ITEM 1. BUSINESS - --------------------------------
INTRODUCTION
Everflow Eastern Partners, L.P. (the "Company"), a Delaware limited partnership, engages in the business of oil and gas exploration and development. The Company was formed for the purpose of consolidating the business and oil and gas properties of Everflow Eastern, Inc., an Ohio corporation ("EEI"), and the oil and gas properties owned by certain limited partnerships and working interest programs managed or operated by EEI (the "Programs"). Everflow Management Limited, LLC (the "General Partner"), an Ohio limited liability company, is the general partner of the Company.
EXCHANGE OFFER. The Company made an offer (the "Exchange Offer") to acquire the common shares of EEI (the "EEI Shares") and the interests of investors in the Programs (collectively the "Interests") in exchange for units of limited partnership interest (the "Units"). The Exchange Offer was made pursuant to a Registration Statement on Form S-1 declared effective by the Securities and Exchange Commission on December 19, 1990 (the "Registration Statement") and the Prospectus dated December 19, 1990, as filed with the Commission pursuant to Rule 424(b).
The Exchange Offer terminated on February 15, 1991 and holders of Interests with an aggregate value (as determined by the Company for purposes of the Exchange Offer) of $66,996,249 accepted the Exchange Offer and tendered their Interests. Effective on such date, the Company acquired such Interests, which included partnership interests and working interests in the Programs, and all of the outstanding EEI Shares. Of the Interests tendered in the Exchange Offer, $28,565,244 was represented by the EEI Shares and $38,431,005 by the remaining Interests.
The parties who accepted the Exchange Offer and tendered their Interests received an aggregate of 6,632,464 Units. Everflow Management Company, a predecessor of the General Partner of the Company, contributed Interests with an aggregate Exchange Value of $670,980 in exchange for a 1% interest in the Company.
THE COMPANY. The Company was organized in September 1990. The principal executive offices of the Company, the General Partner and EEI are located at 585 West Main Street, Canfield, Ohio 44406 (telephone number 330-533-2692).
GENERAL
This Annual Report on Form 10-K contains forward-looking statements which involve risks and uncertainties. The Company's actual results may differ significantly from the results discussed in the forward-looking statements. All statements that address operating
performance, events or developments that the Company anticipates will occur in the future, including statements related to future revenue, profits, expenses, and income or statements expressing general optimism about future results, 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," "anticipates," "intends," "plans," "believes," "estimates," variations of such words, and similar expressions are intended to identify forward-looking statements. Forward-looking statements are subject to the safe harbors created in the Exchange Act.
Factors that may cause such a difference include, but are not limited to, the competition with the oil and gas industry, the price of oil and gas in the Appalachian Basin area, the number of Units tendered pursuant to the Repurchase Right and the ability to locate productive oil and gas prospects for development by the Company. The Company undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise.
DESCRIPTION OF THE BUSINESS
GENERAL. The Company has participated on an on-going basis in the acquisition and development of undeveloped oil and gas properties and has pursued the acquisition of producing oil and gas properties.
SUBSIDIARIES. The Company has two subsidiaries. EEI was organized as an Ohio corporation in February 1979 and, since the consummation of the Exchange Offer, has been a wholly-owned subsidiary of the Company. EEI is engaged in the business of drilling, developing and operating oil and gas properties and maintains a leasehold inventory from which the Company selects prospects for development.
A-1 Storage of Canfield, Ltd. ("A-1 Storage") was organized as an Ohio limited liability company in late 1995 and is 99% owned by the Company and 1% owned by EEI. A-1 Storage's business includes leasing of office space to the Company as well as rental of storage units to non-affiliated parties.
CURRENT OPERATIONS. The properties of the Company consist in large part of fractional undivided working interests in properties containing Proved Reserves of oil and gas located in the Appalachian Basin region of Ohio and Pennsylvania. Approximately 91% of the estimated total future cash inflows related to the Company's oil and gas reserves as of December 31, 2001 are attributable to natural gas reserves. The substantial majority of such properties are located in Ohio and consist primarily of proved producing properties with established production histories.
The Company's operations since February 1991 primarily involve the production and sale of oil and gas and the drilling and development of 259 (net) wells. The Company serves as the operator of approximately 76% of the gross wells and 86% of the net wells which comprise the Company's properties.
The Company expects to hold its producing properties until the oil and gas reserves underlying such properties are substantially depleted. However, the Company may from time to time sell any of its producing or other properties or leasehold interests if the Company believes that such sale would be in its best interest.
BUSINESS PLAN. The Company continually evaluates whether the Company can develop oil and gas properties at historical levels given the current costs of drilling and development activities, the current prices of oil and gas, and the Company's experience with regard to finding oil and gas in commercially productive quantities. The Company has decreased its level of activity in the development of oil and gas properties compared with historical levels. Management of the Company has from time to time explored and evaluated the possible sale of the Company. The Company intends to continue to evaluate this and other alternatives to maximize value for its Unitholders. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
ACQUISITION OF PROSPECTS. The Company, through its wholly-owned subsidiary EEI, maintains a leasehold inventory from which the General Partner will select oil and gas prospects for development by the Company. EEI makes additions to such leasehold inventory on an on-going basis. The Company may also acquire leases from third parties. Prior to 2000, EEI generated approximately 90% of the prospects which were drilled. Beginning in 2000, the Company began generating fewer prospects and has participated in more joint ventures with other operators. EEI's current leasehold inventory consists of approximately 32 prospects in various stages of maturity representing approximately 700 net acres under lease.
In choosing oil and gas prospects for the Company, the General Partner does not attempt to manage the risks of drilling through a policy of selecting diverse prospects in various geographic areas or with the potential of oil and gas production from different geological formations. Rather, substantially all prospects are expected to be located in the Appalachian Basin of Ohio (and, to a lesser extent, Pennsylvania) and to be drilled primarily to the Clinton/Medina Sands geological formation or closely related oil and gas formations in such area.
ACQUISITION OF PRODUCING PROPERTIES. As a potential means of increasing its reserve base, the Company expects to evaluate opportunities which it may be presented with to acquire oil and gas producing properties from third parties in addition to its ongoing leasehold acquisition and development activities. The Company has acquired a limited amount of producing oil and gas properties.
The Company will continue to evaluate properties for acquisition. Such properties may include, in addition to working interests, royalty interests, net profit interests and production payments, other forms of direct or indirect ownership interests in oil and gas production, and properties associated with the production of oil and gas. The Company also may acquire general or limited partner interests in general or limited partnerships and interests in joint ventures, corporations or other entities that have, or are formed to acquire, explore for or
develop, oil and gas or conduct other activities associated with the ownership of oil and gas production.
FUNDING FOR ACTIVITIES. The Company finances its current operations, including undeveloped leasehold acquisition activities, through cash generated from operations and the proceeds of borrowings. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Results of Operations."
The Company is permitted to incur indebtedness for any partnership purpose. It is currently anticipated that any such indebtedness will consist primarily of borrowings from commercial banks. The Company and EEI have a revolving credit facility with Bank One, N.A., pursuant to which it had no borrowings in 2001 and no principal indebtedness was outstanding as of March 20, 2002. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Liquidity and Capital Resources."
Although the Partnership Agreement does not contain any specific restrictions on borrowings, the Company has no specific plans to borrow for the acquisition of producing oil and gas properties. The Company expects that borrowings may be made for the acquisition of undeveloped acreage for future drilling and development and to fund the Company's costs of drilling and completing wells. In addition, the Company could borrow funds to enable it to repurchase any Units tendered in connection with the Repurchase Right. See "Management's Discussion and Analysis of Financial Condition and results of operations - Liquidity and Capital Resources."
The Company has a substantial amount of oil and gas reserves which have not been pledged as collateral for its existing loans. The Company generally would not expect to borrow funds, from whatever source, in excess of 40% of its total Proved Reserves (as determined using the Company's Standardized Measure of Discounted Future Net Cash Flows), although there can be no assurance that circumstances would not lead to the necessity of borrowings in excess of this amount. Based upon its current business plan, management has no present intention to have the Company borrow in excess of this amount. The Company has estimated Proved and Proved Developed Reserves, determined as of December 31, 2001, which aggregate $45,094,000 (Standardized Measure of Discounted Future Net Cash Flows) with no bank debt outstanding under the revolving credit facility as of December 31, 2001.
MARKETING
The ability of the Company to market oil and gas found in and produced on its properties will depend on many factors beyond its control, the effect of which cannot be accurately anticipated or predicted. These factors include, among others, the amount of domestic oil and gas production and foreign imports available from other sources, the capacity and proximity of pipelines, governmental regulations, and general market demand.
OIL. Any oil produced from the properties can be sold at the prevailing field price to one or more of a number of unaffiliated purchasers in the area. Generally, purchase contracts for the sale of oil are cancelable on 30 days' notice. The price paid by these purchasers is generally an established or "posted" price which is offered to all producers. All posted prices in the areas where the Company's properties are located are generally somewhat lower than the spot market prices, although there have been substantial fluctuations in crude oil prices in recent years.
The price of oil in the Appalachian Basin has ranged from a low of $8.50 per barrel in December 1998 to a high of $33.25 in September 2000. As of March 20, 2002, the posted field price in the Appalachian Basin area, the Company's principal area of operation, was $21.25 per barrel of oil. There can be no assurance that prices will not be subject to continual fluctuations. Future oil prices are difficult to predict because of the impact of worldwide economic trends, supply and demand variables, and such non-economic factors as the political impact on pricing policies by the Organization of Petroleum Exporting Countries ("OPEC") and the possibility of supply interruptions. To the extent the prices that the Company receives for its crude oil production decline or remain at current levels, the Company's revenues from oil production will be reduced accordingly.
Since January 1993, the Company has sold substantially all of its crude oil production to Ergon Oil Purchasing, Inc.
NATURAL GAS. The deliverability and price of natural gas is subject to various factors affecting the supply and demand of natural gas as well as the effect of federal regulations. Prior to 2000, there had been a surplus of natural gas available for delivery to pipelines and other purchasers. During 2000, decreases in worldwide energy production capability and increases in energy consumption brought about a shortage in natural gas supplies. This resulted in increases in natural gas prices throughout the United States, including the Appalachian Basin. However, more recently during 2001, lower energy consumption and increased natural gas supplies have reduced prices to historical levels. From time to time, especially in summer months, seasonal restrictions on natural gas production have occurred as a result of distribution system restrictions. Certain of the Company's wells have been subject to these limited, seasonal shut-ins and restrictions.
Over the past ten years, the Company had followed a practice of selling a significant portion of its natural gas pursuant to Intermediate Term Adjustable Price Gas Purchase Agreements (the "East Ohio Contracts") with Dominion Field Services, Inc. and its
affiliates ("Dominion") (including The East Ohio Gas Company). Pursuant to the East Ohio Contracts and subject to certain restrictions and adjustments, including termination clauses, Dominion was obligated to purchase, and the Company was obligated to sell, all natural gas production from a specified list of wells (the "Contract Wells"). Pricing under the East Ohio Contracts was adjusted annually, up or down, by an amount equal to 80% of the increase or decrease in Dominion's average Gas Cost Recovery ("GCR") rates.
The Company's last remaining East Ohio Contract terminated during 2001 and was replaced by short-term contracts, which obligate Dominion to purchase, and the Company to sell and deliver certain quantities of natural gas production on a monthly basis throughout the contract periods. A summary of the Company's gas purchase contracts with Dominion follows:
November 2001 through March 2002
The first 40,000 MCF per month is priced at $3.51 per MCF.
The next 50,000 MCF per month is priced at $4.73 per MCF.
The next 50,000 MCF per month is priced at $5.35 per MCF.
All gas in excess of 140,000 MCF per month is priced at the NYMEX settled price plus $.10 up to the first 250,000 MCF in the aggregate during the period.
All gas in excess of the above volumes is priced at the NYMEX settled price plus $.45.
April 2002 through October 2002
The first 50,000 MCF per month is priced at $4.73 per MCF.
The next 50,000 MCF per month is priced at $5.35 per MCF.
The next 20,000 MCF per month is priced at $3.35 per MCF.
In the event the 250,000 MCF in the November 2001 through March 2002 period is not met, any remaining balance is priced at the NYMEX settled price plus $.10 during the period.
All gas in excess of the above volumes is priced at the NYMEX settled price plus $.45.
November 2002 through October 2003
The first 20,000 MCF per month is priced at $3.35 per MCF.
The next 20,000 MCF per month is priced at $4.00 per MCF.
The next 20,000 MCF per month is priced at $4.10 per MCF.
All gas in excess of the above volumes is priced at NYMEX settled price plus $.45.
November 2003 through March 2004
The first 20,000 MCF per month is priced at $4.05 per MCF.
Gas in excess of the above volumes has not been committed.
The Company also has short-term contracts with Interstate Gas Supply, Inc. ("IGS"), which obligate IGS to purchase, and the Company to sell and deliver certain quantities of natural gas production on a monthly basis throughout the contract periods. A summary of the Company's gas purchase contracts with IGS follows:
November 2001 through October 2002
The first 50,000 MCF per month is priced at $4.56 per MCF.
All gas in excess of the above volumes is priced at NYMEX settled price plus $.42.
April 2002 through October 2002 and April 2003 through October 2003
The first 20,000 MCF per month is priced at $3.19 per MCF.
All gas in excess of the above volumes is priced at the NYMEX settled price plus $.27.
November 2002 through March 2003
The first 20,000 MCF per month is priced at $3.19 per MCF.
The next 20,000 MCF per month is priced at $4.01 per MCF.
All gas in excess of the above volumes is priced at the NYMEX settled price plus $.57.
November 2003 through March 2004
The first 20,000 MCF per month is priced at $4.10 per MCF.
All gas in excess of the above volumes is priced at the NYMEX settled price plus $.57.
As detailed above, the price paid for natural gas purchased by Dominion and IGS varies based on quantities committed by the Company from time to time. As of December 31, 2001, natural gas purchased by Dominion covers production from approximately 420 gross wells, while natural gas purchased by IGS covers production from approximately 190 gross
wells. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Inflation and Changes in Prices."
For the year ended December 31, 2001, with the exception of Dominion and IGS, which accounted for approximately 50% and 27%, respectively, of the Company's natural gas sales, no one natural gas purchaser has accounted for more than 10% of the Company's gas sales. The Company expects that Dominion and IGS will be the only material natural gas customers for 2002.
SEASONALITY
During summer months, seasonal restrictions on natural gas production have occurred as a result of distribution system restrictions. These production restrictions, and the nature of the Company's business, result in seasonal fluctuations in the Company's revenue, with the Company receiving more income in the first and fourth quarters of its fiscal year.
TITLE TO PROPERTIES
As is customary in the oil and gas industry, the Company performs a limited investigation as to ownership of leasehold acreage at the time of acquisition and conducts a title examination and necessary curative work prior to the commencement of drilling operations on a tract. Title examinations have been performed for substantially all of the producing oil and gas properties owned by the Company with regard to (i) substantial tracts of land forming a portion of such oil and gas properties and (ii) the wellhead location of such properties. The Company believes that title to its properties is acceptable although such properties may be subject to royalty, overriding royalty, carried and other similar interests in contractual arrangements customary in the oil and gas industry. Also, such properties may be subject to liens incident to operating agreements and liens for current taxes not yet due, as well as other comparatively minor encumbrances.
COMPETITION
The oil and gas industry is highly competitive in all its phases. The Company will encounter strong competition from major and independent oil companies in acquiring economically desirable prospects as well as in marketing production therefrom and obtaining external financing. Major oil and gas companies, independent concerns, drilling and production purchase programs and individual producers and operators are active bidders for desirable oil and gas properties, as well as the equipment and labor required to operate those properties. Many of the Company's competitors have financial resources, personnel and facilities substantially greater than those of the Company.
The availability of a ready market for the oil and gas production of the Company depends in part on the cost and availability of alternative fuels, the level of consumer demand, the extent of other domestic production of oil and gas, the extent of importation of foreign oil and gas, the cost of and proximity to pipelines and other transportation facilities, regulations by
state and federal authorities and the cost of complying with applicable environmental regulations. The volatility of prices for oil and gas and the continued oversupply of domestic natural gas have, at times, resulted in a curtailment in exploration for and development of oil and gas properties.
There is also extensive competition in the market for gas produced by the Company. Decreases in worldwide energy production capability and increases in energy consumption have brought about a shortage in energy supplies recently. This, in turn, has resulted in substantial competition for markets historically served by domestic natural gas resources both with alternate sources of energy, such as residual fuel oil, and among domestic gas suppliers. As a result, at times there has been volatility in oil and gas prices, widespread curtailment of gas production and delays in producing and marketing gas after it is discovered. Changes in government regulations relating to the production, transportation and marketing of natural gas have also resulted in significant changes in the historical marketing patterns of the industry. Generally, these changes have resulted in the abandonment by many pipelines of long-term contracts for the purchase of natural gas, the development by gas producers of their own marketing programs to take advantage of new regulations requiring pipelines to transport gas for regulated fees, and an increasing tendency to rely on short-term sales contracts priced at spot market prices. See "Marketing" above.
Gas prices, which were once effectively determined by government regulations, are now influenced largely by the effects of competition. Competitors in this market include other producers, gas pipelines and their affiliated marketing companies, independent marketers, and providers of alternate energy supplies.
REGULATION OF OIL AND GAS INDUSTRY
The exploration, production and sale of oil and natural gas are subject to numerous state and federal laws and regulations. Such laws and regulations govern a wide variety of matters, including the drilling and spacing of wells, allowable rates of production, marketing, pricing and protection of the environment. Such regulations may restrict the rate at which the Company's wells produce oil and natural gas below the rate at which such wells could produce in the absence of such regulations. In addition, legislation and regulations concerning the oil and gas industry are constantly being reviewed and proposed. Ohio and Pennsylvania, the states in which the Company owns properties and operates, have statutes and regulations governing a number of the matters enumerated above. Compliance with the laws and regulations affecting the oil and gas industry generally increases the Company's costs of doing business and consequently affects its profitability. Inasmuch as such laws and regulations are frequently amended or reinterpreted, the Company is unable to predict the future cost or impact of complying with such regulations.
The interstate transportation and sale for resale of natural gas is regulated by the Federal Energy Regulatory Commission (the "FERC") under the Natural Gas Act of 1938 ("NGA"). The wellhead price of natural gas is also regulated by FERC under the authority of the Natural Gas Policy Act of 1978 ("NGPA"). Subsequently, the Natural Gas Wellhead Decontrol
Act of 1989 (the "Decontrol Act") was enacted on July 26, 1989. The Decontrol Act provided for the phasing out of price regulation under the NGPA commencing on the date of enactment and completely eliminated all such gas price regulation on January 1, 1993. In addition, FERC recently has adopted and proposed several rules or orders concerning transportation and marketing of natural gas. The impact of these rules and other regulatory developments on the Company cannot be predicted. It is expected that the Company will sell natural gas produced by its oil and gas properties to a number of purchasers, including various industrial customers, pipeline companies and local public utilities, although the majority will be sold to East Ohio as discussed earlier.
As a result of the NGPA and the Decontrol Act, the Company's gas production is no longer subject to price regulation. Gas which has been removed from price regulation is subject only to that price contractually agreed upon between the producer and purchaser. Under current market conditions, deregulated gas prices under new contracts tend to be substantially lower than most regulated price ceilings originally prescribed by the NGPA. FERC recently has proposed and enacted several rules or orders concerning transportation and marketing of natural gas. In 1992, the FERC finalized Order 636, a rule pertaining to the restructuring of interstate pipeline services. This rule requires interstate pipelines to unbundle transportation and sales services by separately pricing the various components of their services, such as supply, gathering, transportation and sales. These pipeline companies are required to provide customers only the specific service desired without regard to the source for the purchase of the gas. Although the Partnership is not an interstate pipeline, it is likely that this regulation may indirectly impact the Partnership by increasing competition in the marketing of natural gas, possibly resulting in an erosion of the premium price historically available for Appalachian natural gas. The impact of these rules and other regulatory developments on the Company cannot be predicted.
Regulation of the production, transportation and sale of oil and gas by federal and state agencies has a significant effect on the Company and its operating results. Certain states, including Ohio and Pennsylvania, have established rules and regulations requiring permits for drilling operations, drilling bonds and reports concerning the spacing of wells.
ENVIRONMENTAL REGULATION
The activities of the Company are subject to various federal, state and local laws and regulations designed to protect the environment. The Company does not conduct activities offshore. Operations of the Company on onshore oil properties may generally be liable for clean-up costs to the federal government under the Federal Clean Water Act for up to $50,000,000 for each incident of oil or hazardous pollution substance and for up to $50,000,000 plus response costs under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 ("Superfund") for hazardous substance contamination. Liability is unlimited in cases of willful negligence or misconduct, and there is no limit on liability for environmental clean-up costs or damages with respect to claims by the state or private persons or entities. In addition, the Company is required by the Environmental Protection Agency ("EPA") to prepare and implement spill prevention control and countermeasure plans relating to the
possible discharge of oil into navigable waters; and the EPA will further require permits to authorize the discharge of pollutants into navigable waters. State and local permits or approvals may also be needed with respect to waste-water discharges and air pollutant emissions. Violations of environment-related lease conditions or environmental permits can result in substantial civil and criminal penalties as well as potential court injunctions curtailing operations. Such enforcement liabilities can result from prosecution by public or private entities.
Various state and governmental agencies are considering, and some have adopted, other 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.
In addition, from time to time, prices for either oil or natural gas have been regulated by the federal government, and such price regulation could be reimposed at any time in the future.
OPERATING HAZARDS AND UNINSURED RISKS
The Company's oil and gas operations are subject to all operating hazards and risks normally incident to drilling for and producing oil and gas, such as encountering unusual formations and pressures, blow-outs, environmental pollution and personal injury. The Company maintains such insurance coverage as it believes to be appropriate taking into account the size of the Company and its operations. Losses can occur from an uninsurable risk or in amounts in excess of existing insurance coverage. The occurrence of an event which is not insured or not fully insured could have an adverse impact on the Company's revenues and earnings.
In certain instances, the Company may continue to engage in exploration and development operations through drilling programs formed with non-industry investors. In addition, the Company also will conduct a significant portion of its operations with other parties in connection with the drilling operations conducted on properties in which it has an interest. In these arrangements, all joint interest parties, including the Company, may be fully liable for their proportionate share of all costs of such operations. Further, if any joint interest party defaults on its obligations to pay its share of costs, the other joint interest parties may be required to fund the deficiency until, if ever, it can be collected from the defaulting party. As a result of the foregoing or similar oilfield circumstances, the Company could become liable for amounts significantly in excess of amounts originally anticipated to be expended in connection with such operations. In addition, financial difficulty for an operator of oil and gas properties could result in the Company's and other joint interest owners' interests in properties and the wells and equipment located thereon becoming subject to liens and claims of creditors, notwithstanding the fact that non-defaulting joint interest owners and the Company may have previously paid to the operator the amounts necessary to pay their share of such costs and expenses.
CONFLICTS OF INTEREST
The Partnership Agreement grants the General Partner broad discretionary authority to make decisions on matters such as the Company's acquisition of or participation in a drilling prospect or a producing property. To limit the General Partner's management discretion might prevent it from managing the Company properly. However, because the business activities of the affiliates of the General Partner on the one hand and the Company on the other hand are the same, potential conflicts of interest are likely to exist, and it is not possible to completely mitigate such conflicts.
The Partnership Agreement contains certain restrictions designed to mitigate, to the extent practicable, these conflicts of interest. The agreement restricts, among other things, (i) the cost at which the General Partner or its affiliates may acquire properties from or sell properties to the Company; (ii) loans between the General Partner, its affiliates and the Company, and interest and other charges incurred in connection therewith; and (iii) the use and handling of the Company's funds by the General Partner.
EMPLOYEES
As of March 20, 2002, the Company (either directly or indirectly through EEI) had 16 full-time and two part-time employees. These employees primarily are engaged in the following areas of business operations: two in land and lease acquisition, five in field operations, five in accounting, and six in administration.
ITEM 2.
ITEM 2. PROPERTIES. - ----------------------
Set forth below is certain information regarding the oil and gas properties of the Company.
In the following discussion, "gross" refers to the total acres or wells in which the Company has a working interest and "net" refers to gross acres or wells multiplied by the Company's percentage of working interests therein. Because royalty interests held by the Company will not affect the Company's working interests in its properties, neither gross nor net acres or wells reflect such royalty interests.
PROVED RESERVES.(1) The following table reflects the estimates of the Company's Proved Reserves which are based on the Company's report as of December 31, 2001.
OIL (BBLS) GAS (MCF) ---------- --------- Proved Developed 719,000 41,925,000 Proved Undeveloped -- -- ---------- ---------- Total 719,000 41,925,000 ========== ==========
------------------------- (1) The Company has not determined proved reserves associated with its proved undeveloped acreage. A reconciliation of the Company's proved reserves is included in the Notes to the Financial Statements.
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS.(1) The following table summarizes, as of December 31, 2001, the oil and gas reserves attributable to the oil and gas properties owned by the Company. The determination of the standardized measure of discounted future net cash flows as set forth herein is based on criteria promulgated by the Securities and Exchange Commission, using calculations based solely on Proved Reserves, current unescalated cost and price factors, and discounted to present value at 10%.
(THOUSANDS) ---------
Future cash inflows from sales of oil and gas $138,032 Future production and development costs 57,159 Future income tax expense 1,675 --------
Future net cash flows 79,198 Effect of discounting future net cash flows at 10% per annum 34,104 -------- Standardized measure of discounted future net cash flows $ 45,094 ========
--------------------------------- (1) See the Notes to the Financial Statements for additional information.
PRODUCTION. The following table summarizes the net oil and gas production, average sales prices and average production (lifting) costs per equivalent unit of production for the periods indicated.
---------------------- (1) Oil production is converted to MCF equivalents at the rate of 6 MCF per BBL (barrel).
PRODUCTIVE WELLS. The following table sets forth the gross and net oil and gas wells of the Company as of December 31, 2001.
---------------------------- (1) Oil wells are those wells which generate the majority of their revenues from oil production; gas wells are those wells which generate the majority of their revenues from gas production.
ACREAGE. The Company had 45,207 gross developed acres and 32,310 net developed acres as of December 31, 2001. Developed acreage is that acreage assignable to productive wells. The Company had approximately 700 gross and net undeveloped acres as of December 31, 2001.
DRILLING ACTIVITY. The following table sets forth the results of drilling activities on properties owned by the Company. Such information and the results of prior drilling activities should not be considered as necessarily indicative of future performance.
---------------------- (1) All wells are located in the United States. All wells are development wells; no exploratory wells were drilled.
PRESENT ACTIVITIES. The Company has drilled 4 gross and 1.64 net development wells since December 31, 2001. As of March 20, 2002, the Company had 2 gross and 0.70 net wells in the process of being drilled.
DELIVERY COMMITMENTS. The Company entered into various contracts with Dominion and IGS which, subject to certain restrictions and adjustments, obligate Dominion and IGS to purchase and the Company to sell all natural gas production from certain contract wells. The contract wells comprise more than 75% of the Company's natural gas sales. In addition, the Company has entered into various short-term contracts which obligate the purchasers to purchase and the Company to sell and deliver certain quantities of natural gas production on a monthly basis throughout the term of the contracts.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS - ----------------------------
There are no material pending legal proceedings to which the Company is a party or to which any of its property is subject.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - --------------------------------------------------------------
During the fourth quarter of the fiscal year ended December 31, 2001, there were no matters submitted to a vote of security holders through the solicitation of proxies or otherwise.
PART II -------
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER - ---------------------------------------------------------------------------- MATTERS MARKET --------
There is currently no established public trading market for the Units. At the present time, the Company does not intend to list any of the Units for trading on any exchange or otherwise take any action to establish any market for the Units. As of March 20, 2002, there were 5,771,174 Units held by 1,443 holders of record.
DISTRIBUTION HISTORY. - --------------------
The Company commenced operations with the consummation of the Exchange Offer in February 1991. Management's stated intention was to make quarterly cash distributions equal to $0.125 per Unit (or $0.50 per Unit on an annualized basis) for the first eight quarters following the closing date of the Exchange Offer. The Company has paid a quarterly distribution every quarter since July 1991. Based upon the current number of Units outstanding, each quarterly distribution of $0.125 per Unit would be approximately $730,000. The Company made a quarterly distribution of $0.25 per Unit in January 2002 and currently intends to make a quarterly distribution of $0.25 per Unit in April 2002 and quarterly distributions of at least $0.125 per Unit in July and October 2002.
REPURCHASE RIGHT. - ----------------
The Partnership Agreement provides, that beginning in 1992 and annually thereafter, the Company will repurchase for cash up to 10% of the then outstanding Units, to the extent Unitholders offer Units to the Company for repurchase (the "Repurchase Right"). The Repurchase Right entitles any Unitholder, between May 1 and June 30 of each year, to notify the Company that he elects to exercise the Repurchase Right and have the Company acquire certain or all of his Units. The price to be paid for any such Units is calculated based on the method provided for in the Partnership Agreement. The Company accepted an aggregate of 77,344, 206,531 and 117,488 of its Units of limited partnership interest at a price of $5.79, $6.11 and $9.73 per Unit pursuant to the terms of the Company's Offers to Purchase dated April 30, 1999, 2000 and 2001, respectively. See Note 4 in the Company's financial statement for additional information on the Repurchase Right.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA - -----------------------------------------------
- ------------------------------ (1) Debt includes the Company's long-term debt and borrowings under the Company's revolving credit facility.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND - -------------------------------------------------------------------------- RESULTS OF OPERATIONS ---------------------
GENERAL
The Company was organized in September 1990 as a limited partnership under the laws of the State of Delaware. Everflow Management Limited, LLC, an Ohio limited liability company, is the general partner of the Company. The Company was formed to engage in the business of oil and gas exploration and development through a proposed consolidation of the business and oil and gas properties of EEI, and the oil and gas properties owned by certain limited partnerships and working interest programs managed or operated by the Programs.
Effective February 15, 1991, pursuant to the Exchange Offer to acquire the EEI shares and the Interests in exchange for Units of the Company's limited partnership interest, the Company acquired the Interests and the EEI Shares and EEI became a wholly-owned subsidiary of the Company.
The General Partner is a limited liability company. The members of the General Partner are EMC, two individuals who are currently directors and/or officers of EEI, Thomas L. Korner and William A. Siskovic, and Sykes Associates, a limited partnership controlled by Robert F. Sykes, the Chairman of the Board of EEI.
LIQUIDITY AND CAPITAL RESOURCES
FINANCIAL POSITION
Working capital surplus of $7.0 million as of December 31, 2001 represented a $1.0 million decrease from December 31, 2000 due primarily to decreases in cash and equivalents of $869 thousand and accounts receivable from oil and gas production of $603
thousand during 2001. These were partially offset by a decrease in accounts payable of $514 thousand. In August 2001, the Company entered into an agreement that modified its prior credit agreement. 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 anticipates renewing the facility on an every other year basis to minimize debt origination, carrying and interest costs associated with long-term bank commitments. The Company made no borrowings under the revolving credit facilities during 2001. Cash flows were used to pay for the funding of the Company's investment in and the continued development of oil and gas properties and to repurchase Units pursuant to the Repurchase Right. The Company repurchased 117,488 Units at a price of $9.73 per Unit, or $1,143,158, on June 30, 2001. The Company also used cash flows to make quarterly Cash Distributions, which totaled $8.8 million.
The following table summarizes the Company's financial position at December 31, 2001 and December 31, 2000:
CASH FLOWS FROM OPERATING, INVESTING AND FINANCING ACTIVITIES
The Company generated almost all of its cash sources from operating activities. During the years ended 2001 and 2000, cash provided by operations was used to fund the development of additional oil and gas properties, repurchase of Units pursuant to the Repurchase Right and distributions to partners.
The following table summarizes the Company's Statements of Cash Flows for the years ended December 31, 2001 and 2000:
Note: All items in the previous table are calculated as a percentage of total cash sources. Total cash sources include the following items, if positive: cash flow from operations before working capital changes, changes in working capital, net cash provided by investing activities and net cash provided by financing activities, plus any decrease in cash and cash equivalents.
As the above table indicates, the Company's cash flow from operations before working capital changes during the twelve months of 2001 and 2000 represented 94% and 95% of total cash sources, respectively. Changes in working capital other than cash and equivalents decreased cash by $77 thousand and $2,818 thousand during 2001 and 2000, respectively. The decrease in accounts receivable at December 31, 2001 compared to December 31, 2000 is the result of lower production volumes. Total production revenues receivable as of December 31, 2001 amounted to $2.5 million compared to $3.1 million at December 31, 2000. Due to lower production volumes, accounts payable relating to production as of December 31, 2001 was also lower. Accounts payable amounted to $505 thousand as of December 31, 2001 compared to $1,019 thousand at December 31, 2000. The Company had investments in short-term marketable corporate debt securities of $3.8 million and $3.6 million at December 31, 2001 and 2000, respectively.
The Company's cash flows used by investing activities increased $706 thousand, or 28%, during 2001 as compared with 2000. The Company's cash flows used by investing activities decreased $464 thousand, or 15%, during 2000 as compared with 1999. The primary reason for the increase in cash flows used by investing activities in 2001 was an increase in the purchase of property and equipment. The purchase of property and equipment increased $801 thousand, or 31%, during 2001 as compared with 2000. The purchase of property and equipment decreased $821 thousand, or 24%, during 2000 as compared with 1999.
The Company's cash flows used by financing activities increased $1,210 thousand, or 14%, during 2001 as compared with 2000. The primary reason for this increase was that distributions to Unitholders increased $1,257 thousand. Payments on debt increased $71 thousand to $126 thousand during 2001. The Company's cash flows used by financing activities increased $2,998 thousand, or 51%, during 2000 as compared with 1999. The primary reason for this increase was that distributions to Unitholders increased $3,693 thousand. Proceeds from the issuance of debt decreased $2,175 thousand and payments on debt decreased $3,684 thousand to $54 thousand during 2000. Additionallly, payments on the repurchase of Units increased $814 thousand, or 182%, during 2000 as compared with 1999.
The Company's ending cash and equivalents balance of $1.1 million and short-term investments balance of $3.8 million at December 31, 2001, as well as on-going monthly operating cash flows, should be adequate to meet short-term cash requirements. The Company has established a quarterly distribution and management believes the payment of such distributions will continue at least through 2002. The Company has paid a quarterly distribution every quarter since July 1991. Minimum cash distributions are estimated to be $730 thousand per quarter ($.125 per Unit). The Company intends to distribute $1.5 million ($.25 per Unit) in April 2002 using the proceeds from its investments in marketable corporate debt securities.
Capital expenditures for the development of oil and gas properties in the Company and the acquisition of undeveloped leasehold acreage have decreased compared with historical levels. The Company drilled or participated in the drilling of an additional 33 drillsites in 2001. The Company's share of these drillsites amounts to 15.14 net developed properties. The Company's share of proved gas reserves decreased by 6.6 million MCFs, or 14%, between
December 31, 2000 and 2001, while proved oil reserves decreased by 195 thousand barrels, or 21%, between December 31, 2000 and 2001. The Company continues to develop primarily natural gas fields, as represented by the discovery and addition of 1.9 million MCFs of natural gas versus 35 thousand barrels of crude oil during 2001. The Standardized Measure of Discounted Future Net Cash Flows of the Company's reserves decreased by $36.9 million between December 31, 2000 and 2001. The primary reason for this decrease was due to decreases in natural gas and crude oil prices between December 31, 2000 and 2001. Management believes the Company should be able to drill or participate in the drilling of 7 to 15 net wells each year for the next few years.
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 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 will be 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 partner's 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 Investor's Units so tendered shall be prorated for purposes of calculating the actual number of Units to be acquired during any such period. The Company repurchased 117,488, 206,531 and 77,344 Units during 2001, 2000 and 1999 pursuant to the Repurchase Right at a price of $9.73, $6.11 and $5.79 per Unit, respectively. The Company has, in the past, borrowed against its credit facility to meet such obligations and could do so again in 2002, although current cash flows would reduce borrowing requirements. The Repurchase Right to be conducted in 2002 will result in Unitholders being offered a price of $5.66 per Unit. The Company estimates it could need to borrow up to $3.3 million in the event the 2002 offering pursuant to the Repurchase Right is fully subscribed.
RESULTS OF OPERATIONS
The following table and discussion is a review of the results of operations of the Company for the years ended December 31, 2001, 2000 and 1999. 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:
Revenues for the year ended December 31, 2001 decreased $686 thousand, or 4%, compared to the same period in 2000. Revenues for the year ended December 31, 2000 increased $1,858 thousand, or 12%, compared to the same period in 1999. These changes were due primarily to changes in crude oil and natural gas sales between the periods involved.
Oil and gas sales decreased $660 thousand, or 4%, from 2000 to 2001. The primary reason for this decrease was the result of lower natural gas production and lower crude oil production and oil prices. The Company's gas production decreased by 613 thousand MCF. The primary reason for this decrease was due to declining production from the Company's existing oil and gas properties caused by numerous events including production restrictions resulting from a warmer than usual fourth quarter in the Appalachian Basin. The average price received per MCF increased from $3.32 to $3.93 from 2000 to 2001. Oil sales were lower due primarily to a decrease in the average sales price of oil from $27.82 to $22.57 per barrel from 2000 to 2001. Additionally, oil production decreased by 16 thousand barrels. Gas sales accounted for 89%, 84% and 89% of total oil and gas sales in 2001, 2000 and 1999, respectively. Oil and gas sales increased $1.9 million, or 13%, from 1999 to 2000. The primary reason for this increase in oil and gas sales between 1999 and 2000 was higher natural gas and crude oil prices. The Company's gas production decreased by 49 thousand MCF, and the average price received per MCF increased from $3.08 to $3.32.
Production costs increased $174 thousand, or 8%, and decreased $393 thousand, or 15%, during 2001 and 2000, respectively. The primary reason for the increase in 2001 was an increase in the number of producing wells. Depreciation, depletion and amortization decreased $61 thousand, or 1%, between 2000 and 2001. The primary reason for this decrease is lower production volumes, although the impact of the decrease in production volumes was offset by
lower reserves. Depreciation, depletion and amortization decreased $252 thousand, or 5%, between 1999 and 2000.
Well management and operating revenues increased $25 thousand, or 6%, from 2000 to 2001. Well management and operating costs increased $45 thousand, or 37%, from 2000 to 2001. The reason for these increases in well management and operating revenues and costs was due to the increase in Company operated oil and gas interests. Well management and operating revenues increased $7 thousand, or 2%, from 1999 to 2000. Well management and operating costs increased $16 thousand, or 15%, from 1999 to 2000.
Abandonments and write downs of oil and gas properties decreased $200 thousand between 2000 and 2001 and decreased $249 thousand between 1999 and 2000. These decreases were attributable to a reduction in the write down of oil and gas properties and abandonments of oil and gas properties. During 2001 and 2000, the Company had no impairment on its oil and gas properties. During 1999, the Company wrote down oil and gas properties by approximately $601 thousand to provide for impairment on certain of its oil and gas properties.
General and administrative expenses increased $37 thousand, or 3%, between 2000 and 2001, and decreased $294 thousand, or 18%, between 1999 and 2000. The primary reason for the increase during 2001 was an increase in overhead costs associated with ongoing operations of the Company. In addition, the decrease in general and administrative expenses between 1999 and 2000 was the result of a reduction in personnel and related costs due to a decrease in the level of activity in acquiring leasehold prospects and drilling activity.
Net other income amounted to $178 thousand, $271 thousand, and $77 thousand in 2001, 2000 and 1999, respectively. In 2001, interest income decreased as a result of lower interest rates.
The Company is not a tax paying entity, and the net taxable income or loss, other than the taxable income or loss attributable to EEI, is allocated directly to its respective partners.
Net income decreased $749 thousand, or 9%, between 2000 and 2001. The decrease was primarily the result of a decrease in oil and gas sales. Net income increased $3.1 million, or 58%, between 1999 and 2000. The increase resulted from increased oil and gas sales and the decreases in direct costs and general and administrative expenses. Net income represented 48%, 51% and 36% of total revenues during the years ended December 31, 2001, 2000 and 1999, respectively.
NEW ACCOUNTING STANDARDS
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," was issued. SFAS No. 133 establishes accounting and reporting standards for derivative instruments and hedging activities. SFAS No. 133, as amended by SFAS No. 137, is effective for all fiscal quarters of all fiscal years beginning after June 15, 2000. In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141, "Business Combinations." SFAS No. 141 requires the purchase method of accounting for business combinations initiated after June 30, 2001 and eliminates the pooling-of-interest method and further clarifies the criteria to recognize intangible assets separately from goodwill. The adoption of SFAS Nos. 133 and 141 had no material effect on the Company's financial statements.
In June 2001, FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets." Under SFAS No. 142, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to periodic impairment tests. Other intangible assets will continue to be amortized over their useful lives. SFAS No. 142 is effective for fiscal years beginning after December 15, 2001. In June 2001, 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 long-lived assets and the associated asset retirement cost. In August 2001, FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-lived Assets," which is effective the first quarter of fiscal year 2002. SFAS No. 144 modifies and expands the financial accounting and reporting for the impairment or disposal of long-lived assets other than goodwill. The Company is still evaluating the impact of these new standards, but at this time does not believe their adoption will have a significant impact on its financial position and results of operations.
INFLATION AND CHANGES IN PRICES
While the cost of operations is affected by inflation, oil and gas prices have fluctuated in recent years and generally have not matched inflation. The price of oil in the Appalachian Basin has ranged from a low of $8.50 per barrel in December 1998 to a high of $33.25 in September 2000. As of March 20, 2002, the posted field price in the Appalachian Basin area, the Company's principal area of operation, was $21.25 per barrel of oil. Although the Company's sales are affected by this type of price instability, the impact on the Company is not as dramatic as might be expected since less than 9% of the Company's total future cash inflows related to oil and gas reserves as of December 31, 2001 are comprised of oil reserves.
Natural gas prices have also fluctuated more recently. Under the various gas purchase agreements with Dominion Field Services, Inc. and its affiliates (including The East Ohio Gas Company), adjustments to the price of gas paid to the Company were based on 80% of the increase or decrease in Dominion's average GCR rates. The Company's average price of gas during 1999 amounted to $3.08 per MCF. The Company's average price of gas during 2000 increased $.24 to $3.32 compared to 1999. The Company's average price of gas during 2001
increased $.61 to $3.93 compared to 2000. The price of gas in the Appalachian Basin increased significantly throughout 2000 and reached a high of more than $10.00 per MCF in January 2001. The Company's gas is currently sold under short-term contracts where the price is determined using a monthly strip price. The Company at times will lock-in a monthly strip price over certain time periods. Excess gas production above locked-in quantities is sold at a price tied to the then current monthly NYMEX settled price. As of March 20, 2001, the current one-year strip price for Henry Hub Natural Gas on the NYMEX is $3.42 per MCF. The Company's sales are significantly impacted by pricing instability in the natural gas market. One of the consequences of these pricing fluctuations is evident in the Company's Standardized Measure of Discounted Future Net Cash Flows increasing from $53.7 million at December 31, 1999 to $82.0 million at December 31, 2000, and then decreasing to $45.1 million at December 31, 2001.
The Company's Standardized Measure of Discounted Future Net Cash Flows decreased by $36.9 million from December 31, 2000 to December 31, 2001 and increased by $28.3 million from December 31, 1999 to December 31, 2000. A reconciliation of the Changes in the Standardized Measures of Discounted Future Net Cash Flows is included in the Company's consolidated financial statements.
ITEM 7A.
ITEM 7A. 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 December 31, 2001, none of the Company's total long-term debt consisted of floating rate debt.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA - -----------------------------------------------------
See attached pages to.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON - ----------------------------------------------------------- ACCOUNTING AND FINANCIAL DISCLOSURE -----------------------------------
Not applicable.
PART III --------
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT - -------------------------------------------------------------
The Company, as a limited partnership, does not have any directors or executive officers. The General Partner of the Company is Everflow Management Limited, LLC, an Ohio limited liability company formed in March 1999, as the successor to the Company's original general partner. The members of the General Partner as of March 20, 2002 are Everflow Management Corporation, an Ohio corporation ("EMC"), Thomas L. Korner and William A. Siskovic, all of whom are directors and/or officers of EEI, and Sykes Associates, a limited partnership controlled by Robert F. Sykes, Chairman of the Board of EEI.
EMC is the Managing Member of the General Partner. EMC was formed in September 1990 to act as the Managing General Partner of Everflow Management Company, the predecessor of the General Partner. EMC is owned by the other members of the General Partner and EMC currently has no employees, but as Managing Member of the General Partner, makes all management and business decisions on behalf of the General Partner and thus on behalf of the Company.
EEI has continued its separate existence and provides general, administrative, management and leasehold functions for the Company. Personnel previously employed by EEI to conduct its operation, drilling and field supervisory functions have become employed directly by the Company and discharge the same functions on behalf of the Company. All of EEI's outstanding shares are owned by the Company.
DIRECTORS AND OFFICERS OF EEI AND EMC. The executive officers and directors of EEI and EMC as of March 20, 2002 are as follows:
. All directors of EEI are elected to serve by the Company, which is EEI's sole shareholder. All officers of EEI serve at the pleasure of the Board of Directors. Directors and officers of EEI receive no compensation or fees for their services to EEI or their services on behalf of the Company.
All directors and officers of EMC hold their positions with EMC pursuant to a shareholders' agreement among EMC and such directors and officers. The shareholders agreement controls the operation of EMC, provides for changes in share ownership of EMC, and determines the identity of the directors and officers of EMC as well as their replacement.
ROBERT F. SYKES has been a Director of EEI since March 1987 and Chairman of the Board since May 1988. Mr. Sykes is the Chairman of the Board and a Director of EMC and has served in such capacities since its formation in September 1990. He was the Chairman of the Board of Sykes Datatronics, Inc., Rochester, New York, from its organization in 1986 until his resignation in January 1989. Sykes Datatronics, Inc. is a manufacturer of telephone switching equipment. Mr. Sykes also served as President and Chief Executive Officer of Sykes Datatronics, Inc. from 1968 until October 1983 and from January 1985 until October 1985. Mr. Sykes also has been a Director of Voplex, Inc., Rochester, New York, a manufacturer of plastic products, and a Director of ACC Corp., a long distance telephone company.
THOMAS L. KORNER has been President of EEI and EMC since November 1995 and the President and Treasurer of Everflow Nominee. Mr. Korner is also a Director of EMC and has served in such capacity since its formation in September 1990. He served as Vice President and Secretary of EEI from April 1985 to November 1995 and as Vice President and Secretary of EMC from September 1990 to November 1995. He served as the Treasurer of EEI from June 1982 to June 1986. Mr. Korner supervises and oversees all aspects of EEI's business, including oil and gas property acquisition, development, operation and marketing. Prior to joining EEI in June 1982, Mr. Korner was a practicing certified public accountant with Hill, Barth and King, certified public accountants, and prior to that with Arthur Andersen & Co., certified public accountants. He has a Business Administration Degree from Mt. Union College.
DAVID A. KIDDER has been the Treasurer of EEI since June 1986 and has been employed by EEI since April 1985. From 1983 to 1985, he was Treasurer of LGM Corporation, Columbus, Ohio, an oil and gas service company; from 1982 to 1983, he was Treasurer of OPEX, Inc., Columbus, Ohio, a producer of oil and gas; and from 1980 to 1981, he was Treasurer of United Petroleum, Inc., Columbus, Ohio, a producer of oil and gas. From 1973 to 1980, Mr. Kidder was involved in the oil and gas industry in various financial and accounting capacities. Prior to that time, Mr. Kidder practiced as a certified public accountant with Coopers & Lybrand, certified public accountants. Mr. Kidder has a Bachelor of Arts Degree in Accounting from the University of Cincinnati.
WILLIAM A. SISKOVIC has been a Vice President of EEI since January 1989. Mr. Siskovic is a Vice President, Secretary-Treasurer, Principal Financial and Accounting Officer and a Director of EMC. He has served as Principal Financial Officer and Secretary of EMC since November 1995 and in all other capacities since the formation of EMC in September 1990. He is
responsible for the financial operations of the Company and EEI. From August 1980 to July 1984, Mr. Siskovic served in various financial and accounting capacities including Assistant Controller of Towner Petroleum Company, a public independent oil and gas operator, producer and drilling fund sponsor company. From August 1984 to September 1985, Mr. Siskovic was a Senior Consultant for Arthur Young & Company, certified public accountants, where he was primarily responsible for the firm's oil and gas consulting practice in the Cleveland, Ohio office. From October 1985 until joining EEI in April 1988, Mr. Siskovic served as Controller and Principal Accounting Officer of Lomak Petroleum, Inc., a public independent oil and gas operator and producer. He has a Business Administration Degree in Accounting from Cleveland State University.
COMPLIANCE TO SECTION 16(a) OF THE EXCHANGE ACT. Section 16(a) of the Securities Exchange Act of 1934 requires the Company's officers and directors, and persons who own more than 10% of the Units to file reports of ownership and changes in ownership with the Securities and Exchange Commission. Officers, directors and greater than 10% Unitholders are required by SEC regulation to furnish the Company with copies of all Section 16(a) forms they file.
Based solely on the Company's review of the copies of such forms furnished to the Company, the Company believes that its officers, directors and greater than 10% beneficial owners complied with all Section 16(a) filing requirements for 2001.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION - ---------------------------------
As a limited partnership the Company has no executive officers or directors, but is managed by the General Partner. The executive officers of EMC and EEI are compensated either directly by the Company or indirectly through EEI. The compensation described below represents all compensation from either the Company or EEI.
The following table sets forth information concerning the annual and long-term compensation for services in all capacities to the Company for the fiscal years ended December 31, 2001, 2000 and 1999, of those persons who were, at December 31, 2001: (i) the chief executive officer; and (ii) the other highly compensated executive officer of the Company. The Chief Executive Officer and such other executive officer are hereinafter referred to collectively as the "Named Executive Officers."
- ----------------------------------- No Named Executive Officer received personal benefits or perquisites during 2001, 2000 and 1999 in excess of the lesser of $50,000 or 10% of his aggregate salary and bonus.
(1) Includes amounts received from participation in certain overriding royalty interest arrangements organized by EEI. Also includes amounts contributed under the Company's 401(K) Retirement Savings Plan. The Company matched employees' contributions to the 401(K) Retirement Savings Plan to the extent of 50% of the first 6% of a participant's salary reduction in 1999. Beginning in 2000, the Company matched employees' contributions to the 401(K) Retirement Savings Plan to the extent of 100% of the first 6% of a participant's salary reduction. The amounts attributable to the Company's matching contribution vest immediately. (2) Includes amounts received by Thomas L. Korner from participation in certain overriding royalty interest arrangements organized by EEI of $44,721, $40,225 and $28,310 in 2001, 2000 and 1999, respectively. (3) Includes amounts received by William A. Siskovic from participation in certain overriding royalty interest arrangements organized by EEI of $35,625, $33,001 and $20,020 in 2001, 2000 and 1999, respectively.
The General Partner, EMC and the members do not receive any separate compensation or reimbursement for their management efforts on behalf of the Company. All direct and indirect costs incurred by the Company are borne by the General Partner of the Company and the Unitholders as Limited Partners of the Company in proportion to their respective interest in the Company. The members are not entitled to any fees or other compensation as a result of the acquisition or operation of oil and gas properties by the Company. The members, in their individual capacities, are not entitled to share in distributions from or income of the Company on an ongoing basis, upon liquidation or otherwise. The members only share in the revenues, income and distributions of the Company indirectly through their ownership of the General Partner of the Company. The General Partner is entitled to share in the income and expense of the Company on the basis of its interests in the Company. The General Partner through it predecessor, Everflow Management Company, contributed Interests (as defined and described in "Item 1. Business" above) with an Exchange value of $670,980 for its interest as a general partner in the Company.
None of the officers of the Company has an employment agreement.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT - -------------------------------------------------------------------------
The General Partner is a limited liability company of which EMC, an Ohio corporation is the Managing Member. The members of the General Partner are Thomas L. Korner and William A. Siskovic, both of whom are directors and officers of EEI, and Sykes Associates, a limited partnership controlled by Robert F. Sykes, Chairman of the Board of EEI and EMC. The General Partner of the Company, owns a 1.1493% interest in the Company. The members and their affiliates currently hold (in addition to the General Partner's interest in the Company) 1,261,440 Units, representing approximately 21.86% of the outstanding Units.
The following table sets forth certain information with respect to the number of Units beneficially owned as of March 20, 2002 by each person known to the management of the Company to own beneficially more than 5% of the outstanding Units; by each director and officer of EMC; and by all directors and officers as a group. The table also sets forth (i) the ownership interests of the General Partner, and (ii) the ownership of EMC.
(1) Does not include the interest in the Company owned indirectly by such individuals as a result of their ownership in (i) the General Partner (based on its 1.15% interest in the Company) or (ii) EMC (based on EMC's 1% managing member's interest in the General Partner).
(2) Includes the interest in the General Partner owned indirectly by such individuals as a result of their share ownership in EMC resulting from EMC's 1% managing member's interest in the General Partner.
(3) Includes 732,855 Units held by Sykes Associates, a New York limited partnership comprised of Mr. Sykes and his wife as general partners and four adult children as limited partners, 162,462 Units of the Company held by the Robert F. Sykes Annuity Trust and 161,147 Units held by the Catherine Sykes Annuity Trust.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - ----------------------------------------------------------
In the past, certain officers, directors and more than 10% Unitholders of the Company have invested, and may in the future invest, in oil and gas programs sponsored by EEI on the same terms as unrelated investors. In the past, certain officers, directors and/or more than 10% Unitholders of the Company have frequently participated and will likely participate in the future as working interest owners in wells in which the Company has an interest. The Company
anticipates that any such participation by individual members of the Company's management would enable such individuals to participate in the drilling and development of undeveloped drillsites on an equal basis with the Company or the particular drilling program acquiring such drillsites, which participation would be on a uniform basis with respect to all drilling conducted during a specified time frame, as opposed to selective participation. Frequently, such participation has been on more favorable terms than the terms which were available to unrelated investors. Frequently, EEI loaned the officers of the Company the funds necessary to participate in the drilling and development of such wells. Such loans currently accrue interest at the rate of LIBOR plus 150 basis points per annum. As of December 31, 2001, the aggregate outstanding balance of such indebtedness was approximately $4,000 and $73,000 owing from Thomas L. Korner and William A. Siskovic, respectively.
Certain officers and directors of EMC own oil and gas properties and, as such, contract with the Company to provide field operations on such properties. These ownership interests are charged per well fees for such services on the same basis as all other working interest owners.
PART IV -------
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K - -----------------------------------------------------------------------------
(a) (1) Financial Statements --------------------
The following Consolidated Financial Statements of the Registrant and its subsidiaries are included in Part II, Item 8:
Page(s) -------
Auditors' Report on Audited Financial Statements Balance Sheets - Statements of Income Statements of Partners' Equity Statements of Cash Flows Notes to Financial Statements -
(a) (2) Financial Statements Schedules -------------------------------
All schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted.
(a) (3) Exhibits --------
See the Exhibit Index at page E-1 of this Annual Report on Form 10-K.
Exhibit Index -------------
Exhibit No. Description ----------- -----------
4.1 Certificate of Limited Partnership of the (1) Registrant dated September 13, 1990, as filed with the Delaware Secretary of State on September 14, 1990
4.2 Form of Agreement of Limited Partnership of (1) the Registrant
4.3 General Partnership Agreement of Everflow (1) Management Company
4.4 Articles of Incorporation of Everflow (1) Management Corporation
4.5 Code of Regulations of Everflow Management (1) Corporation
4.6 Shareholders Agreement for Everflow (1) Management Corporation
4.7 Third Amended and Restated Loan Agreement, (2) dated as of May 1, 1991 between Everflow Eastern, Inc., the Registrant and the banks listed therein, with National Bank of Detroit as Agent
4.8 First Amendment to Third Amended and (5) Restated Loan and Security Agreements dated July 1, 1993, between Everflow Eastern, Inc. and Everflow Eastern Partners, L.P. and the banks listed therein, with National Bank of Detroit as Agent
4.9 Revolving Credit Note to First Amendment to (5) Third Amended and Restated Loan and Security Agreement dated as of July 1, 1993
4.10 Credit Agreement dated January 19, 1995 (8) between Everflow Eastern, Inc. and Everflow Eastern Partners, L.P. and Bank One, Texas, National Association
E-1
Exhibit Index -------------
Exhibit No. Description ----------- -----------
4.11 Amendment to Credit Agreement dated (13) February 23, 1996 between Everflow Eastern, Inc. and Everflow Eastern Partners, L.P. and Bank One, Texas, National Association
4.12 Second Amendment to Credit Agreement dated (13) December 30, 1996 between Everflow Eastern, Inc. and Everflow Partners, L.P. and Bank One, Texas, National Association
4.13 Loan Modification Agreement dated June 16, (14) 1997 between Bank One, N.A., Bank One, Texas, N.A. and Everflow Eastern, Inc. and Everflow Eastern Partners, L.P.
4.14 Loan Modification Agreement dated May 29, (15) 1998 between Bank One, N.A., Successor to Bank One, Texas, N.A., and Everflow Eastern, Inc. and Everflow Eastern Partners L.P.
4.15 Articles of Organization of Everflow (17) Management Limited, LLC
4.16 Operating Agreement of Everflow Management (17) Limited, LLC dated March 8, 1999
4.17 Loan Modification Agreement dated May 25, (18) 1999 between Bank One, N.A., and Everflow Eastern, Inc. and Everflow Eastern Partners, L.P.
4.18 Loan Modification Agreement dated September (19) 19, 2000, between Bank One, N.A., and Everflow Eastern, Inc. and Everflow Eastern Partners, L.P.
4.19 Loan Modification Agreement dated August (20) 28, 2001 between Bank One, N.A., and Everflow Eastern, Inc. and Everflow Eastern Partners, L.P.
10.1 Lease Agreement dated June 30, 1984 by and (1) between Village Green Associates, Inc. and Everflow Eastern, Inc.
10.2 Gas Purchase Agreement dated September 3, (3) 1991 by and between the Registrant and The East Ohio Gas Company
E-2
Exhibit No. Description ----------- -----------
10.3 Intermediate Term Adjustable Price Gas (4) Purchase Agreement, contract #10342, dated October 9, 1992, between The East Ohio Gas Company and Everflow Eastern Partners, L.P.
10.4 Quaker State Full Load Crude Oil Purchase (4) Agreement dated January 13, 1993, between Quaker State Oil Refining Corporation and Everflow Eastern Partners, L.P.
10.5 Intermediate Term Adjustable Gas Purchase (6) Agreement, Contract #10461, dated March 10, 1994, between The East Ohio Gas Company and Everflow Eastern Partners, L.P.
10.6 Intermediate Term Adjustable Gas Purchase (7) Agreement, Contract #10515, dated August 10, 1994, between The East Ohio Gas Company and Everflow Eastern Partners, L.P.
10.7 Operating facility lease dated October 3, (9) 1995 between Everflow Eastern Partners, L.P. and A-1 Storage of Canfield, Ltd.
10.8 Intermediate Term Adjustable Gas Purchase (11) Agreement, Contract #11245, dated May 29, 1996, between The East Ohio Gas Company and Everflow Eastern Partners, L.P.
10.9 Intermediate Term Adjustable Gas Purchase (11) Agreement, Contract #11285, dated May 29, 1996, between The East Ohio Gas Company and Everflow Eastern Partners, L.P.
10.10 One Year Term Gas Purchase Agreement dated (12) August 1, 1996, between Everflow Eastern Partners, L.P. and JDS Energy Corporation
10.11 One Year Term Gas Purchase Agreement dated (13) January 20, 1997, between Everflow Eastern Partners, L.P. and JDS Energy Corporation
10.12 Gas Purchase Agreement, Contract #11467, (16) dated November 1, 1997, between Everflow Eastern Partners, L.P. and CNG Energy Services Corporation.
E-3
Exhibit No. Description ----------- -----------
10.13 One Year Term Gas Purchase Agreement dated (16) November 1, 1998, between Everflow Eastern Partners, L.P. and JDS Energy Systems, Inc.
22.1 Subsidiaries of the Registrant (10)
- --------------------
(1) Incorporated herein by reference to the appropriate exhibit to Registrant's Registration Statement on Form S-1 (Reg. No. 33-36919).
(2) Incorporated herein by reference to the appropriate exhibit to the Registrant's Quarterly Report on Form 10-Q for the second quarter ended June 30, 1991.
(3) Incorporated herein by reference to the appropriate exhibit to Registrant's Annual Report on Form 10-K for the year ended December 31, 1991 (File No. 0-19279).
(4) Incorporated herein by reference to the appropriate exhibit to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1992 (File No. 0-19279).
(5) Incorporated herein by reference to the appropriate exhibit to the Registrant's Quarterly Report on Form 10-Q for the second quarter ended June 30, 1993.
(6) Incorporated herein by reference to the appropriate exhibit to the Registrant's Quarterly Report on Form 10-Q for the second quarter ended June 30, 1994.
(7) Incorporated herein by reference to the appropriate exhibit to the Registrant's Quarterly Report on Form 10-Q for the third quarter ended September 30, 1994.
(8) Incorporated herein by reference to the appropriate exhibit to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994 (File No. 0-19279).
(9) Incorporated herein by reference to the appropriate exhibit to the Registrant's Quarterly Report on Form 10-Q for the third quarter ended September 30, 1995.
(10) Incorporated herein by reference to the appropriate exhibit to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995 (File No. 0-19279).
(11) Incorporated herein by reference to the appropriate exhibit to the Registrant's Quarterly Report on Form 10-Q for the second quarter ended June 30, 1996.
(12) Incorporated herein by reference to the appropriate exhibit to the Registrant's Quarterly Report on Form 10-Q for the third quarter ended September 30, 1996.
(13) Incorporated herein by reference to the appropriate exhibit to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1996 (File No. 0-19279).
(14) Incorporated herein by reference to the appropriate exhibit to the Registrant's Quarterly Report on Form 10-Q for the second quarter ended June 30, 1997.
(15) Incorporated herein by reference to the appropriate exhibit to the Registrant's Quarterly Report on Form 10-Q for the second quarter ended June 30, 1998.
(16) Incorporated herein by reference to the appropriate exhibit to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1998 (File No. 0-19279).
(17) Incorporated herein by reference to the appropriate exhibit to the Registrant's Quarterly Report on Form 10-Q for the first quarter ended March 31, 1999.
(18) Incorporated herein by reference to the appropriate exhibit to the Registrant's Quarterly Report on Form 10-Q for the second quarter ended June 30, 1999.
(19) Incorporated herein by reference to the appropriate exhibit to the Registrant's Quarterly Report on Form 10-Q for the third quarter ended September 30, 2000.
(20) Incorporated herein by reference to the appropriate exhibit to the Registrant's Quarterly Report on Form 10-Q for the third quarter ended September 30, 2001.
E-4
SIGNATURES ----------
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
EVERFLOW EASTERN PARTNERS, L.P.
By: EVERFLOW MANAGEMENT LIMITED, LLC General Partner By: EVERFLOW MANAGEMENT CORPORATION Managing Member
EVERFLOW EASTERN PARTNERS, L. P.
2001 CONSOLIDATED FINANCIAL REPORT
EVERFLOW EASTERN PARTNERS, L. P.
CONTENTS
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Page ----
AUDITORS' REPORT ON THE FINANCIAL STATEMENTS
FINANCIAL STATEMENTS Consolidated balance sheets - Consolidated statements of income Consolidated statements of partners' equity Consolidated statements of cash flows Notes to consolidated financial statements -
Independent Auditors' Report ----------------------------
To the Partners Everflow Eastern Partners, L. P. Canfield, Ohio
We have audited the accompanying consolidated balance sheets of Everflow Eastern Partners, L. P. and subsidiaries as of December 31, 2001 and 2000, and the related consolidated statements of income, partners' equity, and cash flows for each of the three years in the period ended December 31, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Everflow Eastern Partners, L. P. and subsidiaries as of December 31, 2001 and 2000, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America.
HAUSSER + TAYLOR LLP
Cleveland, Ohio March 14, 2002, except for Note 8, dated March 20, 2002
EVERFLOW EASTERN PARTNERS, L. P.
CONSOLIDATED BALANCE SHEETS
December 31, 2001 and 2000 - --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
EVERFLOW EASTERN PARTNERS, L. P.
CONSOLIDATED BALANCE SHEETS
December 31, 2001 and 2000 - --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
EVERFLOW EASTERN PARTNERS, L. P.
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 2001, 2000 and 1999 - --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
EVERFLOW EASTERN PARTNERS, L. P.
CONSOLIDATED STATEMENTS OF PARTNERS' EQUITY
Years Ended December 31, 2001, 2000 and 1999 - --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
EVERFLOW EASTERN PARTNERS, L. P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2001, 2000 and 1999 - --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
EVERFLOW EASTERN PARTNERS, L. P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. 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 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.
B. 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.
C. Use of Estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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.
D. Fair Value of Financial Instruments - The fair values of cash, accounts receivable, short-term investments (based on quoted market values), accounts payable and other short-term obligations approximate their carrying values because of the short maturity of these financial instruments. The carrying values of the Company's long-term obligations approximate their fair value. In accordance with Statement of Financial Accounting Standards ("SFAS") No. 107, "Disclosure About Fair Value of Financial Instruments," rates available at balance sheet dates to the Company are used to estimate the fair value of existing debt.
E. Cash Equivalents - For purposes of the statement of cash flows, the Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. The Company maintains at various financial institutions cash and cash equivalents which may exceed federally insured amounts and which may, at times, significantly exceed balance sheet amounts due to float.
EVERFLOW EASTERN PARTNERS, L. P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
F. Property and Equipment - The Company uses the successful efforts method of accounting for oil and gas exploration and production activities. Under successful efforts, costs to acquire mineral interests in oil and gas properties and to drill and equip development wells are initially capitalized. Costs of development wells (on properties the Company has no further interest in) that do not find proved reserves and geological and geophysical costs are expensed. The Company has not participated in exploratory drilling and owns no interest in unproved properties.
Capitalized costs of proved properties, after considering estimated dismantlement and abandonment costs and estimated salvage values, are amortized by the unit-of-production method based upon estimated proved developed reserves. Depletion, depreciation and amortization on proved properties amounted to $4,417,473, $4,477,379 and $4,728,480 for the years ended December 31, 2001, 2000 and 1999, respectively.
On sale or retirement of a unit of a proved property (which generally constitutes the amortization base), the cost and related accumulated depreciation, depletion, amortization and write down are eliminated from the property accounts, and the resultant gain or loss is recognized.
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," requires that long-lived assets (including oil and gas properties) and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Everflow utilizes a field by field basis for assessing impairment of its oil and gas properties. The Company wrote down oil and gas properties by approximately $200,000, $400,000 and $601,000 during 2001, 2000 and 1999, respectively, to provide for impairment on certain of its oil and gas properties.
Pipeline and support equipment and other corporate property and equipment are depreciated principally on the straight-line method over their estimated useful lives (pipeline and support equipment - 10 years, other corporate equipment - 3 to 7 years, other corporate property - building and improvements with a cost of $1,007,107 - 40 years). Depreciation on pipeline and support equipment and other corporate property and equipment amounted to $91,477, $91,735 and $91,112 for the years ended December 31, 2001, 2000 and 1999, respectively.
Maintenance and repairs of property and equipment are expensed as incurred. Major renewals and improvements are capitalized, and the assets replaced are retired.
G. Revenue Recognition - The Company recognizes revenue from oil and gas production as it is extracted and sold from the properties. Other revenue is recognized at the time it is earned and the Company has a contractual right to such revenue.
EVERFLOW EASTERN PARTNERS, L. P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
G. Revenue Recognition (Continued)
The Company participates (and may act as drilling contractor) with unaffiliated joint venture partners in the drilling, development and operation of jointly owned oil and gas properties. Each owner, including the Company, has an undivided interest in the jointly owned property(ies). Generally, the joint venture partners 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 consist principally of drilling and development costs the Company has advanced or incurred on behalf of joint venture partners. The Company earns and receives monthly management and operating fees from certain joint venture partners after the properties are completed and placed into production.
H. Income Taxes - Everflow is not a tax-paying entity and the net taxable income or loss, other than the taxable income or loss allocable to EEI, which is a C corporation owned by Everflow, will be allocated directly to its respective partners. The Company is not able to determine the net difference between the tax bases and the reported amounts of Everflow's assets and liabilities due to separate tax elections that were made by owners of the working interests and limited partnership interests that comprised Programs.
EEI and its subsidiaries account for income taxes under SFAS No. 109, "Accounting for Income Taxes." Income taxes are provided for all items (as they relate to EEI and its subsidiaries) in the Consolidated Statement of Income regardless of the period when such items are reported for income tax purposes. SFAS No. 109 provides that deferred tax assets and liabilities be recognized for temporary differences between the financial reporting basis and tax basis of certain of EEI's and its subsidiaries' assets and liabilities. In addition, SFAS No. 109 requires that deferred tax assets and liabilities be measured using enacted tax rates expected to apply to taxable income in the years in which the temporary differences are expected to be recovered or settled. The impact on deferred taxes of changes in tax rates and laws, if any, is reflected in the financial statements in the period of enactment. In some situations, SFAS No. 109 permits the recognition of expected benefits of utilizing net operating loss and tax credit carryforwards.
I. 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. The allocation changes as unitholders elect to exercise the repurchase right (see Note 4).
Earnings and distributions per limited partner Unit have been computed based on the weighted average number of Units outstanding during the year for each year presented. Average outstanding Units for earnings and distributions per Unit calculations amount to 5,829,918, 5,991,928 and 6,133,865 in 2001, 2000 and 1999, respectively.
EVERFLOW EASTERN PARTNERS, L. P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
J. New Accounting Standards - In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," was issued. SFAS No. 133 establishes accounting and reporting standards for derivative instruments and hedging activities. SFAS No. 133, as amended by SFAS No. 137, is effective for all fiscal quarters of all fiscal years beginning after June 15, 2000. In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141, "Business Combinations." SFAS No. 141 requires the purchase method of accounting for business combinations initiated after June 30, 2001 and eliminates the pooling-of-interest method and further clarifies the criteria to recognize intangible assets separately from goodwill. The adoption of SFAS Nos. 133 and 141 had no material effect on the Company's financial statements.
In June 2001, FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets." Under SFAS No. 142, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to periodic impairment tests. Other intangible assets will continue to be amortized over their useful lives. SFAS No. 142 is effective for fiscal years beginning after December 15, 2001. In June 2001, 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 long-lived assets and the associated asset retirement cost. In August 2001, FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-lived Assets," which is effective the first quarter of fiscal year 2002. SFAS No. 144 modifies and expands the financial accounting and reporting for the impairment or disposal of long-lived assets other than goodwill. The Company is still evaluating the impact of these new standards, but at this time does not believe their adoption will have a significant impact on its financial position and results of operations.
NOTE 2. SHORT-TERM INVESTMENTS
Short-term investments consist principally of marketable corporate debt securities which are classified as trading. The fair values of the investments approximate cost.
NOTE 3. CREDIT FACILITIES AND LONG-TERM DEBT
In August 2001, the Company entered into an agreement that modified (extended) its prior credit agreement. 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 anticipates renewing the facility every other year to minimize debt origination, carrying and interest costs associated with long-term bank commitments. Borrowings under the facility are unsecured; however, the Company has agreed, if requested by the bank, to execute any supplements to the agreement including security and mortgage agreements on the Company's assets. The agreement contains restrictive covenants requiring the Company to maintain the following: (i) loan balance not to exceed the borrowing base of $4,000,000; (ii) tangible net worth of at least $40,000,000; and (iii) a total debt to tangible net worth ratio of not more than 0.5 to 1.0. In addition, there are restrictions on mergers, sales and acquisitions, the incurrence of additional debt and the pledge or mortgage of the Company's assets.
EVERFLOW EASTERN PARTNERS, L. P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3. CREDIT FACILITIES AND LONG-TERM DEBT (CONTINUED)
There were no borrowings outstanding on revolving credit facilities at December 31, 2001 and 2000. The following schedule reflects activity under the Company's revolving credit facilities for the years ended December 31, 2001, 2000 and 1999. The average amount outstanding under the facility was calculated using daily balances and a 365 day period. The weighted average interest rates were calculated by dividing the interest expense for the year for such borrowings by the average amounts outstanding during the period.
The Company purchased a building and funded its cost, including improvements, in part, through mortgage notes. The notes have an aggregate balance of $512,014 and $637,822 at December 31, 2001 and 2000, respectively, and at December 31, 2001 bear interest at fixed (with options to adjust or convert to variable in certain subsequent years) rates ranging from 5.47% - 8.06% and a weighted average rate of 6.51%. The notes at December 31, 2001 require aggregate payments of principal and interest of $7,175 per month. Maturities on the notes are expected to be as follows: 2002 - $53,900; 2003 - $57,500; 2004 - $61,400; 2005 - $65,600; 2006 - $68,100; thereafter - $205,514.
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 December 31, 2001, none of the Company's total long-term debt consisted of floating rate debt.
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 are allocated to the unitholders (the limited partners) and 1% of revenues and costs are allocated to the general partner. Such allocation has changed and will change in the future due to unitholders electing to exercise the repurchase right.
EVERFLOW EASTERN PARTNERS, L. P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4. PARTNERS' EQUITY (CONTINUED)
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, 2001 calculation, is estimated to be $5.66 per Unit, net of the distributions ($.50 per Unit in total) expected to be made in January and April 2002.
Units repurchased pursuant to the repurchase right, for each of the four years in the period ended December 31, 2001, are as follows:
EVERFLOW EASTERN PARTNERS, L. P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5. PROVISION FOR INCOME TAXES
As referred to in Note 1, EEI and its subsidiaries account for current and deferred income taxes under the provisions of SFAS No. 109. The deferred taxes are the result of temporary differences arising from differences in financial reporting and tax reporting methods for EEI's proved properties.
EVERFLOW EASTERN PARTNERS, L. P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5. PROVISION FOR INCOME TAXES (CONTINUED)
A reconciliation between taxes computed at the Federal statutory rate and the effective tax rate in the statements of income follows:
EEI has percentage depletion deduction carryforwards for tax purposes of approximately $2,160,000. These carryforwards can be carried forward indefinitely. For financial reporting purposes, the deferred tax liability at December 31, 2001 and 2000 has been reduced by approximately $661,000 and $730,000, respectively, for the tax effect of carryforwards.
NOTE 6. RETIREMENT PLAN
The Company has a defined contribution plan pursuant to Section 401(k) of the Internal Revenue Code for all employees who have reached the age of 21 and completed one year of service. Certain contributions to the plan are at the discretion of EMC's Board of Directors. The Company matched employees' contributions to the 401(K) Retirement Savings Plan to the extent of 50% of the first 6% of a participant's salary reduction in 1999. Beginning in 2000, the Company matched employees' contributions to the 401(K) Retirement Savings Plan to the extent of 100% of the first 6% of a participant's salary reduction. The amounts attributable to the Company's matching contribution vest immediately. The Company made contributions of $63,275, $52,683 and $38,879 for the years ended December 31, 2001, 2000 and 1999, respectively.
EVERFLOW EASTERN PARTNERS, L. P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7. RELATED PARTY TRANSACTIONS
Since 1989, EEI provided certain employees with an opportunity to receive assignments of certain overriding royalty interests which were created at the time EEI generated certain oil and gas leases. Certain employees of the Company have been given the option of having a portion of their compensation in the form of an assignment in certain of such overriding royalty interests. Those employees who elect to receive a portion of their compensation in this form receive an assignment of a pro rata portion of each of the overriding royalty interests selected. During the calendar years ended December 31, 2001, 2000 and 1999, approximately $140,000, $140,000 and $117,000, respectively, was distributed to such employees from such overriding royalty interests.
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 to participate in the drilling and development of such wells. Such loans currently accrue interest at LIBOR plus 150 basis points. Such receivables are expected to be paid from production revenues attributable to such interests or through joint interest assessments.
NOTE 8. BUSINESS SEGMENTS, RISKS AND MAJOR CUSTOMERS
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.
Management of the Company continually evaluates whether the Company can develop oil and gas properties at historical levels given current industry and market conditions. If the Company is unable to do so, it could be determined that it is in the best interests of the Company and its unitholders to reorganize, liquidate or sell the Company. However, management cannot predict whether any sale transaction will be a viable alternative for the Company in the immediate future.
EVERFLOW EASTERN PARTNERS, L. P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8. BUSINESS SEGMENTS, RISKS AND MAJOR CUSTOMERS (CONTINUED)
Gas sales accounted for 89%, 84% and 89% of total oil and gas sales in 2001, 2000 and 1999, respectively. Approximate percentages of total oil and gas sales from significant purchasers for the years ended December 31, 2001, 2000 and 1999, respectively, were as follows:
The Company expects that Dominion, Ergon Oil and IGS will be the only major customers in 2002.
In 2001 and over the past ten years, the Company had been selling a significant portion of its natural gas pursuant to Intermediate Term Adjustable Price Gas Purchase Agreements with Dominion.
The Company's last remaining agreement terminated during 2001 and was replaced by short-term contracts, which obligate Dominion to purchase, and the Company to sell and deliver, certain natural gas production from the Company's wells throughout the contract periods. A summary of certain pricing provisions included in gas purchase contracts with Dominion follows:
Production Period November 2001 through March 2002 (Dominion)
The first 40,000 MCF per month is priced at $3.51 per MCF. The next 50,000 MCF per month is priced at $4.73 per MCF. The next 50,000 MCF per month is priced at $5.35 per MCF. All gas in excess of 140,000 MCF per month is priced at the NYMEX settled price plus $.10 up to the first 250,000 MCF in the aggregate during the period. All gas in excess of the above volumes is priced at the NYMEX settled price plus $.45.
Production Period April 2002 through October 2002 (Dominion)
The first 50,000 MCF per month is priced at $4.73 per MCF. The next 50,000 MCF per month is priced at $5.35 per MCF. The next 20,000 MCF per month is priced at $3.35 per MCF. In the event the 250,000 MCF in the November 2001 through March 2002 period is not met, any remaining balance is priced at the NYMEX settled price plus $.10 during the period. All gas in excess of the above volumes is priced at the NYMEX settled price plus $.45.
EVERFLOW EASTERN PARTNERS, L. P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8. BUSINESS SEGMENTS, RISKS AND MAJOR CUSTOMERS (CONTINUED)
Production Period November 2002 through October 2003 (Dominion)
The first 20,000 MCF per month is priced at $3.35 per MCF. The next 20,000 MCF per month is priced at $4.00. The next 20,000 MCF per month is priced at $4.10. All gas in excess of the above volumes is priced at NYMEX settled price plus $.45.
Production Period November 2003 through March 2004 (Dominion)
The first 20,000 MCF per month is priced at $4.05 per MCF. Gas in excess of 20,000 MCF per month has not been committed.
The Company also has short-term contracts with IGS, which obligate IGS to purchase, and the Company to sell and deliver, certain quantities of natural gas production on a monthly basis throughout the contract periods. A summary of certain pricing provisions included in the gas purchase contracts with IGS follows:
Production Period November 2001 through October 2002 (IGS)
The first 50,000 MCF per month is priced at $4.56 per MCF. All gas in excess of 50,000 MCF per month is priced at NYMEX settled price plus $.42.
Production Period April 2002 through October 2002 and April 2003 through October 2003 (IGS)
The first 20,000 MCF per month is priced at $3.19 per MCF. All gas in excess of 20,000 MCF per month is priced at the NYMEX settled price plus $.27.
Production Period November 2002 through March 2003 (IGS)
The first 20,000 MCF per month is priced at $3.19 per MCF. The next 20,000 MCF per month is priced at $4.01 per MCF. All gas in excess of the above volumes is priced at the NYMEX settled price plus $.57.
Production Period November 2003 through March 2004 (IGS)
The first 20,000 MCF per month is priced at $4.10 per MCF. All gas in excess of 20,000 MCF per month is priced at the NYMEX settled price plus $.57.
As detailed above, the price paid for natural gas purchased by Dominion and IGS varies based on quantities locked in by the Company from time to time. As of December 31, 2001, natural gas purchased by Dominion covers production from approximately 420 gross wells, while natural gas purchased by IGS covers production from approximately 190 gross wells.
EVERFLOW EASTERN PARTNERS, L. P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9. COMMITMENTS AND CONTINGENCIES
Everflow paid a dividend in January 2002 of $.25 per Unit. The distribution amounted to approximately $1,460,000.
The Company is the general partner in certain oil and gas partnerships. As general partner, the Company shares in unlimited liability to third parties with respect to the operations of the partnerships and may be liable to limited partners for losses attributable to breach of fiduciary obligations.
NOTE 10. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of selected quarterly financial data for the years ended December 31, 2001 and 2000:
Quarterly operating results are not necessarily representative of operations for a full year for various reasons, including the volatility and seasonality of oil and gas production and prices, the highly competitive and, at times, seasonal nature of the oil and gas industry and worldwide economic conditions.
EVERFLOW EASTERN PARTNERS, L. P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11. SUPPLEMENTAL INFORMATION RELATING TO OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED)
The following supplemental unaudited oil and gas information is required by SFAS No. 69, "Disclosures About Oil and Gas Producing Activities."
The tables on the following pages set forth pertinent data with respect to the Company's oil and gas properties, all of which are located within the continental United States.
In 2001, 2000 and 1999, development costs include the purchase of approximately $309,000, $-0- and $1,452,000, respectively, of producing oil and gas properties.
EVERFLOW EASTERN PARTNERS, L. P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11. SUPPLEMENTAL INFORMATION RELATING TO OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED) (CONTINUED)
Income tax expense was computed using statutory tax rates and reflects permanent differences that are reflected in the Company's consolidated income tax expense for the year.
EVERFLOW EASTERN PARTNERS, L. P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11. SUPPLEMENTAL INFORMATION RELATING TO OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED) (CONTINUED)
ESTIMATED QUANTITIES OF PROVED OIL AND GAS RESERVES
The Company has not determined proved reserves associated with its proved undeveloped acreage. At December 31, 2001 and 2000, the Company had 700 and 780 net proved undeveloped acres, respectively. The carrying cost of the proved undeveloped acreage that is included in proved properties amounted to $528,208 and $682,206 at December 31, 2001 and 2000, respectively.
EVERFLOW EASTERN PARTNERS, L. P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11. SUPPLEMENTAL INFORMATION RELATING TO OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED) (CONTINUED)
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS
EVERFLOW EASTERN PARTNERS, L. P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11. SUPPLEMENTAL INFORMATION RELATING TO OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED) (CONTINUED)
The estimated future cash flows are determined based on year-end prices for crude oil, current allowable prices (reduced for periods beyond the contract period to year-end market prices) applicable to expected natural gas production, estimated production of proved crude oil and natural gas reserves, estimated future production and development costs of reserves, based on current economic conditions, and the estimated future income tax expense, based on year-end statutory tax rates (with consideration of future tax rates already legislated) to be incurred on pretax net cash flows less the tax basis of the properties involved. Such cash flows are then discounted using a 10% rate.
The methodology and assumptions used in calculating the standardized measure are those required by SFAS No. 69. It is not intended to be representative of the fair market value of the Company's proved reserves. The valuation of revenues and costs does not necessarily reflect the amounts to be received or expended by the Company. In addition to the valuations used, numerous other factors are considered in evaluating known and prospective oil and gas reserves.