UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A10-K
| ☒ | Annual Report Pursuant to Section 13 or 15(d) | ||
| of the Securities Exchange Act of 1934 |
For the FiscalFiscal Year Ended December 31, 20182020
OR
| ☐ | Transition Report Pursuant to Section 13 or 15(d) | ||
| of the Securities Exchange Act of 1934 |
Commission File No. 0-19279
EVERFLOW EASTERN PARTNERS, L.P.
(Exact name of registrant as specified in its charter)
| Delaware | 34-1659910 | ||
(State or other jurisdiction of | (I.R.S. Employer | ||
| incorporation or organization) |
Identification No.) |
| 585 West Main Street | |||
| P.O. Box 629 | |||
Canfield, Ohio | 44406 | ||
| (Address of principal executive offices) | (Zip Code) |
Registrant’sRegistrant’s telephone number, including area code: (330) (330) 533-2692
Securities registered pursuant to Section 12(b) of the Act.
| Trading | Name of each exchange | ||
| Title of each class | Symbol(s) | on which registered | |
| None |
None
Securities registered pursuant to Section 12(g) of the Act:
Units of Limited Partnership Interest
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No X ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No X ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No X
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ | |||
| Non-accelerated filer | ☐ | |||||
| Smaller reporting company | ☒ | Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 USC. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ NoX ☒
There were 4,320,9274,218,123 Units of limited partnership interest held by non-affiliates of the Registrant as of June 30, 2018.2020. At June 30, 2018,2020, there was no public market for the Registrant’s Units of limited partnership interest. There were 5,549,3555,441,928 Units of limited partnership interest of the Registrant as of March 10, 2019.2021. The Units generally do not have any voting rights, but, in certain circumstances, the Units are entitled to one vote per Unit.
Except as otherwise indicated, the information contained in this Report is as of December 31, 2018.2020.
EVERFLOW EASTERN PARTNERS, L.P.
INDEX
| DESCRIPTION | PAGE NO. | ||
| Part I. | |||
| Item 1. | Business | 1 | |
| Item 1A. | Risk Factors | 10 | |
| Item 1B. | Unresolved Staff Comments | 10 | |
| Item 2. | Properties | 11 | |
| Item 3. | Legal Proceedings | 14 | |
| Item 4. | Mine Safety Disclosures | 14 | |
| Supplemental Item – Information About Our Executive Officers | 15 | ||
| Part II. | |||
| Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities | 16 | |
| Item 6. | Selected Financial Data | 16 | |
| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 17 | |
| Item 7A. | Quantitative and Qualitative Disclosures About Market Risk | 27 | |
| Item 8. | Financial Statements and Supplementary Data | 27 | |
| Report of Independent Registered Public Accounting Firm | F-3 | ||
| Consolidated Balance Sheets | F-5 | ||
| Consolidated Statements of Operations | F-7 | ||
| DESCRIPTION | PAGE NO. | ||
| Consolidated Statements of Partners’ Equity | F-8 | ||
| Consolidated Statements of Cash Flows | F-9 | ||
| Notes to Consolidated Financial Statements | F-10 | ||
| Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | 29 | |
| Item 9A. | Controls and Procedures | 29 | |
| Item 9B. | Other Information | 30 | |
| Part III. | |||
| Item 10. | Directors, Executive Officers and Corporate Governance | 31 | |
| Item 11. | Executive Compensation | 35 | |
| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | 38 | |
| Item 13. | Certain Relationships and Related Transactions, and Director Independence | 40 | |
| Item 14. | Principal Accounting Fees and Services | 41 | |
| Part IV. | |||
| Item 15. | Exhibits and Financial Statement Schedules | 42 | |
| Item 16. | Form 10-K Summary | 42 | |
| Exhibit Index | E-1 | ||
PART I
Introduction
Everflow Eastern Partners, L.P. (the “Company”), a Delaware limited partnership, engages in the business of oil and gas acquisition, exploration, development and production. 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 (the “SEC”) 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. The telephone number is (330) 533-2692.
Description of the Business
General. The Company has participated on an on-going basis in the acquisition, exploration, development and production 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 oil and gas production and operations management.
A-1 Storage of Canfield, Ltd. (“A-1 Storage”) was organized as an Ohio limited liability company in 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 50% of the estimated total future cash inflows related to the Company’s crude oil and natural gas reserves as of December 31, 2020 are attributable to natural gas reserves. The 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 approximately 444 (net) wells. The Company serves as the operator of approximately 60% of the gross wells and 76% of the net wells which comprise the Company’s properties during the year 2020.
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. In January and July 2020, the Company reached separate agreements with unaffiliated third parties to sell substantially all the Company’s interests in 233 oil and gas properties located in Western Pennsylvania.
In March 2020, the World Health Organization declared the outbreak of the novel strain of the coronavirus (“COVID-19”) a global pandemic. COVID-19 has led to global shutdowns as governments imposed, and continue to impose, regulations in efforts to control the spread of COVID-19. As a result, physical and economic uncertainties have arisen which have negatively impacted the Company’s operations, cash flows and financial position.
Sales of Deep Rights. The Company has sold its deep rights in certain Ohio and Pennsylvania properties for cash consideration as part of various agreements with multiple purchasers (the "Dispositions"). The Dispositions included no producing reserves, and the Company retained the rights to the shallow portion of all acreage sold in addition to some of the rights to a portion of the deep acreage sold, subject to the agreements. During 2012, the Company sold approximately 30,600 acres in conjunction with the Dispositions.
Business Plan. The Company continually evaluates whether it can develop oil and gas properties at historical levels given the current costs of drilling and development activities, the current prices of crude oil and natural gas, and the Company’s ability to find oil and gas in commercially productive quantities. See “MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.”
Acquisition of Prospects. The Company maintains a leasehold inventory from which the General Partner will select oil and gas prospects for development by the Company. The Company 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. As of December 31, 2020, the Company’s current leasehold inventory consists of approximately 20 prospects in various stages of maturity representing less than 100 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 Pennsylvania and are to be drilled primarily to the Clinton/Medina Sands geological formation or closely related oil and gas formations in such area. The Company also has the right to participate in the development of certain wells in the Utica geological formation with various joint venture partners. The Company does not currently participate in the operation of such wells, and has not yet determined whether, or to what extent, it might exercise its right to do so.
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 did not acquire any producing oil and gas properties during 2020 or 2019.
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 has historically financed its current operations, including undeveloped leasehold acquisition activities, primarily through cash generated from operations and existing cash and equivalents. 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. In April 2020, EEI received an unsecured loan of approximately $327,000 through a commercial bank under the United States Small Business Administration’s (the “SBA”) Paycheck Protection Program (the “PPP Loan”), which provided employers relief in response to COVID-19. The PPP Loan was forgiven by the SBA in February 2021. It is currently anticipated that any future indebtedness would consist primarily of borrowings from commercial banks. The Company and EEI had no other borrowings in 2020 or 2019 and no principal indebtedness was outstanding as of March 10, 2021. See “MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Liquidity and Capital Resources.”
Although the Company’s Amended and Restated Agreement of Limited Partnership dated as of February 10, 2010 (as amended from time to time, 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 or for any other purpose. See “MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Liquidity and Capital Resources.”
The Company owns a significant amount of oil and gas reserves. The Company generally does not expect to borrow funds, from whatever source, in excess of 40% of its total value of proved developed reserves (as determined using the Company’s Standardized Measure of Discounted Future Net Cash Flows). However, there can be no assurance that the Company’s future obligations and liabilities would not lead to borrowings in excess of such amount. Based upon its current business plan, management has no present intention to cause the Company to borrow in excess of this amount. The Company has estimated the value of proved and proved developed reserves, determined as of December 31, 2020, net of asset retirement obligations, which aggregate a net liability of $8,564,000 (Standardized Measure of Discounted Future Net Cash Flows).
Marketing. The ability of the Company to market crude oil and natural gas found in and produced on its properties will depend on a number of factors beyond its control, and the impact of such factors, either individually or in the aggregate, cannot be anticipated or measured. 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.
Crude Oil. Any crude 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 crude 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. Historically, posted prices in the areas where the Company’s properties are located have generally been somewhat lower than the spot market prices. There have been substantial fluctuations in crude oil prices in recent years, including 2020 and 2019.
The price of crude oil in the Appalachian Basin has ranged from a low of $8.50 per barrel in December 1998 to a high of $138.00 in July 2008. As of March 10, 2021, $60.44 per barrel was the prevailing field price in the Appalachian Basin area, the Company’s principal area of operation. There can be no assurance that prices will not be subject to continual fluctuations. Future crude 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”), governmental instability in foreign oil producing countries, energy and environmental policy of federal, state and local governments, and the possibility of supply interruptions. To the extent the prices that the Company receives for its crude oil production decline, the Company’s revenues from crude 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 resulted in a shortage in natural gas supplies. This resulted in increases in natural gas prices throughout the United States, including the Appalachian Basin. During 2001, lower energy consumption and increased natural gas supplies reduced prices to historical levels. During the period from 2002 through the first half of 2008, shortages in natural gas supplies had resulted from increased energy consumption from industrial, commercial, residential and electric power usage. During the second half of 2008 and through 2016, excess natural gas supplies resulted from the combination of increased production from integrated and independent producers and decreased industrial and commercial energy consumption resulting from the global and United States financial crises and recession. During 2017 and through 2019, excess natural gas supplies were the continued result of increased production and production capacity from regional integrated and independent producers. During 2020, excess natural gas supplies were primarily the result of decreased industrial and commercial energy consumption resulting from global shutdowns related to COVID-19. From time to time, especially in summer months, seasonal restrictions on natural gas production have occurred as a result of distribution system restrictions.
Over the ten years prior to 2002, 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. 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 rates.
Since 2002 and through November 2020, the Company had multiple annual or biennial contracts with Dominion, which obligated Dominion to purchase, and the Company to sell and deliver, certain quantities of natural gas production from the Company’s oil and gas properties throughout the contract periods. In November 2020, Dominion was acquired by Berkshire Hathaway Energy and Dominion’s name was changed to Eastern Energy Field Services, Inc. (“EEFS”). Since November 2020, the Company has multiple annual contracts, which obligate EEFS to purchase, and the Company to sell and deliver, certain quantities of natural gas production from the Company’s oil and gas properties throughout the contract periods. The Company may elect to lock-in specific volumes of natural gas to be sold in specific months at a mutually agreeable price. As of March 10, 2021, the Company did not have any significant quantities of natural gas volumes locked-in with EEFS.
As detailed above, the price paid for natural gas purchased by EEFS varies based on quantities committed to by the Company from time to time. Natural gas sold under these contracts in excess of the committed quantities is sold at the month’s closing price at Henry Hub, which is the location for pricing NYMEX, plus or minus regional basis adjustments, as per the contracts. These contracts are not considered derivatives, but have been designated as annual sales contracts as defined by generally accepted accounting principles. During 2020, natural gas purchased by EEFS, including when it was formerly Dominion, covered production from approximately 570 gross operated wells. See “MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – Commodity Pricing, Risk Management Activities and Inflation.”
Since the second half of 2013, the market price for natural gas in the Appalachian Basin has experienced a decline relative to the price at Henry Hub primarily as a result of regional basis adjustments resulting from the increased supply of natural gas in the Ohio and Pennsylvania regions. Changes in the market price for natural gas, including regional basis, impact the Company’s revenues, earnings and liquidity. The Company is unable to predict potential future movements in the market price for natural gas, including regional basis, and thus cannot predict the ultimate impact of prices on its operations.
During 2020, no one natural gas purchaser accounted for more than 10% of the Company’s natural gas sales other than EEFS, including when it was formerly Dominion, whose purchases of natural gas from operated wells accounted for approximately 70% of the Company’s consolidated natural gas sales. The Company expects that EEFS will be the only material natural gas purchaser during fiscal year 2021.
Seasonality. During summer months, seasonal restrictions on natural gas production have sometimes occurred as a result of distribution system restrictions. These production restrictions, and the nature of the Company’s business, can result in seasonal fluctuations in the Company’s revenue, with the Company sometimes 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 encounters strong competition from major and independent oil and gas 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, including 2020, 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. Increases in energy consumption have at times brought about a shortage in energy supplies. 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 crude oil and natural 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” appearing on page 4 herein.
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 crude 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. The wellhead price of natural gas is also regulated by the 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, the FERC 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 of natural gas sales from operated wells will be sold to EEFS as discussed earlier.
As a result of the NGPA and the Decontrol Act, the Company’s natural gas production is no longer subject to price regulation. Natural 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. In addition to the deregulation of gas prices, the FERC 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 Company is not an interstate pipeline company, it is likely that this regulation may indirectly impact the Company by increasing competition in the marketing of natural gas. 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. The ultimate impact of these rules and other regulatory developments on the Company cannot be predicted.
In addition, from time to time, prices for either crude oil or natural gas have been regulated by the federal government, and such price regulation could be re-imposed at any time in the future.
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 any offshore activities. 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 contamination and for up to $50,000,000, plus response costs, under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 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.
Operating Hazards and Uninsured Risks. The Company’s crude oil and natural gas operations are subject to all operating hazards and risks normally incident to drilling for and producing crude oil and natural 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 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.
Data Security Considerations. The Company has implemented data security measures and has not, to date, been subject to any material data security breaches, data loss or cyber-attacks. However, despite the Company’s efforts to protect sensitive information and confidential and personal data, comply with applicable laws, rules and regulations and implement data security measures, the Company’s facilities and systems may be vulnerable to security breaches and other data loss, including cyber-attacks. In addition, it is not possible to predict the impact on the Company’s business of the future loss, alteration or misappropriation of information in the Company’s possession related to the Company and EEI’s employees, former employees, or others. This could lead to negative publicity, legal claims, theft, modification or destruction of proprietary information or key information, damage to or inaccessibility of critical systems, operational disruptions and other significant costs, which could have an adverse impact on the Company’s revenues and earnings.
Hydraulic Fracturing. Many of the Company’s exploration and production operations depend on the use of hydraulic fracturing to enhance production from oil and gas wells. This technology involves the injection of fluids - usually consisting mostly of water but typically including small amounts of several chemical additives - as well as sand into a well under high pressure in order to create fractures in the formation that allow oil or gas to flow more freely to the wellbore. Most of our wells would not be economical without the use of hydraulic fracturing to stimulate production from the well. Due to concerns raised relating to potential impacts of hydraulic fracturing on groundwater quality, legislative and regulatory efforts at the federal level and in some states have been initiated to render permitting and compliance requirements more stringent for hydraulic fracturing or prohibit the activity altogether. Such efforts could have an adverse effect on crude oil and natural gas production activities.
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 10, 2021, EEI had 17 full-time and 2 part-time employees. These employees are primarily engaged in the following areas of business operations: eight in administration, five in field operations, four in accounting and two in land and lease acquisition.
Not a required disclosure for a Smaller Reporting Company, however the Company does disclose the following risk factor:
An epidemic, pandemic or public health crisis could disrupt our operations and have a material adverse effect on our business.
The Company could be materially and adversely affected by the outbreak of a widespread health epidemic or pandemic, such as COVID-19. The occurrence of such an outbreak could materially disrupt our business and operations, including if government authorities impose mandatory closures, seek voluntary closures or impose restrictions on our operations. Furthermore, the risk of contracting viruses or other illnesses that may be transmitted through human contact could cause employees to avoid interacting with other people, which could materially and adversely affect the ability to adequately staff our operations. If an outbreak reaches pandemic levels, there may also be long-term effects on the economies of affected countries. Any of the foregoing would severely disrupt the Company’s operations and could have a material adverse effect on our business, results of operations, cash flows and financial condition.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None
Set forth below is certain information regarding the oil and gas properties of the Company which are located in the Appalachian Basin of Ohio and Pennsylvania.
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.
Natural Gas and Crude Oil Reserves. Proved reserves are the estimated quantities of crude oil and natural gas, which, by an analysis of geological and engineering data, can be estimated with reasonable certainty to be recoverable in future years from known reservoirs under existing economic conditions, operating methods and government regulations. Prices include consideration of changes in existing prices provided only by contractual arrangements, but not on escalations based upon future conditions. The estimated reserves include reserves attributable to the Company’s direct ownership interests in crude oil and natural gas properties as well as the reserves attributable to the Company’s percentage interests in crude oil and natural gas properties owned through joint ventures. All of the reserves are generally located in the Appalachian Basin region of Ohio and Pennsylvania. The Company bases its estimates of proved reserves on the 12-month un-weighted average price of the first-day-of-the-month price for each calendar month of the year preceding the evaluation date. The Company then applies any basis adjustments specifically applicable to each oil and gas property based on location and pricing details. The natural gas prices used in the estimation of proved reserves were $1.46 and $2.17 per MCF at December 31, 2020 and 2019 respectively, and the crude oil prices used in the estimation of proved reserves were $36.30 and $52.14 per BBL at December 31, 2020 and 2019, respectively.
Reserve estimates are imprecise and may change as additional information becomes available. Furthermore, estimates of natural gas and crude oil reserves are projections based on engineering data. There are uncertainties inherent in the interpretation of this data as well as the projection of future rates of production and the timing of development expenditures. Reservoir engineering is a subjective process of estimating underground accumulations of natural gas and crude oil that cannot be measured in an exact way and the accuracy of any reserve estimate is a function of the quality of available data and of engineering and geological interpretation and judgment.
The preparation of the Company’s natural gas and crude oil reserve estimates was completed in accordance with our prescribed internal control procedures, which include verification of input data delivered to the Company’s third-party reserve specialist, as well as a multi-functional management review. For the year ended December 31, 2020, the Company retained Wright & Company, Inc. (“Wright & Company”), a third-party, independent petroleum engineering firm, to prepare a report of proved reserves. The reserves report included a detailed review of all of the Company’s crude oil and natural gas properties. Wright & Company’s evaluation was based on more than 40 years of experience in the estimation of and evaluation of petroleum reserves, specified economic parameters, operating conditions, and government regulations applicable as of December 31, 2020. The Wright & Company report, including the qualifications of the chief technical person responsible for the report, was prepared in accordance with generally accepted petroleum engineering and evaluation principles and is attached as Exhibit 99.1 to this Annual Report on Form 10-K.
Reserves Reported to Other Agencies. There were no estimates of total, proved net oil or gas reserves filed with or included in reports to any other federal authority or agency during 2020 or 2019.
Proved Reserves.(1) The following table reflects the estimates of the Company’s proved reserves which are based on the Company’s reserves report as of December 31, 2020.
Oil (BBLS) | Gas (MCF) | |||||||
Proved Developed | 235,000 | 5,750,000 | ||||||
Proved Undeveloped | - | - | ||||||
Total | 235,000 | 5,750,000 | ||||||
(1) | The Company has not determined proved reserves associated with its proved and other undeveloped properties, including its deep property interests, at December 31, 2020. A reconciliation of the Company’s proved reserves is included in the Notes to the Consolidated Financial Statements. |
Production. The following table summarizes the net crude oil and natural gas production, average sales prices and average production (lifting) costs per equivalent unit of production for 2020 and 2019.
| Production | Average Sales Price | Average Lifting Cost | ||||||||||||||||||
Oil (BBLS) | Gas (MCF) | per BBL | per MCF | per Equivalent MCF(1) | ||||||||||||||||
2020 | 31,000 | 1,185,000 | $ | 38.94 | $ | 1.85 | $ | 1.42 | ||||||||||||
2019 | 42,000 | 1,840,000 | $ | 53.10 | $ | 2.79 | $ | 1.25 | ||||||||||||
(1) | Oil production is converted to MCF equivalents at the rate of 6 MCF per BBL. |
Productive Wells. The following table sets forth the gross and net oil and gas wells of the Company as of December 31, 2020.
Gross Wells | Net Wells | ||||||||||||||||||||
| (1) | (1) | (1) | (1) | ||||||||||||||||||
Oil | Gas | Total | Oil | Gas | Total | ||||||||||||||||
| 252 | 901 | 1,153 | 141 | 591 | 732 | ||||||||||||||||
(1) | Oil wells are those wells which generated the majority of their revenues from crude oil production during 2020; gas wells are those wells which generated the majority of their revenues from natural gas production during 2020. |
Standardized Measure of Discounted Future Net Cash Flows.(1) The following table summarizes, as of December 31, 2020, 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 SEC, using calculations based solely on proved reserves, current un-escalated costs, prices based on the 12-month average of the first day of the month price for each month in the year ended December 31, 2020, discounted to present value at 10%.
(Thousands) | ||||
Future cash inflows from sales of oil and gas | $ | 16,918 | ||
Future production and development costs | (11,227 | ) | ||
Future asset retirement obligations, net of salvage | (13,879 | ) | ||
Future income tax expense | (42 | ) | ||
Future net cash flows | (8,230 | ) | ||
Effect of discounting future net cash flows | ||||
at 10% per annum | (334 | ) | ||
Standardized measure of discounted future | ||||
net cash flows | $ | (8,564 | ) | |
(1) | See the Notes to the Consolidated Financial Statements for additional information. |
Acreage. The Company had approximately 47,500 gross developed acres and 31,800 net developed acres as of December 31, 2020. Developed acreage is that acreage assignable to productive wells. The Company had less than 100 gross and net proved undeveloped acres as of December 31, 2020.
Drilling Activity. The Company was not involved in any drilling activities during 2020. The following table sets forth the results of drilling activities during 2019 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.
Development Wells (1) | ||||||||||||||||
| Productive (2) | Dry (2) | |||||||||||||||
Gross | Net | Gross | Net | |||||||||||||
2019 | 3.00 | 0.93 | - | - | ||||||||||||
1. | All wells are located in the United States. All wells are development wells. No exploratory wells were drilled. |
2. | A productive well is any well that is not a dry well. A dry well is a well that proves to be incapable of producing either oil or gas in sufficient quantities to justify completion as an oil and gas well. Completion refers to installation of permanent equipment for production of oil and gas, or, in the case of a dry well, to reporting to the appropriate authority that the well has been abandoned. All wells drilled were completed during the fiscal year, regardless of when drilling was initiated. |
Present Activities. The Company has not participated in the drilling of any wells since December 31, 2020.
Delivery Commitments. The Company has entered into various contracts with EEFS, including when it was formerly Dominion, which, subject to certain restrictions and adjustments, obligate EEFS to purchase and the Company to sell and deliver all natural gas production from certain operated contract wells. These operated contract wells comprised approximately 70% of the Company’s consolidated natural gas sales during 2020. In addition, the Company has entered into other various short-term contracts which obligate the purchasers to purchase and the Company to sell and deliver undetermined quantities of natural gas production on a monthly basis throughout the term of the contracts.
Company Headquarters. The Company owns an approximately 6,400 square foot building located in Canfield, Ohio.
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. MINE SAFETY DISCLOSURES
Not applicable.
ExplanatorySUPPLEMENTAL ITEM — INFORMATION ABOUT OUR EXECUTIVE OFFICERS
The executive officers of EEI and EMC as of March 24, 2021 are as follows:
| Name | Age | Positions and Offices with EEI | Positions and Offices with EMC | ||||
| Brian A. Staebler | 46 | President, Principal Executive Officer and director | President, Principal Executive Officer and director | ||||
| Michael W. Rathburn | 37 | Vice President, Secretary-Treasurer, Principal Financial and Accounting Officer and director | Vice President, Secretary-Treasurer, Principal Financial and Accounting Officer and director | ||||
| William A. Siskovic | 65 | Vice President officer and director | Vice President officer and director | ||||
Brian A. Staebler was elected to serve as President and Principal Executive Officer and director of EEI and EMC on March 24, 2021. Michael W. Rathburn was elected to serve as Vice President, Secretary-Treasurer, Principal Financial and Accounting Officer and director of EEI and EMC on March 24, 2021. William A. Siskovic was elected to serve as Vice President, officer and director on March 24, 2021.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
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 10, 2021, there were 5,441,928 Units held by 1,281 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 paid a quarterly distribution every quarter from July 1991 through October 2015. The Company paid cash distributions equal to $0.25 and $0.30 per Unit in April 2020 and 2019, respectively. The Company intends to make future distributions as cash flows warrant.
Repurchase Right
The Partnership Agreement provides that beginning in 1992 and annually thereafter the Company offers to repurchase for cash up to 10% of the then outstanding Units, to the extent Holders offer Units to the Company for repurchase (the “Repurchase Right”). The Repurchase Right entitles any Holder(s), between May 1 and June 30 of each year, to notify the Company that the Holder(s) elects to exercise the Repurchase Right and have the Company acquire certain or all 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 86,388 of its Units of limited partnership interest at a price of $1.50 per Unit pursuant to the terms of the Company’s Offer to Purchase dated April 30, 2019. The Company accepted an aggregate of 81,039 of its Units of limited partnership interest at a price of $0.86 per Unit pursuant to the terms of the Company’s Offer to Purchase dated April 30, 2020. The Company has determined that the price associated with the 2021 Repurchase Right, based upon the December 31, 2020 calculation, is estimated to be $0.36 per Unit. See Note 3 in the Company’s consolidated financial statements for additional information on the Repurchase Right.
ITEM 6. SELECTED FINANCIAL DATA
Not a required disclosure for a Smaller Reporting Company.
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 acquisition, exploration, development and production 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 Everflow Management Corporation, an Ohio Corporation ("EMC"); two individuals who are officers and directors of EEI, William A. Siskovic and Brian A. Staebler; one individual who serves as the Chairman of the Board of EEI, Thomas L. Korner; and one private New York limited liability company.
As discussed earlier, the outbreak of COVID-19 has negatively impacted our business and results of operations in 2020 and could have a continued negative impact on our business and operations in 2021 and the future. The extent to which the Company’s operations will be impacted by the outbreak will depend largely on future developments, which are highly uncertain and cannot be accurately predicted, including new information which may emerge concerning the severity of the outbreak and actions taken by government authorities to contain the outbreak or treat its impact, among other things.
Liquidity and Capital Resources
Financial Position
The following table summarizes the Company’s financial position at December 31, 2020 and December 31, 2019:
December 31, 2020 | December 31, 2019 | |||||||||||||||
Amount | % | Amount | % | |||||||||||||
(Amounts in Thousands) | (Amounts in Thousands) | |||||||||||||||
Working capital | $ | 27,471 | 79 | % | $ | 29,519 | 77 | % | ||||||||
Property and equipment (net) | 7,302 | 21 | 8,795 | 23 | ||||||||||||
Other | 132 | - | 132 | - | ||||||||||||
Total | $ | 34,905 | 100 | % | $ | 38,446 | 100 | % | ||||||||
Long-term liabilities | $ | 17,246 | 49 | $ | 19,150 | 50 | ||||||||||
Partners' equity | 17,659 | 51 | 19,296 | 50 | ||||||||||||
Total | $ | 34,905 | 100 | % | $ | 38,446 | 100 | % | ||||||||
Working capital surplus of $27.5 million as of December 31, 2020 represented a $2.0 million decrease from December 31, 2019 due primarily to decreases in cash and equivalents and production accounts receivable and increases in accounts payable and accrued expenses offset somewhat by an increase in investments. The decrease in cash and equivalents is primarily the result of cash used in investing and financing activities during 2020, offset somewhat by cash provided by operating activities. The decrease in production accounts receivable is primarily the combined result of lower average natural gas and crude oil prices received and a decrease in natural gas volumes produced during the current receivable period as compared to the prior comparable period as well as the result of a payment from a third party operator for a significant prior period balance. The decrease in natural gas volumes produced is primarily associated with a decrease production reported by third party operators during the current receivable period as compared to the prior comparable period. The increase in accounts payable is primarily the result of an increase in payables associated with the disposal of various oil and gas properties, offset somewhat by a decrease in production and related other payables. The increase in accrued expenses is primarily the result of a balance held from the PPP Loan obtained in April 2020, offset somewhat by less current asset retirement obligations at December 31, 2020 as compared to the prior comparable reporting date. The increase in investments is primarily the result of additional purchases of shares in a mutual fund that invests primarily in investment grade, short-term fixed and floating rate debt securities.
Property and equipment of $7.3 million as of December 31, 2020 represented a $1.5 million decrease from December 31, 2019 due primarily to $1.0 million of depreciation, depletion and amortization (“DD&A”) recognized during 2020 in addition to $553,000 associated with disposals of oil and gas properties.
Long-term liabilities of $17.2 million as of December 31, 2020 represented a decrease of $1.9 million from December 31, 2019 due primarily to a decrease in asset retirement obligations, offset somewhat by an increase in operational advances. The decrease in asset retirement obligations is primarily the result of asset retirement obligations being settled during 2020 and less asset retirement obligations being classified as current liabilities at December 31, 2020 as compared to the prior comparable reporting date, offset somewhat by the effect of 2020 accretion expense recognized to adjust the liabilities to their present value at December 31, 2020. The increase in operational advances is primarily the result of additional deposits collected from third party joint venture partners for their share of estimated future plugging and abandonment costs.
In April 2020, EEI received a PPP Loan of approximately $327,000. The PPP Loan was forgiven by the SBA in February 2021. Prior to receiving the PPP Loan, the Company had not held a credit facility with a bank since 2003, nor has it had any additional borrowings since receipt of the PPP Loan. The Company expects to have more than $200,000 of cash available to fund the Repurchase Right in 2021. As a result, additional financing will not likely be required in the event the Repurchase Right is fully subscribed. In the event that additional financing is necessary to fund the Repurchase Right, the Company would likely enter into a commitment for a new line of credit. The Company cannot provide any assurance as to the availability of any such line of credit under current market conditions. As further discussed below, the Company expects existing cash and equivalents and cash flows from ongoing operations to meet short-term cash requirements.
Cash Flows from Operating, Investing and Financing Activities
Cash provided by the Company’s operating activities and existing cash and equivalents were used in investing and financing activities during 2020 and 2019. The following table summarizes the Company’s Consolidated Statements of Cash Flows for the years ended December 31, 2020 and 2019:
2020 | 2019 | |||||||||||||||
Dollars | % | Dollars | % | |||||||||||||
(Amounts in Thousands) | (Amounts in Thousands) | |||||||||||||||
Operating Activities: | ||||||||||||||||
Net income (loss) before adjustments | $ | (203 | ) | (11 | )% | $ | 2,356 | 47 | % | |||||||
Adjustments | 390 | 21 | 1,249 | 25 | ||||||||||||
Cash flow from operations before working capital changes | 187 | 10 | 3,605 | 72 | ||||||||||||
Changes in working capital | 159 | 9 | 614 | 12 | ||||||||||||
Net cash provided by operating activities | 346 | 19 | 4,219 | 84 | ||||||||||||
Investing Activities: | ||||||||||||||||
Purchase of investments | (264 | ) | (14 | ) | (2,975 | ) | (59 | ) | ||||||||
Purchase of property and equipment | (118 | ) | (7 | ) | (324 | ) | (6 | ) | ||||||||
Proceeds from disposal of property and equipment | 104 | 6 | 39 | 1 | ||||||||||||
Settlement of disposal of property and equipment | (469 | ) | (25 | ) | - | - | ||||||||||
Net cash used in investing activities | (747 | ) | (40 | ) | (3,260 | ) | (64 | ) | ||||||||
Financing Activities: | ||||||||||||||||
Proceeds from loan | 327 | 18 | - | - | ||||||||||||
Distributions | (1,390 | ) | (75 | ) | (1,685 | ) | (34 | ) | ||||||||
Repurchase of Units | (70 | ) | (4 | ) | (129 | ) | (3 | ) | ||||||||
Proceeds from options exercised | 26 | 1 | 45 | 1 | ||||||||||||
Net cash used in financing activities | (1,107 | ) | (60 | ) | (1,769 | ) | (36 | ) | ||||||||
Net change in cash and equivalents | $ | (1,508 | ) | (81 | )% | $ | (810 | ) | (16 | )% | ||||||
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 equivalents. |
As the above table indicates, the Company’s cash flow from operations before working capital changes of $187,000 represented 10% of total cash sources provided during 2020, and the Company’s cash flow from operations before working capital changes of $3.6 million represented 72% of total cash sources provided during 2019. The decrease in cash flow from operations before working capital changes in 2020, as compared to the prior comparable period, was primarily due to less crude oil and natural gas sales, net of decreased production costs and a decrease in operational advances collected during 2020 as compared to 2019. Changes in working capital other than cash and equivalents increased cash by $159,000 and $614,000 during 2020 and 2019, respectively. The $159,000 increase in cash resulting from changes in working capital other than cash and equivalents in 2020 was primarily the result of a decrease in production accounts receivable, offset somewhat by increases in other current assets and accrued expenses. The decrease in production accounts receivable is primarily the combined result of lower average natural gas and crude oil prices received and a decrease in natural gas volumes produced during the current receivable period as compared to the prior comparable period as well as the result of a payment from a third party operator for a significant prior period balance. The decrease in natural gas volumes produced is primarily associated with production reported by third party operators during the current receivable period as compared to the prior comparable period. The increase in other current assets was primarily related to additional receivables associated with EEI’s income taxes at December 31, 2020 as compared to the prior comparable reporting date. The increase in accrued expenses was primarily the result of the addition of the PPP Loan, offset somewhat by less asset retirement obligations being classified as current liabilities at December 31, 2020 as compared to the prior comparable reporting date.
The Company used cash in investing activities of $747,000 and $3.3 million in 2020 and 2019, respectively. The $2.5 million decrease in cash used in investing activities was primarily the result of less cash used for purchases of investments and property and equipment made in 2020 as compared to those made in the prior comparable period, offset somewhat by cash used for the settlement of disposal of property and equipment paid in 2020 as compared to the prior comparable period.
The Company used cash in financing activities of $1.1 million and $1.8 million in 2020 and 2019, respectively. The $700,000 decrease in cash used in financing activities was primarily the result of proceeds received by EEI from the PPP Loan in 2020 and less cash distributions paid to Unitholders in 2020 as compared to cash distributions paid in the prior comparable period. EEI did not receive any loan proceeds in 2019.
The Company’s ending cash and equivalents balance of $10.2 million at December 31, 2020, as well as on-going monthly operating cash flows, should be adequate to meet short-term cash requirements. The Company intends to make future distributions as cash flows warrant.
The Company did not participate in the drilling of any new oil and gas properties during 2020. The Company’s share of proved gas reserves decreased by 7.3 BCF, or 56%, between December 31, 2019 and December 31, 2020, while proved oil reserves decreased by 94,000 BBLS, or 29%, between December 31, 2019 and December 31, 2020. The Standardized Measure of Discounted Future Net Cash Flows of the Company’s reserves decreased by $6.1 million between December 31, 2019 and December 31, 2020. The primary reasons for this decrease were due to decreases in average natural gas and crude oil prices in 2020, as compared to the prior comparable period, and the related downward revisions in quantities of natural gas and crude oil reserves between December 31, 2019 and 2020.
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 accepted an aggregate of 86,388 of its Units of limited partnership interest at a price of $1.50 per Unit pursuant to the terms of the Company’s Offer to Purchase dated April 30, 2019. The Company accepted an aggregate of 81,039 of its Units of limited partnership interest at a price of $0.86 per Unit pursuant to the terms of the Company’s Offer to Purchase dated April 30, 2020. The Company has determined that the price associated with the 2021 Repurchase Right, based upon the December 31, 2020 calculation, is estimated to be $0.36 per Unit.
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, 2020 and 2019. 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:
Year Ended December 31, | ||||||||
2020 | 2019 | |||||||
Revenues: | ||||||||
Crude oil and natural gas sales | 89 | % | 93 | % | ||||
Well management and operating | 11 | 7 | ||||||
Other | - | - | ||||||
Total revenues | 100 | 100 | ||||||
Expenses: | ||||||||
Production costs | 51 | 33 | ||||||
Well management and operating | 6 | 4 | ||||||
Depreciation, depletion and amortization | 26 | 8 | ||||||
Accretion expense | 6 | 3 | ||||||
General and administrative expense | 53 | 29 | ||||||
Total expenses | 142 | 77 | ||||||
Other income | 35 | 7 | ||||||
Income tax expense (benefit) | (2 | ) | - | |||||
Net income (loss) | (5 | )% | 30 | % | ||||
Revenues for the year ended December 31, 2020 decreased $4.0 million, or 51%, compared to the prior comparable period. This decrease was due primarily to a decrease in crude oil and natural gas sales during 2020 as compared to 2019.
Crude oil and natural gas sales decreased $3.9 million, or 53%, from 2019 to 2020. This decrease was the combined result of decreases in crude oil and natural gas volumes produced and lower average natural gas and crude oil prices received during 2020 as compared to 2019. The Company’s natural gas production decreased by 655,000 MCF, or 36%, while crude oil production decreased by 11,000 BBLS, or 26%, from 2019 to 2020. The primary reasons for the decrease in crude oil and natural gas volumes produced during 2020 as compared to 2019 are the result of more operated oil and gas properties being voluntarily shut-in during 2020 as compared to the prior comparable period and production decline associated with existing oil and gas properties. The average price received per MCF of natural gas decreased from $2.79 in 2019 to $1.85 in 2020. The average price received per BBL of crude oil decreased from $53.10 in 2019 to $38.94 in 2020. Natural gas sales accounted for 64% and 69% of total crude oil and natural gas sales in 2020 and 2019, respectively.
Production costs decreased $657,000, or 25%, from 2019 to 2020. The decrease is primarily the result of less costs recognized in association with third party operated properties and decreased costs associated with Company operated properties as more Company operated properties were voluntarily shut-in during 2020 as compared to the prior comparable period.
DD&A increased $370,000, or 62%, from 2019 to 2020. The increase is primarily the result of a decrease in natural gas and crude oil reserves as of the most recent valuation date, December 31, 2020, as compared to the prior valuation date, December 31, 2019. The decrease in natural gas and crude oil reserves from 2019 to 2020 was primarily the result of lower natural gas and crude oil prices used to value reserves at December 31, 2020 as compared to the prior valuation date. The lower natural gas and crude oil prices contributed to decreasing the average economic life of the Company’s oil and gas properties as compared to their prior valuation date. The effect of the decreased natural gas and crude oil reserves on DD&A was offset somewhat by less crude oil and natural gas volumes produced during 2020 as compared to the prior comparable period.
General and administrative expense decreased $243,000, or 11%, from 2019 to 2020. The decrease is primarily the result of less legal expenses and information technology costs incurred during 2020 as compared to the prior comparable period, as well as various cost-cutting measures management has implemented during 2020 in response to operational challenges caused by COVID-19.
The Company recognized other income of $1.3 million during 2020 as compared to $618,000 of other income recognized during the prior comparable period. Other income recognized during 2020 increased as compared to the prior comparable period primarily due to more gains recognized in association with disposals of oil and gas properties, offset somewhat by a decrease in investment income. The increase in gain on disposal of property and equipment was primarily the result of the Company having a substantial increase in the number of properties disposed during 2020 as compared to the prior comparable period. The decrease in investment income is primarily due to the Company having received less dividends and having recognized less unrealized gains on it investments during 2020 as compared to the prior comparable period.
The Company reported a net loss of $203,000 during 2020, as compared to reported net income of $2.4 million during the prior comparable period. The primary reasons for the decrease are decreases in crude oil and natural gas sales and an increase in DD&A, offset somewhat by decreases in production costs and general and administrative expenses and an increase in other income. Net loss represented 5% of total revenues during 2020, whereas net income represented 30% of total revenues during 2019.
Application of Critical Accounting Policies
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 $903,000 and $554,000 during 2020 and 2019, 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.
The Company evaluates its crude oil and natural gas properties for impairment annually. Generally accepted accounting principles require that long-lived assets (including crude oil and natural 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. The Company utilizes a field by field basis for assessing impairment of its oil and gas properties.
Management of the Company believes that the accounting estimate related to crude oil and natural gas property impairment is a “critical accounting estimate” because it is highly susceptible to change from year to year. It requires the use of crude oil and natural gas reserve estimates that are directly impacted by future crude oil and natural gas prices and future production volumes. Actual crude oil and natural gas prices have fluctuated in the past and are likely to do so in the future.
Crude oil and natural gas reserve estimates are prepared annually based on existing contractual arrangements and current market conditions. Any increases in estimated future cash flows would have no impact on the reported value of the Company’s crude oil and natural gas properties. In contrast, decreases in estimated future cash flows could require the recognition of an impairment loss equal to the difference between the estimated fair value of the crude oil and natural gas properties (determined by calculating the discounted value of the estimated future cash flows) and the carrying amount of the crude oil and natural gas properties. Any impairment loss would reduce property and equipment as well as total assets of the Company. An impairment loss would also decrease net income or increase net loss. The Company did not recognize any impairment during 2020 or 2019.
Asset Retirement Obligations. The Company follows generally accepted accounting principles which require the fair value of a liability for an asset retirement obligation to be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. For the Company, these obligations include dismantlement, plugging and abandonment of crude oil and natural gas wells and associated pipelines and equipment. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. The liability is accreted to its then present value each period, and the capitalized cost is depleted over the estimated useful life of the related asset.
The estimated liability is based on historical experience in dismantling, plugging and abandoning wells, estimated remaining lives of those wells based on reserves estimates, estimates of the external cost to dismantle, plug and abandon the wells in the future and federal and state regulatory requirements. The liability is discounted using an assumed credit-adjusted risk-free interest rate. Revisions to the liability will likely occur due to: changes in estimates of dismantlement, plugging and abandonment costs; changes in estimated remaining lives of the wells; changes in federal or state regulations regarding dismantlement, plugging and abandonment requirements; and other factors.
The Company has no assets legally restricted for purposes of settling its asset retirement obligations. The Company has determined that there are no other material retirement obligations associated with tangible long-lived assets.
Revenue Recognition. The Company recognizes crude oil and natural gas revenues when production is sold to a purchaser at a fixed or determinable price, when delivery has occurred, title and risk of loss have transferred to the purchaser, and collectability of the revenue is reasonably assured. The Company utilizes the sales method to account for gas production volume imbalances. Under this method, revenue is recognized only when gas is produced and sold on the Company’s behalf. The Company had no material gas imbalances at December 31, 2020 or 2019. Other revenues consist of miscellaneous revenues that are recognized at the time services are rendered, the Company has a contractual right to such revenue and collection is reasonably assured.
The Company participates (and may act as drilling contractor) with unaffiliated joint venture partners and employees in the drilling, development and operation of jointly owned crude oil and natural gas properties. Each owner, including the Company, has an undivided interest in the jointly owned properties. Generally, the joint venture partners and employees participate on the same drilling/development cost basis as the Company and, therefore, no revenue, expense or income is recognized on the drilling and development of the properties. The Company receives reimbursement of administrative costs associated with preparation, drilling and development of jointly owned crude oil and natural gas properties from certain joint venture partners. Accounts receivable from joint venture partners, if applicable, consist principally of drilling and development costs the Company has advanced or incurred on behalf of joint venture partners. Accounts payable to joint venture partners consist principally of deposits received from joint venture partners for drilling and development costs. The Company earns and receives monthly management and operating fees from certain joint venture partners and employees after the properties are completed and placed into production.
Commodity Pricing, Risk Management Activities and Inflation
The Company’s revenues, operating results, financial condition and ability to borrow funds or obtain additional capital depend substantially on prevailing prices for natural gas and crude oil. Declines in oil and gas prices may have a material adverse effect on the Company’s financial condition, liquidity, ability to obtain financing and operating results. Lower oil and gas prices also may reduce the amount of oil and gas that the Company can produce economically. Historically, oil and gas prices and markets have been volatile, with prices fluctuating widely, and they are likely to continue to be volatile. Depressed prices in the future would have a negative impact on the Company’s future financial results. In particular, substantially lower prices would significantly reduce revenue, potentially increase depletion, depreciation and amortization and potentially trigger impairment under generally accepted accounting principles.
The majority of the Company’s production is sold at market responsive prices. Generally, if the related commodity index falls, the price received for the Company’s production will also decline. Therefore, the amount of revenue the Company realizes is partially determined by factors beyond the Company’s control. However, management has in recent years and may in the future mitigate this price risk on a portion of the Company’s anticipated production by shutting-in wells during certain periods of depressed natural gas prices in an attempt to hold production for the future when natural gas prices have recovered. Under this arrangement, there is also a risk that natural gas prices will not recover and that the production of future volumes will be sold at the same depressed or potentially further depressed natural gas prices.
While the cost of operations is impacted by inflation, crude oil and natural gas prices have fluctuated in recent years and generally have not matched inflation. The price of crude oil in the Appalachian Basin has ranged from a low of $8.50 per barrel in December 1998 to a high of $138.00 in July 2008. As of March 10, 2021, $60.44 per barrel was the prevailing field price in the Appalachian Basin area, the Company’s principal area of operation.
Natural gas prices have also fluctuated more recently. The Company’s average price of natural gas during 2020 was $1.85 per MCF, a decrease of $0.94 per MCF as compared to 2019. The Company’s average price of natural gas during 2019 was $2.79 per MCF, an increase of $0.02 per MCF as compared to 2018. The Company’s average price of natural gas during 2018 was $2.77 per MCF, an increase of $0.05 per MCF as compared to 2017. The Company’s average price of natural gas during 2017 was $2.72 per MCF, an increase of $0.91 per MCF as compared to 2016. The price of natural gas in the Appalachian Basin increased significantly throughout 2005 and reached a high of more than $14.00 per MCF in October and November 2005. More recently, the price for Henry Hub Natural Gas on the NYMEX settled for the month of March 2021 at $2.85 per MCF and the regional basis adjustment settled for the month of March 2021 at $(0.56) per MCF, resulting in a net regional market price of $2.29 per MCF. Since 2002, the Company has had and continues to have multiple annual or biennial contracts with various purchasers of natural gas, which obligate certain purchasers to purchase, and the Company to sell and deliver, certain quantities of natural gas production from the Company’s oil and gas properties throughout the contract periods. Per the terms of one of the Company’s contracts with a gas purchaser, the Company may elect to lock-in specific volumes of natural gas to be sold in specific months at a mutually agreeable price. As of March 10, 2021, the Company did not have any significant quantities of natural gas volumes locked-in with any of its gas purchasers.
The Company’s sales are significantly impacted by pricing instability in the crude oil and natural gas markets. One of the consequences of these pricing fluctuations is evident in the Company’s Standardized Measure of Discounted Future Net Cash Flows, decreasing from $41.7 million at December 31, 2013 to $28.2 million at December 31, 2014, decreasing to $(8.2) million at December 31, 2015, decreasing to $(9.9) million at December 31, 2016, increasing to $(5.1) million at December 31, 2017, increasing to $4.4 million at December 31, 2018, decreasing to $(2.5) million at December 31, 2019 and decreasing to $(8.6) million at December 31, 2020.
The Company’s Standardized Measure of Discounted Future Net Cash Flows decreased by $6.1 million from December 31, 2019 to December 31, 2020. A reconciliation of the Changes in the Standardized Measure of Discounted Future Net Cash Flows is included in the Company’s consolidated financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not a required disclosure for a Smaller Reporting Company.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See attached pages F-1 to F-24.
EVERFLOW EASTERN PARTNERS, L. P.
2020 CONSOLIDATED FINANCIAL REPORT
EVERFLOW EASTERN PARTNERS, L. P.
CONTENTS
Report of Independent Registered Public Accounting Firm
To the Partners
Everflow Eastern Partners, L. P.
Canfield, Ohio
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Everflow Eastern Partners, L. P. and subsidiaries (the "Company") as of December 31, 2020 and 2019, and the related consolidated statements of operations, partners' equity, and cash flows for the years then ended and the related notes (collectively referred to as the "financial statements"). 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, 2020 and 2019, and the consolidated results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
Basis of Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates.
Accounting for Asset Retirement Obligations
Description of the Matter
At December 31, 2020, asset retirement obligations ("ARO") totaled approximately, $15 million. As further described in Note 1G, the Company’s ARO reflects the estimated present value of its obligations, for dismantlement, plugging and abandonment of crude oil and natural gas wells and associated pipelines and equipment. The estimation of the ARO requires significant judgment given the magnitude of the expected retirement costs and higher estimation uncertainty related to the timing of settlements and settlement amounts. Auditing the Company’s ARO is complex and highly judgmental because of the significant estimation required by management in determining the obligation. In particular, the estimate was sensitive to significant subjective assumptions such as retirement cost estimates and the estimated timing of settlements, which are both affected by expectations about future market and economic conditions.
How We Addressed the Matter in Our Audit
We obtained an understanding of the Company’s internal controls over its ARO estimation process, including management’s review of the significant assumptions that have a material effect on the determination of the obligations. To test the ARO, our audit procedures included, among others, assessing the significant assumptions and inputs used in the valuation, such as retirement cost estimates and timing of settlement assumptions. For example, we evaluated retirement cost estimates by comparing the Company’s estimates to its recent costs to retire wells. Additionally, we compared assumptions for the timing of settlements to production forecasts and tested the mathematical accuracy of the ARO calculations.
/s/ Maloney + Novotny LLC
We have served as the Company's auditor since 1988.
Cleveland, Ohio
March 25, 2021
EVERFLOW EASTERN PARTNERS, L. P.
December 31, 2020 and 2019
2020 | 2019 | |||||||
ASSETS | ||||||||
CURRENT ASSETS | ||||||||
Cash and equivalents | $ | 10,249,207 | $ | 11,757,057 | ||||
Investments | 20,372,652 | 20,107,580 | ||||||
Production accounts receivable | 815,419 | 1,208,634 | ||||||
Other | 79,950 | 8,150 | ||||||
Total current assets | 31,517,228 | 33,081,421 | ||||||
PROPERTY AND EQUIPMENT | ||||||||
Proved properties (successful efforts accounting method) | 142,912,812 | 174,633,910 | ||||||
Pipeline and support equipment | 719,988 | 791,756 | ||||||
Corporate and other | 2,093,989 | 2,090,250 | ||||||
Gross property and equipment | 145,726,789 | 177,515,916 | ||||||
Less accumulated depreciation, depletion, amortization and write down | 138,424,885 | 168,720,741 | ||||||
Net property and equipment | 7,301,904 | 8,795,175 | ||||||
OTHER ASSETS | 131,863 | 131,624 | ||||||
TOTAL ASSETS | $ | 38,950,995 | $ | 42,008,220 | ||||
The accompanying notes are an integral part of these financial statements.
EVERFLOW EASTERN PARTNERS, L. P.
CONSOLIDATED BALANCE SHEETS
December 31, 2020 and 2019
2020 | 2019 | |||||||
LIABILITIES AND PARTNERS' EQUITY | ||||||||
CURRENT LIABILITIES | ||||||||
Accounts payable | $ | 2,470,720 | $ | 2,136,590 | ||||
Accrued expenses | 1,575,935 | 1,425,492 | ||||||
Total current liabilities | 4,046,655 | 3,562,082 | ||||||
DEFERRED INCOME TAXES | 27,900 | 45,700 | ||||||
OPERATIONAL ADVANCES | 2,653,099 | 2,463,685 | ||||||
ASSET RETIREMENT OBLIGATIONS | 14,564,400 | 16,640,632 | ||||||
COMMITMENTS AND CONTINGENCIES | - | - | ||||||
LIMITED PARTNERS' EQUITY, SUBJECT TO REPURCHASE RIGHT | ||||||||
Authorized - 8,000,000 Units | ||||||||
Issued and outstanding - 5,441,928 and 5,492,967 Units, respectively | 17,442,684 | 19,063,258 | ||||||
GENERAL PARTNER'S EQUITY | 216,257 | 232,863 | ||||||
Total partners' equity | 17,658,941 | 19,296,121 | ||||||
TOTAL LIABILITIES AND PARTNERS' EQUITY | $ | 38,950,995 | $ | 42,008,220 | ||||
The accompanying notes are an integral part of these financial statements.
EVERFLOW EASTERN PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 2020 and 2019
2020 | 2019 | |||||||
REVENUES | ||||||||
Crude oil and natural gas sales | $ | 3,413,680 | $ | 7,298,279 | ||||
Well management and operating | 405,560 | 538,401 | ||||||
Other | 5,310 | 8,232 | ||||||
Total revenues | 3,824,550 | 7,844,912 | ||||||
DIRECT COST OF REVENUES | ||||||||
Production costs | 1,955,265 | 2,612,507 | ||||||
Well management and operating | 244,474 | 321,004 | ||||||
Depreciation, depletion and amortization | 970,115 | 600,180 | ||||||
Accretion expense | 243,468 | 273,023 | ||||||
Total direct cost of revenues | 3,413,322 | 3,806,714 | ||||||
GENERAL AND ADMINISTRATIVE EXPENSE | 2,024,011 | 2,267,337 | ||||||
Total cost of revenues | 5,437,333 | 6,074,051 | ||||||
INCOME (LOSS) FROM OPERATIONS | (1,612,783 | ) | 1,770,861 | |||||
OTHER INCOME | ||||||||
Investment income | 273,419 | 590,333 | ||||||
Gain on disposal of property and equipment | 1,067,994 | 27,775 | ||||||
Total other income | 1,341,413 | 618,108 | ||||||
INCOME (LOSS) BEFORE INCOME TAXES | (271,370 | ) | 2,388,969 | |||||
INCOME TAX EXPENSE (BENEFIT) | ||||||||
Current | (50,300 | ) | 28,292 | |||||
Deferred | (17,800 | ) | 5,000 | |||||
Total income tax expense (benefit) | (68,100 | ) | 33,292 | |||||
NET INCOME (LOSS) | $ | (203,270 | ) | $ | 2,355,677 | |||
Allocation of Partnership Net Income (Loss): | ||||||||
Limited Partners | $ | (200,806 | ) | $ | 2,327,392 | |||
General Partner | (2,464 | ) | 28,285 | |||||
Net income (loss) | $ | (203,270 | ) | $ | 2,355,677 | |||
Net income (loss) per unit | $ | (0.04 | ) | $ | 0.42 | |||
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, 2020 and 2019
2020 | 2019 | |||||||
PARTNERS' EQUITY – BEGINNING OF YEAR | $ | 19,296,121 | $ | 18,709,962 | ||||
Net income (loss) | (203,270 | ) | 2,355,677 | |||||
Cash distributions ($0.25 per unit in 2020 and $0.30 per unit in 2019) | (1,390,016 | ) | (1,684,936 | ) | ||||
Repurchase of Units | (69,694 | ) | (129,582 | ) | ||||
Options exercised | 25,800 | 45,000 | ||||||
PARTNERS' EQUITY – END OF YEAR | $ | 17,658,941 | $ | 19,296,121 | ||||
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, 2020 and 2019
2020 | 2019 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
Net income (loss) | $ | (203,270 | ) | $ | 2,355,677 | |||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation, depletion and amortization | 1,043,892 | 677,256 | ||||||
Accretion expense | 243,468 | 273,023 | ||||||
Unrealized gain on investments | (403 | ) | (69,208 | ) | ||||
Gain on disposal of property and equipment | (1,067,994 | ) | (27,775 | ) | ||||
Deferred income taxes | (17,800 | ) | 5,000 | |||||
Changes in assets and liabilities: | ||||||||
Production accounts receivable | 393,215 | 453,035 | ||||||
Other current assets | (71,800 | ) | 56,531 | |||||
Other assets | (239 | ) | (5,828 | ) | ||||
Accounts payable | (31,422 | ) | 266,705 | |||||
Accrued expenses | (130,709 | ) | (93,262 | ) | ||||
Operational advances | 189,414 | 328,053 | ||||||
Total adjustments | 549,622 | 1,863,530 | ||||||
Net cash provided by operating activities | 346,352 | 4,219,207 | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
Purchase of investments | (264,669 | ) | (2,974,236 | ) | ||||
Purchase of property and equipment | (117,890 | ) | (323,903 | ) | ||||
Proceeds from disposal of property and equipment | 104,269 | 38,639 | ||||||
Settlement of disposal of property and equipment | (468,934 | ) | - | |||||
Net cash used in investing activities | (747,224 | ) | (3,259,500 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
Proceeds from loan | 326,932 | - | ||||||
Distributions | (1,390,016 | ) | (1,684,936 | ) | ||||
Repurchase of Units | (69,694 | ) | (129,582 | ) | ||||
Proceeds from options exercised | 25,800 | 45,000 | ||||||
Net cash used in financing activities | (1,106,978 | ) | (1,769,518 | ) | ||||
NET CHANGE IN CASH AND EQUIVALENTS | (1,507,850 | ) | (809,811 | ) | ||||
CASH AND EQUIVALENTS AT BEGINNING OF YEAR | 11,757,057 | 12,566,868 | ||||||
CASH AND EQUIVALENTS AT END OF YEAR | $ | 10,249,207 | $ | 11,757,057 | ||||
Supplemental disclosures of cash flow information: | ||||||||
Cash paid during the year for income taxes | $ | 22,949 | $ | 40,215 | ||||
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 and Principles of Consolidation – Everflow Eastern Partners, L.P. ("Everflow") is a Delaware limited partnership which was organized in September 1990 to engage in the business of oil and gas acquisition, exploration, development and production. Everflow was formed to consolidate the business and crude oil and natural gas properties of Everflow Eastern, Inc. ("EEI") and subsidiaries and the crude oil and natural gas properties owned by certain limited partnership and working interest programs managed or sponsored by EEI ("EEI Programs" or the "Programs"). | |
Everflow Management Limited, LLC ("EML"), an Ohio limited liability company, is the general partner of Everflow and, as such, is authorized to perform all acts necessary or desirable to carry out the purposes and conduct of the business of Everflow. The members of EML include Everflow Management Corporation ("EMC"); two individuals who are officers and directors of EEI; one individual who is the Chairman of the Board of EEI; and one private limited liability company which also serves as Everflow’s largest limited partner. EMC is an Ohio corporation formed in September 1990 and is the managing member of EML. EML holds no assets other than its general partner's interest in Everflow, nor does it have any liabilities. In addition, EML has no separate operations or role apart from its role as Everflow's general partner. The consolidated financial statements include the accounts of Everflow, its wholly-owned subsidiaries, including EEI, and interests with joint venture partners (collectively, the "Company"), which are accounted for under the proportional consolidation method. All significant accounts and transactions between the consolidated entities have been eliminated. |
B. | Use of Estimates – The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America ("generally accepted accounting principles" or "GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates impacting the Company's financial statements include revenue and expense accruals and oil and gas reserve quantities. In the oil and gas industry, and especially as related to the Company's natural gas sales, the processing of actual transactions generally occurs 60-90 days after the month of delivery of its product. Consequently, accounts receivable from production and crude oil and natural gas sales are recorded using estimated production volumes and market or contract prices. Differences between estimated and actual amounts are recorded in subsequent periods’ financial results. As is typical in the oil and gas industry, a significant portion of the Company's accounts receivable from production and crude oil and natural gas sales consists of unbilled receivables. Oil and gas reserve quantities are utilized in the calculation of depreciation, depletion and amortization and the impairment of crude oil and natural gas properties and also impact the timing and costs associated with asset retirement obligations. The Company's estimates, especially those related to oil and gas reserves, could change in the near term and could significantly impact the Company's results of operations and financial position. |
EVERFLOW EASTERN PARTNERS, L. P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. | Organization and Summary of Significant Accounting Policies |
C. | Fair Value of Financial Instruments – The fair values of cash and equivalents, accounts receivable, 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 because they are considered to be at current market rates. In accordance with generally accepted accounting principles, rates available to the Company at the balance sheet dates are used to estimate the fair value of existing obligations. |
D. | Cash and Equivalents – The Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents. The Company maintains, at various financial institutions, cash and equivalents which may exceed federally insured amounts and which may, at times, significantly exceed balance sheet amounts due to float. Cash and equivalents include $2,653,099 and $2,463,685 of operational advances at December 31, 2020 and 2019, respectively, which are funds collected and held on behalf of joint venture partners for their anticipated share of future plugging and abandonment costs. Operational advances held on behalf of joint venture partners include approximately $720,200 and $390,000 held on behalf of employees, including officers and directors, at December 31, 2020 and 2019, respectively. |
E. | Investments – The Company’s investments are classified as available-for-sale securities and consist of shares held in a mutual fund that invests primarily in investment grade, U.S. dollar denominated short-term fixed and floating rate debt securities. The mutual fund seeks current income while seeking to maintain a low volatility of principal. |
The Financial Accounting Standards Board established a framework for measuring fair value and expands disclosures about fair value measurements by establishing a fair value hierarchy that prioritizes the inputs and defines valuation techniques used to measure fair value. The hierarchy gives highest priority to Level I inputs and lowest priority to Level III inputs. The three levels of the fair value hierarchy are described below:
Level I – Quoted prices are available in active markets for identical financial instruments as of the reporting date.
Level II – Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reporting date, and fair value is determined through the use of models or other valuation methodologies.
Level III – Pricing inputs are unobservable for the financial instrument and include situations where there is little, if any, market activity for the financial instrument. The inputs into the determination of fair value require significant management judgment or estimation.
The Company’s investments are carried at fair market value based on quoted prices available in active markets and are therefore classified as Level I.
EVERFLOW EASTERN PARTNERS, L. P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. | Organization and Summary of Significant Accounting Policies |
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, to drill and equip development wells and related asset retirement costs are 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 $903,226 and $553,953 during 2020 and 2019, 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. Generally accepted accounting principles require 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. The Company, at least annually, reviews its proved crude oil and natural gas properties (on a field by field basis) for impairment by comparing the carrying value of its properties to the properties' undiscounted estimated future net cash flows. Estimates of future crude oil and natural gas prices, operating costs, and production are utilized in determining undiscounted future net cash flows. The estimated future production of oil and gas reserves is based upon the Company's independent reserve engineer's estimate of proved reserves which includes assumptions regarding field decline rates and future prices and costs. For properties where the carrying value exceeds undiscounted future net cash flows, the Company recognizes as impairment the difference between the carrying value and fair market value of the properties. The Company determines fair market value, using the income approach, as the properties’ discounted estimated future net cash flows. The key assumptions above are not observable in the market and, therefore, the fair value of the oil and gas properties is classified as Level III. The Company did not write down any crude oil and natural gas properties during 2020 or 2019. |
EVERFLOW EASTERN PARTNERS, L. P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. | Organization and Summary of Significant Accounting Policies |
F. | Property and Equipment (Continued) | |
Pipeline and support equipment and other corporate property and equipment are recorded at cost and depreciated principally on the straight-line method over their estimated useful lives (pipeline and support equipment - 10 to 15 years, other corporate equipment - 3 to 7 years, building and improvements - 39 to 40 years). Depreciation on pipeline and support equipment amounted to $66,889 and $46,227 for the years ended December 31, 2020 and 2019, respectively. Depreciation on other corporate property and equipment, included in general and administrative expense, amounted to $73,777 and $77,076 for the years ended December 31, 2020 and 2019, 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. | Asset Retirement Obligations – Generally accepted accounting principles require the fair value of a liability for an asset retirement obligation to be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. For the Company, these obligations include dismantlement, plugging and abandonment of crude oil and natural gas wells and associated pipelines and equipment. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. The liability is accreted to its then present value each period, and the capitalized cost is depleted over the estimated useful life of the related asset. | |
The estimated liability is based on historical experience in dismantling, plugging and abandoning wells, estimated remaining lives of those wells based on reserves estimates, estimates of the external cost to dismantle, plug and abandon the wells in the future and federal and state regulatory requirements. The liability is discounted using an assumed credit-adjusted risk-free interest rate. Revisions to the liability will likely occur due to: changes in estimates of dismantlement, plugging and abandonment costs, changes in estimated remaining lives of the wells, changes in federal or state regulations regarding plugging and abandonment requirements, and other factors. Gain on disposal of property and equipment includes approximately $1,009,200 associated with non-cash settlements of asset retirement obligations during 2020. |
EVERFLOW EASTERN PARTNERS, L. P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. | Organization and Summary of Significant Accounting Policies |
G. | Asset Retirement Obligations (Continued) |
The schedule below is a reconciliation of the Company's liability for the years ended December 31:
2020 | 2019 | |||||||
Beginning of period | $ | 17,221,632 | $ | 17,003,486 | ||||
Liabilities incurred | 2,860 | 3,745 | ||||||
Liabilities settled | (2,472,560 | ) | (58,622 | ) | ||||
Accretion expense | 243,468 | 273,023 | ||||||
End of period | $ | 14,995,400 | $ | 17,221,632 | ||||
H. | Revenue Recognition – Revenues from contracts with customers are recognized when performance obligations are satisfied in accordance with contractual terms. | |
For the sale of crude oil and natural gas from operated properties, the Company generally considers each unit (BBL or MCF) to be a separate performance obligation. The transaction price may consist of fixed and variable consideration, in which the variable amount is determinable each production period and is recognized as revenue upon pickup/delivery of the crude oil or natural gas, which is the point in time that the customer obtains control of the crude oil or natural gas and the Company's performance obligation is satisfied. Crude oil and natural gas sales derived from third party operated wells are recognized under similar terms as sales of crude oil and natural gas from operated properties and revenue is recognized at a point in time when the product is delivered, the purchaser obtains control and the Company's performance obligation is satisfied. Crude oil and natural gas sales represent the Company's share of revenues, net of royalties and other revenue interests owned by other parties. When settling crude oil and natural gas on behalf of royalty owners or working interest owners, the Company is acting as an agent and thus reports the revenue on a net basis. Based on the Company's judgment, the Company's performance obligations have been satisfied and an unconditional right to consideration exists at December 31, 2020 and 2019, respectively; therefore, the Company recognized amounts due from contracts with customers as production accounts receivable within the Company’s consolidated balance sheets at December 31, 2020 and 2019, respectively. |
EVERFLOW EASTERN PARTNERS, L. P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. | Organization and Summary of Significant Accounting Policies |
H. | Revenue Recognition (Continued) | |
The Company utilizes the sales method to account for gas production volume imbalances. Under this method, revenue is recognized only when gas is produced and sold on the Company’s behalf. The Company had no material gas imbalances at December 31, 2020 and 2019. The Company frequently participates (and may act as drilling contractor) with affiliated and unaffiliated joint venture partners and certain employees, officers and directors in the drilling, development and operation of jointly owned oil and gas properties. Each owner, including the Company, has an undivided interest in the jointly owned properties. Generally, the joint venture partners, employees, officers and directors 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. Well management and operating revenues are derived from a variety of both verbal and written operating agreements with joint venture partners, and are recognized monthly as services are provided and properties are managed and operated. Other revenues consist of miscellaneous revenues that are recognized at the time services are rendered, the Company has a contractual right to such revenue and collection is reasonably assured. |
I. | 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, is allocated directly to its respective partners. The non-taxable status of the Programs and Everflow is the primary reconciling item between taxes computed at the Federal statutory rate and the effective tax rate in the consolidated statements of operations. The Company is not able to determine the net difference between the tax bases and the reported amounts of Everflow's assets and liabilities due to separate elections that were made by owners of the working interests and limited partnership interests that comprised the Programs. | |
EEI accounts for income taxes under generally accepted accounting principles, which require income taxes be provided for all items (as they relate to EEI) in the consolidated statements of operations regardless of the period when such items are reported for income tax purposes. Therefore, deferred tax assets and liabilities are recognized for temporary differences between the financial reporting basis and tax basis of certain EEI assets and liabilities. Deferred tax assets and liabilities are 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. Items giving rise to deferred taxes consist primarily of temporary differences arising from differences in financial reporting and tax reporting methods for EEI's proved properties and percentage depletion credits. The Company believes that it has appropriate support for any tax positions taken and, as such, does not have any uncertain tax positions that are material to the financial statements. |
EVERFLOW EASTERN PARTNERS, L. P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. | Organization and Summary of Significant Accounting Policies |
J. | Allocation of Income and Per Unit Data – Under the terms of the limited partnership agreement, initially 99% of revenues and costs were allocated to the Unitholders (the limited partners) and 1% of revenues and costs were allocated to the general partner. Such allocation has changed and may change in the future as Unitholders elect to exercise the Repurchase Right and select officers and employees elect to exercise options (See Note 3). |
Net income (loss) per limited partner Unit have been computed based on the weighted average number of Units outstanding during each year presented.
K. | Subsequent Event – In March 2021, the Company reached separate agreements with unaffiliated third parties to sell substantially all the Company’s interests in 34 oil and gas properties located in Eastern Ohio. The Company expects to recognize a gain on sale of assets of approximately $560,000 in association with the transaction. |
L. | New Accounting Standards – In June 2016, the Financial Accounting Standards Board issued Accounting Standards Update 2016-13, “Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”). ASU 2016-13 amends guidance on reporting credit losses for assets held at amortized cost basis and available for sale debt securities. For assets held at amortized cost basis, ASU 2016-13 eliminates the probable initial recognition threshold and requires entities to reflect their current estimate of all expected credit losses. The amendment affects loans, debt securities, trade receivables, net investments in leases, off-balance sheet credit exposures, reinsurance receivables and any other financial assets not excluded from it scope that have a contractual right to receive cash. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company adopted ASU 2016-13 on January 1, 2020 with no changes to its methodology, financial statements or disclosures. |
The Company has reviewed all other recently issued accounting standards in order to determine their effects, if any, on the consolidated financial statements. Based on that review, the Company believes that none of these standards will have a significant effect on current or future earnings or results of operations.
M. | Reclassifications – Certain prior period amounts have been reclassified to conform with the current period’s presentation. |
EVERFLOW EASTERN PARTNERS, L. P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2. | Current Liabilities |
The Company's accounts payable and accrued expenses consist of the following at December 31:
2020 | 2019 | |||||||
Accounts Payable: | ||||||||
Production and related other | $ | 1,638,704 | $ | 1,768,723 | ||||
Property and equipment disposal | 468,934 | - | ||||||
Other | 300,440 | 304,488 | ||||||
Joint venture partner deposits | 62,642 | 63,379 | ||||||
Total accounts payable | $ | 2,470,720 | $ | 2,136,590 | ||||
Accrued Expenses: | ||||||||
Payroll and retirement plan contributions | $ | 652,530 | $ | 651,856 | ||||
Current portion of asset retirement obligations | 431,000 | 581,000 | ||||||
Paycheck Protection Program loan | 326,932 | - | ||||||
Drilling | 96,419 | 96,419 | ||||||
Federal, state and local taxes | 36,154 | 35,917 | ||||||
Other | 32,900 | 60,300 | ||||||
Total accrued expenses | $ | 1,575,935 | $ | 1,425,492 | ||||
In March 2020, the Coronavirus Aid, Relief and Economic Security Act was enacted into law. The Paycheck Protection Program Flexibility Act (the “Flexibility Act”) was enacted into law in June 2020. Among several other economic stimulus benefits, these laws established the United States Small Business Administration’s Paycheck Protection Program (the “PPP”). In April 2020, EEI received a $326,932 unsecured PPP loan through a commercial bank (the “PPP Loan”). Provisions of the PPP allow the Company to apply for forgiveness of the PPP Loan provided the proceeds are used for covered expenditures and certain other requirements are satisfied. EEI applied for full forgiveness of the PPP Loan in January 2021. In February 2021, the United States Small Business Administration authorized full forgiveness of EEI’s PPP Loan.
Disposals of property and equipment reflect changes to accounts payable.
EVERFLOW EASTERN PARTNERS, L. P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3. | Partners' Equity |
Units represent limited partnership interests in Everflow. The Units are transferable subject only to the approval of any transfer by EML and to the laws governing the transfer of securities. The Units are not listed for trading on any securities exchange nor are they quoted in the automated quotation system of a registered securities association. However, Unitholders may have an opportunity to require Everflow to repurchase their Units pursuant to the Repurchase Right.
The partnership agreement provides that Everflow will repurchase for cash up to 10% of the then outstanding Units, to the extent Unitholders offer Units to Everflow for repurchase pursuant to the Repurchase Right. The Repurchase Right entitles any Unitholder, between May 1 and June 30 of each year, to notify Everflow that the Unitholder elects to exercise the Repurchase Right and have Everflow acquire certain or all Units. The price to be paid for any such Units is calculated based upon the audited financial statements of the Company as of December 31 of the year prior to the year in which the Repurchase Right is to be effective and independently prepared reserve reports. The price per Unit equals 66% of the adjusted book value of the Company allocable to the Units, divided by the number of Units outstanding at the beginning of the year in which the applicable Repurchase Right is to be effective less all interim cash distributions received by a Unitholder. The adjusted book value is calculated by adding partners' equity, the standardized measure of discounted future net cash flows and the tax effect included in the standardized measure and subtracting from that sum the carrying value of oil and gas properties (net of undeveloped lease costs). If more than 10% of the then outstanding Units are tendered during any period during which the Repurchase Right is to be effective, the investors' Units tendered shall be prorated for purposes of calculating the actual number of Units to be acquired during any such period. The price associated with the 2021 Repurchase Right, based upon the December 31, 2020 calculation, is estimated to be $0.36 per Unit.
In June 2020, the Company repurchased 81,039 Units pursuant to the Repurchase Right at a price of $0.86 per Unit. In June 2019, the Company repurchased 86,388 Units pursuant to the Repurchase Right at a price of $1.50 per Unit. In June 2018, the Company repurchased 68,261 Units pursuant to the Repurchase Right at a price of $0.11 per Unit.
The Company has an Option Repurchase Plan (the "Option Plan") which permits the grant of options to repurchase certain Units to select officers and employees (the "Option Plan Participants"). The purpose of the Option Plan is to assist the Company in attracting and retaining officers and other key employees and to enable those individuals to acquire or increase their ownership interest in the Company in order to encourage them to promote the growth and profitability of the Company. The Option Plan is designed to align directly the financial interests of the Option Plan Participants with the financial interests of the Unitholders. The Company granted 30,000 options to officers and certain key employees in June 2020, 2019 and 2018, respectively. All options granted were exercised on the same date.
All Units repurchased pursuant to the Repurchase Right are retired except for those Units issued through the exercise of options pursuant to the Option Plan. There were 5,441,928, 5,492,967 and 5,549,355 outstanding Units following the Company’s repurchase of Units and issuance of options in June 2020, 2019 and 2018, respectively. There were no instruments outstanding at December 31, 2020 or 2019 that would potentially dilute net income per Unit.
EVERFLOW EASTERN PARTNERS, L. P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4. | 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 defined minimum age and term of service requirements (the “Defined Contribution Plan”, or the “DC Plan”). The Company makes safe harbor contributions and matches employees' contributions to the Defined Contribution Plan as annually determined by EMC's Board of Directors. Additionally, the DC Plan has a profit sharing component which provides for contributions to the DC Plan at the discretion of EMC's Board of Directors. Amounts contributed to the DC Plan vest immediately. The Company's total contributions to the Defined Contribution Plan amounted to approximately $187,300 and $190,900 for the years ended December 31, 2020 and 2019, respectively.
Note 5. | Business Segments, Risks and Major Customers |
The Company operates exclusively in Ohio and Pennsylvania of the United States in the acquisition, 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, borrowings or equity offerings. Various federal, state and governmental agencies are considering, and some have adopted, laws and regulations regarding environmental protection which could adversely affect the proposed business activities of the Company. The Company cannot predict what effect, if any, current and future regulations may have on the operations of the Company.
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.
Natural gas sales accounted for 64% and 69% of total crude oil and natural gas sales in 2020 and 2019, respectively. Approximately 80% and 79% of total crude oil and natural gas sales were derived from operated wells in 2020 and 2019, respectively. The Company had one significant purchaser of natural gas production from operated wells for the years ended December 31, 2020 and 2019 (the “Major Gas Purchaser”). Natural gas sales to the Major Gas Purchaser as a percentage of consolidated crude oil and natural gas sales were 45% and 50% in 2020 and 2019, respectively.
Note 5. | Business Segments, Risks and Major Customers (Continued) |
As of December 31, 2020, natural gas purchased by the Major Gas Purchaser covers production from approximately 570 gross operated wells. Production purchased by the Major Gas Purchaser from operated wells comprised approximately 70% and 71% of the Company's consolidated natural gas sales in 2020 and 2019, respectively.
The Company sells substantially all its crude oil production from operated wells to one purchaser (the “Major Oil Purchaser”).
The Company's production accounts receivable result from sales of natural gas and crude oil. A significant portion of the Company's production accounts receivable is due from the Company's major customers. The Company does not view such concentration as an unusual credit risk. However, the Company does not require collateral from its customers and could incur losses if its customers fail to pay. As a result of management's review of current and historical credit losses and economic activity, a valuation allowance was not deemed necessary at December 31, 2020 and 2019. The Company expects that the Major Gas Purchaser and Major Oil Purchaser will continue to be the only major customers for natural gas and crude oil production from its operated wells in 2021. Historically, the Company has not tracked the purchasers of natural gas and crude oil derived from third party operated wells which may have the same customers.
Note 6. | Commitments and Contingencies |
The Company has multiple contracts with the Major Gas Purchaser which obligate the Major Gas Purchaser to purchase, and the Company to sell and deliver, certain quantities of natural gas production from the Company’s oil and gas properties throughout the contract periods. Management believes the Company can meet its delivery commitments based on estimated production.
The Company is party to various legal proceedings and claims in the ordinary course of its business and believes the outcome of such matters will not have a material adverse effect on its consolidated financial position, results of operations, or liquidity.
In March 2020, the World Health Organization declared the outbreak of the novel strain of the coronavirus (“COVID-19”) a global pandemic. COVID-19 has led to global shutdowns as governments imposed regulations in efforts to control the spread of COVID-19. As a result, physical and economic uncertainties have arisen which have negatively impacted the Company’s operations, cash flows and financial position.
EVERFLOW EASTERN PARTNERS, L. P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7. | Supplemental Information Relating to Oil and Gas Producing Activities |
(Unaudited)
The following supplemental unaudited oil and gas information is required by generally accepted accounting principles.
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.
CAPITALIZED COSTS RELATING TO OIL AND GAS | ||||||||
PRODUCING ACTIVITIES | ||||||||
Years ended December 31, | ||||||||
2020 | 2019 | |||||||
Proved oil and gas properties | $ | 142,912,812 | $ | 174,633,910 | ||||
Pipeline and support equipment | 719,988 | 791,756 | ||||||
Gross capitalized costs | 143,632,800 | 175,425,666 | ||||||
Accumulated depreciation, depletion, amortization and write down | 137,211,641 | 167,541,207 | ||||||
Net capitalized costs | $ | 6,421,159 | $ | 7,884,459 | ||||
COSTS INCURRED IN OIL AND GAS PRODUCING ACTIVITIES | ||||||||
Years ended December 31, | ||||||||
2020 | 2019 | |||||||
Property acquisition costs | $ | - | $ | 23,018 | ||||
Development costs | - | 125,071 | ||||||
The Company had no purchases of producing oil and gas properties in 2020 or 2019.
EVERFLOW EASTERN PARTNERS, L. P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7. | Supplemental Information Relating to Oil and Gas Producing Activities |
(Unaudited) (Continued)
RESULTS OF OPERATIONS FOR OIL AND | ||||||||
GAS PRODUCING ACTIVITIES | ||||||||
Years ended December 31, | ||||||||
2020 | 2019 | |||||||
Crude oil and natural gas sales | $ | 3,413,680 | $ | 7,298,279 | ||||
Production costs | (1,955,265 | ) | (2,612,507 | ) | ||||
Depreciation, depletion and amortization | (970,115 | ) | (600,180 | ) | ||||
Accretion expense | (243,468 | ) | (273,023 | ) | ||||
Results of operations before income tax expense (benefit) | 244,832 | 3,812,569 | ||||||
Income tax expense (benefit) | (70,000 | ) | 30,000 | |||||
Results of operations for oil and gas producing activities (excluding corporate overhead and financing costs) | $ | 314,832 | $ | 3,782,569 | ||||
Income tax expense (benefit) was computed using statutory tax rates and reflects permanent differences that are reflected in the Company's consolidated income tax expense (benefit) for the year.
EVERFLOW EASTERN PARTNERS, L. P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7. | Supplemental Information Relating to Oil and Gas Producing Activities |
(Unaudited) (Continued)
ESTIMATED QUANTITIES OF PROVED OIL AND GAS RESERVES | ||||||||
Oil | Gas | |||||||
(BBLS) | (MCF) | |||||||
Balance, January 1, 2019 | 386,000 | 16,358,000 | ||||||
Extensions, discoveries and other additions | 20,000 | 95,000 | ||||||
Production | (42,000 | ) | (1,840,000 | ) | ||||
Revision of previous estimates | (35,000 | ) | (1,578,000 | ) | ||||
Balance, December 31, 2019 | 329,000 | 13,035,000 | ||||||
Production | (31,000 | ) | (1,185,000 | ) | ||||
Revision of previous estimates | (63,000 | ) | (6,100,000 | ) | ||||
Balance, December 31, 2020 | 235,000 | 5,750,000 | ||||||
The Company has not determined proved reserves associated with its proved and other undeveloped properties, including its deep property interests. The Company had less than 100 net proved undeveloped acres at December 31, 2020 and 2019, respectively. The net carrying cost of the proved undeveloped acreage that is included in proved properties amounted to approximately $33,300 at December 31, 2020 and 2019, respectively.
STANDARDIZED MEASURE OF DISCOUNTED FUTURE | ||||||||
NET CASH FLOWS | ||||||||
December 31, | ||||||||
2020 | 2019 | |||||||
(Thousands of Dollars) | ||||||||
Future cash inflows from sales of oil and gas | $ | 16,918 | $ | 45,488 | ||||
Future production and development costs | (11,227 | ) | (26,931 | ) | ||||
Future asset retirement obligations, net of salvage | (13,879 | ) | (15,828 | ) | ||||
Future income tax expense | (42 | ) | (170 | ) | ||||
Future net cash flows | (8,230 | ) | 2,559 | |||||
Effect of discounting future net cash flows at 10% per annum | (334 | ) | (5,061 | ) | ||||
Standardized measure of discounted future net cash flows | $ | (8,564 | ) | $ | (2,502 | ) | ||
EVERFLOW EASTERN PARTNERS, L. P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7. | Supplemental Information Relating to Oil and Gas Producing Activities |
(Unaudited) (Continued)
CHANGES IN THE STANDARDIZED MEASURE OF | ||||||||
DISCOUNTED FUTURE NET CASH FLOWS | ||||||||
Years Ended December 31, | ||||||||
2020 | 2019 | |||||||
(Thousands of Dollars) | ||||||||
Balance, beginning of year | $ | (2,502 | ) | $ | 4,444 | |||
Extensions, discoveries and other additions | - | 551 | ||||||
Revision of quantity estimates | (1,337 | ) | (1,650 | ) | ||||
Sales of crude oil and natural gas, net of production costs | (1,458 | ) | (4,686 | ) | ||||
Net change in income taxes | 79 | 88 | ||||||
Net changes in prices and production costs | (7,748 | ) | (5,161 | ) | ||||
Accretion of discount | (250 | ) | 444 | |||||
Other | 4,652 | 3,468 | ||||||
Balance, end of year | $ | (8,564 | ) | $ | (2,502 | ) | ||
There are numerous uncertainties inherent in estimating quantities of proved reserves and in projecting future rates of production and timing of development expenditures, including many factors beyond the control of the Company. The estimated future cash flows are determined based on crude oil and natural gas pricing parameters established by generally accepted accounting principles, adjusted for contract terms within contract periods, estimated production of proved crude oil and natural gas reserves, estimated future production and development costs of reserves and future retirement obligations (net of salvage), 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 generally accepted accounting principles and United States Securities and Exchange Commission reporting requirements. 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.
Average adjusted natural gas prices used in the estimation of proved reserves were $1.46 and $2.17 per MCF at December 31, 2020 and 2019, respectively, and the average adjusted crude oil prices used in the estimation of proved reserves were $36.30 and $52.14 per BBL at December 31, 2020 and 2019, respectively.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
As of the end of the period covered by this report, management performed, with the participation of our Chief Executive Officer and Chief Financial Officer, an evaluation of the effectiveness of our disclosure controls and procedures as defined in Exchange Act Rules 13a-15. Our disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosures. Based on the evaluation, management concluded that our disclosure controls and procedures were effective for the year ended December 31, 2020.
Management’s Report on Internal Control Over Financial Reporting
Management, including our Chief Executive Officer and Chief Financial Officer, is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Exchange Act Rules 13a-15). Internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Effective internal control can provide only reasonable assurance with respect to financial statement preparation and may not prevent or detect misstatements. Due to limitations on any control systems, no evaluation of controls can provide absolute assurance that all control issues have been detected. In addition, effective internal control at a point in time may become ineffective in future periods because of changes in conditions or due to deterioration in the degrees of compliance with our established policies and procedures. Management intends to continue to evaluate and improve internal controls over financial reporting as necessary and appropriate for the Company’s business, however management cannot provide assurance that such improvements will be sufficient to provide effective internal control over financial reporting.
Management is responsible for assessing the effectiveness of our internal controls over financial reporting. The Company’s management, including the Chief Executive Officer and the Chief Financial Officer, conducted an evaluation of the effectiveness of internal control over financial reporting as of December 31, 2020 based on the guidelines established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) (2013 Framework). Management utilized internal and external resources to assist in the various aspects of its assessment and compliance efforts. As a result of its assessment, management has concluded that the Company’s internal controls over financial reporting were effective as of December 31, 2020.
This Amendment No. 1 toAnnual Report on Form 10-K (this "Amendment No. 1") is being fileddoes not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to amendattestation by the Company’s independent registered public accounting firm pursuant to SEC rules that permit the Company to provide only management’s report in this Annual Report originally filedForm 10-K.
Changes in Internal Control Over Financial Reporting
Management, including its Chief Executive Officer and Chief Financial Officer, has concluded that there were no changes in the Company’s internal control over financial reporting during 2020 that have materially affected, or are reasonably likely to materially affect the Company’s internal control over financial reporting.
Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain Officers.
Effective March 24, 2021, Everflow Management Corporation, managing member of Everflow Management Limited, LLC, general partner of the Company, announced the following appointments and departure:
● | Appointment of Brian A. Staebler as President and Principal Executive Officer. |
● | Appointment of Michael W. Rathburn as Vice President, Secretary-Treasurer, Principal Financial and Accounting Officer and Director. |
● | Departure of William A. Siskovic as President and Principal Executive Officer and appointment to Vice President. |
See “DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE” for further discussion.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
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 24, 2021 are EMC; two individuals who are officers and directors of EEI, William A. Siskovic and Brian A. Staebler; one individual who serves as the Chairman of the Board of EEI, Thomas L. Korner; and one private New York limited liability company.
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 as a holder of interests in many of the same crude oil and natural gas properties that the Company operates. EEI also employs all personnel to conduct all of the Company’s business. 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 24, 2021 are as follows:
| Name | Age | Positions and Offices with EEI | Positions and Offices with EMC | ||||
| Thomas L. Korner | 67 | Chairman of the Board and director | Chairman of the Board and director | ||||
| Brian A. Staebler | 46 | President, Principal Executive Officer and director | President, Principal Executive Officer and director | ||||
| Michael W. Rathburn | 37 | Vice President, Secretary-Treasurer, Principal Financial and Accounting Officer and director | Vice President, Secretary-Treasurer, Principal Financial and Accounting Officer and director | ||||
| William A. Siskovic | 65 | Vice President officer and director | Vice President officer and director | ||||
| Peter H. Sykes | 64 | None | Director | ||||
All officers of EEI are employed by EEI to conduct business affairs of the Company. All directors of EEI are elected to serve by the Company, which is EEI’s sole shareholder. Directors of EEI received no additional compensation or fees for their services to EEI or their services on behalf of the Company in 2020 or 2019.
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 replacements.
As a result of the foregoing organizational structure, the Company does not have a nominating committee or a compensation committee. The Directors of EMC function as the Company’s audit committee. None of the members of EMC’s board are “independent.” The Company believes that its status as a limited partnership, the limited voting rights possessed by holders of limited partnership units, and the existence of contractual arrangements governing the selection of EMC’s directors and officers makes it appropriate for the Company not to maintain nominating or compensation committees. Each director of EMC participates in determining the compensation of the executive officers of the Company.
Thomas L. Korner was President and Principal Executive Officer of EEI and EMC from November 1995 to January 2010, when he resigned from these positions and was appointed as Chairman of the Board for both entities. Mr. Korner has also served as a director of EMC 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. In these roles, Mr. Korner has successfully led the Company since its formation. 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.
Peter H. Sykes has been a director of EMC since November 2008. Mr. Sykes is the founder and former President of Sykes Wealth Strategies Inc., which provided financial advice to individuals, endowments, partnerships and corporations, from 2005 to 2019. Mr. Sykes has also served as an account vice president with UBS Financial and Paine Webber, both financial services companies, from 1984 until 2005. Mr. Sykes’ experience as a senior executive in financial consulting, with partnerships and corporations in particular, provides the Company with a valuable resource and qualifies him as a director.
William A. Siskovic was President and Principal Executive Officer of EEI and EMC from January 2010 to March 2021, when he resigned from these positions to accept a reduced role as Vice President of Operations. He remains an officer and director of EEI and EMC. Mr. Siskovic had also previously served as Vice President of EEI from January 1989 to January 2010 and a Vice President, Secretary-Treasurer, Principal Financial and Accounting Officer and a director of EMC. He had served as Principal Financial and Accounting Officer and Secretary of EMC since November 1995 and in all other capacities since the formation of EMC in September 1990. Mr. Siskovic’s experience as a senior financial executive with EEI and EMC since the Company’s formation provides the Company with a valuable resource and qualifies him for his role as officer and director. He is now responsible for day-to-day operational efficiency 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. Mr. Siskovic has a Business Administration Degree in Accounting from Cleveland State University and currently serves on the Board of Trustees of the Children's Mental Health Circle of Friends Foundation, a nonprofit organization that serves a counseling center providing behavioral health care services.
Brian A. Staebler was appointed to serve as President and Principal Executive Officer and director of EEI and EMC in March 2021. He now supervises and oversees all aspects of the Company and EEI’s business, including oil and gas property acquisition, development, operation and marketing. He had previously served as Vice President, Secretary-Treasurer, Principal Financial Accounting Officer and director of EEI and EMC from January 2010 to March 2021. Prior to his role as Vice President, he had served as the Internal Audit Manager for the Company since September 2007, leading the Company’s efforts to become compliant with Sarbanes Oxley regulations. Prior to joining the Company, Mr. Staebler was a Senior Manager with Hausser + Taylor LLC, certified public accountants, and lead in-charge of the audit team that performed the annual audit and quarterly reviews of the Company as well as many other companies in the oil and gas industry. He had been a member of the audit team since December 1997. Mr. Staebler also served as a member of the firm’s oil and gas industry practice, covering an array of areas including attestation, financial reporting and consulting, and tax regulation. Mr. Staebler’s experience in working with the Company for 10 years as an independent auditor, financial reporting consultant and tax consultant, in addition to his experience as an employee of the Company working with Sarbanes Oxley regulations and compliance as it relates specifically to the Company, as well as his role as a senior financial executive since January 2010, qualifies him as an officer and director. Mr. Staebler has a Business Administration Degree in Accounting from the University of Toledo, is an active Certified Public Accountant licensed by the Accountancy Board of Ohio, and is a current member of the American Institute of Certified Public Accountants and the Ohio Society of Certified Public Accountants.
Michael W. Rathburn was appointed to serve as Vice President, Secretary-Treasurer, Principal Financial Accounting Officer and director of EEI and EMC in March 2021. Mr. Rathburn is responsible for the financial operations of the Company and EEI. He had served as the Production Revenue Manager for the Company since April 2019, responsible for overseeing all aspects of the Company’s operations over oil and gas revenues, expenses and production distributions. Prior to joining the Company, Mr. Rathburn was a Senior Manager with Maloney + Novotny, LLC, certified public accountants, and lead in-charge of the audit team that performed the annual audit and quarterly reviews of the Company as well as other companies in the oil and gas industry and public sector. He had been a member of the audit team since May 2007. Mr. Rathburn also served as a member of the firm’s oil and gas industry practice, accounting and attestation practice and SEC practice. While at the firm, Mr. Rathburn specialized in attestation, financial reporting (both public and private sectors), corporate taxation and business consulting. Mr. Rathburn’s experience in working with the Company for 12 years as an independent auditor, financial reporting and tax consultant, in addition to his experience as an employee of the Company working as the Production Revenue Manager, qualifies him as an officer, director and audit committee financial expert. Mr. Rathburn has a Business Administration Degree in Accounting from Miami University, is an active Certified Public Accountant licensed by the Accountancy Board of Ohio and is a current member of the American Institute of Certified Public Accountants and the Ohio Society of Certified Public Accountants.
Audit Committee
EMC is the managing general partner of the Company. The directors and officers of EMC serve as the Company’s audit committee as specified in section 3(a)(58)(B) of the Exchange Act. Michael W. Rathburn, who is not independent, has been designated the Company’s audit committee financial expert.
REPORT OF THE AUDIT COMMITTEE
The Audit Committee oversees the Company’s financial reporting process on behalf of the Board of Directors of Everflow Management Corporation, the managing general partner of Everflow Management Limited, LLC, the general partner of the Company. Management has the primary responsibility for the financial statements and the reporting process, including the systems of internal controls. The independent registered public accountants are responsible for expressing an opinion on the conformity of those audited financial statements with accounting principles generally accepted in the United States.
We have discussed with the independent registered public accountants of the Company, Maloney + Novotny LLC, the matters that independent registered public accounting firms must communicate to audit committees under Public Company Accounting Oversight Board (the “PCAOB”) requirements, which includes a review of the results of the independent registered public accountant’s examination of the Company’s financial statements and related processes.
We have received and reviewed written disclosures and the letter from Maloney + Novotny LLC, which is required by applicable rules of the PCAOB, and we have discussed with Maloney + Novotny LLC their independence under such standards. We have concluded that the independent registered public accountants are independent from the Company and its management.
Based on our review and discussions referred to above, we have recommended to the Board of Directors that the audited financial statements of the Company be included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, for filing with the Securities and Exchange Commission on March 27, 2019, to correct a unit error in the interactive data exhibits made by our filing agent. No other changes have been made to the Annual Report.Commission.
Respectfully submitted by the members of the Audit Committee:
Brian A. Staebler (Chairman)
William A. Siskovic
Thomas L. Korner
Peter H. Sykes
Michael W. Rathburn
Code of Ethics. The Company has adopted a Code of Ethics that applies to the Company’s principal executive officer, principal financial officer, principal accounting officer, or persons performing similar functions. The Code of Ethics is included as Exhibit 14.1 to this Annual Report on Form 10-K.
A copy of the Code of Ethics will be provided upon written request.
Section 16(a) Beneficial Ownership Reporting Compliance. Section 16(a) of the Securities Exchange Act requires the Company’s officers and directors, and persons who own more than 10% of a registered class of the Company’s equity securities to file reports of ownership and changes in ownership with the SEC. Officers, directors and greater than 10% owners 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 all required Section 16(a) filings for fiscal year 2020 were timely made.
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 by EEI. The compensation described below represents all compensation from EEI.
Overview of 2020 Executive Compensation Components
Components of executive compensation in the 2020 fiscal year for the executive officers of EMC and EEI include the following:
● | base salary |
● | annual cash bonuses |
● | retirement and other benefits |
Base Salary
The base salary of the executive officers is intended to provide fixed compensation for the performance of core duties. In determining appropriate salary levels, consideration is given to the level and scope of responsibility, experience, and Company and individual performance. The base salaries paid during fiscal 2020 are shown in the Summary Compensation Table appearing further below in this Item 11.
Annual Cash Bonuses
The annual bonus of the executive officers is intended to supplement the fixed compensation provided in the base salary to recognize an individual’s performance in a fiscal year. Payment with respect to any cash bonus is contingent upon the satisfaction of objective and subjective performance criteria. The annual cash bonus is determined at the end of each fiscal year. The amount is awarded in the first fiscal quarter following the end of each fiscal year.
Executive officers are provided an annual cash bonus each year based on the achievement of certain financial and non-financial performance objectives during the previous fiscal year. Annual cash bonuses are based on a percentage of the executive’s base salary. For 2020, the Board of Directors set a range of these bonuses between 100% and 160% of the executive’s base salary, based on the Company achieving specified financial and non-financial performance objectives. In 2020, the financial performance objectives that were used for determining financial performance-based cash awards were asset management, profitability and overall company stability. In 2020, the non-financial performance objectives that were used for determining non-financial performance based cash awards were corporate governance and adherence to policies and procedures as well as other factors that vary depending on responsibilities.
The 2021 target annual cash bonus awards for executive officers are established as a percentage of the executive’s base salary. These target amounts range between 50% and 160% of base salary. These target amounts were determined considering executive pay at companies of comparable size. The Board of Directors believes it is important that these target and maximum payout levels are aligned with the Company’s long-term strategic plan and the Company’s expectation of future financial performance.
Retirement and Other Benefits
The executive officers are entitled to the same benefits coverage as other employees such as health insurance, life and disability insurance, participation in the Company’s 401(k) plan, and the reimbursement of ordinary and reasonable business expenses. The executive officers are also provided with additional supplementary life insurance and a Company owned vehicle.
The Company has an Option Repurchase Plan under which the Company may grant options to repurchase Units acquired by the Company as part of the Repurchase Right to eligible officers and employees. The Company granted a total of 20,000 options to executive officers in 2020 and 2019, respectively, all of which were exercised immediately.
The Company does not currently offer any deferred compensation program, supplemental executive retirement plan or any financial planning services for executive officers.
The following table sets forth information concerning the annual compensation for services in all capacities to the Company for the fiscal years ended December 31, 2020 and 2019, of those persons who were at December 31, 2020: (i) the Principal Executive Officer of EMC and EEI; and (ii) the Principal Financial Officer of EMC and EEI. The Principal Executive Officer and Principal Financial Officer are hereinafter referred to collectively as the “Named Executive Officers.”
| SUMMARY COMPENSATION TABLE | ||||||||||||||||||
Annual Compensation | ||||||||||||||||||
Other | ||||||||||||||||||
Name and Principal Position | Year | Salary | Bonus | Compensation(1) | Total | |||||||||||||
William A. Siskovic, President and Principal Executive Officer | 2020 | $ | 155,600 | $ | 197,000 | $ | 47,700 | (2) | $ | 400,300 | ||||||||
| 2019 | $ | 145,400 | $ | 195,000 | $ | 52,600 | (2) | $ | 393,000 | ||||||||
| ||||||||||||||||||
Brian A. Staebler, Vice President and Principal Financial and Accounting Officer | 2020 | $ | 140,600 | $ | 152,000 | $ | 43,900 | (3) | $ | 336,500 | ||||||||
| 2019 | $ | 132,700 | $ | 150,000 | $ | 46,500 | (3) | $ | 329,200 | ||||||||
No Named Executive Officer received personal benefits or perquisites during 2020 or 2019 in excess of $10,000.
(1) | Includes amounts contributed under the Company’s Defined Contribution Plan in the form of employer-matched contributions and profit sharing contributions on behalf of the executive officers, and amounts considered taxable wages with respect to personal use of a Company vehicle, the Company’s Group Term Life Insurance Plan, and additional supplemental life insurance. Additional terms of the Defined Contribution Plan are described in the section entitled “Retirement Plans” appearing later in this Item 11. |
(2) | During fiscal years ended December 31, 2020 and 2019, includes $21,500 and $28,200, respectively, contributed as profit sharing to the Defined Contribution Plan, $19,200 and $16,800 contributed as matching contributions to the Defined Contribution Plan, $700 and $1,300, respectively, considered taxable wages with respect to personal use of a Company vehicle, and $6,300 considered taxable wages with respect to the Company’s Group Term Life Insurance Plan and additional supplemental life insurance. |
(3) | During fiscal years ended December 31, 2020 and 2019, includes $23,400 and $28,200, respectively, contributed as profit sharing to the Defined Contribution Plan, $16,800 and $13,800, respectively, contributed as matching contributions to the Defined Contribution Plan, $1,900 and $2,600 considered taxable wages with respect to personal use of a Company vehicle, and $1,800 and $1,900 considered taxable wages with respect to the Company’s Group Term Life Insurance Plan and additional supplemental life insurance. |
None of the Named Executive Officers has an employment agreement with the Company or EEI.
Outstanding Equity Awards
The Company granted a total of 20,000 options to executive officers in 2020 and 2019, respectively, all of which were exercised immediately. There were no outstanding unexercised options as of December 31, 2020 or 2019.
Retirement Plans
The Company has a defined contribution plan pursuant to section 401(k) of the Internal Revenue Code for all employees, including officers, who have reached the age of 21 and completed one year of service (the “Defined Contribution Plan”, or the “DC Plan”). The Company makes safe harbor contributions and matches employees' contributions to the Defined Contribution Plan as annually determined by EMC's board of directors. Additionally, the DC Plan has a profit sharing component which provides for contributions to the DC Plan at the discretion of EMC's board of directors. Amounts contributed to the DC Plan vest immediately.
The Defined Contribution Plan is further described in Note 4 of the Company’s consolidated financial statements included herein.
Director Compensation
Thomas L. Korner, William A. Siskovic, Brian A. Staebler and Peter H. Sykes did not receive any additional compensation for their service as Directors during 2020 or 2019.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The General Partner is a limited liability company of which EMC, an Ohio corporation, is the managing member. The members of the General Partner as of March 24, 2021 are EMC; two individuals who are officers and directors of EEI, William A. Siskovic and Brian A. Staebler; one individual who serves as the Chairman of the Board of EEI, Thomas L. Korner; and one private New York limited liability company. The General Partner of the Company owns a 1.22% interest in the Company.
The following table sets forth certain information with respect to the number of Units beneficially owned as of March 24, 2021 by each person known to the management of the Company to own beneficially more than 5% of the outstanding Units; and by each director and officer of EMC. The table also sets forth (i) the ownership interests of the General Partner and (ii) the ownership of EMC.
| BENEFICIAL OWNERSHIP OF UNITS IN THE COMPANY, | ||||||||||||||||
| EVERFLOW MANAGEMENT LIMITED, LLC AND EMC | ||||||||||||||||
Percentage | ||||||||||||||||
Interest in | ||||||||||||||||
Percentage | Everflow | Percentage | ||||||||||||||
Units in | of Units in | Management | Interest in | |||||||||||||
Name of Holder | Company | Company (1) | Limited, LLC (2) | EMC | ||||||||||||
Directors and Executive Officers | ||||||||||||||||
William A. Siskovic (officer and director of EMC) | 116,767 | 2.15 | 18.18 | 18.18 | ||||||||||||
Peter H. Sykes (3) (director of EMC) | 80,902 | 1.49 | - | - | ||||||||||||
Thomas L. Korner (Chairman of the Board & director of EMC) | 65,135 | 1.20 | 18.18 | 18.18 | ||||||||||||
Brian A. Staebler (officer and director of EMC) | 46,922 | 0.86 | 9.09 | 9.09 | ||||||||||||
Michael W. Rathburn (officer and director of EMC) | 14,399 | 0.26 | - | - | ||||||||||||
| 324,125 | 5.96 | 45.45 | 45.45 | |||||||||||||
Other Beneficial Owners of >5% of the Company | ||||||||||||||||
Catherine S. Massie (4) | 837,674 | 15.39 | 54.55 | 54.55 | ||||||||||||
| 1,161,799 | 21.35 | 100.00 | 100.00 | |||||||||||||
(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 1.22% 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 80,902 Units held by PHS Associates, a New York limited partnership owned by the family of Peter H. Sykes. |
(4) | Includes 729,805 Units, or 13.41% of the Company’s outstanding Units, held by Sykes Associates, LLC, a New York limited liability company located at 27 Wexford Glen, Pittsford, NY 14534, of which Catherine S. Massie is co-manager, and 107,869 Units, or 1.98% of the Company’s outstanding Units, held by CSM Associates, a New York limited partnership owned by the family of Catherine S. Massie. DFS Associates, a New York limited partnership owned by the family of David F. Sykes, owns an additional 80,902 Units, or 1.49% of the Company’s outstanding Units. David F. Sykes is also co-manager of Sykes Associates, LLC. Neither Catherine S. Massie nor David F. Sykes are officers or directors of EMC. |
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
In the past, certain officers, directors and Unitholders who beneficially own more than 10% of the Company have invested in crude oil and natural gas programs sponsored by EEI on the same terms as other unrelated investors in such programs. 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 drill sites on an equal basis with the Company or the particular drilling program acquiring such drill sites, 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 other unrelated investors in such programs. Prior to the Sarbanes-Oxley Act of 2002, EEI loaned the officers of the Company the funds necessary to participate in the drilling and development of such wells. The Company ceased making these loans in compliance with the Sarbanes-Oxley Act of 2002.
Certain officers and directors of EMC own crude oil and natural 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. William A. Siskovic, Thomas L. Korner and Brian A. Staebler did not make any investments in crude oil and natural gas properties and pipelines, including deposits for projects scheduled to commence in the subsequent year, during 2020. William A. Siskovic, Thomas L. Korner and Brian A. Staebler each made investments in crude oil and natural gas properties and pipelines, including deposits for projects scheduled to commence in the subsequent year, during 2019 in the amount of $8,900.
As a result of its organizational structure, the Company does not have a nominating committee or a compensation committee. The Directors of EMC function as the Company’s audit committee. None of the members of EMC’s board are “independent” under the current independence standards of Rule 5605(a)(2) of the Marketplace Rules of The NASDAQ Stock Market. The Company believes that its status as a limited partnership, the limited voting rights possessed by holders of limited partnership units, and the existence of contractual arrangements governing the selection of EMC’s directors and officers makes it appropriate for the Company not to maintain nominating or compensation committees.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Maloney + Novotny LLC served as the Company’s independent auditor for the years ended December 31, 2020 and 2019. The following is a summary of the fees billed to the Company by Maloney + Novotny LLC for professional services rendered during the years ended December 31, 2020 and 2019, respectively.
December 31, | ||||||||
2020 | 2019 | |||||||
Audit fees | $ | 169,400 | $ | 170,000 | ||||
Audit related fees | - | - | ||||||
Tax fees | - | 5,100 | ||||||
All other fees | - | - | ||||||
Total | $ | 169,400 | $ | 175,100 | ||||
Audit fees include fees for the audit and quarterly reviews of the consolidated financial statements, assistance with and review of documents filed with the SEC, accounting and financial reporting consultations and research work necessary to comply with generally accepted auditing standards. Tax fees include fees for tax planning and tax advice.
The Company has a policy to assure the independence of its registered public accounting firm. Prior to each fiscal year, the audit committee receives a written report from its independent auditor describing the elements expected to be performed in the course of its audit of the Company’s financial statements for the coming year.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
| (a) | (1) | Financial Statements |
The following Consolidated Financial Statements of the Registrant and its subsidiaries are included in Part II, Item 8:
| Page(s) | ||
| Report of Independent Registered Public Accounting Firm | F-3 | |
| Consolidated Balance Sheets | F-5 | |
| Consolidated Statements of Operations | F-7 | |
| Consolidated Statements of Partners’ Equity | F-8 | |
| Consolidated Statements of Cash Flows | F-9 | |
| Notes to Consolidated Financial Statements | F-10 |
| (a) | (2) | Financial Statements Schedules |
All schedules for which provision is made in the applicable accounting regulation of the SEC 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.
(b) | Exhibits required by Item 601 of Regulation S-K |
Exhibits required to be filed by the Company pursuant to Item 601 of Regulation S-K are contained in the Exhibits listed under Item 15(a)(3).
(c) | Financial Statements Schedules required by Regulation S-X (17 CFR 210) |
All schedules for which provision is made in the applicable accounting regulation of the SEC are not required under the related instructions or are inapplicable, and therefore have been omitted.
None.
| Exhibit No. | Description | Description | ||
| 3.1 | Certificate of Limited Partnership of the Registrant dated September 13, 1990, as filed with the Delaware Secretary of State on September 14, 1990 | (1) | Certificate of Limited Partnership of the Registrant dated September 13, 1990, as filed with the Delaware Secretary of State on September 14, 1990 | (1) |
| 3.2 | (2) | Amended and Restated Agreement of Limited Partnership of the Registrant, dated as of February 10, 2010 | (2) | |
| 3.3 | General Partnership Agreement of Everflow Management Company | (1) | General Partnership Agreement of Everflow Management Company | (1) |
| 3.4 | Articles of Incorporation of Everflow Management Corporation | (1) | Articles of Incorporation of Everflow Management Corporation | (1) |
| 3.5 | Code of Regulations of Everflow Management Corporation | (1) | Code of Regulations of Everflow Management Corporation | (1) |
| 3.6 | (3) | Articles of Organization of Everflow Management Limited LLC | (3) | |
| 3.7 | Amended and Restated Operating Agreement of Everflow Management Limited, LLC dated December 31, 2008 | (4) | Amended and Restated Operating Agreement of Everflow Management Limited, LLC dated December 31, 2008 | (4) |
| 3.8 | (8) | Amendment No. 1 to Amended and Restated Agreement of Limited Partnership of Everflow Eastern Partners, L.P. | (8) | |
| 4.1 | Description of Securities | |||
| 10.1 | Shareholders Agreement for Everflow Management Corporation | (1) | Shareholders Agreement for Everflow Management Corporation | (1) |
| 10.2 | Operating facility lease dated October 3, 1995 between Everflow Eastern Partners, L.P. and A-1 Storage of Canfield, Ltd. | (5) | Operating facility lease dated October 3, 1995 between Everflow Eastern Partners, L.P. and A-1 Storage of Canfield, Ltd. | (5) |
| 14.1 | (9) | Code of Ethics | ||
| 21.1 | Subsidiaries of the Registrant | (6) | Subsidiaries of the Registrant | (6) |
| 31.1 | Certification of CEO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | (9) | Certification of CEO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| 31.2 | Certification of CFO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | (9) | Certification of CFO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| 32.1 | Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | (9) | Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
| 99.1 | (9) | Report of Wright & Company, Inc. dated February 1, 2021 concerning evaluation of oil and gas reserves. | ||
| 99.2 | (7) | Audit Committee Charter of Everflow Management Corporation | (7) | |
EXHIBIT INDEX
Exhibit No. | Description | |
101.INS | Instance Document | |
101.SCH | XBRL Taxonomy Extension Schema Document | |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | |
101.DEF | XBRL Taxonomy Extension Definition Document | |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document | |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document |
(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 Current Report on Form 8-K dated February 12, 2010 (File No. 0-19279). |
(3) | 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 (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, 2008 (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 third quarter ended September 30, 1995 (File No. 0-19279). |
(6) | 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). |
(7) | Incorporated herein by reference to the appropriate exhibit to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2014 (File No. 0-19279). |
(8) | 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, 2018 (File No. 0-19279). |
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 | |
| By: | /s/ | Thomas L Korner | Director | March | |
| By: | /s/ Brian A. Staebler | President, Principal Executive Officer and Director | March 25, 2021 | ||
| Brian A. Staebler | |||||
| By: | /s/ | Vice President, Treasurer, Principal Financial and Accounting Officer and Director | March | ||
| Michael W. Rathburn | |||||
| By: | /s/ William A. Siskovic | Vice President | Officer and Director | March | |
| William A. Siskovic |
| ||||
| By: | /s/ | Director | March | ||