
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summer months. These increases were mitigated because higher oil and gas reserve
estimates have also resulted from higher natural gas and oil prices.
Abandonment and write down of oil and gas properties decreased $25,000
and $50,000 during three and six months ended June 30, 2003, respectively,
compared to the same periods in 2002. A reduction in leasehold abandonments is
primarily responsible for these decreases.
General and administrative expenses decreased $3,000, or 1%, and
$12,000, or 2%, during the three and six months ended June 30, 2003,
respectively, compared with the same periods in 2002. The primary reason for
these decreases is due to lower overhead expenses associated with ongoing
administration.
Net other income increased $11,000 and $28,000 during the three and six
months ended June 30, 2003, respectively, compared to the same periods in 2002.
These increases are the result of increases in interest income earned on cash
and equivalent balances and decreases in interest expense due to the elimination
of debt.
The Company reported net income of $2.6 million, an increase of $1.1
million, or 69%, during the three months ended June 30, 2003 compared to the
same period in 2002. The Company reported net income of $4.8 million, an
increase of $1.5 million, or 46%, during the six months ended June 30, 2003
compared to the same period in 2002. The increases in oil and gas sales were
primarily responsible for these increases in net income. Net income represented
56% and 45% of total revenues during the three months ended June 30, 2003 and
2002, respectively. Net income represented 52% and 43% of total revenues during
the six months ended June 30, 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
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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 June 30,
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 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.
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Part II. Other Information
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 31.1 Certification of CEO
Exhibit 31.2 Certification of CFO
Exhibit 32 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 second quarter.
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SIGNATURE
Pursuant to the requirement of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EVERFLOW EASTERN PARTNERS, L.P.
By: EVERFLOW MANAGEMENT LIMITED, LLC,
General Partner
By: EVERFLOW MANAGEMENT CORPORATION
Managing Member
By: /s/William A. Siskovic
---------------------------------------
August 8, 2003 William A. Siskovic
Vice President and
Principal Financial Accounting Officer
(Duly Authorized Officer)
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