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EVERFLOW EASTERN PARTNERS LP - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

August 13, 2014

Liquidity and Capital Resources

The following table summarizes the Company's financial position at June 30, 2014 and December 31, 2013: June 30, 2014 December 31, 2013 Amount % Amount % (Amounts in Thousands) (Amounts in Thousands) Working capital $ 25,534 46 % $ 23,853 42 % Property and equipment (net) 30,205 54 32,011 57 Other 274 - 284 1 Total $ 56,013 100 % $ 56,148 100 % Deferred income taxes $ 204 - % $ 214 - % Long-term liabilities 8,206 15 7,976 14 Partners' equity 47,603 85 47,958 86 Total $ 56,013 100 % $ 56,148 100 %



Working capital of $25.5 million as of June 30, 2014 represented an increase of $1.7 million from December 31, 2013, due primarily to an increase in cash and equivalents and decrease in accrued expenses, offset somewhat by an increase to accounts payable. The increase in cash and equivalents is primarily the result of cash provided by operating activities exceeding cash used in investing and financing activities during the six months ended June 30, 2014. The decrease in accrued expenses is primarily the result of all payroll and retirement contributions accrued at December 31, 2013 having been paid during the six months ended June 30, 2014. The increase to accounts payable is primarily the result of timing associated with the receipt of invoices associated with production expenses.

The Company funds its operation with cash generated by operations and existing cash and equivalent balances. The Company has had no borrowings since 2003 and no principal indebtedness was outstanding as of August 10, 2014. The Company anticipates, although there is no assurance it will be able to, entering into a new credit agreement for the purpose, if necessary, of funding future annual repurchase rights. The Company has no current alternate financing plan, nor does it anticipate that one will be necessary. The Company used cash on hand to fund the payment of a distribution amounting to approximately $2.8 million in July 2014.

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The Company's cash flow from operations before the change in working capital was $4.6 million, a decrease of $528,000, or 10%, during the six months ended June 30, 2014, as compared to the comparable period in 2013. Changes in working capital from operations other than cash and equivalents decreased cash by $622,000 during the six months ended June 30, 2014 due primarily to a decrease in accrued expenses and an increase in accounts receivable, offset somewhat by an increase in accounts payable.

Cash flows provided by operating activities was $4.0 million for the six months ended June 30, 2014 and was used primarily to pay quarterly distributions.

Management of the Company believes cash flows and existing cash and equivalents should be sufficient to meet the current funding requirements of ongoing operations, capital investments to develop oil and gas properties, the repurchase of Units pursuant to the 2015 repurchase right and the payment of quarterly distributions.

The Company has multiple annual contracts with Dominion Field Services and Interstate Gas Supply (collectively, the "Major Gas Purchasers"), some of which were entered into during the six month period ended June 30, 2014, which obligate the Major Gas 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. The Company may elect to lock-in specific volumes of natural gas to be sold in specific months at a mutually agreeable price. The Company has elected to lock-in various monthly quantities of natural gas which total 1.62 BCF through October 2015 at various monthly weighted-average pricing provisions averaging $3.32 per MCF, net of estimated regional basis adjustments. Pricing provisions with the Major Gas Purchasers apply to certain fixed quantities on a monthly basis with excess monthly quantities being priced based on the current spot market price, plus or minus a current regional basis adjustment. The impact of these contracts on the Company's future oil and gas sales cannot fully be measured until actual production volumes and prices have been determined.

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Results of Operations

The following table and discussion is a review of the results of operations of the Company for the three and six month periods ended June 30, 2014 and 2013. All items in the table are calculated as a percentage of total revenues. This table should be read in conjunction with the discussions of each item below:

Three Months Six Months Ended June 30, Ended June 30, 2014 2013 2014 2013 Revenues: Crude oil and natural gas sales 96 % 96 % 96 % 96 % Well management and operating 4 4 4 4 Total revenues 100 % 100 % 100 % 100 % Expenses: Production costs 22 21 25 25 Well management and operating 2 2 2 2 Depreciation, depletion and amortization 22 33 23 32 Accretion expense 2 2 2 2 General and administrative 14 12 16 14 Total expenses 62 % 70 % 68 % 75 % Gain on sale of deep rights - - - 32 Income taxes - - - (6 ) Net income 38 % 30 % 32 % 51 %



Revenues for the three and six month periods ended June 30, 2014 decreased $207,000 and $744,000, respectively, as compared to the prior comparable periods. The decreases were primarily due to decreases in crude oil and natural gas sales during the three and six month periods ended June 30, 2014 as compared to the prior comparable periods.

Crude oil and natural gas sales decreased $202,000, or 5%, during the three months ended June 30, 2014 as compared to the prior comparable period. The decrease was primarily the result of lower natural gas volumes produced, offset somewhat by higher average crude oil prices received, during the three month period ended June 30, 2014 as compared to the prior comparable period. Crude oil and natural gas sales decreased $734,000, or 9%, during the six months ended June 30, 2014 as compared to the prior comparable period. The primary reasons for this decrease were lower natural gas and crude oil volumes produced, offset somewhat by higher average natural gas and crude oil prices received during the six month period ended June 30, 2014 as compared to the prior comparable period.

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Production costs decreased $175,000, or 8%, during the six month period ended June 30, 2014 as compared to the prior comparable period. This decrease was primarily the result of decreases to ad valorem taxes, repairs and maintenance expenses, and other expenses associated with third party operated properties incurred during the six month period ending June 30, 2014 as compared to the prior comparable period.

Depreciation, depletion and amortization ("DD&A") decreased $542,000, or 38%, during the three months ended June 30, 2014 as compared to the prior comparable period. DD&A decreased $914,000, or 33%, during the six months ended June 30, 2014 as compared to the prior comparable period. The primary reasons for these decreases are lower natural gas and crude oil volumes produced during the three and six month periods ended June 30, 2014 as compared to the prior comparable periods, and higher natural gas and crude oil reserves. The increase in natural gas and crude oil reserves is primarily the result of higher benchmark natural gas and crude oil prices indexed throughout 2013 as compared to benchmark prices indexed throughout 2012. The higher 2013 benchmark prices were used to value reserves at December 31, 2013, the most recent valuation date, which increased the average economic life of the Company's oil and gas properties as compared to December 31, 2012, the prior valuation date.

General and administrative expenses increased $68,000, or 13%, during the three months ended June 30, 2014 as compared to the prior comparable period. General and administrative expenses increased $47,000, or 4%, during the six months ended June 30, 2014 as compared to the prior comparable period. The primary reasons for these increases are additional legal costs incurred relative to protecting the Company's interests in the bankruptcy proceedings of a third party joint venture partner, as well as additional costs associated with the purchase and installation of new computer hardware and software for the Company's primary administrative office.

The Company recognized a gain on sale of deep rights of $2.8 million during the six month period ended June 30, 2013 in association with the sale of deep mineral interests in certain Ohio properties (the "Disposition"). The Disposition included no producing reserves, and the Company retained the rights to the shallow portion of all acreage sold.

All current income tax expenses incurred by the Company during the three and six month periods ended June 30, 2014 were offset by deferred income tax benefits. Income tax expenses were $559,000 during the six month period ended June 30, 2013, and consisted primarily of deferred income taxes associated with revenue recognized in conjunction with the Disposition.

The Company reported net income of $1.6 million during the three months ended June 30, 2014, an increase of $285,000, or 22%, from the prior comparable period amount of $1.3 million. The increase in net income is primarily the result of a decrease in DD&A, offset somewhat by a decrease in crude oil and natural gas sales. The Company reported net income of $2.5 million during the six months ended June 30, 2014, a decrease of $1.9 million, or 43%, from the prior comparable period amount of $4.4 million. The decrease in net income is primarily the result of decreases in gain on sale of deep rights and crude oil and natural gas sales, offset somewhat by decreases in production costs, DD&A, and income tax expenses. Net income represented 38% and 30% of total revenues during the three month periods ended June 30, 2014 and 2013, respectively, and 32% and 51% of total revenue during the six month periods ended June 30, 2014 and 2013, respectively.

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Critical Accounting Policies

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The critical accounting policies that affect the Company's more complex judgments and estimates are described in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2013.

Forward-Looking Statements

Except for historical financial information contained in this Form 10-Q, the statements made in this report are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended ("Exchange Act"). In addition, words such as "expects," "anticipate," "intends," "plans," "believes," "estimates," variations of such words and similar expressions are intended to identify forward-looking statements. Factors that may cause actual results to differ materially from those in the forward-looking statements include price fluctuations in the gas market in the Appalachian Basin, actual oil and gas production and the weather in the Northeast Ohio area and the ability to locate economically productive oil and gas prospects for development by the Company. In addition, any forward-looking statements speak only as of the date on which such statement is made and the Company does not undertake any obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise.


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Source: Edgar Glimpses


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