**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

----

 

**Form10-K**

 

**x****   Annual report underSection 13 or 15 (d) of the Securities Exchange Act of 1934**

** **

**for thefiscal year ended December 31, 2005**

** **

**o****   Transitionreport under Section 13 or 15 (d) of the Securities Exchange Act of 1934**

** **

**for thetransition period from             to             **

** **

**CommissionFile No. 01-32683**

 

----

 

**ENSOURCEENERGY INCOME FUND LP**

** **
| **Delaware**                             | ** ** | **20-2668934**      |
|------------------------------------------|------------|---------------------|
| (State or other jurisdiction of          |       | (I.R.S. Employer    |
| incorporation or organization)           |       | Identification No.) |
| ** **                               | ** ** | ** **          |
| **7500  San Felipe, Suite 440**          |       |                |
| **Houston,  Texas**                      |       | **77063**           |
| (Address of principal executive offices) |       | (Zip code)          |

 

**(713)659-1794**

Issuer’s TelephoneNumber, Including Area Code

 

Securitiesregistered pursuant to Section 12(b) of the Act:

 
| **Title  of each class** | ** ** | **Name  of each exchange on which registered** |
|--------------------------|------------|------------------------------------------------|
| **Common  Units**        | ** ** | **None**                                       |

 

Securitiesregistered pursuant to Section 12(g) of the Act:

**None**

 

Indicate by check mark ifthe registrant is a well known seasoned issuer, as defined in Rule 405 of theSecurities Act. Yes  o     No  ý

 

Indicate by check mark ifthe registrant is not required to file reports pursuant to Section 13 orSection 15(d) of the Securities Exchange Act of 1934. Yes  o     No  ý

 

Indicate by check mark whetherthe registrant (1) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (orfor 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  ý     No  o

 

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K is notcontained herein, and will not be contained, to the best of the registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment to this Form 10-K.  o

 

Indicate by check markwhether the registrant is a large accelerated filer, and accelerated filer, ora non-accelerated filer (as defined in Rule 12b-2 of the Securities ExchangeAct of 1934).

 
| Large Accelerated Filer  o |   | Accelerated Filer  o |   | Non-Accelerated Filer  ý |
|--------------------------------------|--------|--------------------------------|--------|-----------------------------------------|

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act). Yes  ý     No  o

 

As of March 24, 2006, theregistrant had not issued any common units. As a result, there was not anaggregate market value of the voting and non-voting common equity held bynon-affiliates of the registrant.

 

 

----

 

**ENSOURCEENERGY INCOME FUND L.P.Table of Contents**

** **
| PART  I         |   |                                                                                               |   |   |
|-----------------|--------|----------------------------------------------------------------------------------------------------|--------|--------|
| ITEMS 1. and 2. |   | Business and Properties                                                                            |   |   |
| ITEM 1A.        |   | Risk Factors                                                                                       |   |   |
| ITEM 1B.        |   | Unresolved  Staff Comments                                                                         |   |   |
| ITEM 3.         |   | Legal Proceedings                                                                                  |   |   |
| ITEM 4.         |   | Submission  of Matters to a Vote of Security Holders                                               |   |   |
|            |   |                                                                                               |   |   |
| PART II         |   |                                                                                               |   |   |
| ITEM 5.         |   | Market for  Common Units and Related Unitholder Matters and Issuer Purchases of Equity  Securities |   |   |
| ITEM 6.         |   | Selected Financial  Data                                                                           |   |   |
| ITEM 7.         |   | Management  Discussion and Analysis of Financial Condition and Results of Operations               |   |   |
| ITEM 7A.        |   | Quantitative  and Qualitative Disclosures About Market Risk                                        |   |   |
| ITEM 8.         |   | Financial  Statements and Supplementary Data                                                       |   |   |
| ITEM 9.         |   | Changes in  and Disagreements With Accountants on Accounting and Financial Disclosure              |   |   |
| ITEM 9A.        |   | Controls and  Procedures                                                                           |   |   |
| ITEM 9B.        |   | Other Information                                                                                  |   |   |
|            |   |                                                                                               |   |   |
| PART III        |   |                                                                                               |   |   |
| ITEM 10.        |   | Directors  and Executive Officers of the General Partner.                                          |   |   |
| ITEM 11.        |   | Executive  Compensation.                                                                           |   |   |
| ITEM 12.        |   | Security  Ownership of Certain Beneficial Owners and Management.                                   |   |   |
| ITEM 13.        |   | Certain  Relationships and Related Party Transactions.                                             |   |   |
| ITEM 14.        |   | Principal  Accounting Fees and Services.                                                           |   |   |
|            |   |                                                                                               |   |   |
| PART IV         |   |                                                                                               |   |   |
| ITEM 15.        |   | Exhibits,  Financial Statements and Schedules                                                      |   |   |

 

i

----

 

**PART I**

 

*SignificantRelationships Referenced in this Annual Report*

* *

Unless the contextrequires otherwise, throughout this report, we use the terms set forth below:

 

•              “we”,“us”, “our”, the “Partnership” or “Ensource Energy Income Fund” refers toEnsource Energy Income Fund LP.

 

•              “EnsourceEnergy Partners” or the “General Partner” refers to Ensource Energy Partners,LP.

 

•              “EnsourceReserves” or the “Operating Company” refers to Ensource Reserves ManagementLLC.

 

•              “Ensource”or “Ensource Energy Company” refers to Ensource Energy Company LLC, the generalpartner of our General Partner.

 

**CautionaryNote Regarding Forward-Looking Statements**

** **

This annual reportcontains “forward-looking statements” within the meaning of the PrivateSecurities Litigation Reform Act of 1995. Specific forward-looking statementscan be identified by the fact that they do not relate strictly to historical orcurrent facts and include, without limitation, words such as “may,” “will,”“expects,” “believes,” “anticipates,” “plans,” “estimates,” “projects,”“targets,” “forecasts,” “seeks,” “could” or the negative of such terms or othervariations on such terms or comparable terminology. Similarly, statements thatdescribe Ensource Energy Income Fund’s objectives, plans or goals areforward-looking. The Partnership’s forward-looking statements are based onmanagement’s current intent, belief, expectations, estimates and projectionsregarding the Partnership and Eastern American Natural Gas Trust, or NGT, aswell as projections regarding the oil and gas industry. These statements arenot guarantees of future performance and involve risks, uncertainties,assumptions and other factors that are difficult to predict, including thosediscussed below. Therefore, actual results may vary materially from what is expressedin or indicated by the forward-looking statements. In particular,forward-looking statements as to the Partnership’s financial and businessperformance following the proposed acquisition of NGT should be understood asqualified by the absence of any opportunity for the Partnership to performcomprehensive due diligence on NGT. These forward-looking statements might havebeen significantly different had such due diligence been undertaken. Readers ofthis report are cautioned not to place undue reliance on these forward-lookingstatements since, while the Partnership believes the assumptions on which theforward-looking statements are based are reasonable, there can be no assurancethat these forward-looking statements will prove to be accurate. If one or moreof these risks or uncertainties materialize, or if underlying assumptions proveincorrect, our actual results may vary materially from those anticipated,estimated, projected or expected. You should not put under reliance on theseforward-looking statements. The forward looking-statements included in thisreport are only made as of the date of this report and we undertake noobligation to publicly update forward-looking statements to reflect subsequentevents or circumstances.

 

**ITEMS1. AND 2.****         BUSINESSAND PROPERTIES**

** **

**General**

 

We are a Delaware limitedpartnership formed in May 2005. We were formed by our General Partner for thepurpose of conducting and consummating the exchange offer and second-stepmerger as described below. Our General Partner owns 100% of the OperatingCompany.

 

After the consummation ofthe second-step merger, the Operating Company’s purpose will be to acquire,manage and operate all newly acquired properties (other than properties weacquire directly, which we expect would be the legacy properties from NGT andonly properties that do not generate unrelated business taxable income forfederal income tax purposes – generally, gross royalties, net profits interestsand production payments). The general partner of our General Partner isEnsource.

 

1

----

 

**Exchange Offer**

 

On November 21, 2005, wemade an offer, which we refer to in this report as the exchange offer, toacquire all of the outstanding depositary units of NGT in exchange for ourcommon units and a pro rata share of the special cash distribution of $5.9million that is to be paid promptly after completion of the exchange offer. Theactual amount of special cash distribution payable to each person whosedepositary units are accepted by us for exchange pursuant to the exchange offerwill be equal to the product of the following:

 

•      the totalnumber of depositary units accepted by us for exchange from such holder; and

 

•      a fraction ofwhich the numerator is $5,900,000 and the denominator of which is the totalnumber of depositary units accepted by us for exchange in the exchange offer.

 

According to NGT’s AnnualReport on Form 10-K for the year ended December 31, 2005, there were5,880,100 depositary units outstanding (which excludes 19,900 withdrawn trustunits, or 0.03% of the 5,900,000 total outstanding NGT trust units). Withdrawnunits that are reconstituted as depositary units under the depositaryarrangement with the depositary may participate in the exchange offer. Theexchange offer is the first step in our plan to acquire all of NGT’soutstanding trust units, including the number of depositary units that wouldconstitute at least a majority of the outstanding trust units.

 

It is a condition to ourobligation to accept depositary units validly tendered, and not withdrawn, forexchange in the exchange offer that on the expiration date of the exchangeoffer, as that date may be extended, we receive valid tenders of depositaryunits, that are not properly withdrawn as of the expiration date of theexchange offer, evidencing not less than a majority of the total trust unitsthat are outstanding. We refer to this condition as the “minimum tendercondition.” As a result, valid tenders of depositary units for exchange must bereceived by us from the holders of at least 2,950,001 depositary units that arenot withdrawn, by the expiration date, as that date may be extended, for theminimum tender condition to be satisfied. As of March 24, 2006, we haveextended the termination date of the exchange offer until 5:00 pm EasternStandard Time on March 31, 2006.

 

NGT’s depositaryagreement permits holders of depositary units to withdraw from the depositarythe trust units and zero coupon bonds that such depositary units represent. Thewithdrawal of such trust units is effected by the written request of a recordholder to the depositary for withdrawal of the trust units and correspondingzero coupon bonds, or treasury securities, and such withdrawal may be done onlyin denominations of 50 depositary units or an integral multiple of 50. Suchwithdrawn trust units are generally not transferable, except by operation oflaw, transfers to the depositary or the initial transfer to a record holderupon a withdrawal request. Thus, we are not offering to acquire such withdrawntrust units in the exchange offer. Holders of withdrawn trust units will notreceive part of the special cash distribution. Additionally, upon consummationof the second-step merger (as described below), such withdrawn trust units willbe canceled and converted into the right to receive 0.4 common units.Holders of withdrawn trust units will not have dissenters’ rights with respectto the second-step merger. However, holders of withdrawn trust units mayparticipate in the exchange offer, and thus the special cash distribution, ifthey redeposit their withdrawn trust units with the depositary by following theinstructions set out in the deposit agreement and validly tender the depositaryunits received upon such redeposit before the expiration of the exchange offer.Such redeposits may be done only in denominations of 50, or an integralmultiple of 50, trust units accompanied by the corresponding number of treasurysecurities. For each 50 withdrawn trust units, there is a corresponding $1,000face amount U.S. treasury bonds required, or $20 for each withdrawn trustunit redeposited.

 

In addition to limitedtransferability, holders of withdrawn trust units are not entitled to receivedistributions of cash proceeds from the matured treasury securities comprisingpart of the depositary units upon the liquidation of NGT.

 

**Second-Step Merger**

 

We intend, promptly aftercompletion of the exchange offer and the acceptance of depositary units forexchange and the issuance of our common units in exchange therefore, to seek tohave NGT consummate the second-step merger. The purpose of the second-stepmerger is to acquire all remaining NGT trust units (whether represented bydepositary units not tendered and exchanged in the offer or withdrawn trust unitsof NGT) and to accept any depositary units thereafter delivered to us. Pursuantto the terms of the second-step merger:

 

2

----

 

•      each remainingdepositary unit that was not offered to and accepted by us in the exchangeoffer that is validly tendered to us would be converted into the right toreceive one common unit of the Partnership (0.4 common units for the trust uniton deposit and 0.6 common units for the undivided one-fiftieth of the $1,000face amount of the zero coupon bonds on deposit); and

 

•      each withdrawntrust unit would be converted into the right to receive 0.4 common units of thePartnership.

 

However, holders ofdepositary units whose depositary units are exchanged for common units in thesecond-step merger (and, therefore, who did not participate in the exchangeoffer) will not be entitled to participate in the special cash distributionpayable to holders whose depositary units are accepted for exchange in theexchange offer.

 

While we do not currentlyintend to seek any changes concerning the contracts with Eastern AmericanEnergy Corporation, or Eastern American, or any of its affiliates, we believethat we can reduce the combined effect of increasing expenses and decliningproduction attributable to NGT’s legacy assets by implementing a riskmanagement program under the current commodity price environment. As a result,we believe that holders of depositary units or withdrawn units would benefitfrom our business plan, which includes (1) future acquisitions of netprofits interests from Ensource Reserves to reduce or eliminate the decline inproduction attributable to the legacy assets and (2) implementation of arisk management policy that would be designed by us to reduce the adverse effectsof a future decline in commodity prices for expected future production of thePartnership.

 

Despite our intention notto change any of the material terms of the contracts with Eastern American, wehave received a letter from Eastern American asserting that the second-stepmerger through what we refer to as the Partnership Merger (whereby NGT will bemerged with and into the Partnership, with the Partnership continuing as thesurviving entity and the separate existence of NGT ceasing) would lead to thetermination of the current gas purchase contract between Eastern American andone of its marketing affiliates, Eastern American Marketing Corporation,pursuant to which such affiliate purchases NGT production. All of NGT’srevenues are generated by such purchases. Eastern American asserts that thePartnership Merger would lead to the termination of NGT, and because the gaspurchase contract specifically states that it would terminate upon thetermination of NGT, the gas purchase contract would then terminate. If theinterpretation is correct, Eastern American, or an affiliate, is required tocontinue to purchase production from the legacy assets under a new gas purchasecontract upon the same terms and conditions as Eastern American, as operator,receives for its production from the underlying properties.

 

Alternatively, we maychoose what we refer to as the Subsidiary Merger approach for the second-stepmerger. Eastern American has advised us of its opinion that if NGT does notsurvive the second-step merger, the gas purchase contract will terminate.Although we do not agree with Eastern American’s contention, we may seek toavoid such a dispute with Eastern American by choosing to effect the SubsidiaryMerger. In such merger, a newly-formed, wholly-owned subsidiary of thePartnership will be merged with and into NGT, with NGT continuing as thesurviving entity and the gas purchase contract remaining in effect. NGT willcontinue to exist and be a wholly-owned subsidiary of the Partnership. In theevent we consummate a Subsidiary Merger, the Partnership will become thetrustee of NGT (in place of the current trustee) and we will further amend thetrust agreement to delete provisions of that agreement that are obsolete,inapplicable or unnecessary because NGT would no longer have publicunitholders.

 

**Comment on Fairness Opinion**

 

On November 29, 2005Houlihan Lokey Howard & Zukin issued an opinion to the NGT’s trustee thatthe exchange offer is not fair to NGT’s unitholders. This opinion did *not*address the merits of our businessplan or the concept of creating a growth vehicle on behalf of all theunitholders. Without taking into account all the elements of our proposal,including the special cash distribution, subordination of our investment to thecurrent unitholders, management, business plan, etc., we believe that thebenefits, and therefore the fairness of our offer was not adequately evaluatedin reaching their opinion. We have requested the analysis supporting theopinion, but to date have received no response from the Trustee.

 

**Properties**

 

We do not own anyproperties and we currently do not conduct any operations. As ofDecember 31, 2005, NGT’s assets consisted of its net profits interests onproperties located in the Appalachian Basin states of West Virginia and Pennsylvania,the legacy assets (containing estimated proved reserves of 17,263 millioncubic feet of

 

3

----

 

natural gas, with a PV-10present value of approximately $114.27 million). The zero coupon bonds,which mature on May 15, 2013, in respect of the outstanding depositaryunits have a face amount of approximately $117.6 million and an estimatedfair market value (based on recently quoted prices) of approximately$84.93 million as of December 31, 2005. Upon the closing of the exchangeoffer and the acceptance of depositary units validly tendered for exchange, ourGeneral Partner will contribute $20.05 million for its 1% general partnerinterest, the incentive distribution rights, subordinated units and the warrantto purchase a total of 1,000,000 common units at an exercise price of$36.40 per common unit.

 

The General Partner ownsall the limited liability company interests of the Operating Company, whichwill be an operating company that will acquire and hold title to any oil andnatural gas properties acquired after the second-step merger. We will invest aportion of the net proceeds from the capital contributions of the GeneralPartner, along with net proceeds from the sale of zero coupon bonds (whichcould total up to approximately $84.93 million based on quoted prices asof December 31, 2005 and assuming the sale of the full $117.6 millionface amount of zero coupon bonds underlying all outstanding depositary units),to acquire up to 99% net profits interests in oil and gas properties purchasedby the Operating Company. The Operating Company intends to set up a borrowingbase facility with a lender to manage working capital requirements and to fundacquisitions.

 

**Current Trends**

 

Our strategy is toconduct our business in a manner similar to that of many of the energy incomefunds operating in Canada, except that we will focus on acquiring net profitsinterests on properties in the United States. The Canadian energy income fundsprincipally seek to acquire and manage mature oil and natural gas properties.To our knowledge, there are currently 36 publicly traded energy income fundslisted on the Toronto Stock Exchange with a combined market capitalization ofover U.S. $50 billion as of September 1, 2005. These fundsreport that they typically distribute approximately 50-90% of their cash flow,depending on their respective asset mix and reserve life. We are aware that thesecurities of six of the Canadian energy income funds trade on exchanges in theUnited States (trading symbols: ERF, HTE, PTF, PVX, PWI and PGH). Based uponpublished reports, the ownership of U.S. investors in these six funds rangesfrom approximately 50% to 70% and the combined market capitalization of thesesix dual listed funds is in excess of U.S. $16 billion.

 

**Employees**

 

We do not have anyemployees. We have two executive officers, one of whom is a member of our boardof directors. We do not intend to have any full time employees prior to theconsummation of the exchange offer.

 

**WhereYou Can Find More Information**

 

As a registrant, we filecertain documents electronically with the Securities and Exchange Commission,or SEC, including annual reports on Form 10-K, quarterly reports on Form 10-Qand current reports on Form 8-K (as appropriate). Our principal executiveoffices are located at 7500 San Felipe, Houston, Texas 77063 and our telephonenumber is (713) 659-1794. Our internet address is www.ensource-energy.com. Wedo not make copies of our reports filed under the Securities Exchange Act of1934, as amended, (“Exchange Act”), available on our website because wecurrently do not conduct any operations. These reports may be accessed free ofcharge through our internet website (located at www.ensource-energy.com), wherewe provide a link to the SEC’s website (at www.sec.gov). We will also provideelectronic or paper copies of our filings free of charge upon request. We makeour website content available for informational purposes only. The websiteshould not be relied upon for investment purposes nor is it incorporated byreference into this Form 10-K. You may read and copy any materials we file withthe SEC at the SEC’s public reference room at 100 F Street NE,Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for furtherinformation regarding the public reference room.

 

Information publiclyfiled by NGT are available to the public from commercial document retrievalservices and at the Internet website maintained by the SEC athttp://www.sec.gov.

 

**NOTE ON NGT INFORMATION**

 

NGT has not cooperatedwith the Partnership in, and has not been involved in, the preparation of thisreport and has not verified the information contained in this report relatingto NGT. In respect of information relating to NGT’s business and operationspresented in, or omitted from, this report, the Partnership has relied uponpublicly available information, primarily information publicly filed by

 

4

----

 

NGT with the SEC.Information publicly filed by NGT may be examined and copies may be obtained atthe places and in the manner set forth in the section captioned “Where You CanFind More Information.”

 

**ITEM 1A.****               RISKFACTORS**

 

Our business faces manyrisks. If any of these risks were to occur, our business, results of operations,cash flows and financial condition could be materially adversely affected.

 

All of the informationincluded in this report and any subsequent reports we may file with the SEC ormake available to the public before investing in any securities issued by usshould be carefully considered and evaluated.

 

Among the key riskfactors that may have a direct impact on our business, results of operations,cash flows and financial condition are:

 

**Risk Factors Relating to the Exchange Offer andSecond-Step Merger**

 

***The exchange offer may reduce the number of depositaryunitholders and thereby adversely affect the liquidity and value ofnon-tendered depositary units.***

 

In the event that not allof the depositary units are tendered to and accepted by us for exchange in theexchange offer, the total number of depositary units and withdrawn trust unitsof NGT held by individual holders will be greatly reduced. As a result, theclosing of the exchange offer would adversely affect the liquidity and couldalso adversely affect the market value of the remaining depositary units heldby the public. Subject to the rules of the New York Stock Exchange, or theNYSE, the depositary units may be delisted from the NYSE. As a result of suchdelisting, depositary units not tendered pursuant to the exchange offer maybecome illiquid and may be of reduced value.

 

***The second-step merger may not be approved by the trustee,which could require us to seek equity financing to fund elements of ourbusiness plan earlier than we would be required to do if the second-step mergeris consummated, and may adversely affect the liquidity and value ofnon-tendered depositary units. In such event, we will be the majority holder ofNGT’s outstanding trust units.***

*** ***

NGT’s trust agreementprovides that the trustee must consent to any merger or business combinationinvolving the trust. In the event the trustee does not consent to thesecond-step merger, we may not be able to effect the second-step merger. Sincewe plan to use our available cash resources to fund future acquisitions andthen funds from future equity financings, the failure to complete thesecond-step merger could require us to seek equity financing to fund futureacquisitions earlier than we would be required to do if the second-step mergeris consummated. Additionally, the number of depositary units and withdrawntrust units held by individual holders will be greatly reduced. As a result,the liquidity of the depositary units could be adversely affected and themarket value of the remaining depositary units held by the public could also beadversely affected. Subject to the rules of the NYSE, the depositary units maybe delisted from the NYSE. In the event the second-step merger is not effected,we will hold a majority of the trust units and will have controlling votes onmany issues brought before any trust unitholder meeting held pursuant to thetrust agreement.

 

***If Eastern American Marketing Corporation stops purchasingthe gas produced in connection with the NGT legacy assets upon the consummationof the second-step merger, it may have a material adverse affect on us.***

*** ***

Eastern American hasasserted that the gas purchase contract by which its affiliate, EasternAmerican Marketing Corporation, purchases all of the gas produced in connectionwith NGT’s legacy assets would terminate pursuant to its terms uponconsummation of the Partnership Merger. Although we will complete thesecond-step merger in a manner that will not result in a termination of the gaspurchase contract under its terms, Eastern American Marketing Corporation couldcease to purchase gas under the gas purchase agreement. While such a cessationwould be a breach of Eastern American Marketing Corporation’s contractualobligation under the gas purchase contract and we will have legal and equitableremedies available to us, such a failure by Eastern American MarketingCorporation to perform under the gas purchase agreement could have a materialadverse affect on our financial condition and results of operations.

 

5

----

 

***The Partnership’s verification of the reliability of NGT’sinformation included in, or omitted from, this report, pursuant to thePartnership’s due diligence review of NGT has been limited by the Partnership’sinability to obtain from the trustee the accounting and other records necessaryfor the Partnership to fully assess the financial and operating condition ofNGT.***

*** ***

In respect of allinformation relating to NGT presented in, incorporated by reference into oromitted from, this report, the Partnership has relied upon publicly availableinformation, including information publicly filed by NGT with the SEC. Althoughthe Partnership has no knowledge that would indicate that any statementscontained herein regarding NGT’s condition, including its financial oroperating condition, based upon such publicly filed reports and documents areinaccurate, incomplete or untrue, the Partnership was not involved in thepreparation of such information and statements. Any financial, operating or otherinformation regarding NGT that may be detrimental to the Partnership followingthe Partnership’s acquisition of NGT that has not been publicly disclosed byNGT, or errors in the Partnership’s estimates due to the lack of informationfrom NGT, may have an adverse effect on the benefits the Partnership expects toachieve through the consummation of the exchange offer.

 

***Upon your receipt of common units of the Partnership in theexchange offer, you will become a common unitholder in the Partnership whichmay change the rights and privileges you hold as a depositary unitholder ofNGT.***

*** ***

The Partnership is aDelaware limited partnership that will be governed by the laws of the State ofDelaware and by its amended and restated limited partnership agreement. TheRevised Limited Partnership Act of the State of Delaware extends to limitedpartners certain rights and privileges that may not exist under Delawarestatutory trust law and, conversely, does not extend certain rights andprivileges that you may have as a trust unitholder of a trust governed byDelaware law. The general partner of a limited partnership may elect to adoptcertain provisions that have the effect of discouraging a third party fromacquiring control of the limited partnership. Such provisions could limit theprice that some investors might be willing to pay in the future for commonunits of the Partnership. These Delaware provisions may also have the effect ofdiscouraging or preventing certain types of transactions involving an actual ora threatened change in control of the Partnership, including unsolicitedtakeover attempts, even though such a transaction may offer the Partnershipcommon unitholders the opportunity to sell their common units of thePartnership at a price above the prevailing market price.

 

***Financial Information of NGT is not prepared in accordancewith GAAP.***

*** ***

The financial statementsof NGT are prepared on a modified cash basis of accounting, which is acomprehensive basis of accounting other than accounting principles generallyaccepted in the United States, or GAAP. Although this basis of accounting ispermitted for royalty trusts by the SEC, the financial statements of NGT differfrom GAAP financial statements because revenues are not accrued in the month ofproduction and cash reserves may be established for specified contingencies anddeducted which could not be accrued in GAAP financial statements.

 

***Depositary unitholders were not independently represented inestablishing the terms of the exchange offer, and consequently the terms of theexchange offer may not be fair to depositary unitholders and may have beenmaterially different if depositary unitholders had been independentlyrepresented.***

*** ***

No independentrepresentative of the holders of depositary units was engaged by us forpurposes of negotiating the terms of the exchange offer, nor was a fairnessopinion, appraisal or other report related to the exchange offer obtained by usfrom an unaffiliated third party. On November 29, 2005, Houlihan Lokey Howard& Zukin issued an opinion to NGT’s trustee that the exchange offer is notfair to NGT’s unitholders. We did not seek the recommendations of NGT’s trusteeor the recommendations about the type of transaction or the terms or pricesfrom any independent underwriter, financial advisor or other securitiesprofessional. The absence of these protections was considered, but was notjudged to be significant by us, in determining the fairness of the proposedexchange offer to such holders. We determined that the likelihood that such anunaffiliated representative of the unitholders or a fairness opinion would addvalue to the process of structuring the combination transactions was minimaland outweighed the costs of retaining such a representative or fairnessopinion. As a result, the exchange rate and other terms of the exchange offermay not be as favorable as the terms that might have been obtained had anindependent representative been retained or a fairness opinion requested.

 

6

----

 

**Risk Factors Related to Our Business and the Oiland Natural Gas Industry**

 

***We are a new partnership with no operating history, and wemight not be able to operate our business or implement our operating policiesand strategies successfully, which could negatively impact our ability to paydistributions and cause you to lose all or part of your investment.***

*** ***

We were established inMay 2005 and have not yet commenced acquisition operations. We are subject toall of the business risks and uncertainties associated with any new business,including the risk that we will not achieve our investment objectives and thatthe value of your investment could decline substantially. The results of ouroperations will depend on many factors, including the availability of acquisitionopportunities presented to the Operating Company. Furthermore, if we cannotsuccessfully operate our business or implement our operating policies andstrategies as described in this report because the Operating Company cannotsuccessfully execute its business plan and strategies as described in thisreport, it could negatively impact our ability to pay distributions and causeyou to lose all or part of your investment.

 

***Uncertainties exist in integrating the business andoperations of the Partnership and NGT.***

*** ***

The Partnership intends,to the extent possible, to integrate NGT’s operations. Although the Partnershipbelieves that the integration of NGT’s operations into the Partnership’s willnot present any significant difficulties, there can be no assurance that thePartnership will not encounter substantial difficulties integrating NGT’soperations with the Partnership’s operations, resulting in a delay or thefailure to achieve the anticipated synergies and, therefore, the expectedincreases in earnings and cost savings. The difficulties of combining theoperations of the companies include, among other things:

 

•              possibleinconsistencies in standards, controls, procedures and policies between NGT andthe Partnership;

 

•              thepossibility of tax costs or inefficiencies associated with the integration ofthe operations of the combined company; and

 

•              thepossible need to modify operating control standards in order to comply with theSarbanes-Oxley Act of 2002 and the rules and regulations promulgated thereunder.

 

For these reasons, thePartnership may fail to complete successfully the necessary integration of NGTand the Partnership, or to realize any of the anticipated benefits of theintegration of the two companies. Actual cost savings and synergies may belower than the Partnership currently expects and may take a longer time toachieve than the Partnership currently anticipates.

 

Additionally, we may notbe able to execute our business plan, and even if we are successful, we can notassure any level of cash distribution or any increase in the trading price ofour common units.

 

***Our future distributions and proved reserves will bedependent upon the success of the Operating Company’s, and thus Ensource’s,efforts to acquire, manage and develop oil and natural gas properties thatconform to the acquisition profile described in this report.***

*** ***

In addition to ownershipof the net profits interests currently owned by NGT, in the future, our assetswill consist of net profits interests we acquire from the Operating Company inoil and natural gas properties that the Operating Company acquires in thefuture. Other than initially acquiring the net profits interests on suchproperties, we will not have any control, right or power to manage or developor control the management or development of such properties. Unless we acquirenet profits interests from the Operating Company on properties it acquires inthe future containing additional proved reserves or it successfully developsproved reserves on properties it acquires, our proved reserves will decline asthe reserves attributable to the underlying properties burdened by suchinterests are produced. In addition, if the costs to develop or operate theproperties burdened by our legacy or future acquired net profits interestsincrease, the estimated proved reserves associated with our net profitsinterests will be reduced below the level that would otherwise be estimated.The Operating Company, under the management of Ensource, will manage anddevelop such properties, and the ultimate value to us of the net profitsinterests burdening such properties which we acquire will be dependent upon theability of Ensource, through the Operating Company, to acquire, manage anddevelop such properties. As a result, our future cash distributions will bedependent to a substantial extent upon the ability of Ensource to acquire,manage and develop such properties.

 

7

----

 

Suitable acquisitioncandidates may not be available on terms and conditions that the OperatingCompany, through Ensource, finds acceptable, and acquisitions pose substantialrisks to the Operating Company and our businesses, financial conditions andresults of operations. Even if future acquisitions are completed, the followingare some of the risks associated with acquisitions, which could reduce theamounts payable to us in respect of net profits interests we purchase from theOperating Company on the affected property:

 

•              some ofthe acquired properties may not produce revenues, reserves, earnings or cashflow at anticipated levels;

 

•              theOperating Company may assume liabilities that were not disclosed or that exceedits estimates;

 

•              theOperating Company may be unable to integrate acquired properties successfullyand realize anticipated economic, operational and other benefits in a timelymanner, which could result in substantial costs and delays or other operation,technical or financial problems;

 

•              acquisitionscould disrupt the Operating Company’s ongoing business, distract management,divert resources and make it difficult to maintain our current businessstandards, controls and procedures; and

 

•              theOperating Company may incur additional debt related to future acquisitions.

 

Producing oil and naturalgas wells extract hydrocarbons from underground structures referred to asreservoirs. Reservoirs contain a finite volume of hydrocarbon reserves referredto as reserves in place. Based on prevailing prices and productiontechnologies, only a fraction of reserves in place can be recovered from agiven reservoir. While prolonged increased prices or enhancements in productiontechnology can permit increases in the fraction of reserves in place that canultimately be recovered from a given reservoir, the volume of the reserves inplace that is recoverable from a particular reservoir is reduced as productionfrom that well continues. The reduction is referred to as depletion.Ultimately, the economically recoverable reserves from a particular well willdeplete entirely and the producing well will cease to produce and will beplugged and abandoned. As a result, unless the Partnership is able over thelong term to replace the reserves that are produced in respect of its netprofits interests, investors in its common units should consider the cashdistributions that are paid on the common units not merely as a “yield” on thecommon units, but as a combination of both a return of capital and a return oninvestment. Investors in our common units will have to obtain the return ofcapital invested out of cash flow derived from their investments in commonunits during the period when reserves can be economically recovered.Accordingly, we give no assurances that the distributions you receive over thelife of your investment will meet or exceed your initial capital investment.

 

***We will initially invest our funds in interest bearingaccounts and securities which may produce annual interest payments to us thatare less than the annual management fees and expenses we pay indirectly toEnsource, thus the initial return on your investment may be lower than when ourportfolio is fully invested in properties that meet our investment objectives.***

*** ***

We anticipate that,depending on market conditions, it will take us approximately 12-24 months toinvest substantially all of our funds in net profits interests burdening oiland natural gas producing properties that meet the investment objectives of theOperating Company. During this period, we will invest our funds primarily intemporary investments, such as cash, cash equivalents, interest bearing U.S.government securities and high-quality debt securities maturing in one year orless, which may produce returns that are less than the management fees we payindirectly to Ensource. As a result, any distributions payable during thisperiod may be lower than the distributions that we may be able to pay when ourfunds are fully invested in net profits interests in oil and natural gas assetsthat meet our investment objectives. In addition, until such time as our fundsare invested in net profits interests in oil and natural gas properties meetingour investment objectives, the market price for our common units may decline.

 

***Upon making acquisitions, we will reduce the cash funds weotherwise have available, thus making us more dependent on income from oil andnatural gas properties.***

*** ***

The amount of risk to uswill increase as we use our funds, consisting of cash, cash equivalents, U.S.government securities and high-quality debt maturing in one year or less, topurchase net profits interests burdening oil and natural gas properties thatare acquired by the Operating Company in the future. The amount of our funds

 

8

----

 

will decrease asacquisitions are made, thereby making us more dependent on income from oil andnatural gas properties. Ultimately, we expect to invest all of our funds otherthan a working capital reserve determined by our General Partner to beappropriate for our needs.

 

***We may not have sufficient cash to enable us to pay theminimum quarterly distribution.***

*** ***

Our ability to pay theminimum quarterly distribution of $0.50 per common and subordinated unit eachquarter (subject to proration for the quarter in which the closing of theexchange offer occurs) will depend upon a number of factors, including ourrevenues, which will depend primarily upon the amount of free cash flowgenerated by our net profits interests from the legacy properties we acquirefrom NGT and net profits interests that burden oil and natural gas propertiesacquired by the Operating Company. The amount of such free cash flow isdependent upon numerous factors beyond the Operating Company’s control. Otherfactors that may affect our ability to pay the minimum quarterly distributioneach quarter include the following:

 

•              thecosts to acquire net profits interests from the Operating Company;

 

•              differencesbetween our projections of production, realized prices and costs attributableto our net profits interests and the actual realized results from such netprofits interests;

 

•              ourintention not to incur indebtedness by the Partnership, the funds from whichcould otherwise be used to pay cash distributions;

 

•              proceedsfrom or payments in respect of the Partnership’s hedging activities;

 

•              capitalexpenditures; and

 

•              adjustmentsin cash reserves made by our General Partner in its discretion.

 

Additionally, our abilityto pay the minimum quarterly distribution each quarter will depend on theamount of cash the Operating Company generates from its operations, which willfluctuate from quarter to quarter based on, among other things:

 

•              theactual volume of hydrocarbons produced from the burdened properties, the pricesrealized for that production and the costs incurred in connection therewith;

 

•              thelevel of its indebtedness, the payments of principal and interest requiredthereunder and the restrictions contained in the debt instruments of theOperating Company relating to such indebtedness; and

 

•              thelevel of its maintenance and drilling expenses.

 

In addition, the actualamount of cash we will have available for distribution will depend on otherfactors affecting the Operating Company, some of which are beyond its control,including:

 

•              thelevel of capital expenditures it makes to acquire, maintain or enhance itsproducing properties;

 

•              thecost of its acquisitions, if any;

 

•              itsdebt service requirements, if any;

 

•              fluctuationsin its working capital needs;

 

•              timingand collectibility of receivables;

 

9

----

 

•              restrictionson distributions contained in its credit facility, if any;

 

•              itsability to make working capital borrowings under its credit facility, if any,to pay distributions;

 

•              prevailingeconomic conditions; and

 

•              theamount of cash reserves established by its managers for the proper conduct ofits business.

 

Furthermore, you shouldbe aware that our ability to pay the minimum quarterly distribution eachquarter depends primarily on cash flow, including cash flow from workingcapital reserves and cash balances, and not solely on profitability, which isaffected by non-cash items. Therefore, we may make cash distributions duringperiods when we record losses and may not make distributions during periodswhen we record profits.

 

Finally, we may also notbe able to make any distributions to anyone due to one or more of the followingsituations:

 

•              restrictionson net profits distributions by the Operating Company contained in its futuredebt agreements;

 

•              ourgeneral and administrative expenses, including expenses we will incur as theresult of being a public company;

 

•              reservesour General Partner believes prudent for us to maintain for the proper conductof our business or to provide for future distributions;

 

•              ourGeneral Partner’s board of directors has broad discretion to establish reservesfor the prudent conduct of our business and the establishment of those reservescould result in a reduction of our stated distribution policy;

 

•              whileour partnership agreement requires us to distribute our available cash, ourpartnership agreement, including our cash distribution policy containedtherein, may be amended by a vote of at least a majority of our outstandingcommon units;

 

•              even ifour cash distribution policy is not modified or revoked, the amount ofdistributions paid under our policy and the decision to make any distributionis at the discretion of our General Partner, taking into consideration theterms of our partnership agreement;

 

•              underSection 17-607 of the Delaware Revised Uniform Limited Partnership Act, we maynot make a distribution to you if the distribution would cause our liabilitiesto exceed the fair value of our assets; and

 

•              we maylack sufficient cash to pay distributions to our unitholders due to increasesin general and administrative expenses, working capital requirements andanticipated cash needs.

 

***High oil and natural gas prices may increase theavailability of alternative sources of capital and reduce the availability ofsuitable properties that constitute the Operating Company’s targetedinvestments.***

*** ***

As a result of thecurrent high prices for oil and natural gas relative to historic levels, bothpublic and private energy companies are generally experiencing strong financialresults and increased cash flows. Therefore, such companies are not inclined tosell producing oil and natural properties as a means of generating cash. Inaddition, if the lenders to such companies base borrowing capacity on reservevalue calculations, then such companies may be able to borrow more funds thanwhen commodity prices are lower because higher commodity prices typicallyincrease reserve values. Each of these scenarios may reduce the availability ofsuitable properties for the Operating Company to acquire because less companiesare selling such properties, and if such properties are being sold, thosecompanies enjoying strong financial results may be able to pay more for suchproperties than the Operating Company. If the Operating Company is unable topurchase suitable oil and natural gas properties, its reserves will depletewithout replenishment, thereby negatively affecting is revenues, which in turnwill affect our revenues and cash flow.

 

10

----

 

***The Operating Company may not be able to compete foracquisition opportunities with competitors who may have greater resources orhave a lower cost of capital, thus allowing them to pay more for assets. Thisdisparity may cause the operating company to lose investment opportunities andthus not be able to implement its business plan.***

*** ***

The Operating Company isa newly-formed company with no operating history or established funding source.It operates in a highly competitive environment for acquiring properties,marketing oil and natural gas, and securing trained personnel. A large numberof entities with more established operating histories will compete with theOperating Company to make the types of investments that it plans to make inenergy assets. The Operating Company will compete with public and privatecompanies, investment banks, private equity funds, institutional investors andhigh net worth individuals. Many of its competitors are substantially largerand have considerably greater financial, technical and marketing resources thanit does. For example, some competitors may have a lower cost of funds andaccess to funding sources that are not available to the Operating Company. Inaddition, some of its competitors may have higher risk tolerances or differentrisk assessments, which could allow them to consider a wider variety ofinvestments and establish more relationships than it. Also, there issubstantial competition for capital available for investment in the oil andnatural gas industry. The competitive pressures for properties, marketing oiland natural gas, and securing trained personnel that the Operating Companyfaces may have a material adverse effect on its business, financial conditionand results of operations. The Operating Company may not be able to identifyoil and natural gas properties fitting its investment objective, and if it doesidentify such properties, it may not be able to acquire them due to a lack offunding or not being able to offer a higher price than companies with greaterresources or lower cost of capital. If the Operating Company does acquire suchproperties, it may not be able to recruit enough qualified personnel tooperate, manage and develop such properties. As our strategy is to acquire netprofits interests on future acquisitions by the Operating Company, theinability of the Operating Company to consummate acquisitions or delays inacquisitions or to operate, manage or develop properties could affect ourfuture results of operations and our ability to successfully implement ourstrategy.

 

***A substantial or extended decline in oil and natural gasprices may adversely affect our business, financial condition or results ofoperation and our ability to meet our capital expenditure obligations andfinancial commitments.***

*** ***

The price that (1) werealize for the production attributable to the legacy properties we acquirefrom NGT and (2) the Operating Company receives for its oil and natural gasproduction heavily influences our revenue, profitability, access to capital andfuture rate of growth due to our purchase of net profits interests on thoseproducing properties. Oil and natural gas are commodities and, therefore, theirprices are subject to wide fluctuations in response to relatively minor changesin supply and demand. Historically, the markets for oil and natural gas havebeen volatile. These markets will likely continue to be volatile in the future.The prices realized for the production attributable to NGT’s legacy net profitsinterests and attributable to any net profits interests we acquire in the futurethat burden properties acquired by the Operating Company, and the levels ofthis production, depend on numerous factors beyond our control. These factorsinclude the following:

 

•              changesin global supply and demand for oil and natural gas;

 

•              theactions of the Organization of Petroleum Exporting Countries, or OPEC;

 

•              theprice and quantity of imports of foreign oil and natural gas;

 

•              politicalconditions, including embargoes, in or affecting other oil-producing activity;

 

•              thelevel of global oil and natural gas exploration and production activity;

 

•              thelevel of global oil and natural gas inventories;

 

•              weatherconditions;

 

•              technologicaladvances affecting energy consumption; and

 

•              theprice and availability of alternative fuels.

 

11

----

 

Lower oil and natural gasprices may not only indirectly decrease revenues on a per common unit basis butalso may reduce the amount of oil and natural gas that can be producedeconomically. A substantial or extended decline in oil or natural gas pricesmay materially and adversely affect our future business, financial condition,results of operations, liquidity, ability to pay cash distributions or theability of the Operating Company to finance planned capital expenditures onproperties on which we hold a net profits interest.

 

***Drilling for and producing oil and natural gas are high riskactivities with many uncertainties that could adversely affect the OperatingCompany’s, and thus, our business, financial condition or results ofoperations.***

*** ***

To the extent that theOperating Company purchases properties with a significant percentage ofadditional development, exploitation or enhanced recovery opportunities, ourfuture success will depend in part on the success of the exploitation,development and production activities to be conducted by the Operating Companyon such properties that are burdened by a net profits interest that we purchasefrom the Operating Company. The Operating Company’s oil and natural gasdevelopment and production activities are subject to numerous risks beyond theOperating Company’s control, including the risk that drilling will not resultin commercially viable oil or natural gas production. The Operating Company’sdecisions to purchase, develop or otherwise exploit properties will depend inpart on the evaluation of data obtained through production data and engineeringstudies, geophysical and geological analyses, the results of which are ofteninconclusive or subject to varying interpretations. Reserve estimates depend onmany assumptions that may turn out to be inaccurate. Any material inaccuraciesin these reserve estimates or underlying assumptions will materially affect thequantities and present value of the Operating Company’s reserves. The cost ofdrilling, completing, operating and re-working wells is often uncertain beforedrilling commences. Overruns in budgeted expenditures are common risks that canmake a particular project uneconomical and that will adversely affect therevenues we receive under our net profits interest on such overrun property.Further, many factors may curtail, delay or cancel drilling, including thefollowing:

 

•              delaysimposed by or resulting from compliance with regulatory requirements;

 

•              pressureor irregularities in geological formations;

 

•              shortagesof or delays in obtaining equipment and qualified personnel;

 

•              equipmentfailures or accidents;

 

•              adverseweather conditions, such as hurricanes and tropical storms;

 

•              reductionsin oil and natural gas prices;

 

•              titleproblems; and

 

•              limitationsin the market for oil and natural gas.

 

Any of these events cancause substantial losses, including personal injury or loss of life, damage toor destruction of property, natural resources and equipment, pollution, environmentalcontamination, loss of wells and regulatory penalties, which will reduce thecash payable by the Operating Company to us under the net profits interests weown on the affected property.

 

The Operating Companyexpects to maintain insurance against various losses and liabilities arisingfrom its operations; however, insurance against all operational risks is notavailable. Additionally, the Operating Company may elect not to obtaininsurance if Ensource believes that the cost of available insurance isexcessive compared to the perceived risks presented. Losses could thereforeoccur for uninsurable or uninsured risks or in amounts in excess of existinginsurance coverage. The occurrence of an event on a property owned by theOperating Company and on which we hold a net profits interest that is not fullycovered by insurance could have a material adverse impact on our financialcondition and results of operations.

 

12

----

 

***Substantial acquisitions or other transactions could requiresignificant external capital and could change the Operating Company’s, and thusour, risk and property profile.***

*** ***

The Operating Company’sstrategy is to target lower risk, medium-to-long lived oil and natural gasproperties located predominantly on shore in the continental United States,significant acquisitions or other transactions can change the character of theOperating Company’s operations and business. The character of the newproperties may be substantially different in operating or geologicalcharacteristics or geographic location than the Operating Company’s existingproperties. As a result of the differences in property characteristics and riskprofiles, the Operating Company may not be able to obtain external funding forany such acquisitions or other transactions or to obtain external funding onterms acceptable to it.

 

The changes in thecharacteristics and risk profiles of such properties will in turn affect ourrisk profile, which may negatively affect our ability to issue equitysecurities in order to fund future acquisitions of net profits interests.

 

***Properties that the Operating Company buys may not produceas projected, and it may be unable to identify liabilities associated with theproperties or obtain protection from sellers against them.***

*** ***

Our business strategyincludes a continuing acquisition program by the operating company and ourpurchase from the operating company of net profits interests on such acquiredproperties. The Operating Company’s assessment of properties being evaluatedfor possible purchase will not reveal all existing or potential problems, norwill it permit the Operating Company to become familiar enough with theproperties to assess fully their capabilities and deficiencies. In the courseof the Operating Company’s due diligence, it may not inspect every well orpipeline. Inspections may not reveal structural and environmental problems,such as pipeline corrosion or groundwater contamination, when they are made.The Operating Company may not be able to obtain contractual indemnities fromthe seller for liabilities that it created. The Operating Company may berequired to assume the risk of the physical condition of the properties inaddition to the risk that the properties may not perform in accordance with theOperating Company’s expectations.

 

***The Operating Company may transfer or abandon propertiesthat are subject to the net profits interests.***

*** ***

The Operating Company mayat any time transfer all or part of the properties underlying the net profitsinterests. Our common unitholders are not entitled to vote on any transfer,however, any such transfer must also simultaneously include the net profitsinterests at a corresponding price.

 

The Operating Company orany transferee may abandon any well or property if it reasonably believes thatthe well or property can no longer produce in commercially economic quantities.This could result in termination of the net profits interests relating to theabandoned well.

 

***If oil and natural gas prices decrease, we may be requiredto take write-downs of the carrying values of our oil and natural gasproperties.***

*** ***

Accounting rules requirethat we review periodically the carrying value of our net profits interests onoil and natural gas properties, that is, both the legacy net profits interestsand net profits interests that we acquire in the future, for possibleimpairment. Based on specific market factors and circumstances at the time ofprospective impairment reviews, and the continuing evaluation of development plans,production data, economics and other factors, we may be required to write downthe carrying value of its oil and natural gas properties. A write-downconstitutes a non-cash charge to earnings. We may incur impairment charges inthe future, which could have a material adverse effect on our results ofoperations in the period taken.

 

***The Operating Company may incur substantial losses and besubject to substantial liability claims as a result of the Operating Company’soil and natural gas operations. These losses and liability claims couldmaterially and adversely affect the cash we receive.***

*** ***

Losses and liabilitiesarising from uninsured and underinsured events at the Operating Company couldmaterially and adversely affect the cash we receive under our net profitsinterests on properties acquired by the Operating Company which in turn couldadversely affect our financial condition or results of operations. TheOperating Company’s oil and natural gas exploitation and production activitiesare subject to all of the operating risks associated with drilling for andproducing oil and natural gas, including the possibility of:

 

13

----

 

•              environmentalhazards, such as uncontrollable flows of oil, natural gas, brine, well fluids,toxic gas or other pollution into the environment, including groundwater andshoreline contamination;

 

•              abnormallypressured formations;

 

•              mechanicaldifficulties, such as stuck oil field drilling and service tools and casingcollapse;

 

•              fires andexplosions;

 

•              personalinjuries and death; and

 

•              naturaldisasters.

 

Any of these risks couldadversely affect the Operating Company’s ability to conduct operations orresult in substantial losses to the Operating Company and, thereby reducing thecash otherwise payable to us in respect of our net profits interests in theproperty subject to the Operating Company’s operations. In addition, pollutionand environmental risks generally are not fully insurable. If a significantaccident or other event occurs and is not fully covered by insurance, then itcould adversely affect the Operating Company, thereby reducing the cashotherwise payable to us in respect of and through our net profits interestsburdening the Operating Company’s property.

 

***Our net profits interests may initially burden a limitednumber of producing assets, which would magnify the effect if one of thoseassets were to suffer a significant loss. This could negatively impact our netprofits interest in such assets, our ability to pay you distributions and causeyou to lose all or part of your investment.***

*** ***

Our primary investmentactivity and business is to acquire net profits interests burdening propertiesto be acquired by the Operating Company in the future. While we intend for ourinvestments to be allocated among a substantial number of properties, there isno limit on the amount of the Operating Company’s capital that it may invest inany one asset or group of assets if the board of directors of our GeneralPartner approves such acquisition. In addition, upon closing of the exchangeoffer and the second-step merger, our operating assets will consist of thelegacy net profits interests of NGT, together with cash from the capitalcontribution by our General Partner and proceeds form the sale of the zerocoupon bonds. A consequence of this concentration is that the aggregate returnswe initially realize may be adversely affected if a small number of theproperties underlying the legacy NGT net profits interests perform poorly or ifany such properties otherwise become impaired or require substantial capital tomaintain production. While the Operating Company will have fixed guidelines fordiversification, our future investments in additional net profits interestscould be concentrated in relatively few producing assets or in a few productionregions even if the Operating Company is successful in achieving what itbelieves constitutes appropriate diversification. In such cases, financialdifficulty on the part of any single producing property will expose us to agreater risk of loss than would be the case if the Operating Company were toinvest in a more diverse set of assets. To the extent that the OperatingCompany makes a large investment in a small number of properties, our net assetvalue and thus the market price of our common units may fluctuate as a resultof changes in the financial condition or in the market’s assessment of theproperty base subject to our net profits interests. These factors couldnegatively impact our ability to pay you distributions and could cause you tolose all or part of your investment.

 

***A majority of the oil and natural properties subject to thenet profits interests may be geographically concentrated, which could cause netproceeds payable under the net profits interests to be impacted by regionalevents.***

*** ***

In the event that amajority of the oil and natural gas properties subject to the net profitsinterests are located in a concentrated area, any regional events, includingnatural disasters, that increase costs, reduce availability of equipment orsupplies, reduce demand or limit production may impact the net proceeds payableunder the net profits interests more than if the properties were moregeographically diversified.

 

***The number of prospective natural gas purchasers and methodsof delivery are considerably less than would otherwise exist from a moregeographically diverse group of properties.***

*** ***

Under the terms of thenet profits interests, much of the economic risk of the underlying oil andnatural gas properties is passed along to us.

 

14

----

 

Under the terms of thenet profits interests, virtually all costs that may be incurred in connectionwith the oil and natural gas properties, including overhead costs that are notsubject to an annual reimbursement limit, are deducted as production costs orexcess production costs in determining amounts payable to us. Therefore, webear up to 99% of the costs of the working interest properties, and if costsexceed revenues, we do not receive any payments under the net profitsinterests.

 

In addition, although wewould never have to pay costs relative to the burdened properties if theyexceeded revenues, the terms of the net profits interests provide for suchexcess costs to be accumulated and charged in future periods, which couldresult in our not receiving any payments under the net profits interests untilall prior uncharged costs have been recovered by the Operating Company.

 

***Market conditions or operational impediments may hinder theOperating Company’s access to oil and natural gas markets or delay theOperating Company’s production.***

*** ***

Market conditions or theunavailability of satisfactory oil and natural gas transportation arrangementsmay hinder the Operating Company’s access to oil and natural gas markets ordelay its production. The availability of a ready market for oil and naturalgas production attributable to its interests therein depends on a number offactors, including the demand for and supply of oil and natural gas and theproximity of reserves to pipelines and terminal facilities. The ability of theoperator or working interest owner of the properties burdened by our netprofits interests to market the production attributable to such interestsdepends in substantial part on the availability and capacity of gatheringsystems, pipelines and processing facilities owned and operated by thirdparties. The failure of such operator or working interest owner to obtain suchservices on acceptable terms could materially adversely affect the cash wereceive in respect of our interests, which in turn could adversely affect ourfinancial condition or results of operations. The operator could be required toshut in wells for a lack of a market or because of inadequacy or unavailabilityof natural gas pipeline or gathering system capacity. If that were to occur,then we would be unable to realize revenue in respect of our interests in thenet revenue from those wells until production arrangements were made to deliverto market.

 

***The Operating Company is subject to complex laws that canaffect the cost, manner or feasibility of doing business.***

*** ***

Exploration, development,production and sale of oil and natural gas are subject to extensive federal,state and local regulation. Because the operating company participates in theseactivities, it may be required to make large expenditures to comply withgovernmental regulations. Matters subject to regulation include:

 

•              dischargepermits for drilling operations;

 

•              drillingbonds;

 

•              reportsconcerning operations;

 

•              thespacing of wells;

 

•              unitizationand pooling of properties; and

 

•              taxation.

 

Under these laws, theOperating Company could be liable for personal injuries, property damage andother damages. Failure to comply with these laws also may result in thesuspension or termination of its operations and subject it to administrative,civil and criminal penalties. Moreover, these laws could change in ways thatsubstantially increase its costs. Any such liabilities, penalties, suspensions,terminations or regulatory changes could materially adversely affect itsfinancial condition and results of operations and thus our financial conditionand results of operations through our net profits interests in propertyacquired and operated by the Operating Company.

 

15

----

 

***Because the Operating Company handles oil and natural gasand other petroleum products in its businesses, it may incur significant costsand liabilities in the future resulting from a failure to comply with new orexisting environmental regulations or an accidental release of hazardoussubstances into the environment.***

*** ***

The operations of theOperating Company’s wells, gathering systems, pipelines and other facilitiesthat it acquires in the future will be subject to stringent and complexfederal, state and local environmental laws and regulations. These include, forexample:

 

•              thefederal Clean Air Act and comparable state laws and regulations that imposeobligations related to air emissions;

 

•              thefederal Resource Conservation and Recovery Act, or RCRA, and comparable statelaws that impose requirements for the discharge of waste from the OperatingCompany’s facilities; and

 

•              theComprehensive Environmental Response, Compensation and Liability Act of 1980,or CERCLA, also known as “Superfund,” and comparable state laws that regulatethe cleanup of hazardous substances that may have been released at propertiescurrently or previously owned or operated by the Operating Company or locationsto which it has sent waste for disposal.

 

Failure to comply withthese laws and regulations may trigger a variety of administrative, civil andcriminal enforcement measures, including the assessment of monetary penalties,the imposition of remedial requirements, and the issuance of orders enjoiningfuture operations. Certain environmental statutes, including the Clean Air Act,RCRA, CERCLA and the federal Water Pollution Control Act of 1972, also known asthe Clean Water Act, and analogous state laws and regulations, impose strict,joint and several liability for costs required to clean up and restore siteswhere hazardous substances have been disposed of or otherwise released.Moreover, it is not uncommon for neighboring landowners and other third partiesto file claims for personal injury and property damage allegedly caused by therelease of hazardous substances or other waste products into the environment.

 

Moreover, the possibilityexists that stricter laws, regulations or enforcement policies could significantlyincrease the Operating Company’s compliance costs and the cost of anyremediation that may become necessary. It may not be able to recover thesecosts from insurance. Any of these additional costs and liabilities will reducethe amounts payable to us under our net profits interests on the affectedproperties, which reductions could be material, and which will in turn reducethe cash we have available to pay distributions to our unitholders.

 

***If the Operating Company acquires properties with significantdevelopment, exploitation, enhanced recovery or other capital costs, operationsby the Operating Company could require substantial capital expenditures, whichwill reduce cash available payable to us on the net profits interest royaltiesthat we acquire in the future from the Operating Company in respect of suchproperties.***

*** ***

The oil and natural gasindustry is capital intensive. The Operating Company expects to makesubstantial capital expenditures in its business and operations for theacquisition, development and production of oil and natural gas reserves.Development and production expenditures will reduce the net profits generatedin respect of the properties on which such expenditures are incurred, whichwill in turn reduce the cash payable to us in respect of our net profitsinterests thereon. The Operating Company expects to finance its future capitalexpenditures with cash flow from operations, and we expect to finance ourfuture capital expenditures (which will consist primarily of the acquisition ofnet profits interests on properties acquired in the future by the OperatingCompany) with proceeds from the sale of the zero coupon bonds, from the capitalcontribution made by our General Partner and its affiliates (net of costs andexpenses of this exchange offer and the second-step merger) and proceeds fromfuture sales of limited partner interests in the Partnership. The OperatingCompany’s cash flow from operations and access to capital are subject to anumber of variables, including:

 

•              its provedreserves;

 

•              thelevel of oil and natural gas it is able to produce from existing wells;

 

•              theprices at which its oil and natural gas are sold; and

 

•              itsability to acquire, locate and produce new reserves.

 

16

----

 

***The Operating Company may be unable to obtain needed capitalor financing on satisfactory terms, which could lead to a decline in its oiland natural gas reserves.***

*** ***

If the OperatingCompany’s revenues or the borrowing base under any revolving credit facilitydecrease as a result of lower oil and natural gas prices, operatingdifficulties, declines in reserves or for any other reason, it may have limitedability to obtain the capital necessary to sustain its operations at currentlevels. If additional capital is needed, it may not be able to obtain debt orequity financing on terms favorable to it, or at all. If cash generated byoperations or available under any revolving credit facility is not sufficientto meet its capital requirements, the failure to obtain additional financingcould result in a curtailment of its operations relating to development of itsprospects, which in turn could lead to a possible decline in its oil andnatural gas reserves. These declines could in turn reduce the amount payable tous in respect of our net profits interests, which could in turn reducematerially the amount of cash available for distribution to our unitholders.

 

***The unavailability or high cost of additional drilling rigs,equipment, supplies, personnel and oil field services could adversely affectthe Operating Company’s ability to execute on a timely basis its exploitationand development plans within its budget.***

*** ***

Shortages or the highcost of drilling rigs, equipment, supplies or personnel could delay or adverselyaffect its development and exploitation operations, which could have a materialadverse effect on the business, financial condition or results of operations ofthe Operating Company, which could in turn affect adversely the cash payable tous in respect of our net profits interests on properties acquired by theOperating Company.

 

***The Operating Company’s use of oil and natural gas pricehedging contracts involves credit risk and may limit future revenues from priceincreases and result in significant fluctuations in its net income.***

*** ***

The Operating Companyanticipates that it will enter into forward sales contracts for its oil andnatural gas production to reduce its exposure to fluctuations in the price ofoil and natural gas and to seek to preserve the intended economic benefits ofits property acquisitions. Forward sales contracts will expose it to risk offinancial loss in some circumstances, including if production is less thanexpected, the other party to the contract defaults on its obligations or thereis a change in the expected differential between the underlying price in thehedging agreement and actual prices received. Forward sales contracts may limitthe benefit it would have otherwise received from increases in the price foroil and natural gas.

 

***The Partnership’s use of oil and natural gas price hedgingcontracts involves credit risk and may limit future revenues from priceincreases and result in significant fluctuations in its net income.***

*** ***

The Partnershipanticipates that it will enter into financial hedging transactions for aportion of the oil and natural gas production attributable to its net profitsinterests in properties owned by the Operating Company in order to reduce itsexposure to fluctuations in the price of oil and natural gas and to seek topreserve the intended economic benefits of its net profits acquisitions.Hedging transactions will expose the Partnership to risk of financial loss insome circumstances, including if production attributable to the net profitsinterests is less than expected, the other party to the contract defaults onits obligations or there is a change in the expected differential between theunderlying price in the hedging agreement and actual prices received.

 

**Risk Factors Inherent to an Investment in thePartnership**

 

***Our future distributions may be reduced as a result of ourgovernance structure.***

*** ***

There is no guaranteethat common unitholders will receive quarterly distributions from us. Ourdistribution policy is subject to certain restrictions and may be changed atany time, including:

 

•              ourGeneral Partner’s board of directors has broad discretion to establish reservesfor the prudent conduct of our business and the establishment of those reservescould result in a reduction of our stated distribution policy;

 

•              whileour partnership agreement requires us to distribute our available cash, ourpartnership agreement, including our cash distribution policy containedtherein, may be amended by a vote of at least a majority of our outstandingcommon units;

 

17

----

 

•              even ifour cash distribution policy is not modified or revoked, the amount ofdistributions paid under our policy and the decision to make any distributionis at the discretion of our General Partner, taking into consideration theterms of our partnership agreement;

 

•              underSection 17-607 of the Delaware Revised Uniform Limited Partnership Act, we maynot make a distribution to you if the distribution would cause our liabilitiesto exceed the fair value of our assets; and

 

•              we maylack sufficient cash to pay distributions to our unitholders due to increasesin general and administrative expenses, working capital requirements andanticipated cash needs.

 

***If the General Partner loses key senior management or isunable to attract and retain the talent required for our business, ouroperating results could suffer.***

*** ***

Our performance dependslargely on the efforts and abilities of the members of senior management of ourGeneral Partner. These executives have substantial experience and expertise inthe energy business. The unexpected loss of services of one or more of theseindividuals could have an adverse effect on our business. As we grow, theGeneral Partner will need to attract and retain additional qualified personneland develop, train and manage an increasing number of management-levelemployees. We cannot assure you that our General Partner will be able toattract and retain personnel as needed in the future. In particular, we dependon the performance of Scott W. Smith, President and Chief Executive Officer,and Marshall M. Eubank, Executive Vice President and Chief Financial Officer,of our General Partner.

 

***The General Partner, the Operating Company and Ensource donot currently have any employees nor have they contracted for any oil andnatural gas professionals. If they are unable to hire adequately employees orcontract for such oil and natural gas professionals, they may not be ableexecute the Operating Company’s business plan.***

*** ***

We and our affiliates arenewly created companies with no operating history, thus we do not have anyemployees other than the senior management described in this report.Additionally, none of the General Partner, the Operating Company nor Ensourcehave contracted for the services of any oil and natural gas professionalsbecause there is currently no oil and natural gas property for the OperatingCompany to develop and manage. The Operating Company, under the management ofEnsource, will not hire any employees or contract for any oil and natural gasprofessionals until after consummation of the second-step merger or thedetermination that we will not be able to complete the second step merger dueto the failure or refusal of the trustee of NGT to enter into the merger agreement,when they have identified oil and natural gas properties to acquire. They maynot be able to identify and hire qualified employees or to contract for oil andnatural gas professionals when they are ready to do so. This inability to hireemployees or to contract for oil and natural gas professionals may delayexecution of the Operating Company’s business plan, which in turn could causethe Operating Company to miss acquisition or management and developmentopportunities or reduce the oil and natural gas production of existingproperties, all of which would have a negative impact on the OperatingCompany’s revenues.

 

***The Partnership’s anti-takeover provisions may delay orprevent a change of control of the Partnership, which could adversely affectthe price of our common units.***

*** ***

The existence of someprovisions in the Partnership’s amended and restated limited partnershipagreement and Delaware law may delay or prevent a change in control of thePartnership, which could adversely affect the price of our common units. ThePartnership’s limited partnership agreement contain some provisions that maymake the acquisition of control of the Partnership more difficult, includingprovisions relating to the effects of removal of the General Partner andlimitations on voting rights imposed upon a beneficial owner of 20% or more ofour common units. In addition, Delaware law also imposes some restrictions onmergers and other business combinations between the Partnership and any holderof 15% or more of its outstanding common units.

 

***A regular trading market for our common units might notdevelop, which would harm the liquidity and value of our common units.***

*** ***

There is no establishedtrading market for our common units. The Partnership’s common units have beenapproved for listing on the NYSE, subject to official notice of issuance, underthe symbol “ENF”, however, we

 

18

----

 

cannot assure you thatregular trading of our common units will develop on that exchange or elsewhere or,if developed, that any such market will be sustained. Accordingly, we cannotassure you of:

 

•              theliquidity of any trading market for our common units;

 

•              theability of our unitholders to sell their common units; or

 

•              theprices that our unitholders may obtain for their common units.

 

***The market price and trading volume of our common units maybe volatile following this offering, and you may be unable to resell yourshares at or above the unit price prior to the exchange offer.***

*** ***

Even if active tradingmarkets develop for our common units after the exchange offer, the market priceof our common units may be highly volatile and subject to wide fluctuations. Inaddition, the trading volume in our common units may fluctuate and causesignificant price variations to occur. The trading price per common unit isexpected to be a function of anticipated Partnership distributable income,which will in turn be a function of the net profits from the NGT legacyinterests and the oil and natural gas properties acquired by the OperatingCompany in the future. In addition, the trading price will be affected byperceptions of our ability to successfully execute our business strategy. Themarket price of the common units will also be sensitive to a variety of marketconditions including, but not limited to, interest rates and the ability of theOperating Company to acquire suitable oil and natural gas properties. Changesin market conditions may adversely affect the trading price of our commonunits. If the market price of our common units declines significantly, you maybe unable to resell your units at or above the market price of the depositaryunits prior to the transaction. We cannot assure you that the market price ofour common units will not fluctuate or decline significantly in the future.Some of the factors that could negatively affect our common unit price orresult in fluctuations in the price or trading volume of our common unitsinclude:

 

•              actualor anticipated variations in our quarterly operating results or distributions;

 

•              changesin market valuations of similar companies;

 

•              adversemarket reaction to any increased indebtedness that the Operating Company incursin the future;

 

•              loss ofpartnership status;

 

•              changesin revenue or earning estimates or publication of research reports by analysts;

 

•              speculationin the press or investment community; and

 

•              generalmarket and economic conditions, including fluctuations in commodity prices orinterest rates.

 

The stock markets ingeneral have experienced extreme volatility that has often been unrelated tothe operating performance of particular companies. These broad marketfluctuations may adversely affect the trading price of our common units.

 

***We may allocate our capital after the transaction toacquisitions with which you may not agree.***

*** ***

We will have significantflexibility in investing the funds available to us after the second-step mergerand may use such funds to acquire net profits interests or other investmentswith which you may not agree. Although we have attempted to describe theOperating Company’s targeted investments and their expected characteristics,our goal is to invest in future net profits interests in a manner and time soas to increase distributions and common unitholder value. If the energy marketdictates that we vary our investment approach from that described in thisreport, then we will adjust our strategy accordingly.

 

19

----

 

***Terrorist attacks and other acts of violence or war mayaffect any market for our common units, impact the businesses in which theOperating Company invests and harm its operations and profitability.***

*** ***

Terrorist attacks mayharm the Operating Company’s results of operations and thus your investment byway of the net profits interests acquired from the Operating Company onproperty it acquires. We cannot assure you that there will not be furtherterrorist attacks against the United States or U.S. businesses. Such attacks orarmed conflicts in the U.S. or elsewhere may impact the businesses in which theOperating Company invests directly or indirectly, by undermining economicconditions in the United States. Losses resulting from terrorist attacks aregenerally uninsurable.

 

***The common units are not equivalent to shares of commonstock. Even if common unitholders are dissatisfied, they cannot easily removeour General Partner.***

*** ***

The common units shouldnot be viewed by investors as shares in a corporation. The common unitsrepresent a limited partnership interest in the Partnership. After completionof the exchange offer and second step merger, the Partnership’s assets will bethe net profits interests constituting the legacy assets we acquire from NGT,cash from the General Partner’s contribution and sale of the zero coupon bondsunderlying the depositary units accepted by us for exchange and net profitsroyalty interests we acquire in the future on producing properties to beacquired by the Operating Company in the future.

 

Unlike the holders ofcommon stock in a corporation, common unitholders have only limited votingrights on matters affecting our business and, therefore, limited ability toinfluence management’s decisions regarding our business. Common unitholders didnot elect our General Partner or the board of directors of our General Partnerand will have no right to elect our General Partner or the board of directorsof our General Partner on an annual or other continuing basis.

 

The board of directors ofour General Partner is appointed by Ensource, as our General Partner’s generalpartner, and the limited partners of our General Partner. The General Partner’sboard of directors has a fiduciary duty to manage the General Partner on behalfof its partners. The General Partner, in turn, has a fiduciary duty to managethe Partnership on behalf of its partners. These differing duties could resultin conflicts of interest.

 

Furthermore, if commonunitholders are dissatisfied with the performance of our General Partner, theywill have little ability to remove our General Partner. First, our GeneralPartner generally may not be removed except upon the vote of the holders of atleast 662/3% of the outstanding units voting together asa single class. Also, if our General Partner is removed without cause duringthe subordination period and common units held by the General Partner and itsaffiliates are not voted in favor of that removal, all remaining subordinatedunits will automatically be converted into common units and any existingarrearages on the common units will be extinguished. A removal of the GeneralPartner under these circumstances would adversely affect the common units byprematurely eliminating their distribution and liquidation preference over thesubordinated units, which would otherwise have continued until we had metcertain distribution and performance tests.

 

Cause is narrowly definedto mean that a court of competent jurisdiction has entered a final,non-appealable judgment finding the General Partner liable for actual fraud,gross negligence, or willful or wanton misconduct in its capacity as ourGeneral Partner. Cause does not include most cases of charges of poormanagement of the business, so the removal of the General Partner because ofthe common unitholders’ dissatisfaction with the General Partner’s performancein managing our partnership will most likely result in the termination of thesubordination period.

 

Furthermore, commonunitholders’ voting rights are further restricted by the partnership agreementprovision providing that any common units held by a person that owns 20% ormore of any class of common units then outstanding, other than the GeneralPartner, its affiliates, their transferees and persons who acquired such unitswith the prior approval of the board of directors of the General Partner, cannotbe voted on any matter. In addition, the partnership agreement containsprovisions limiting the ability of common unitholders to call meetings or toacquire information about our operations, as well as other provisions limitingthe common unitholders’ ability to influence the manner or direction ofmanagement.

 

As a result of theseprovisions, the price at which our common units will trade may be lower becauseof the absence or reduction of a takeover premium in the takeover price.

 

20

----

 

***The control of ourGeneral Partner may be transferred to a third party without common unitholderconsent.***

*** ***

Ensource may transfer its general partner interest in the GeneralPartner to a third party in a merger or in a sale of all or substantially allof its assets without the consent of the unitholders. Furthermore, there is norestriction in the partnership agreement of our General Partner on the abilityof the owners of our General Partner to transfer their ownership interest inthe General Partner to a third party. The new owner of our General Partnerwould then be in a position to replace the board of directors and officers ofour General Partner with its own choices and thereby influence the decisionstaken by the board of directors and officers.

 

***We may issueadditional common units without your approval, which would dilute your existingownership interests.***

*** ***

During the subordination period and thereafter, our General Partner maycause us to issue, without your approval, an unlimited number of additionallimited partner interests, which may include common units or limited partnerinterests that are junior, pari passu or senior to common units in respect ofthe preference to cash distributions and distributions in liquidation. Ourpartnership agreement does not give the common unitholders the right to approveour issuance at any time of equity securities ranking junior, pari passu orsenior to the common units.

 

The issuance of additional common units or other equity securities ofequal or senior rank will have the following effects:

 

•              yourproportionate ownership interest in us will decrease;

 

•              theamount of cash available for distribution on each unit may decrease;

 

•              becausea lower percentage of total outstanding common units will be subordinated units,the risk that a shortfall in the payment of the minimum quarterly distributionwill be borne by the common unitholders will increase;

 

•              therelative voting strength of each previously outstanding common unit may bediminished; and

 

•              themarket price of the common units may decline.

 

One of our objectives is to continually add to our reserves throughacquisitions of net profits interests in producing properties acquired in thefuture by the Operating Company. Our success is, in part, dependent on our abilityto raise capital from time to time. Our common unitholders may suffer dilutionin connection with future issuance of partnership units the proceeds of whichare used to fund such acquisitions.

 

***Cost reimbursementsdue our General Partner may be substantial and will reduce the cash availableto you.***

*** ***

Prior to making any regular quarterly distribution on the common units,we will reimburse (or set aside funds to reimburse) our General Partner and itsaffiliates, for all expenses they have incurred on our behalf. Thereimbursement of expenses could adversely affect our ability to pay cashdistributions to you. Our General Partner has sole discretion to determine theamount of these expenses. In addition, our General Partner and its affiliatesmay provide us with other services for which we will be charged fees asdetermined by our General Partner. Excluding reimbursements for costs andexpenses associated with this offering and the related transactions, weestimate that the total amount of the reimbursements and fees will beapproximately $2.3 million in the first year following this offering.

 

***Your liability maynot be limited if a court finds that common unitholder action constitutescontrol of our business.***

*** ***

A general partner of a partnership generally has unlimited liabilityfor the obligations of the partnership, except for those contractualobligations of the partnership that are expressly made without recourse to suchgeneral partner. While our partnership is organized under Delaware law, weconduct business in a number of other states. The limitations on the liabilityof holders of limited partner interests for the obligations of a limitedpartnership have

 

21

----

 

not been clearly established in some of the other states in which we dobusiness. You could be liable for our obligations as if you were a generalpartner if:

 

•              acourt or government agency determined that we were conducting business in astate but had not complied with that particular state’s partnership statute; or

 

•              yourright to act with other common unitholders to remove or replace the GeneralPartner, to approve some amendment to our partnership agreement or to takeother actions under our partnership agreement constitute “control” of ourbusiness.

 

In addition, Section 17-607 of the Delaware Revised Uniform LimitedPartnership Act provides that, under some circumstances, a common unitholdermay be liable to us for the amount of a distribution for a period of threeyears from the date of the distribution.

 

***Economic downturnscould impair the Operating Company’s access to capital, which could negativelyimpact our ability to pay you distributions and cause you to lose all or partof your investment.***

*** ***

The Operating Company will partially rely on bank loans and creditfacilities to make acquisitions of oil and natural gas properties. Economicdownturns could lead to decreases in revenues, net income and assets.Unfavorable economic conditions also could increase the Operating Company’sfunding costs, limit its access to the capital markets or result in decisionsby lenders not to extend credit to it. These events could prevent the OperatingCompany from making additional investments and harm its operating results,which in turn could negatively affect the amounts that the Operating Companypays to us in respect of the net profits interests we acquire from theOperating Company, and, therefore, our ability to pay you cash distributions.Similarly, we may be unable to make investments in additional net profitsinterests, which in turn could negatively impact our ability to pay youdistributions.

 

***The board ofdirectors of the General Partner may change most of our operating policies andstrategies without prior notice or common unitholder approval, the effects ofwhich could adversely affect our results of operations, financial condition orthe amount of cash available for distribution to unitholders.***

*** ***

The board of directors of our General Partner has the authority tomodify or waive most of our current operating policies and our strategieswithout prior notice and without common unitholder approval. We cannot predictthe effect that any changes to our current operating policies and strategieswould have on our business, operating results or value of our common units.However, the effects might be adverse, which could negatively impact ourability to pay you distributions and cause you to lose all or part of yourinvestment. In the event that such board of directors determines that we cannoteconomically pursue our investment objectives, they may at some future datedecide to seek to convert us to an operating company, pursue investmentsoutside of the upstream oil and gas industry or cause us to liquidate. Such aconversion or election to liquidate may not be effected without approval of arequisite percentage of the General Partner’s board of directors and theholders of a majority of our common units.

 

***If we issue seniorsecurities, such as preferred units, we will be exposed to additional risks, whichcould negatively impact our ability to pay you distributions and cause you tolose all or part of your investment.***

*** ***

Our present intention is not to issue any indebtedness of thePartnership. We may, however, issue preferred securities that are senior torights to distributions or in liquidation than our common units. We refer toany such preferred units collectively as senior securities. We may issue seniorsecurities to make investments in net profits interest royalties, or to pay ourobligations and expenses. We can offer no assurance that we will achieveresults that will permit the payment of any cash distributions. Further, if weissue senior securities, we will be prohibited from making distributions ifdoing so causes us to fail to maintain the asset coverage ratios ifdistributions are limited by the terms of any of the senior securities.

 

22

----

 

Certain risks apply to the issuance of senior securities, including thefollowing:

 

•              Wewill be exposed to increased risk of loss if we issue senior securities toraise cash to make investments. If we do issue senior securities, a decrease inthe value of our investments would have a greater negative impact on our netasset value and the value of our common units than if we did not issue seniorsecurities.

 

•              Thecosts of senior securities may exceed the income from the net profits interestsin oil and natural gas properties we purchase with the senior securities. Wewill suffer a decline in net asset value if the investment performance of thenet profits interests purchased with the proceeds of the senior securitiesfails to cover our costs (including any distributions paid on seniorsecurities).

 

•              Itis likely that any senior securities we may issue will be governed by aninstrument containing covenants restricting our operating flexibility.

 

•              We,and indirectly our common unitholders, will bear the cost of issuing andservicing senior securities, resulting in increased expenses that coulddecrease our distributions and investment return.

 

The occurrence of any of these risks could negatively impact ourability to pay distributions and cause you to lose all or part of yourinvestment.

 

***Increases in marketinterest rates may both reduce the value of our portfolio assets and increaseour cost of capital.***

*** ***

If the Operating Company incurs significant amounts of debt to financeits acquisitions activities, the cash we receive in respect of our net profitsinterests (which will be subordinated to debt service required to be paid bythe Operating Company) would be negatively affected by increases in marketinterest rates, which would in turn adversely affect the amount of cashavailable for distributions to unitholders. In addition, an increase ininterest rates would make it more expensive for the Operating Company to usedebt to finance its investments, which could in turn adversely affect theOperating Company’s ability to acquire additional producing properties and ourability to successfully implement our strategy. As a result, a significantincrease in market interest rates could reduce the value of our net profitsinterests burdening producing oil and gas assets and reduce the cash availablefor distributions to unitholders.

 

**Tax Risksto Common Unitholders**

 

***The IRS could treatus as a corporation for federal income tax purposes, which could substantiallyreduce the cash available for distribution to you.***

*** ***

The after-tax economic benefit of an investment in the common unitsdepends largely on our being treated as a partnership for federal income taxpurposes. We have not requested, and we do not plan to request, a ruling fromthe IRS on this or any other tax matter affecting us.

 

If we were treated as a corporation for federal income tax purposes, wewould pay federal income tax on our income at the corporate tax rate, which iscurrently a maximum of 35%. Distributions to you may be taxed again ascorporate dividends, and no income, gains, losses or deductions would flowthrough to you. Because a tax would be imposed upon us as a corporation, ourcash available for distribution to you would be substantially reduced. If wewere treated as a corporation there would be a material reduction in theafter-tax return to the unitholders, likely causing a substantial reduction inthe value of our common units.

 

Current law may change so as to cause us to be treated as a corporationfor federal income tax purposes or otherwise subject us to entity-leveltaxation. The partnership agreement provides that if a law is enacted or existinglaw is modified or interpreted in a manner that subjects us to taxation as acorporation or otherwise subjects us to entity-level taxation for federal,state or local income tax purposes, the minimum quarterly distribution amountand the target distribution amounts will be adjusted to reflect the impact ofthat law on us.

 

23

----

 

***If you are adepositary unitholder you may recognize gain from our sale of zero coupon bondseven if you do not receive cash distributions from us as a result of the sale.***

*** ***

Any gain from our sale of zero coupon bonds will be allocated to thecommon units that depositary unitholders received in exchange for zero couponbonds to account for the difference between the tax basis and fair market ofthe zero coupon bonds transferred to us. We do not anticipate makingdistributions as a result of proceeds from the sale of zero coupon bonds. Thus,a common unitholder might have gain allocated to him as a result of the sale ofzero coupon bonds that he is required to take into account in computing hisfederal income tax liability, even though no cash distributions are made to himby us.

 

***A successful IRScontest of the federal income tax positions we take may adversely affect themarket for our common units, and the cost of any IRS contest will be borne byour common unitholders and our General Partner.***

*** ***

We have not requested a ruling from the IRS with respect to ourtreatment as a partnership for federal income tax purposes or any other matteraffecting us. The IRS may adopt positions that differ from the conclusions ofour counsel expressed in this report or from the positions we take. It may benecessary to resort to administrative or court proceedings to sustain some orall of our counsel’s conclusions or the positions we take. A court may notagree with all of our counsel’s conclusions or positions we take. Any contestwith the IRS may materially and adversely impact the market for our commonunits and the price at which they trade. In addition, our costs of any contestwith the IRS will be borne indirectly by our common unitholders and our GeneralPartner because the costs will reduce our cash available for distribution.

 

***You may be requiredto pay taxes on your share of our income even if you do not receive any cashdistributions from us.***

*** ***

You will be required to pay any federal income taxes and, in somecases, state and local income taxes on your share of our taxable income even ifyou receive no cash distributions from us. You may not receive cashdistributions from us equal to your share of our taxable income or even the taxliability that results from that income.

 

***Tax gain or loss ondisposition of common units could be different than expected.***

*** ***

If you sell your common units, you will recognize a gain or loss equalto the difference between the amount realized and your tax basis in thosecommon units. Prior distributions to you in excess of the total net taxableincome you were allocated for a common unit, which decreased your tax basis in thatcommon unit, will, in effect, become taxable income to you if the common unitis sold at a price greater than your tax basis in that common unit, even if theprice is less than your original cost. A substantial portion of the amountrealized, whether or not representing gain, may be ordinary income. Inaddition, if you sell your common units, you may incur a tax liability inexcess of the amount of cash you receive from the sale.

 

***Tax-exempt entities,regulated investment companies and foreign persons face unique tax issues fromowning common units that may result in adverse tax consequences to them.***

*** ***

Investment in common units by tax-exempt entities, such as individualretirement accounts (known as IRAs), regulated investment companies (known asmutual funds) and non-U.S. persons raises issues unique to them. We expect allof our income will be qualifying income to a regulated investment company fortaxable years of the regulated investment company beginning after October 22,2004. Distributions to non-U.S. persons may be reduced by withholding tax atthe highest effective tax rate applicable to individuals, and non-U.S. commonunitholders may be required to file federal income tax returns and pay tax ontheir share of our taxable income.

 

***You will likely besubject to state and local taxes in states where you do not live as a result ofan investment in units.***

*** ***

In addition to federal income taxes, you will likely be subject toother taxes, including state and local taxes, unincorporated business taxes andestate, inheritance or intangible taxes that are imposed by the variousjurisdictions in which we do business or own property, even if you do not livein any of those jurisdictions. You will likely be required to file state andlocal income tax returns and pay state and local income taxes in some or all ofthese jurisdictions. Further, you may be subject to penalties for failure tocomply with those requirements. We will initially own assets in West Virginiaand Pennsylvania. Each of these states currently imposes a personal income

 

24

----

 

tax. It is your responsibility to file all United States federal, stateand local tax returns. Our counsel has not rendered an opinion on the state orlocal tax consequences of an investment in the common units.

 

**RiskFactors Related to Our General Partner**

 

***Our General Partnerand its management team have no experience managing a publicly tradedpartnership, and we cannot assure you that their past experience will besufficient to manage the Partnership.***

*** ***

Our General Partner’s senior management team lacks experience inmanaging a publicly traded partnership with a business plan and a cashdistribution policy as described herein. This lack of experience may hinder itsability to take advantage of attractive investment opportunities and, as aresult, achieve our investment objectives.

 

***If our GeneralPartner fails to develop or maintain an effective system of internal controls,we may not be able to accurately report our financial results or prevent fraud.As a result, current and potential common unitholders could lose confidence inour financial reporting, which would harm our business and the trading price ofour common units.***

*** ***

Effective internal controls are necessary for us to provide reliablefinancial reports, prevent fraud and operate successfully as a public company.If we cannot provide reliable financial reports or prevent fraud, ourreputation and operating results would be harmed. We cannot be certain that ourGeneral Partner’s efforts to develop and maintain our internal controls will besuccessful, that it will be able to maintain adequate controls over ourfinancial processes and reporting in the future or that we will be able tocomply with our obligations under Section 404 of the Sarbanes-Oxley Act of2002. Any failure to develop or maintain effective internal controls, ordifficulties encountered in implementing or improving our internal controls,could harm our operating results or cause us to fail to meet our reportingobligations. Ineffective internal controls could also cause investors to loseconfidence in our reported financial information, which would likely have anegative effect on the trading price of our common units.

 

***Our General Partnerwill have conflicts of interest.***

*** ***

Ensource, as the general partner of our General Partner and pursuant toa management agreement with our General Partner, will provide, or cause to beprovided, management and supervisory services to the Partnership and theGeneral Partner in consideration for reimbursement of the costs incurred and afixed base management fee of $50,000 per month payable in arrears. In addition,the incentive distribution rights held by our General Partner will entitle ourGeneral Partner to an increased share (an additional 24.75%) of cashdistributed by the Partnership in excess of specified threshold levels.Similarly, Ensource will be entitled to a management incentive fee under themanagement agreement with the Operating Company. The incentive distributionrights and the management incentive fee may create an incentive for Ensource tomaximize the short-term payments to us in respect of our net profits interestsrather than managing the Partnership in a manner better suited to the long termbenefits of all the unitholders. This arrangement may also create an incentivefor Ensource, through the General Partner, to selectively invest thePartnership’s assets in net profits interests burdening short-lived producingassets that generate significant cash flow over a relatively short time frame,thereby resulting in increased cash distributions by the Partnership in theshort term. Similarly, the management incentive fee may also create anincentive for Ensource to selectively invest the Operating Company’s assets inshort-lived producing assets that generate cash flow over a relatively shorttime frame.

 

Any expenses which Ensource incurs in relation to the business of theOperating Company are required to be paid by the Operating Company and will bededucted in calculating the net profits interests payable to us. These expensesare not subject to a limit other than as may be provided under a periodicreview by the board of directors of our General Partner and, as a result, theremay not be an incentive for Ensource to minimize these expenses.

 

***Our obligation toreimburse our General Partner for certain expenses could result in a conflictof interest, which could negatively impact our investment returns and the valueof your investment.***

*** ***

Under our partnership agreement, we will reimburse our General Partnerfor certain expenses it or Ensource incurs on our behalf, such as management,accounting, tax, legal and other administrative services and costs payable toemployees and third parties to monitor our management, financial and legalaffairs. As a result, investors in our common units will invest on a “gross”basis and receive distributions on a “net” basis after expenses, resulting in,among other things, a lower rate of return than might be achieved if aninvestor were to invest

 

25

----

 

in such properties directly. Due to this arrangement, there may betimes when our General Partner has interests that differ from those of ourcommon unitholders, giving rise to a conflict which could negatively impact ourinvestment returns and the value of your investment.

 

***We will pay ourGeneral Partner incentive distributions based on the level of cash wedistribute to our unitholders. This arrangement may lead Ensource to recommendriskier or more speculative investments for the Operating Company in an effortto maximize the General Partner’s incentive compensation.***

*** ***

To the extent that the available cash from operating surplus that isdistributed in any quarter exceeds the amount which must be distributed (or setaside for distribution) to each holder of common units and subordinated unitsoutstanding as of the record date for distribution before any amount isdistributed in respect of incentive distribution rights, which we refer to hereinas the Distribution Threshold Amount, the General Partner will participate insuch excess by receiving 24.75% of such excess in respect of its incentivedistribution rights (which is in addition to its 1% share of such excessdistributions in respect of its 1% general partner interest).

 

We expect that the quarterly Distribution Threshold Amount of $0.625per unit will occur in 2010, so incentive distribution rights will thereaftershare in quarterly distributions of available cash from operating surplus inexcess of $0.625 per unit.

 

The way in which the distributions payable to our General Partner inrespect of the incentive distribution rights is determined may encourageEnsource to cause the Operating Company to use leverage to increase the returnon its investments. Under certain circumstances, the use of leverage by theOperating Company may increase the likelihood of default, which would adverselyaffect our common unitholders, including common unitholders considering thisoffering, because payments in respect of the net profits interests burdeningthe properties would be subordinate to those of debt holders. Other keycriteria related to determining appropriate investments and investmentstrategies, including the preservation of capital, might be under-weighted byEnsource if it were to focus disproportionately on maximizing the incentivedistributions. Such a practice could result in Ensource causing the OperatingCompany to invest in more high cash flow properties with a shorter reserve lifethan would otherwise be the case, which could affect our ability to paydistributions at expected levels over the long term.

 

***Our General Partnerand Ensource’s liability will be limited under the partnership agreement, andwe will agree to indemnify our General Partner and Ensource against certainliabilities, which may lead our General Partner and Ensource to act in ariskier manner on our behalf than it would when acting for its own account.***

*** ***

Neither our General Partner nor Ensource has assumed any responsibilityto us other than the responsibility of our General Partner to provide theservices specified in our partnership agreement and the responsibility ofEnsource to provide the services to us specified in the management agreement,which will be entered upon consummation of the exchange offer, and they willnot be responsible for any action of the board of directors of the GeneralPartner in declining to follow Ensource’s advice or recommendations. Pursuantto the management agreement with our General Partner, which will be enteredupon consummation of the exchange offer, Ensource and its managing members,officers and employees will not be liable to us for their acts, under themanagement agreement, absent willful misfeasance, bad faith, gross negligenceor reckless disregard in the performance of their duties. We have agreed toindemnify, defend and protect the General Partner and its partners, directors,officers and employees with respect to all expenses, losses, damages,liabilities, demands, charges and claims arising from their acts on our behalfnot constituting bad faith, fraud or willful misconduct or, in the case ofcriminal acts, did not act with knowledge that the conduct was unlawful. Theseprotections may lead Ensource to act in a riskier manner when acting on ourbehalf, either by way of the management agreement or by virtue of its status asthe general partner of our General Partner, than it would when acting for itsown account.

 

***The OperatingCompany will pay Ensource an incentive management fee based on base net profitsinterests proceeds. This arrangement may lead Ensource to recommend riskier ormore speculative investments for the Operating Company in an effort to maximizeits incentive compensation.***

*** ***

As an incentive to acquire oil and natural gas properties andperforming its other duties under the management agreement, Ensource, and itsdesignees, which will include key employees of the General Partner and theOperating Company, will be entitled to receive a quarterly management incentivefee, payable by the Operating Company in arrears, based on a sliding percentageof Base NPI Net Proceeds (as defined on page 42 of this report).

 

26

----

 

The way in which the incentive management fee payable to Ensource isdetermined may encourage Ensource to cause the Operating Company to useindebtedness to increase the base net profits interests proceeds payable to us.Under certain circumstances, the use of indebtedness by the Operating Companymay increase the likelihood of default by the Operating Company in itsobligations for such indebtedness, which would adversely affect our commonunitholders, including common unitholders considering this offering, becausepayments in respect of the net profits interests burdening the properties wouldbe subordinate to those of debt holders. Other key criteria related todetermining appropriate investments and investment strategies, including thepreservation of capital, might be under-weighted by Ensource if it were to focusdisproportionately on maximizing the management incentive fee income. Such apractice could result in Ensource causing the Operating Company to invest inmore high cash flow properties with a shorter reserve life than would otherwisebe the case, which could affect our ability to pay distributions at expectedlevels over the long term.

 

The management incentive fee will not be payable by the OperatingCompany in respect of any calendar quarter in respect of which the cashdistribution to our common and subordinated unitholders from operating surplus(excluding the use of any cash contributed by our General Partner) for suchquarter is less than the minimum quarterly distribution per unit, or $0.50 perunit. The Partnership is not obligated to make this payment to the OperatingCompany, but the amount of such fee will be deducted each quarter in respect ofwhich it is paid from, and such deduction will have the effect of reducing theapplicable percentage of, Base NPI Net Proceeds otherwise payable to the Partnershipin connection with the net profits interest purchased from the OperatingCompany.

 

***Ensource may beremoved as the general partner of our General Partner without prior notice orconsent of the common unitholders of the Partnership, which could adverselyaffect our results of operations, financial condition and the amount of cashavailable for distribution to unitholders.***

*** ***

The limited partnership agreement of our General Partner permits thelimited partners of our General Partner to remove Ensource as the generalpartner of our General Partner if, among other events, the following occur: (i)Ensource is determined to have engaged in negligence or willful misconduct inthe performance of its obligations; (ii) Ensource is in material breach of our GeneralPartner’s partnership agreement, or (iii) we fail to pay the minimum quarterlydistributions of $0.50 per common unit for six consecutive quarters. Thelimited partners of the General Partner are a combination of investment funds,foundations, hedge funds and high net worth individuals. Because of ourorganizational structure, common unitholders of the Partnership will have noright to prevent such removal if they object to or disagree with such removal.Such removal may cause disruption in the management of our General Partner andthus us. It may also lead to a change in investment strategy and operatingpolicies of the Operating Company and us. We cannot predict the effect that anychanges to management and operating policies and strategies would have on ourbusiness, operating results and value of our common units. However, the effectsmight be adverse, which could negatively impact our ability to pay youdistributions and cause you to lose all or part of your investment.

 

**ITEM 1B.****       UNRESOLVED STAFF COMMENTS**

** **

None

 

**ITEM 3.****          LEGAL PROCEEDINGS**

** **

None.

 

**ITEM 4.****          SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS**

** **

None.

 

27

----

 

**PART II**

 

**ITEM 5.****                             MARKET FOR COMMON UNITSAND RELATED UNITHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES**

** **

**MarketInformation, Holders**

 

There is currently no public market for our common units. Our commonunits have been approved for listing on the New York Stock Exchange, subject toofficial notice of issuance, under the symbol “ENF.”

 

As of March 29, 2006, all of our common units are held by one holder.

 

**Distributions**

 

We have not paid any distributions on our common units. We intend topay quarterly distributions to our common and subordinated common unitholdersout of assets legally available for distribution. Our quarterly distributions,if any, will be determined by the board of directors of our General Partner.

 

After completion of the second-step merger, we plan to establish an“opt in” distribution reinvestment plan for our common unitholders. If weimplement such a plan, then, if we declare a distribution, common unitholderswho specifically “opt in” to the distribution reinvestment plan will receivecommon units in lieu of cash distributions.

 

**RecentSales of Unregistered Securities**

 

There were no sales of unregistered securities by us during 2005.

 

**IssuerPurchases of Equity Securities**

 

We did not purchase any of our common units during 2005.

 

**ITEM 6.****                             SELECTED FINANCIAL DATA**

** **

The Partnership had not commenced operations effective December 31,2005. All activity through December 31, 2005, is related to the Partnershipformation and preparation of the proposed Partnership Offering which ispresented in the Financial Statements and the Notes to the FinancialStatements. The Partnership has selected December 31 as its fiscal yearend.

 

**ITEM 7.****                             MANAGEMENT DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

** **

The following discussion should be read in conjunction with theFinancial Statements, including the notes thereto, included elsewhere in thisreport.

 

**General**

 

We are a Delaware limited partnership formed in May 2005. We wereformed by our General Partner for the purpose of conducting and consummatingthe exchange offer and subsequent merger as more fully described under “Item 1.Business” and executing the business plan described herein. Our primarybusiness model, after the consummation of the transactions described in thisreport, is to increase unitholder value in terms of cash distributions percommon unit and capital appreciation through the acquisition of net profitsinterests on oil and natural gas properties that the Operating Company, awholly-owned subsidiary of the General Partner, will acquire in the future andto manage effectively the current assets of NGT, including reinvesting theproceeds from the sale of the zero coupon bonds that constitute a part of thedepositary units.

 

Because we are a limited partnership, our operations will be managed byour General Partner. Our General Partner is a limited partnership whose generalpartner is Ensource. Ensource will manage the operations of our GeneralPartner, and our General Partner will in turn manage us. Pursuant to thelimited partnership agreement of

 

28

----

 

our General Partner, our General Partner has delegated its powers andauthorities to manage our business and affairs to the board of directors of ourGeneral Partner. Additionally, the board of directors of our General Partnerwill cause our General Partner to enter into a management agreement withEnsource pursuant to which Ensource will provide to us certain supervisory andmanagement functions. Our General Partner will provide all administrative andother services and functions to us. However, the board of directors will retainthe power to: 

 

•      obligate our General Partner to makeexpenditures in excess of $15 million dollars for any single acquisitionof oil and gas properties;

 

•      approve any sale or other disposition of ourGeneral Partner’s assets involving net proceeds of more than $15 million;

 

•      approve the incurrence of any indebtednessfor borrowed money (not including trade payables incurred in the GeneralPartner’s ordinary course of business) on behalf of the Operating Company orotherwise issue senior or preferred indebtedness of our General Partner of morethan $15 million outstanding at any one time;

 

•      approve the issuance of any general partnerinterests, or classes or series of such interests, or options, rights, warrantsor appreciation rights relating to such interests, or any other type of equitysecurity that our General Partner may lawfully issue other than classes ofinterests then outstanding;

 

•      approve any merger, sale or consolidationwith any person;

 

•      cause the General Partner to effect arecapitalization or reorganization;

 

•      approve any commodity hedging transactionwhereby more than 50% of the Operating Company’s expected production from theOperating Company’s proved developed producing reserves is hedged for thesucceeding 12-month period or whereby the term of such hedging transactionexceeds two years;

 

•      approve any transactions with any affiliateunless such transactions are on an arms-length basis and involve considerationof less than or equal to $250,000;

 

•      approve any change in our General Partner’saccountant; or

 

•      approve any amendment or modification of anymaterial term of the management agreements between our General Partner andEnsource.

 

We do not own any properties and we currently do not conduct any operations.If the exchange offer and second-step merger are successfully consummated, ourbusiness plan is to own and hold the legacy assets acquired from NGT in thesecond-step merger, which will provide the source for ongoing distributions toour limited partners. Upon consummation of the exchange offer, we plan to sellthe zero coupon bonds underlying the depositary units that are accepted by usfor exchange. Also at that time, our General Partner will contribute $20.05million for its 1% general partner interest, the incentive distribution rights,subordinated units and the warrant to purchase a total of 1,000,000 commonunits at an exercise price of $36.40 per common unit.

 

The General Partner owns all the limited liability company interests ofthe Operating Company, which will be an operating company that will acquire andhold title to any oil and natural gas properties acquired after the second-stepmerger. We will invest a portion of the net proceeds from the capitalcontributions of the General

 

29

----

 

Partner, along with net proceeds from the sale of zero coupon bonds(which could total up to approximately $84.94 million based on quoted prices asof December 31, 2005 and assuming the sale of the full $117.6 million faceamount of zero coupon bonds underlying all outstanding depositary units), toacquire up to 99% net profits interests in oil and gas properties purchased bythe Operating Company. The Operating Company intends to set up a borrowing basefacility with a lender to manage working capital requirements and to fundacquisitions.

 

We also plan to distribute on a quarterly basis all available cash fromoperating surplus that we receive from the ownership of those interests beyondthat required to pay our costs and fund reasonable working capital reserves. Wedo not anticipate incurring any debt at the Partnership other than tradeaccounts payable incurred in the ordinary course of our business.

 

***Critical AccountingPolicies***

*** ***

We expect to make estimates and assumptions that affect the reportedamounts of our assets, liabilities, revenues and expenses and relateddisclosure of contingent assets and liabilities. Certain accounting policiesinvolve judgments and uncertainties to such an extent that there is reasonablelikelihood that materially different amounts could have been reported underdifferent conditions, or if different assumptions had been used. We plan toevaluate our estimates and assumptions on a regular basis. We will base ourestimates on our management’s experience in the energy industry and variousother assumptions we believe to be reasonable under the circumstances, theresults of which will form the basis for making judgments about the carryingvalues of assets and liabilities that are not readily apparent from othersources. Actual results may differ from these estimates and assumptions. Below,we have provided expanded discussion of the more significant accountingpolicies, estimates and judgments we expect to use. After the consummation ofthe exchange offer, we will discuss the development, selection and disclosureof each of these with our audit committee. We believe these accounting policiesreflect our more significant estimates and assumptions used in preparation ofour financial statements.

 

***Basis of Accounting***

* *

NGT’s financial statements differ from our financial statements, whichare prepared in accordance with accounting principles generally accepted in theUnited States of America, due to the following: (i) certain cash reserves maybe established for contingencies which were not accrued in the financialstatements; (ii) amortization of the legacy assets is charged directly to NGT’strust corpus; and (iii) the sale of percent of the net profits interests isreflected in NGT’s statements of distributable income as cash proceeds to NGT.

 

***Net ProfitsInterests in Gas Properties***

* *

We plan to periodically assess our net profits interests, including thelegacy assets, to determine whether their net capitalized cost is impaired. Wewill determine if a writedown is necessary to its investment in the net profitsinterests in gas properties to the extent that total capitalized costs, lessaccumulated amortization, exceed undiscounted future net revenues attributableto proved gas reserves of the underlying properties. We will then provide awritedown to the extent that the net capitalized costs exceed the discountedfuture net revenues attributable to proved gas reserves of the underlyingproperties. Any such writedown would not reduce distributable income.

 

Amortization of the net profits interests in gas properties will becalculated on a units-of-production basis, whereby our cost basis in theproperties will be divided by total proved reserves to derive an amortizationrate per reserve unit. Such amortization will not reduce distributable income,rather it is charged directly to properties. Revisions to estimated futureunits-of-production will be treated on a prospective basis beginning on thedate significant revisions are known.

 

The net profits interest impairment test and the determination ofamortization rates will be dependent on estimates of proved gas reservesattributable to our net profits interests. Numerous uncertainties are inherentin estimating reserve volumes and values, including economic and operatingconditions, and such estimates are subject to change as additional informationbecomes available.

 

***Income Taxe****s*

* *

Our tax counsel have advised us that, under then current tax laws, wewill be classified as partnership for federal and state income tax purposesand, therefore, would not be subject to taxation at the Partnership level.

 

30

----

 

Accordingly, no provision for federal or state income taxes has beenmade. However, the opinion of tax counsel is not binding on taxing authorities.

 

***Oil and Natural GasReserve Quantities***

* *

Our estimate of proved reserves will be based on the quantities ofnatural gas and oil that engineering and geological analysis demonstrate, withreasonable certainty, to be recoverable from established reservoirs in thefuture under current operating and economic parameters. We expect to engage anindependent reservoir engineer to prepare an annual reserve and economicevaluation of all our properties on a well-by-well basis.

 

Reserves and their relation to estimated future net cash flows impactour depletion and impairment calculations. As a result, adjustments todepletion and impairment will be made concurrently with changes to reserveestimates. We will prepare our reserve estimates, and the projected cash flowsderived from these reserve estimates, in accordance with SEC guidelines. Theindependent engineering firm described above will adhere to the same guidelineswhen preparing their reserve reports. The accuracy of our reserve estimateswill be a function of many factors including the following: the quality andquantity of available data, the interpretation of that data, the accuracy ofvarious mandated economic assumptions, and the judgments of the individualspreparing the estimates.

 

Our proved reserve estimates will be a function of many assumptions,all of which could deviate significantly from actual results. As such, reserveestimates may materially vary from the ultimate quantities of natural gas andoil and natural gas liquids eventually recovered.

 

***Revenue Recognition***

* *

Under our business plan, we will hold net profits interests inunderlying properties owned by others. We will use the sales method to accountfor natural gas imbalances. Under this method, revenue will be recorded on thebasis of natural gas and oil actually sold by us. In addition, we will recordrevenue for our share of natural gas and oil sold by other owners that cannotbe volumetrically balanced in the future due to insufficient remainingreserves. We will also reduce revenue for other owners’ natural gas sold by usthat cannot be volumetrically balanced in the future due to insufficientremaining reserves. Our remaining over- and underproduced natural gas balancingpositions will be considered in our proved reserves.

 

***DerivativeInstruments and Hedging Activities***

* *

We plan to use derivative financial instruments to achieve a morepredictable cash flow from our natural gas production by reducing our exposureto price fluctuations. We currently have no such hedges. We plan to use swaps,collars, floors or any combination thereof. We will account for theseactivities pursuant to SFAS No. 133 — Accounting for Derivative Instruments andHedging Activities, as amended. This statement establishes accounting andreporting standards requiring that derivative instruments (including certainderivative instruments embedded in other contracts) be recorded at fair marketvalue and included in the balance sheet as assets or liabilities.

 

The accounting for changes in the fair value of a derivative instrumentdepends on the intended use of the derivative and the resulting designation,which is established at the inception of a derivative. SFAS No. 133 requiresthat a company formally document, at the inception of a hedge, the hedgingrelationship and the entity’s risk management objective and strategy forundertaking the hedge, including identification of the hedging instrument, thehedged item or transaction, the nature of the risk being hedged, the methodthat will be used to assess effectiveness and the method that will be used tomeasure hedge ineffectiveness of derivative instruments that receive hedgeaccounting treatment.

 

For derivative instruments designated as cash flow hedges, changes infair value, to the extent the hedge is effective, will be recognized in othercomprehensive income until the hedged item are recognized in earnings. Hedgeeffectiveness is assessed at least quarterly based on total changes in thederivative’s fair value. Any ineffective portion of the derivative instrument’schange in fair value will be recognized immediately in earnings.

 

In December 2004, FASB issued a revised version of SFAS 123,Share-based Payment. The statement requires public entities to measure thecosts of employee services received in exchange for an award of equityinstrument based on the grant-date fair value of the award. The costs will berecognized over the period during which an employee is required to provideservice in exchange for the award, generally the vesting period. The grant-datefair value of employee share options and similar instruments will be estimatedusing option pricing models and

 

31

----

 

adjusted for the unique characteristics of those instruments. We do notexpect that the adoption of this interpretation to have an impact on ourfinancial position, results of operations or cash flows.

 

In March 2005, FASB issued Interpretation (FIN) No. 47, Accounting forConditional Asset Retirement Obligations, which provides additional guidancefor SFAS 143, Asset Retirement Obligation. The statement provides clarificationthat the term asset obligation refers to a legal obligation to perform assetretirement activity in which the timing and (or) method of the settlementconditional on a future event that may or may not be within the control of theentity. The statement also clarifies when an entity would have sufficientinformation to reasonably estimate the fair value of an asset retirementobligation. We will prepare our financial statements accordingly.

 

**Liquidityand Capital Resources**

 

Immediately after the second-step merger, we expect to have net cashresources of approximately $95 million and no indebtedness. We will generatecash from the contribution of the General Partner, net of expenses, the netproceeds from the sale of the zero coupon bonds (which could total up toapproximately $84.94 million based on quoted prices as of December 31, 2005 andassuming the sale of the full $117.6 million face amount of zero coupon bondsunderlying all outstanding depositary units), and cash flows from the legacynet profits interests and on our financial assets, including interest earnedfrom the temporary investment of our cash assets in U.S. government securitiesand other high-quality debt maturing in one year or less. Our primary use ofour financial assets will be acquisitions of net profits interests burdeningproducing properties that are acquired in the future by the Operating Companyand cash distributions to holders of our common and subordinated units.

 

**ITEM 7A.****                    QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK**

** **

We plan to use derivative financial instruments to achieve a morepredictable cash flow from our natural gas production by reducing our exposureto price fluctuations. We currently have no such hedges. We do not plan toincur debt at the Partnership level. The primary objective of the followinginformation is to provide forward-looking quantitative and qualitativeinformation about our potential exposure to market risks. The term “marketrisk” refers to the risk of loss arising from adverse changes in natural gasprices. The disclosures are not meant to be precise indicators of expectedfuture losses, but rather indicators of reasonably possible losses. Thisforward-looking information provides indicators of how we view and manage ourongoing market risk exposures.

 

Our market risk exposure will be in the pricing applicable to thenatural gas production attributable to our net profits interests. Realizedpricing is primarily driven by the spot market prices applicable to our naturalgas production and the prevailing price for crude oil. Pricing for natural gasproduction has been volatile and unpredictable for several years, and we expectthis volatility to continue in the future. The prices we receive for productiondepend on many factors outside of our control.

 

We plan to enter into hedging activities with respect to a portion ofour projected natural gas production through various transactions which hedgethe future prices received. These transactions may include price swaps wherebywe will receive a fixed price for our production and pay a variable marketprice to the contract counterparty. These hedging activities are intended to supportnatural gas prices at targeted levels and to manage our exposure to natural gasprice fluctuations. We do not plan to hold or issue derivative instruments forspeculative trading purposes.

 

**ITEM 8.****                             FINANCIAL STATEMENTS ANDSUPPLEMENTARY DATA**

** **

The information required in this Item 8 is included in the financialstatements beginning on page 50.

 

**ITEM 9.****                             CHANGES IN ANDDISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE**

** **

None.

 

32

----

 

**ITEM 9A.****       CONTROLS AND PROCEDURES**

** **

We maintain a set of disclosure controls and procedures that aredesigned to ensure that information required to be disclosed by us in thereports filed by us under the Exchange Act is recorded, processed, summarizedand reported within the time periods specified in the SEC’s rules and forms. Asof the end of the period covered by this report, we evaluated, under thesupervision and with the participation of our management, including ourPresident and Chief Executive Officer and our Executive Vice President andChief Financial Officer, the effectiveness of our disclosure controls andprocedures pursuant to Rule 13a-15 of the Exchange Act. Based on thatevaluation, our President and Chief Executive Officer and our Executive Vice Presidentand Chief Financial Officer concluded that our disclosure controls andprocedures are effective.

 

During the most recent fiscal quarter, there have been no changes inour internal control over financial reporting that has materially affected, oris reasonably likely to materially affect, our internal control over financialreporting.

 

**ITEM 9B.****       OTHER INFORMATION**

** **

None.

 

33

----

 

**PART III**

 

**ITEM 10.****       DIRECTORS AND EXECUTIVE OFFICERS OF THE GENERALPARTNER.**

** **

**Directors and Executive Officers of ourGeneral Partner**

 

The following table shows information for those persons who will bemembers of the General Partner’s board of directors and Ensource’s existingexecutive officers. Members of the General Partner’s board of directors areelected for one-year terms, or until their successor is elected and qualified,and the General Partner’s executive officers are appointed by the board ofdirectors. 

 
| **Name**           | ** ** | **Age** | ** ** | **Position with our General Partner**                |
|--------------------|------------|---------|------------|------------------------------------------------------|
| Scott W. Smith     |       | 47      |       | Director, Chairman and Chief Executive Officer       |
| Marshall M. Eubank |       | 41      |       | Executive Vice President and Chief Operating Officer |
| Jacob Roorda       |       | 48      |       | Director                                             |
| S.P. Johnson       |       | 50      |       | Director                                             |
| Mark J. Warner     |       | 42      |       | Director                                             |

 

*Scott W. Smith* isDirector, Chairman and Chief Executive Officer of the General Partner. He hasover 25 years of experience in the energy industry, primarily in businessdevelopment, marketing, and acquisition and divestiture of producing assets andexploration/exploitation projects in the energy sector. Mr. Smith’sexperience includes evaluating, structuring, negotiating and managing businessand investment opportunities, including energy investments similar to ourtargeted investments totaling approximately $400 million as both boardmember and principal investor in Wiser Investment Company LLC, the largestshareholder in The Wiser Oil Company (NYSE:WZR) until its sale to Forest OilCorporation (NYSE:FST) in June of 2004. From June 2000 to June 2004 Mr. Smithserved on the board of directors of The Wiser Oil Company. Mr. Smith wasalso a member of the executive committee of The Wiser Oil Company and aprincipal of Sabine Petroleum Partners, LP.

 

*Marshall M. Eubank*is Executive Vice President and Chief Financial Officer of the General Partner.He has over 18 years of corporate finance, investment banking and businessdevelopment and property acquisition experience in the investment banking andenergy sectors. Mr. Eubank’s expertise includes soliciting, arranging,structuring, and negotiating single and multi-party transactions for debt,equity and joint venture instruments for small to medium sized upstream,pipeline and oil field service companies. From December 2001 to December 2004Mr. Eubank served as Vice President, Business Development of Black Stone MineralsCompany, LP, or Black Stone, where he was responsible for raising capital frominstitutional investors and sourcing and negotiating the acquisition of oil andnatural gas properties in the United States. During his tenure with BlackStone, Mr. Eubank was directly involved in the acquisition ofapproximately $300 million of oil and natural gas properties. From June1997 to December 2001, Mr. Eubank worked for Enron Energy CapitalResources as a director of producer finance where he generated and managed aportfolio of investments in the exploration and production and oil fieldservice segments. Prior to joining Enron Energy Capital Resources,Mr. Eubank was Vice President of EnCap Investments, LLC, where he wasresponsible for managing corporate finance engagements as well as investmentsin EnCap’s institutional funds for exploration and production companies and midstream companies.

 

*Jacob Roorda* is aDirector of the General Partner. He is currently Vice President, Corporate ofHarvest Energy Trust (NYSE: HTE), a leading energy trust based in Calgary,Alberta. From June 1999 to July 2002 Mr. Roorda served as Managing Director ofResearch Capital, an investment banking firm, and was responsible for theoverall direction and operations of the Calgary investment banking office ofthe firm. From 1991 to 1996 Mr. Roorda was Manager of Business Development atFletcher Challenge. In January 1996 he co-founded Primewest Energy Trust (NYSE:PWI) and served as Director and Vice President — Corporate where he oversawacquisition strategies. Mr. Roorda holds a Bachelor of Applied Science degreefrom Queen’s University and a Master of Business Administration from theUniversity of Calgary. Mr. Roorda has also held a number of senior engineeringpositions with Dome Petroleum Ltd. From 1987 to 1991 he was Vice President ofthe equity research group and was a ranked oil and natural gas analyst at BZWCanada Ltd. in Toronto.

 

*S.P. Johnson IV*is a Director of the General Partner. Mr. Johnson is currently the President,Chief Executive Officer and a member of the Board of Directors of CarrizoOil & Gas, Inc. (NASDAQ:CRZO) and has been since 1993. Prior to thattime, he worked for 15 years for Shell Oil Company. His managerial positionsincluded Operations Superintendent, Manager of Planning and Finance and Managerof Development Engineering.

 

34

----

 

Mr. Johnson is a Registered Petroleum Engineer and has a B.S. inMechanical Engineering from the University of Colorado. Mr. Johnson is also adirector of Basic Energy Services, Inc.

 

*Mark J. Warner* isDirector of the General Partner. He currently is Director of CorporateDevelopment for PointOne, Inc. in Austin, Texas. In this role, he isresponsible for all capital markets and mergers and acquisitions activity forthe company. Previously, Mr. Warner was Senior Vice President and head ofthe Austin, Texas office of Growth Capital Partners, L.P., one of the largestregional investment and merchant-banking firms in the Southwest. He successfullyassisted a variety of companies in a broad range of industries execute capitalraising and merger, acquisition and divestiture transactions. From 1995 to July2000 Mr. Warner was with Enron Corporation in Houston, Texas as a Directorin Enron North America’s energy finance group. From 1989 to 1993 he served asManager of Petroleum Engineering for Remington Oil Company (formerlyBox Energy) in Dallas, Texas. From 1987-1989 he was a reservoir engineerwith Marathon Oil Company in Lafayette, Louisiana working in the offshore Gulfof Mexico. Mr. Warner has previously served as a member of the board ofdirectors of Hornbeck Offshore Services, Inc. (NYSE:HOS), an integrated marinetransportation company in New Orleans, Louisiana and is currently a director ofQuicksilver Resources, Inc (NYSE:KWK) a Fort Worth, Texas based naturalgas exploration and production company where he serves on the compensation andaudit committees and chairs the nominating committee.

 

***Audit Committee***

*** ***

Our board of directors has determined that it is not necessary for usto have a standing audit committee at this time.  Upon consummation of theexchange offer, an audit committee will be formed which will be responsible forapproving our independent accountants, reviewing with our independentaccountants the plans and results of the audit engagement, approvingprofessional services provided by our independent accountants, reviewing theindependence of our independent accountants and reviewing the adequacy of ourinternal accounting controls.

 

Upon consummation of the exchange offer, the members of the GeneralPartner’s audit committee will be Mark J. Warner, Jacob Roorda and S. P.Johnson IV, all of whom will both be independent for purposes of the NYSEcorporate governance rules and SEC rules. The board of directors intends todesignate Mr. Warner as audit committee financial expert afterconsummation of the exchange offer.

 

***Conflicts Committee***

*** ***

Upon consummation of the exchange offer, the members of the GeneralPartner’s conflicts committee will be Mr. Jacob Roorda and Mr. Mark J. Warner.Pursuant to our General Partner’s limited partnership agreement, the conflictscommittee will review specific matters that the board of directors believes mayinvolve conflicts of interest. The conflicts committee will determine if theresolution of the conflict of interest is fair and reasonable to ourPartnership. Our General Partner’s limited partnership agreement provides thatmembers of the committee may not be officers or employees of our Partnership ordirectors, officers or employees of any of our affiliates and must meet theindependence standards for service on an audit committee of a board ofdirectors as established by the NYSE and SEC rules. Any matters approved by theconflicts committee will be conclusively deemed to be fair and reasonable toour Partnership and approved by all of our unitholders.

 

***CompensationCommittee***

*** ***

Upon consummation of the exchange offer, the members of the GeneralPartner’s compensation committee will be Mr. S.P. Johnson IV and Mr. JacobRoorda. The compensation committee will be responsible for determining thecompensation of Ensource’s executive officers and approving grants under ourequity compensation plans.

 

***Nominating Committeeand Corporate Governance Committee***

*** ***

Upon consummation of the exchange offer the members of the GeneralPartner’s nominating and corporate governance committee will be independent forpurposes of the NYSE corporate governance rules and SEC rules. The nominatingand corporate governance committee will be responsible for selecting nomineesto fill vacancies on the General Partner’s board of directors or a committeethereof, developing and recommending to the board of directors a set ofcorporate governance principles and overseeing the evaluation of the board ofdirectors and our management.

 

35

----

 

The nominating and corporate governance committee will considercandidates for board membership suggested by its members and other boardmembers.

 

**Governance Matters**

** **

***Independence ofBoard Members***

*** ***

Our general partner is committed to having a board of directors thatconsists of at least three independent directors. Pursuant to the NYSE listingstandards, a director will be considered independent if the board determinesthat he or she does not have a material relationship with our general partneror us (either directly or as a partner, unitholder or officer of anorganization that has a material relationship with our general partner or us).The independent members of the board of directors of our general partner willserve as the initial members of the audit and conflicts committees.

 

***HeightenedIndependence for Audit Committee Members***

*** ***

As required by the Sarbanes-Oxley Act of 2002, the SEC has adoptedrules that direct national securities exchanges and associations to prohibitthe listing of securities of a public company if members of its audit committeedo not satisfy a heightened independence standard. In order to meet thisstandard, a member of an audit committee may not receive any consulting fee,advisory fee or other compensation from the public company other than fees forservice as a director or committee member and may not be considered anaffiliate of the public company. The board of directors of our general partnerexpects that all members of its audit committee will satisfy this heightenedindependence requirement.

 

***Audit CommitteeFinancial Expert***

*** ***

An audit committee plays an important role in promoting effectivecorporate governance, and it is imperative that members of an audit committeehave requisite financial literacy and expertise. As required by theSarbanes-Oxley Act of 2002, SEC rules require that a public company disclosewhether or not its audit committee has an “audit committee financial expert” asa member. An “audit committee financial expert” is defined as a person who,based on his or her experience, possesses all of the following attributes:

 

•              Anunderstanding of generally accepted accounting principles and financialstatements;

 

•              Anability to assess the general application of such principles in connection withthe accounting for estimates, accruals, and reserves;

 

•              Experiencepreparing, auditing, analyzing or evaluating financial statements that presenta breadth and level of complexity of accounting issues that are generallycomparable to the breadth and level of complexity of issues that can reasonablybe expected to be raised by our financial statements, or experience activelysupervising one or more persons engaged in such activities;

 

•              Anunderstanding of internal controls and procedures for financial reporting; and

 

•              Anunderstanding of audit committee functions.

 

The board of directors of our general partner expects that Mr. Warnerwill constitute the “audit committee financial expert” on our General Partner’saudit committee.

 

***Executive Sessionsof Board***

*** ***

The General Partner’s board of directors will hold regular executivesessions in which non-management board members meet without any members ofmanagement present. The purpose of these executive sessions is to promote openand candid discussion among the non-management directors. During such executivesessions, one director is designated as the “presiding director,” who isresponsible for leading and facilitating such executive sessions.

 

36

----

 

**Section 16(a) Beneficial Ownership ReportingCompliance**

** **

Section 16(a) of the Securities Exchange Act of 1934 requires ourGeneral Partner’s officers and directors, and persons who own more than10 percent of a registered class of our equity securities to file with theSEC and the New York Stock Exchange reports of ownership of our securities andchanges in reported ownership. Officers and directors of our General Partnerand greater than 10 percent common unitholders are required by SEC rulesto furnish to us copies of all Section 16(a) reports that they file. Basedsolely on a review of reports furnished to our General Partner, we believe thatduring the fiscal year ended December 31, 2005 our General Partner’sofficers, directors and greater than 10 percent common unitholders filedall reports they were required to file under Section 16(a).

 

**Code of Ethics**

** **

As the Partnership does not have employees, it has not adopted a codeof ethics.

 

**ITEM 11.****       EXECUTIVE COMPENSATION.**

** **

We have not paid, but may in the future pay, annual compensation toexecutive officers for their services as executive officers.

 

**Stock Option Grants in Last Fiscal Year**

** **

No options were granted during 2005.

 

**Aggregated Option Exercises in Last FiscalYear and Fiscal Year End Option Values**

** **

No option exercises were made during 2005.

 

**Long Term Incentive Plan Awards**

** **

No long term incentive awards were made during 2005.

 

**Compensation of Directors**

** **

Each independent director will receive an annual fee of $50,000 inquarterly payments. They will also receive reimbursement of reasonableout-of-pocket expenses incurred in connection with participating in each boardmeeting and will receive reimbursement of reasonable out-of-pocket expensesincurred in connection with participating in each committee meeting. Inaddition, the chairman of the audit committee will receive an annual fee of$10,000 in quarterly payments and each chairman of any other committee willreceive an annual fee of $5,000 in quarterly payments for their additionalservices in these capacities. In addition, the General Partner will purchasedirectors and officers’ liability insurance on behalf of its directors andofficers. Independent directors will receive 75% of their directors’ fees paidin our common units issued at a price per share equal to the market price atthe time of payment.

 

No compensation is paid to directors who are not independent directors.

 

**Long-Term Incentive Plan**

** **

Our General Partner has adopted the 2005 Long-Term Incentive Plan,which we refer to as the 2005 Plan. The 2005 Plan is intended to promote theinterests of us by encouraging employees, consultants and directors of ourGeneral Partner who perform services for us, our general partner or ouraffiliates to acquire or increase their equity interests in us and to provide ameans whereby they may develop a sense of proprietorship and personalinvolvement in our development and financial success through the award of unitoptions, restricted units, phantom units and unit appreciation rights. The 2005Plan was developed to encourage recipients of equity awards under the plan toremain with our General Partner and to devote their best efforts to ourbusiness and that of our General Partner.

 

The 2005 Plan will be governed by our General Partner’s board ofdirectors or a committee appointed by the board, whose significant powersinclude, but are not limited to:

 

37

----

 

•              (i)designating participants in the plan;

 

•              (ii) determiningthe type of equity awards to be granted to a participant;

 

•              (iii) determiningthe number of units to be covered by the equity awards;

 

•              (iv) determiningthe terms and conditions of any equity award;

 

•              (v) determining,whether, to what extent, and under what circumstances participants may settle,exercise, cancel or forfeit any equity award;

 

•              (vi) interpretingand administering the 2005 Plan and any instrument or agreement relating to anequity award;

 

•              (vii) establishing,amending, suspending or waiving such rules and regulations and appointing suchagents as it shall deem appropriate for the proper administration of the 2005Plan; and

 

•              (viii) makingany other determination and taking any other action that the committee or boarddeems necessary or desirable for the administration of the 2005 Plan.

 

Subject to adjustment as provided in the 2005 Plan documents, theaggregate number of our units that may be awarded to participants is 500,000.Awards may be made in the form of unit appreciation rights, restricted units,phantom units or options to purchase units. Awards under this plan may be madeto any employee, consultant or director of our General Partner. The units to beawarded under this plan may be obtained through purchases made on the openmarket, from our General Partner, from affiliates of our General Partner, fromus or any of these combinations.

 

The exercise price of unit options to be issued under the 2005 Plan, ifany, will be determined by the board (or committee thereof) at its discretionat the date of grant, but may not be less than 100% of its fair market value asof the date of grant. The committee will determine the time or times at whichthe awards may be exercised in whole or in part, and the method or methods bywhich any payment of the exercise price with respect thereto may be made ordeemed to have been made, which may include, without limitation, cash, notesreceivable from the participant, or cashless-broker transactions or otheracceptable forms of payment.

 

The 2005 Plan will be effective from the date of its approval until theearliest of all available units under the plan have been issued to participantsor the termination of the plan by our General Partner’s board of directors.

 

**Compensation Committee Interlocks and InsiderParticipation**

** **

None of the General Partner’s executive officers serves as a member ofthe board of directors or compensation committee of any entity that has one ormore of its executive officers serving as a member of the General Partner’sboard of directors or its compensation committee.

 

**ITEM 12.****       SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERSAND MANAGEMENT.**

** **

The following table sets forth the beneficial ownership of our commonunits and subordinated units (i) as of March 29, 2006 and (ii) as they will beowned upon the closing of the exchange offer and second-step merger by:

 

•              eachperson known to us to be a beneficial owner of more than 5% of the units,

 

•              byeach director and executive officer of our General Partner and

 

38

----

 

•              byall directors and executive officers of our General Partner as a group.

 

•              Unlessotherwise indicated, the business address of all persons named below is 7500San Felipe, Suite 440, Houston, Texas, 77063.

 

The amounts and percentage of units beneficially owned are reported onthe basis of regulations of the SEC governing the determination of beneficialownership of securities. Under the rules of the SEC, a person is deemed to be a“beneficial owner” of a security if that person has or shares “voting power,”which includes the power to vote or to direct the voting of such security, or“investment power,” which includes the power to dispose of or to direct thedisposition of such security. A person is also deemed to be a beneficial ownerof any securities of which that person has a right to acquire beneficialownership within 60 days. Under these rules, more than one person may bedeemed a beneficial owner of the same securities and a person may be deemed abeneficial owner of securities as to which he has no economic interest.

 

Percentage of beneficial ownership as of March 29, 2006 is based on 990common units and no subordinated units outstanding. The percentage ofbeneficial ownership upon consummation of the exchange offer and second stepmerger is based on a total of 6,545,322 common units and 627,737 subordinatedunits outstanding.

 
| ** **                                                        | ** ** | **Common  Units**    | ** ** | **Percentage  of  Common Units**        | ** ** | **Subordinated  Units(1)** | ** ** | **Percentage  of  Subordinated Units**  | ** ** | **Percentage  of  Total Units** | ** ** |
|-------------------------------------------------------------------|------------|----------------------|------------|-----------------------------------------|------------|----------------------------|------------|-----------------------------------------|------------|---------------------------------|------------|
| **Name**                                                          | ** ** | **Currently  Owned** | ** ** | **Upon  Consummation  of the Offering** | ** ** | **Currently  Owned**       | ** ** | **Upon  Consummation  of the Offering** | ** ** | **Currently  Owned**            | ** ** | **Upon  Consummation  of the Offering** | ** ** | **Currently  Owned** | ** ** | **Upon  Consummation  of the Offering** | ** ** | **Currently  Owned** | ** ** | **Upon  Consummation  of the Offering** | ** ** |
|                                                              |       |                 |       |                                    |       |                       |       |                                    |       |                            |       |   |   |   |   |   |   |   |   |   |   |
| Ensource Energy  Partners, LP(2)                                  |       | —               |       | 1,000,000                               |       | —                     |       | 15.3                                    | %          | —                          |       | 627,737 |   | — |   | 100 | % | — |   | 22.9 | % |
|                                                              |       |                 |       |                                    |       |                       |       |                                    |       |                            |       |   |   |   |   |   |   |   |   |   |   |
| Scott W. Smith(3)                                                 |       | 990                  |       | 0                                       |       | 100                        | %          | 0                                       | %          | —                          |       | 0 |   | — |   | 0 | % | 100 | % | 0 | % |
|                                                              |       |                 |       |                                    |       |                       |       |                                    |       |                            |       |   |   |   |   |   |   |   |   |   |   |
| Marshall M. Eubank(3)                                             |       | —               |       | 0                                       |       | —                     |       | 0                                       | %          | —                          |       | 0 |   | — |   | 0 | % | — |   | 0 | % |
|                                                              |       |                 |       |                                    |       |                       |       |                                    |       |                            |       |   |   |   |   |   |   |   |   |   |   |
| Mark J. Warner(4)(5)                                              |       | —               |       | 3,000                                   |       | —                     |       |                                    | *          | —                          |       | 0 |   | — |   | 0 | % | — |   | 0 | % |
|                                                              |       |                 |       |                                    |       |                       |       |                                    |       |                            |       |   |   |   |   |   |   |   |   |   |   |
| Jacob Roorda(4)(5)                                                |       | —               |       | 3,000                                   |       | —                     |       |                                    | *          | —                          |       | 0 |   | — |   | 0 | % | — |   | 0 | % |
|                                                              |       |                 |       |                                    |       |                       |       |                                    |       |                            |       |   |   |   |   |   |   |   |   |   |   |
| S. P. Johnson(4)(5)                                               |       | —               |       | 3,000                                   |       | —                     |       |                                    | *          | —                          |       | 0 |   | — |   | 0 | % | — |   | 0 | % |
|                                                              |       |                 |       |                                    |       |                       |       |                                    |       |                            |       |   |   |   |   |   |   |   |   |   |   |
| All directors and  executive officers as a group (5 persons) |       | 990                  |       | 1,009,000                               |       | 100                        | %          | 15.3                                    | %          | —                          |       | 627,737 |   | — |   | 100 | % | 100 | % | 22.9 | % |

 

----

* Less than1%. 

 

(1)   Thenumber of subordinated units to be issued to our General Partner in connectionwith our General Partner’s $20.05 million capital contribution upon theconsummation of the exchange offer is based on a price per subordinated unitequal to the average intra-day trading price per depositary unit for the tentrading days before the mailing of the prospectus relating to the exchangeoffer on November 25, 2005, which is $28.84 per unit.

(2)   Includes1,000,000 common units issuable upon exercise of a warrant granted to ourGeneral Partner upon consummation of the exchange offer, which is exercisableat any time prior to the tenth anniversary of the expiration date of theexchange offer. Ensource holds a 0.1% general partner interest in EnsourceEnergy

 

39

----

 

Partners and has the right to appoint onemember to the General Partner’s board of directors and the right to remove suchdirector. Ensource Energy Investors, LLC owns a limited partner interestrepresenting an approximate 62.1% interest in Ensource Energy Partners andbecause of its ownership interest has the right to appoint four members to theGeneral Partner’s board of directors and the right to remove such directors.

(3)   Messrs. Smithand Eubank are managing members of Ensource. As such, each of Messrs. Smith andEubank could be deemed to be a beneficial owner of the units owned by EnsourceEnergy Partners. Messrs. Smith and Eubank disclaim beneficial ownership ofthe equity interests owned by Ensource Equity Partners.

(4)   Becauseof its limited partner interest representing an approximate 86.66% interest inthe General Partner, Ritchie Energy North, L.P., or REN, may appoint fourmembers to the General Partner’s board of directors. and each ofMessrs. Warner, Roorda and Johnson have been designated by REN as boardmembers, with the board currently having one vacancy. Ritchie Energy North,Inc. is the general partner of REN and therefore has voting and investmentpower with respect thereto. Each of Ritchie Energy North, Inc., REN andMessrs. Warner, Roorda and Johnson, may be deemed to be the beneficialowner of the units owned by Ensource Energy Partners and each of them disclaimbeneficial ownership of the units owned by Ensource Energy Partners.

(5)   Includes1,500 common units that each of Messrs. Warner, Roorda and Johnson intendto acquire from the Partnership upon the closing of the exchange offer and1,500 common units that the Partnership intends to grant to each upon suchacquisitions.

 

**ITEM 13.****       CERTAIN RELATIONSHIPS AND RELATED PARTYTRANSACTIONS.**

 

**Expenses of the Offer andSecond-Step Merger**

 

Ensource will pay all the cost of preparing and effecting the offer andconsummating the second-step merger up to $750,000. Any costs in excess of thatamount will be split equally between Ensource and the limited partners of theGeneral Partner, who we refer to as the investors. Upon closing of thesecond-step merger, the Partnership will reimburse Ensource and the investorsfor their proportionate shares of the actual costs in effecting the offer andsecond-step merger.

 

**SubordinatedUnits and Warrant**

 

Concurrently with the acceptance of validly tendered, and not properlywithdrawn, depositary units for exchange pursuant to the exchange offer, ourlimited partnership agreement will be amended and restated. In connection withsuch amendment and restatement, our General partner will contribute$20.05 million to us in consideration for the following:

 

•      its1% general partner interest;

 

•      certainincentive distribution rights;

 

•      627,737subordinated units; and

 

•      awarrant, exercisable at any time during its 10-year term, to purchase from thePartnership 1,000,000 common units at an exercise price of $36.40 per commonunit.

 

The General Partner will pay to the Partnership a total of$20 million for the general partner interest, incentive distributionrights and subordinated units. The remaining $.05 million will be paid forthe warrant. The actual number of subordinated units that the General Partnerwill receive for its cash contribution is based on a price per subordinatedunit equal to the average intra-day trading price per depositary unit for theten trading days before the mailing of the prospectus relating to the exchangeoffer on November 25, 2005, which is $28.84 per unit.

 

Pursuant to the partnership agreement of the General Partner, Ensourcehas agreed that it will use its commercially reasonable best efforts to causethe subordinated units that will be owned by the General Partner to beregistered for resale not later than 30 days after the end of thesubordination period.

 

40

----

 

**Reimbursementof the General Partner**

 

Pursuant to our partnership agreement, we have agreed to reimburse theGeneral Partner for its costs and expenses incurred in its capacity as ourGeneral Partner, including general and administrative and other servicesprovided to us by our General Partner. The General Partner will employ allnecessary personnel to provide certain administrative services (such asaccounting, tax, legal and other services) to us. The costs and expenses forsuch services will include the General Partner’s actual costs incurred inmanaging us. The amounts to be so reimbursed to our General Partner are inaddition to the amounts to be paid by our General Partner to Ensource, andreimbursed by us to our General Partner, as described under the caption “– ManagementAgreement with the General Partner,” below.

 

**ManagementAgreement with the General Partner**

 

The General Partner will enter into a management agreement withEnsource in which Ensource will provide specified supervisory and managementfunctions and services for the General Partner, and thus, the Partnership.Ensource will be entitled to be reimbursed on a monthly basis for allsupervisory and management costs incurred by it in performing administrativeand other services to us and our General Partner. Reimbursement will includeany costs of capital in respect of carrying any supervisory and managementcosts. Ensource will employ all necessary personnel to provide such services(such as supervisory and management) to us and the General Partner. The costsand expenses for such services will include all of Ensource’s actual costsincurred in managing and operating us and our General Partner. In addition,Ensource will be entitled to a management fee of $50,000 per month that will bepayable in arrears. These costs and expenses, along with the management fee,will be paid to Ensource by our General Partner and would be reimbursed to ourGeneral Partner by us, if applicable, based on the nature of services providedwith respect to such costs and expenses attributable to us and would bededucted from cash available for distribution to our unitholders. Onlyreimbursements for costs and expenses constituting supervisory and managementservices directly performed for us will be reimbursed by us to our GeneralPartner and in turn paid by our General Partner to Ensource. Costs and expensessubmitted for payment by us would be subject to review by the ConflictsCommittee of the board of directors of our General Partner on our behalf.

 

***Standard of Care***

*** ***

In exercising its powers and discharging its duties under themanagement agreement, Ensource will be required to act honestly, in good faithand with a view to the best interests of our General Partner and itssubsidiaries and affiliates, and is to exercise that degree of care, diligenceand skill that a reasonably prudent advisor and manager would exercise incomparable circumstances.

 

***Indemnification***

*** ***

The management agreement provides that, except arising out of the grossnegligence or willful misconduct of, or a breach of the agreement by, ourGeneral Partner, Ensource must indemnify our General Partner for any damages,liabilities, costs and expenses (including reasonable attorneys’ fees) arisingfrom the rendering of Ensource’s services under the management agreement. TheGeneral Partner will indemnify Ensource for damages, liabilities, costs andexpenses (including reasonable attorneys’ fees) arising from the grossnegligence or willful misconduct of, or breach of this agreement by, theGeneral Partner.

 

***Term and Termination***

*** ***

The management agreement will be in effect for continuous one-yearterms, with the initial term running until December 31, 2010. Themanagement agreement may be terminated, among other things, upon 60 daysadvance notice of the end of any given term by Ensource, or the GeneralPartner, and upon other customary occurrences such as breach.

 

**ManagementAgreement with the Operating Company**

 

The Operating Company will enter into a management agreement underwhich it will retain the services of Ensource to identify, assess and assist inthe acquisition, disposition and ongoing management of the Operating Company’sproperties and matters generally pertaining to the management and operations ofthe Operating Company, subject to the overall supervision and review of theboard of directors of our General Partner.

 

41

----

 

Ensource will be reimbursed by the Operating Company for the costs ofsuch management services so provided by Ensource. The amounts so payable by theOperating Company will be deducted in calculating the net profits payable tothe Partnership under the net profits interests purchased in the future by thePartnership from the Operating Company on properties acquired by the OperatingCompany in the future.

 

***Management IncentiveFee***

*** ***

As an incentive to acquire oil and natural gas properties andperforming its other duties under the management agreement, Ensource, and itsdesignees, which will include key employees of the General Partner and theOperating Company, will be entitled to receive a quarterly management incentivefee, payable by the Operating Company in arrears, based on a sliding percentageof Base NPI Net Proceeds:

 

•      2.0%of Base NPI Net Proceeds up to $25 million, plus

 

•      1.75%of Base NPI Net Proceeds in excess of $25 million and up to, and including, $50million, plus

 

•      1.0%of Base NPI Net Proceeds in excess of $50 million.

 

The management incentive fee will not be payable by the OperatingCompany in respect of any calendar quarter in respect of which the cashdistribution to our common and subordinated unitholders from operating surplus(excluding the use of any cash contributed by our General Partner) for suchquarter is less than the minimum quarterly distribution per unit or$0.50 per unit. The Partnership will not be obligated to make this paymentto the Operating Company, but the amount of such fee will be deducted eachquarter in respect of which it is paid from, and such deduction will have theeffect of reducing the applicable percentage of, Base NPI Net Proceedsotherwise payable to the Partnership in connection with the net profitsinterest purchased from the Operating Company.

 

As used in the management agreement, Base NPI Net Proceeds is definedas the percentage (which may be up to 99%) specified in the applicable netprofits interests of the net proceeds of the Base NPI (as defined below) in thequarter in respect of which the determination in being made. The term “BaseNPI” is defined as net oil and natural gas revenues received by the OperatingCompany in the quarter for which the determination is being made from the saleof production pursuant to third party marketing agreements, less the sum(determined on a cash, instead of an accrual basis) of

 

•      severanceand ad valorem taxes,

 

•      directoperating expenditures, and

 

•      generaland administrative expenses incurred by the Operating Company.

 

The management incentive fee for a particular quarter will be paid onthe payment date for cash distributions to holders of common units in respectof the calendar quarter for which such management incentive fee related(generally, 45 days after the end of such calendar quarter).

 

***Standard of Care***

*** ***

In exercising its powers and discharging its duties under themanagement agreement, Ensource will be required to act honestly, in good faithand with a view to the best interests of the Operating Company and itssubsidiaries and affiliates, and is to exercise that degree of care, diligenceand skill that a reasonably prudent advisor and manager in respect of theOperating Company and of oil and natural gas properties would exercise incomparable circumstances.

 

***Indemnification***

*** ***

The management agreement provides that, except arising out of the grossnegligence or willful misconduct of, or a breach of the agreement by, theOperating Company, Ensource must indemnify the Operating Company for anydamages, liabilities, costs and expenses (including reasonable attorneys’ fees)arising from the rendering of Ensource’s services under the managementagreement. The Operating Company will indemnify Ensource for damages,liabilities, costs and expenses (including reasonable attorneys’ fees) arisingfrom the gross negligence or willful misconduct of, or breach of this agreementby, the Operating Company.

 

42

----

 

***Term and Termination***

*** ***

The management agreement will be in effect for continuous one-yearterms, with the initial term running until December 31, 2010. Themanagement agreement may be terminated, among other things, upon 60 daysadvance notice of the end of any given term by Ensource or the OperatingCompany, and other customary occurrences such as breach.

 

**NetProfits Interests Agreement**

 

We plan to purchase net profits interests, or NPIs, in each of the oiland gas properties purchased by the Operating Company. The amounts of the NPIsare expected to vary on a property-by-property basis. While the actual NPIconveyances will likely differ in some ways, such agreements will generally beentered into on the following terms.

 

The Operating Company will sell and we will buy a right to somepercentage (up to 99%) of the Net Profits arising from the sale of oil and gasproduced from a property purchased by the Operating Company. Any Net Profitswill be paid to us monthly in arrears by the Operating Company. Net Profits, ifany, with respect to a particular month will be the positive remainder of BaseNPI less

 

•      anycapital expenditures paid by the Operating Company on that property in thatmonth;

 

•      principal,interest, fees, expenses and other amounts paid by the Operating Company underany revolving credit facility during that month; and

 

•      anamount projected by Ensource under the management agreement to meet the workingcapital needs of the Operating Company.

 

If there is no positive remainder in that calculation, the negativeresult of the calculation is carried forward and applied to successive months’Base NPI until the negative amount has been exhausted. As used in thatcalculation, Base NPI means the gross proceeds received from the sale of oiland gas produced from that property during that month, less

 

•      anyad valorem and any similar direct taxes paid in that month;

 

•      directexpenses (other than capital expenditures) for delivery of the oil and gas tothe appropriate gathering system, as well as all labor, material and othercosts of operating, producing and maintaining the property; and

 

•      apro rata portion of the Operating Company’s general and administrative costsand expenses, including the portion of any management incentive fee earned inthat month by Ensource under the management agreement with the OperatingCompany (calculated to spread such costs over each of the Operating Company’sproducing properties).

 

The Operating Company will be required to operate, maintain and managethe property in a prudent manner and take other steps to protect our interestin the property. The conveyance agreement will contain reasonable and customarywarranty of title and limitations of liability.

 

**FiduciaryDuties**

 

Our General Partner is accountable to us and our unitholders as afiduciary. Fiduciary duties owed to unitholders by our General Partner areprescribed by law and our Partnership Agreement. The Delaware Revised UniformLimited Partnership Act, which we refer to in this report as DRLPA, providesthat Delaware limited partnerships may, in their partnership agreements,restrict, eliminate or otherwise modify the fiduciary duties otherwise owed bya general partner to limited partners and the partnership.

 

Our Partnership Agreement contains various provisions modifying andrestricting the fiduciary duties that might otherwise be owed by our GeneralPartner. We have adopted these provisions to allow our General Partner to takeinto account the interests of other parties in addition to our interests whenresolving conflicts of interest. We believe this is appropriate and necessarybecause the Board of Directors of our General Partner has fiduciary duties

 

43

----

 

to manage our General Partner in a manner beneficial both to itsowners, which consists of Ensource and other private investors, as well as tounitholders of the Partnership. Without these modifications, the GeneralPartner’s ability to make decisions involving conflicts of interest would berestricted. The modifications to the fiduciary standards benefit our GeneralPartner by enabling it to take into consideration all parties involved in theproposed action. These modifications also strengthen the ability of our GeneralPartner to attract and retain experienced and capable directors. Thesemodifications represent a detriment to our unitholders because they restrictthe remedies available to unitholders for actions that, without thoselimitations, might constitute breaches of fiduciary duty, as described below.The following is a summary of the material restrictions of the fiduciary dutiesowed by our general partner to the limited partners: 

 
|                                     |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|------------------------------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| State law fiduciary duty standards       |   | Fiduciary duties are generally considered to include an obligation to  act in good faith and with due care and loyalty. The duty of care, in the  absence of a provision in a partnership agreement providing otherwise, would  generally require a general partner to act for the partnership in the same  manner as a prudent person would act on his own behalf. The duty of loyalty,  in the absence of a provision in a partnership agreement providing otherwise,  would generally prohibit a general partner of a Delaware limited partnership  from taking any action or engaging in any transaction where a conflict of  interest is present.                                                                                                                                                                              |
|                                     |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| Partnership agreement modified standards |   | Our Partnership Agreement contains provisions that waive or consent  to conduct by our General Partner and its affiliates that might otherwise  raise issues about compliance with fiduciary duties or applicable law. For  example, our Partnership Agreement provides that when our General Partner is  acting in its capacity as our General Partner, as opposed to in its individual  capacity, it must act in “good faith” and will not be subject to any other  standard under applicable law. In addition, when our General Partner is  acting in its individual capacity, as opposed to in its capacity as our  General Partner, it may act without any fiduciary obligations to us or the  unitholders whatsoever. These standards reduce the obligations to which our  General Partner would otherwise be held. |
|                                     |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|                                     |   | Our Partnership Agreement generally provides that affiliated  transactions and resolutions of conflicts of interest not involving a vote of  unitholders and that are not approved by the Conflicts Committee of the Board  of Directors of our General Partner must be:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|                                     |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|                                     |   | • on  terms no less favorable to us than those generally being provided to or available  from unrelated third parties; or                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|                                     |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|                                     |   | • “fair  and reasonable” to us, taking into account the totality of the relationships  between the parties involved (including other transactions that may be  particularly favorable or advantageous to us).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|                                     |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|                                     |   | If our General Partner does not seek approval from the Conflicts  Committee and its Board of Directors determines that the resolution or course  of action taken with respect to the conflicts of interest satisfies either of  the standards set forth in the bullet points above, then it will be presumed  that, in making its decision, the board of directors acted in good faith, and  in any proceeding brought by or on behalf of any limited partner or the  partnership, the person bringing or prosecuting such proceeding will have the  burden of overcoming such presumption. These standards reduce the obligations  to which our General Partner would otherwise be held.                                                                                                                                           |
|                                     |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|                                     |   | In addition to the other more specific provisions limiting the  obligations of our General Partner, our Partnership Agreement further  provides that our General Partner and its officers and directors will not be  liable for monetary damages to us, our limited partners or assignees for  errors of judgment or for any acts or omissions unless there has been a final  and non-appealable judgment by a court of competent jurisdiction determining  that the General Partner or its officers and directors acted in bad faith or  engaged in fraud or willful misconduct.                                                                                                                                                                                                                                                   |

 

44

----

 
| Rights and remedies of unitholders |   | DRLPA generally provides that a limited partner may institute legal  action on behalf of the partnership to remove damages from a third party  where a General Partner has refused to institute the action or where an  effort to cause a General Partner to do so is not likely to succeed. These  actions include actions against a general partner for breach of its fiduciary  duties or of the partnership agreement. In addition, the statutory or case  law of some jurisdictions may permit a limited partner to institute legal  action on behalf of himself and all other similarly situated limited partners  to recover damages from a General Partner for violations of its fiduciary  duties to the limited partners. |
|------------------------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

In order to become one of our limited partners, you must agree to bebound by the provisions in the partnership agreement, including the provisionsdiscussed above. This is in accordance with the policy of the Delaware Actfavoring the principle of freedom of contract and the enforceability ofpartnership agreements. The failure of a limited partner or assignee to sign apartnership agreement does not render the partnership agreement unenforceableagainst that person.

 

Under the Partnership Agreement, we are required to indemnify ourGeneral Partner and its officers, directors, and managers, to the fullestextent permitted by law, against liabilities, costs and expenses incurred byour General Partner or these other persons. This indemnification is requiredunless there has been a final and non-appealable judgment by a court ofcompetent jurisdiction determining that these persons acted in bad faith orengaged in fraud or willful misconduct. Indemnification is also required forcriminal proceedings unless our General Partner or these other persons actedwith knowledge that their conduct was unlawful. Thus, our General Partner couldbe indemnified for its negligent acts if it met the requirements set forthabove. To the extent that these indemnification provisions purport to includeindemnification for liabilities arising under the Securities Act, in theopinion of the SEC such indemnification is contrary to public policy and,therefore, is unenforceable. If you have questions regarding the fiduciaryduties of our General Partner, you should consult with your own counsel.

 

**RedemptionAgreement**

 

On February 10, 2006, our General Partner entered into aRedemption Agreement with Ensource Energy Investors, LLC, one of thelimited partners in our General Partner. As a result of that agreement,Ensource Energy Investors, LLC, or EEI, withdrew from the General Partner as alimited partner, and the General Partner redeemed from EEI its limited partnerinterest in the General Partner. Prior to such redemption, EEI held anapproximately 62% limited partner interest in our General Partner and had theright under the limited partnership agreement governing our General Partner toappoint four of the five members to our General Partner’s board of directors.The redemption resulted in the payment of $12,460,832.28 to EEI from the escrowthat was established by our General Partner and its investors to fund the$20.05 million contribution by our General Partner to be made upon thesuccessful closing of the exchange offer.

 

In connection with the Redemption Agreement, Scott A. Bedford, anaffiliate of EEI, resigned, effective February 10, 2006, from our GeneralPartner’s board of directors. As a result of Mr. Bedford’s resignation,our General Partner’s board of directors is currently comprised of four members:Scott W. Smith (Chairman), Mark J. Warner, Jacob Roorda and S.P. Johnson IV,with one vacancy.

 

Also on February 10, 2006, our General Partner and the remaininglimited partners of our General Partner entered into an amendment to thelimited partnership agreement that governs our General Partner. As a result ofthis amendment, such limited partners have agreed to contribute to our GeneralPartner a total of approximately $20.1 million to be used to fund the$20.05 million contribution to be made upon the successful closing of theexchange offer. In connection with the amendment, Ritchie Energy North, L.P.,or REN, increased its capital contribution commitment under the limitedpartnership agreement from $5.0 million to approximately$17.47 million, representing an approximate 86.66% limited partnerinterest in our General Partner. REN’s capital commitment is comprised of$5.0 million held in the referenced escrow account, with the balance ofits commitment to be funded upon the successful closing of the exchange offer.As a result of this increased capital commitment, REN holds a majority ininterest of our General Partner and consequently has the right to designatefour of the five members of our General Partner’s board of directors.

 

45

----

 

**ITEM 14.****                      PRINCIPALACCOUNTING FEES AND SERVICES.**

** **

Hein & Associates LLP acts as our principal accountant. Thefollowing is a summary of fees billed by our principal accountant for servicesrendered for the period from May 26, 2006 to December 31, 2005.

 

**Audit Fees**

 

During the fiscal year ended December 31, 2005, the fees billed by ourprincipal accountant were $33,525 in connection with the review of our exchangeoffer and audit of our financial statements included in the registration statementon Form S-4. Estimated fees to be billed for services rendered by our principalaccountant for the audit of our financial statements included in our annualreport are $12,000 for 2005.

 

**Audit-RelatedFees**

** **

During 2005, our principal accountant did not render any audit-relatedservices.

 

**Tax Fees**

 

During 2005, our principal accountant did not render services to us fortax compliance, tax advice and tax planning.

 

**All OtherFees**

 

During 2005, there were no fees billed for products and servicesprovided by the principal accountant other than those set forth above.

 

**AuditCommittee Approval**

 

We currently do not have an audit committee. Our board of directorsapproved the engagement of Hein & Associates LLP as our independentregistered public accounting firm.

 

46

----

 

**PART IV**

 

**ITEM 15.****                      EXHIBITS,FINANCIAL STATEMENTS AND SCHEDULES**

** **

***(a)           Exhibits and Financial StatementSchedules.***

*** ***
| (1)    | ** ** | **Financial Statements**                                                                               | ** ** | ** ** |
|--------|------------|--------------------------------------------------------------------------------------------------------|------------|------------|
|   |       |                                                                                                   |       |       |
|   |       | Report of Independent Registered Public Accounting Firm                                                |       |       |
|   |       | Balance  Sheet as of December 31, 2005                                                                 |       |       |
|   |       | Statement  of Operations for the period from May 26, 2005 (INCEPTION) to  December 31, 2005       |       |       |
|   |       | Statement of Partners’ Capital for the period from May 26, 2005  (INCEPTION) to December 31, 2005 |       |       |
|   |       | Statement  of Cash Flows for the period from May 26, 2005 (INCEPTION) to  December 31, 2005       |       |       |
|   |       | Notes to the Financial Statements                                                                      |       |       |

 

(2)           All financialstatement schedules have been omitted as they are not required, or are notapplicable.

 

(3)           Exhibits

 
| **Exhibit  Number** | ** ** | ** ** | ** ** | **Description**                                                                                                                                                                                                                                                                        |
|---------------------|------------|------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |       |       |       |                                                                                                                                                                                                                                                                                   |
| 3.1*                |       | —     |       | Certificate of Limited Partnership of Ensource Energy Income Fund LP.  (Incorporated by reference to Exhibit 3.1 to the Partnership’s Registration  Statement on Form S-4 (SEC File No. 333-126068), filed on June 23, 2005)                                                      |
|                |       |       |       |                                                                                                                                                                                                                                                                                   |
| 3.2*                |       | —     |       | Certificate of Correction to Certificate of Limited Partnership of  Ensource Energy Income Fund LP (Incorporated by reference to Exhibit 3.2 to  the Partnership’s Registration Statement on Form S-4 (SEC File No.  333-126068), filed on June 23, 2005)                         |
|                |       |       |       |                                                                                                                                                                                                                                                                                   |
| 3.3*                |       | —     |       | Certificate of Correction to Certificate of Limited Partnership of  Ensource Energy Income Fund LP (Incorporated by reference to Exhibit 3.3 to  Amendment No. 1 to the Partnership’s Registration Statement on Form S-4 (SEC  File No. 333-126068), filed on September 15, 2005) |
|                |       |       |       |                                                                                                                                                                                                                                                                                   |
| 3.4*                |       | —     |       | Certificate of Limited Partnership of Ensource Energy Partners, LP  (Incorporated by reference to Exhibit 3.4 to Amendment No. 2 to the Partnership’s  Registration Statement on Form S-4 (SEC File No. 333-126068), filed on  October 17, 2005)                                  |
|                |       |       |       |                                                                                                                                                                                                                                                                                   |
| 3.5*                |       | —     |       | Form of Amended and Restated Agreement of Limited Partnership of  Ensource Energy Income Fund LP (Incorporated by reference as Annex A to the  Partnership’s Prospectus (SEC File No. 333-126068), filed on November 28,  2005).                                                  |
|                |       |       |       |                                                                                                                                                                                                                                                                                   |
| 3.6*                |       | —     |       | Certificate of Formation of Ensource Energy Company LLC (Incorporated  by reference to Exhibit 3.6 to the Partnership’s Registration Statement on  Form S-4 (SEC File No. 333-126068), filed on June 23, 2005)                                                                    |
|                |       |       |       |                                                                                                                                                                                                                                                                                   |
| 3.7*                |       | —     |       | Form of Amended and Restated Agreement of Limited Partnership of  Ensource Energy Partners, LP. (Incorporated by reference to Exhibit 3.7 of  Amendment No. 4 to the Partnership’s Registration Statement on Form S-4 (SEC  File No. 333-126068), filed on November 15, 2005)     |

 

47

----

 
| **Exhibit  Number** | ** ** | ** ** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                              |
|---------------------|------------|------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |       |       |       |                                                                                                                                                                                                                                                                                                                                         |
| 3.8*                |       | —     |       | Amendment to Amended and Restated Limited Partnership Agreement of  Ensource Energy Partners, LP, dated as of February 10, 2006  (Incorporated by reference to Exhibit 10.9 of the Partnership’s Current  Report on Form 8-K (SEC File No. 001-32683), filed on February 13, 2006)                                                 |
|                |       |       |       |                                                                                                                                                                                                                                                                                                                                         |
| 2.9*                |       | —     |       | Certificate of Formation of Ensource Reserves Management LLC  (Incorporated by reference to Exhibit 3.8 to the Partnership’s Registration  Statement on Form S-4 (SEC File No. 333-126068), filed on June 23, 2005)                                                                                                                     |
|                |       |       |       |                                                                                                                                                                                                                                                                                                                                         |
| 3.10*               |       | —     |       | Form of Limited Liability Company Agreement of Ensource Energy  Company LLC (Incorporated by reference to Exhibit 3.9 to Amendment No. 2 to  the Partnership’s Registration Statement on Form S-4 (SEC File No.  333-126068), filed on October 17, 2005)                                                                                |
|                |       |       |       |                                                                                                                                                                                                                                                                                                                                         |
| 3.11*               |       | —     |       | Certificate of Correction to Certificate of Limited Partnership of  Ensource Energy Partners, LP (Incorporated by reference to Exhibit 3.10 to  Amendment No. 1 to the Partnership’s Registration Statement on Form S-4 (SEC  File No. 333-126068), filed on September 15, 2005)                                                        |
|                |       |       |       |                                                                                                                                                                                                                                                                                                                                         |
| 3.12*               |       | —     |       | Form of Limited Liability Company Agreement of Ensource Reserves  Management LLC (Incorporated by reference to Exhibit 3.11 to Amendment No. 2  to the Partnership’s Registration Statement on Form S-4 (SEC File No.  333-126068), filed on October 17, 2005)                                                                          |
|                |       |       |       |                                                                                                                                                                                                                                                                                                                                         |
| 3.13*               |       | —     |       | Form of specimen unit certificate for the common units (Incorporated  by reference to Exhibit 3.12 of Amendment No. 3 to the Partnership’s  Registration Statement on Form S-4 (SEC File No. 333-126068), filed on  November 4, 2005)                                                                                                   |
|                |       |       |       |                                                                                                                                                                                                                                                                                                                                         |
| 10.1*†         |       | —     |       | Form of Management Agreement by and between Ensource Reserves  Management LLC and Ensource Energy Company LLC (Incorporated by reference to  Exhibit 10.1 to Amendment No. 2 to the Partnership’s Registration Statement  on Form S-4 (SEC File No. 333-126068), filed on October 17, 2005)                                             |
|                |       |       |       |                                                                                                                                                                                                                                                                                                                                         |
| 10.2*†         |       | —     |       | Form of Management Agreement by and between Ensource Energy Partners,  LP and Ensource Energy Company LLC (Incorporated by reference to Exhibit 10.2  to Amendment No. 2 to the Partnership’s Registration Statement on Form S-4  (SEC File No. 333-126068), filed on October 17, 2005)                                                 |
|                |       |       |       |                                                                                                                                                                                                                                                                                                                                         |
| 10.3*               |       | —     |       | Form of Warrant to Purchase Common Units issued by Ensource Energy  Income Fund LP in favor of Ensource Energy Partners, LP (Incorporated by  reference to Exhibit 10.3 of Amendment No. 4 to the Partnership’s Registration  Statement on Form S-4 (SEC File No. 333-126068), filed on November 15, 2005)                              |
|                |       |       |       |                                                                                                                                                                                                                                                                                                                                         |
| 10.4*               |       | —     |       | Form of Conveyance of Net Profits Overriding Royalty Interest, by  Ensource Reserves Management LLC, in favor of Ensource Energy Income Fund LP  (Incorporated by reference to Exhibit 10.4 to Amendment No. 1 to the  Partnership’s Registration Statement on Form S-4 (SEC File No. 333-126068),  filed on September 15, 2005)   |
|                |       |       |       |                                                                                                                                                                                                                                                                                                                                         |
| 10.5*               |       | —     |       | Form of Agreement and Plan of Merger by and between Ensource Energy  Income Fund LP and Eastern American Natural Gas Trust (for Partnership  Merger) (Incorporated by reference to Exhibit 10.5 to Amendment No. 2 to the  Partnership’s Registration Statement on Form S-4 (SEC File No. 333-126068),  filed on October 17, 2005) |
|                     |            |            |            |                                                                                                                                                                                                                                                                                                                                              |  |

 

48

----

 
| **Exhibit  Number** | ** ** | ** ** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                           |
|---------------------|------------|------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |       |       |       |                                                                                                                                                                                                                                                                                                                                                      |
| 10.6*†         |       | —     |       | Form of Ensource Energy Partners, LP Long-Term Incentive Plan  (Incorporated by reference to Exhibit 10.6 to Amendment No. 1 to the  Partnership’s Registration Statement on Form S-4 (SEC File No. 333-126068),  filed on September 15, 2005)                                                                                                       |
|                |       |       |       |                                                                                                                                                                                                                                                                                                                                                      |
| 10.7*               |       | —     |       | Form of Agreement and Plan of Merger by and between Merger Sub, a  subsidiary of the Partnership, and Eastern American Natural Gas Trust (for  Subsidiary Merger) (Incorporated by reference to Exhibit 10.7 to Amendment  No. 2 to the Partnership’s Registration Statement on Form S-4 (SEC File No.  333-126068), filed on October 17, 2005) |
|                |       |       |       |                                                                                                                                                                                                                                                                                                                                                      |
| 10.8*               |       | —     |       | Redemption Agreement by and between Ensource Energy Partners, LP and  Ensource Energy Investors LLC dated as of February 10, 2006  (Incorporated by reference to Exhibit 10.8 to the Partnership’s Current  Report on Form 8-K (SEC File No. 001-32683), filed on February 13, 2006)                                                            |
|                |       |       |       |                                                                                                                                                                                                                                                                                                                                                      |
| 31.1                |       | —     |       | Certification by Chief Executive Officer required by Rule 13a-14(a)  and 15d-14(a) under the Exchange Act                                                                                                                                                                                                                                                 |
|                |       |       |       |                                                                                                                                                                                                                                                                                                                                                      |
| 31.2                |       | —     |       | Certification by Chief Financial Officer required by Rule 13a-14(a)  and 15d-14(a) under the Exchange Act                                                                                                                                                                                                                                                 |
|                |       |       |       |                                                                                                                                                                                                                                                                                                                                                      |
| 32.1                |       | —     |       | Certification by Chief Executive Officer pursuant to 18 U.S.C.  Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of  2002                                                                                                                                                                                                       |
|                |       |       |       |                                                                                                                                                                                                                                                                                                                                                      |
| 32.2                |       | —     |       | Certification of Chief Financial Officer pursuant to 18 U.S.C.  Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of  2002                                                                                                                                                                                                       |
|                     |            |            |            |                                                                                                                                                                                                                                                                                                                                                           |  |

 

----

*              Incorporated byreference

†              Management contractor compensatory plan

 

49

----

 

**ENSOURCE ENERGY INCOME FUND, L.P.**

**INDEX TO THE FINANCIAL STATEMENTS**

 

 
| **Financial Statements**                                                                               | ** ** | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|------------|
|                                                                                                   |       |       |
| Report of Independent Registered Public Accounting Firm                                                |       |       |
| Balance  Sheet as of December 31, 2005                                                                 |       |       |
| Statement  of Operations for the period from May 26, 2005 (INCEPTION) to December 31,  2005            |       |       |
| Statement of Partners’ Capital for the period from May 26, 2005  (INCEPTION) to December 31, 2005 |       |       |
| Statement  of Cash Flows for the period from May 26, 2005 (INCEPTION) to December 31,  2005            |       |       |
| Notes to the Financial Statements                                                                      |       |       |

 

50

----

 

**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

 

To the Board of Directors and Partners of Ensource Energy Income FundLP

 

We have audited the accompanying balance sheet of Ensource EnergyIncome Fund LP as of December 31, 2005 and the related statements of operations,partners’ capital and cash flows for the period from May 26, 2005 (inception)to December 31, 2005. These financial statements are the responsibility of thePartnership’s management. Our responsibility is to express an opinion on thesefinancial statements based on our audit.

 

We conducted our audit in accordance with auditing standards of thePublic Company Accounting Oversight Board (United States). Those standardsrequire that we plan and perform the audit to obtain reasonable assurance aboutwhether the financial statements are free of material misstatement. ThePartnership has determined that it is not required to have, nor were we engagedto perform, an audit of its internal control over financial reporting. An auditincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements. An audit also includes assessing theaccounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation. We believethat our audit provides a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above presentfairly, in all material respects, the financial position of Ensource EnergyIncome Fund LP at December 31, 2005, and the results of its operations and itscash flows for the period from May 26, 2005 (inception) to December 31, 2005 inconformity with accounting principles generally accepted in the United Statesof America. 

 

 
|   | */s/ HEIN & ASSOCIATES LLP* |   |
|--------|---------------------------------|--------|
|   | * *                        |
|   | *February 25, 2006*             |
|   | *Houston, Texas*                |

 

51

----

 

**ENSOURCE ENERGY INCOME FUND LP**

 

**BALANCE SHEET**

 

**DECEMBER 31, 2005**

 
| **ASSETS**                                     |       |       |       |
|------------------------------------------------|------------|------------|------------|
| Cash                                           |       | $          | 1,000      |   |
| Deferred  Exchange Offering Costs              |       | 1,142,293  |       |
| Total assets                                   |       | $          | 1,143,293  |   |
| Capital  Contribution subject to reimbursement |       | 1,142,293  |       |
| **PARTNERS’  CAPITAL**                    | ** ** | ** ** | ** ** |
| **Partners’  Capital**                    |       | $          | 1,000      |   |

 

See accompanying notes to financialstatements.

 

52

----

 

**ENSOURCE ENERGY INCOME FUND LP**

 

**STATEMENT OF OPERATIONS**

** **

**FOR THE PERIOD FROM MAY 26, 2005(INCEPTION) TO DECEMBER 31, 2005**

 
| Expenses — start up and organizational  costs |   | $ | 190,638  |   |
|----------------------------------------------------|--------|---|----------|--------|
| Net loss                                           |   | $ | (190,638 | )      |

 

See accompanying notes to financialstatements.

 

53

----

 

**ENSOURCE ENERGY INCOME FUND LP**

 

**STATEMENT OF PARTNERS’ CAPITAL**

 

**FOR THE PERIOD FROM MAY 26, 2005(INCEPTION) TO DECEMBER 31, 2005**

 
| Balance May 26, 2005 (inception) |   | $        | — |   |
|----------------------------------|--------|----------|--------|--------|
| Cash  contributions              |   | $        | 1,000  |   |
| Noncash  contributions           |   | 190,638  |   |
| Net loss                         |   | (190,638 | )      |
| Balance,  December 31, 2005 |   | $        | 1,000  |   |

 

See accompanying notes to financialstatements.

 

54

----

 

**ENSOURCE ENERGY INCOME FUND LP**

 

**STATEMENT OF CASH FLOWS**

 

**FOR THE PERIOD FROM MAY 26, 2005(INCEPTION) TO DECEMBER 31, 2005**

 
| Net loss                                                                                                                     |   | $       | (190,638  | )      |
|------------------------------------------------------------------------------------------------------------------------------|--------|---------|-----------|--------|
| Adjustments to reconcile net loss to net  cash used by operating activities — noncash start up and organizational costs |   | 190,638 |      |
| Net cash used by operating activities                                                                                        |   | —  |      |
| Financing activities — cash contributions                                                                               |   | 1,000   |      |
| Increase in cash and cash at end of period                                                                                   |   | $       | 1,000     |   |
| **Supplemental Disclosure of Noncash  Investing and Financing Activities —**                                            |   |    |      |
| Noncash contributions for deferred  securities issuance cost                                                                 |   | $       | 1,142,293 |   |

 

See accompanying notes to financialstatements.

 

55

----

 

**ENSOURCE ENERGY INCOME FUND LP**

 

**NOTES TO FINANCIAL STATEMENTS**

 

**December 31, 2005**

 

**1.             Organization,Business Operations**

 

Ensource Energy Income Fund LP (the “Partnership”) was formed in Delawareon May 26, 2005 as a master limited partnership whose general partner isEnsource Energy Partners, LP (“General Partner”). The objective of thePartnership is to conduct and consummate an exchange offer and subsequentmerger with Eastern American Natural Gas Trust (“NGT”). The Partnership isoffering to exchange for each outstanding depositary unit of NGT that is heldthrough the depositary arrangement with JP Morgan ChaseBank, N.A., asdepository, one whole common unit representing a limited partnership interestof the Partnership and to receive a special cash distribution upon the termsand conditions set forth in the exchange offer.

 

The Partnership’s ability to commence operations is contingent uponfunding $20.05 million of capital commitments to the General Partner. Theamended and restated agreement of limited partnership of the General Partnerspecifically provides that all of the net proceeds of the General Partner’sCapital Commitments, will be used to purchase a 1.0% general partnership interest,incentive distribution rights, warrants and subordinated units in thePartnership upon the Partnership receiving and accepting a majority of thetotal voting power of all of the outstanding trust units of NGT (“BusinessCombination”) which is discussed in Note 3. The amended and restatedagreement of limited partnership of the General Partner provides that thecapital commitments will be funded into escrow upon commencement of theexchange offer and that the funds in escrow will be released to make a capitalcontribution of the entire commitment into the Partnership upon the BusinessCombination. If the Business Combination is not consummated, the escrowprovision of the proposed amended and restated agreement of limited partnershipprovides that within 10 days after the expiration of the exchange offer,the funds in escrow will be returned to the partners of the General Partner.

 

**2.             Summary of Significant AccountingPolicies**

 

***Basis ofPresentation***

*** ***

The financial statements include the accounts of the Partnership. ThePartnership had not commenced operations effective December 31, 2005. ThePartnership has selected December 31 as its fiscal year end.

 

***Use of Estimates***

*** ***

The preparation of financial statements in conformity with accountingprinciples generally accepted in the United States of America requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities and disclosure of contingencies at the date of thefinancial statements and the reported amounts of expenses during the reportingperiod. Actual amounts could differ from those estimates.

 

***Cash Equivalents***

*** ***

The Partnership considers all highly liquid investments with originalmaturities of three months or less to be cash equivalents.

 

**Income Taxes**

*** ***

For tax purposes, the Partnership is treated as a partnership. As such,income or loss of the Partnership is reported in the income tax returns of thepartners.

 

**Start Up and Organization Costs**

*** ***

Start up and organization costs are expensed as incurred.

 

56

----

 

**Deferred Exchange Offering Costs**

 

Deferred exchange offer costs are being deferred until the exchangeoffer is consummated, or the exchange offer is significantly delayed orcancelled. These costs will become part of the cost of the exchange offer orwill reduce the fair value of the common units issued by the Partnership uponconsummation of the exchange offer. In the event the exchange offer issignificantly delayed or cancelled, these costs will be expensed in the periodeither of these events occurs.

 

**3.             Proposed Business Combination**

 

The Partnership is offering to acquire all of the outstandingdepositary units of NGT, in exchange for common units of the Partnership andfor a pro rata share of the $5,900,000 special cash distribution that is to bepaid promptly after completion of this exchange offer. According to NGT, as ofDecember 31, 2005, there were 5,880,100 depositary units outstanding (whichexcludes 19,900 trust units that have been withdrawn from deposit with thedepository). The proposed exchange offer is the first step in the Partnership’splan to acquire all of the outstanding NGT trust units, including at least thenumber of depositary units that would constitute a majority of such trust units.

 

It is a condition of the Partnership’s obligation to accept depositaryunits validly tendered, and not withdrawn, for exchange in this exchange offerthat on the expiration date of the exchange offer, as that date may beextended, the Partnership receives valid tenders of depositary units, and notproperly withdrawn as of the expiration date of the exchange offer, evidencingnot less than a majority of the total trust units that are outstanding. As aresult, valid tenders for exchange of depositary units must be received by thePartnership from the holders of at least 2,950,001 depositary units and notwithdrawn, by the expiration date, as that date may be extended, for theminimum tender condition to be satisfied. In addition, the Partnership proposesto pay a special cash distribution of $5,900,000 after closing of the exchangeoffer to the depositary unit owners of NGT that tender their depositary unitsto the Partnership in connection with the exchange offer and any subsequentoffering period.

 

The Partnership intends, promptly after completion of the proposedexchange offer and the acceptance of depositary units for exchange and issuanceof the Partnership’s common units in exchange therefore, to seek to have NGTconsummate a second-step merger with and into the Partnership, with thePartnership continuing as the surviving entity of that merger (or alternativelywith a wholly-owned subsidiary of the MLP, with NGT continuing as the survivingentity of that merger as a wholly-owned subsidiary of the Partnership).Pursuant to the terms of the second-step merger, 

 

•      each remainingdepositary unit (other than depositary units owned by the Partnership or NGT)that is validly tendered would be converted into the right to receive 1.0Partnership common units (0.4 common units for the trust unit on deposit and0.6 common units for the undivided one-fiftieth of the $1,000 face amount ofthe zero coupon bonds on deposit);

 

•      each remainingtrust unit, whether subject to a depositary unit that is not validly tenderedto us or constituting a withdrawn unit (other than trust units owned by thePartnership or NGT), would be converted into the right to receive 0.4 commonunits of the Partnership.

 

**4.             Commitment and Related PartyTransactions**

 

Attorney’s fees and other out-of-pocket and overhead costs related tostart-up and organization costs and the proposed transaction have been incurredon behalf of the Partnership by the limited partners of the General Partner andan affiliate of the Partnership, Ensource Energy Company LLC, which is ownedentirely by the founders and principals of the Partnership. These costs havebeen recorded as noncash capital contributions to the Partnership. Managementbelieves the recorded costs approximate the costs that would have been incurredfor these purposes with unaffiliated parties. Such costs have been reported asstart-up and organizational costs and deferred securities issuance costs in theaccompanying financial statements. The deferred exchange offer costs of$1,142,293 are a noncash financing activity.

 

57

----

 

Upon closing of the Business Combination, the Partnership has agreed tomake a special expense reimbursement distribution to the General Partner andEnsource Energy Company LLC for costs and expenses of the Business Combination.

 

On February 10, 2006, the General Partner entered into aRedemption Agreement with Ensource Energy Investors, LLC, one of the limitedpartners in the general partner. As a result of that agreement, Ensource EnergyInvestors, LLC, or EEI, withdrew from the general partner as a limited partner,and the general partner redeemed from EEI its limited partner interest in thegeneral partner. Prior to such redemption, EEI held an approximately 62%limited partner interest in the general partner and had the right under thelimited partnership agreement governing the general partner to appoint four ofthe five members to the general partner’s board of directors. The redemptionresulted in the payment of $12,460,832.38 to EEI from the escrow account thatwas established by the general partner and its investors to fund the $20.05million contribution by the general partner to be made upon the successfulclosing of the exchange offer being made pursuant to the Registration Statementon Form S-4 (file no. 333-126068) previously filed by the Partnership. Also onFebruary 10, 2006, the general partner and the remaining limited partnersof our general partner entered into an amendment to the limited partnershipagreement that governs the general partner. As a result of this amendment, suchlimited partners have agreed to contribute to the general partner a total ofapproximately $20.1 million to be used to fund the $20.05 millioncontribution to be made upon the successful closing of the exchange offer. Inconnection with the amendment, one of the remaining limited partners, RitchieEnergy North, L.P., or REN, increased its capital contribution commitment underthe limited partnership agreement from $5.0 million to approximately $17.47 million,representing an approximate 86.66% limited partner interest in the generalpartner. As a result of this increased capital commitment, REN holds a majorityin interest of the general partner and consequently has the right to designatefour of the five members of the general partner’s board of directors.

 

58

----

 

**SIGNATURES**

 

Pursuant to the requirements of Section 13 or 15(d) of the SecuritiesExchange Act of 1934, the registrant has duly caused this annual report on Form10-K to be signed on its behalf by the undersigned thereto duly authorized.

 
|   | ENSOURCE ENERGY INCOME FUND LP |
|--------|--------------------------------|
|   |                           |
|   | By:                            | Ensource Energy Partners, LP, |   |
|   |                           | its general partner |
|   |                           |
|   | By:                            | Ensource Energy Company LLC, |   |
|   |                           | its general partner |
|        |                                |  |  |  |

 

 
| *Date: March 31, 2006* |   | *By:*                     | */s/ Scott W. Smith* |   |
|------------------------|--------|---------------------------|----------------------|--------|
|                   |   | *Scott W. Smith*          |
|                   |   | *Chief Executive Officer* |

 

Pursuant to the requirements of the Securities Exchange Act of 1934,this annual report on Form 10-K has been signed below by the following personson behalf of the registrant and in the capacities and on the dates indicated. 

 
| /s/ Scott W. Smith     |                                         | President, Chief Executive Officer and Director   | March 31, 2006 |
|------------------------|----------------------------------------------|---------------------------------------------------|----------------|
| Scott W. Smith         | (Principal Executive Officer)                |                                              |
|                   |                                         |                                              |
| /s/ Marshall M. Eubank |                                         | Executive Vice President, Chief Financial Officer | March 31, 2006 |
| Marshall M. Eubank     | (Principal Financial and Accounting Officer) |                                              |
|                   |                                         |                                              |
| /s/ Mark J. Warner     |                                         | Director                                          | March 31, 2006 |
| Mark J. Warner         |                                         |                                              |
|                   |                                         |                                              |
| /s/ Jacob Roorda       |                                         | Director                                          | March 31, 2006 |
| Jacob Roorda           |                                         |                                              |
|                   |                                         |                                              |
| /s/ S. F. Johnson      |                                         | Director                                          | March 31, 2006 |
| S.F. Johnson           |                                         |                                              |
|                        |                                              |                                                   |                |  |  |  |

 

59

----

 

**Exhibit Index**

 
| **Exhibit  Number** | ** ** | ** ** | ** ** | **Description**                                                                                                                                                                                                                                                                              |
|---------------------|------------|------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |       |       |       |                                                                                                                                                                                                                                                                                         |
| 3.1*                |       | —     |       | Certificate of Limited Partnership of Ensource Energy Income Fund LP.  (Incorporated by reference to Exhibit 3.1 to the Partnership’s Registration  Statement on Form S-4 (SEC File No. 333-126068), filed on June 23, 2005)                                                            |
|                |       |       |       |                                                                                                                                                                                                                                                                                         |
| 3.2*                |       | —     |       | Certificate of Correction to Certificate of Limited Partnership of  Ensource Energy Income Fund LP (Incorporated by reference to Exhibit 3.2 to  the Partnership’s Registration Statement on Form S-4 (SEC File No.  333-126068), filed on June 23, 2005)                               |
|                |       |       |       |                                                                                                                                                                                                                                                                                         |
| 3.3*                |       | —     |       | Certificate of Correction to Certificate of Limited Partnership of  Ensource Energy Income Fund LP (Incorporated by reference to Exhibit 3.3 to  Amendment No. 1 to the Partnership’s Registration Statement on Form S-4 (SEC  File No. 333-126068), filed on September 15, 2005)       |
|                |       |       |       |                                                                                                                                                                                                                                                                                         |
| 3.4*                |       | —     |       | Certificate of Limited Partnership of Ensource Energy Partners, LP  (Incorporated by reference to Exhibit 3.4 to Amendment No. 2 to the  Partnership’s Registration Statement on Form S-4 (SEC File No. 333-126068),  filed on October 17, 2005)                                        |
|                |       |       |       |                                                                                                                                                                                                                                                                                         |
| 3.5*                |       | —     |       | Form of Amended and Restated Agreement of Limited Partnership of  Ensource Energy Income Fund LP (Incorporated by reference as Annex A to the  Partnership’s Prospectus (SEC File No. 333-126068), filed on November 28,  2005).                                                        |
|                |       |       |       |                                                                                                                                                                                                                                                                                         |
| 3.6*                |       | —     |       | Certificate of Formation of Ensource Energy Company LLC (Incorporated  by reference to Exhibit 3.6 to the Partnership’s Registration Statement on  Form S-4 (SEC File No. 333-126068), filed on June 23, 2005)                                                                          |
|                |       |       |       |                                                                                                                                                                                                                                                                                         |
| 3.7*                |       | —     |       | Form of Amended and Restated Agreement of Limited Partnership of  Ensource Energy Partners, LP. (Incorporated by reference to Exhibit 3.7 of  Amendment No. 4 to the Partnership’s Registration Statement on Form S-4 (SEC  File No. 333-126068), filed on November 15, 2005)           |
|                |       |       |       |                                                                                                                                                                                                                                                                                         |
| 3.8*                |       | —     |       | Amendment to Amended and Restated Limited Partnership Agreement of  Ensource Energy Partners, LP, dated as of February 10, 2006  (Incorporated by reference to Exhibit 10.9 of the Partnership’s Current  Report on Form 8-K (SEC File No. 001-32683), filed on February 13, 2006) |
|                |       |       |       |                                                                                                                                                                                                                                                                                         |
| 2.9*                |       | —     |       | Certificate of Formation of Ensource Reserves Management LLC  (Incorporated by reference to Exhibit 3.8 to the Partnership’s Registration  Statement on Form S-4 (SEC File No. 333-126068), filed on June 23, 2005)                                                                     |
|                |       |       |       |                                                                                                                                                                                                                                                                                         |
| 3.10*               |       | —     |       | Form of Limited Liability Company Agreement of Ensource Energy  Company LLC (Incorporated by reference to Exhibit 3.9 to Amendment No. 2 to  the Partnership’s Registration Statement on Form S-4 (SEC File No.  333-126068), filed on October 17, 2005)                                |
|                |       |       |       |                                                                                                                                                                                                                                                                                         |
| 3.11*               |       | —     |       | Certificate of Correction to Certificate of Limited Partnership of  Ensource Energy Partners, LP (Incorporated by reference to Exhibit 3.10 to  Amendment No. 1 to the Partnership’s Registration Statement on Form S-4 (SEC  File No. 333-126068), filed on September 15, 2005)        |
|                |       |       |       |                                                                                                                                                                                                                                                                                         |
| 3.12*               |       | —     |       | Form of Limited Liability Company Agreement of Ensource Reserves  Management LLC (Incorporated by reference to Exhibit 3.11 to Amendment No. 2  to the Partnership’s Registration Statement on Form S-4 (SEC File No.  333-126068), filed on October 17, 2005)                          |
|                |       |       |       |                                                                                                                                                                                                                                                                                         |
| 3.13*               |       | —     |       | Form of specimen unit certificate for the common units (Incorporated  by reference to Exhibit 3.12 of Amendment No. 3 to the Partnership’s  Registration Statement on Form S-4 (SEC File No. 333-126068), filed on  November 4, 2005)                                                   |

 

60

----

 
| **Exhibit  Number** | ** ** | ** ** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                           |
|---------------------|------------|------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |       |       |       |                                                                                                                                                                                                                                                                                                                                                      |
| 10.1*†         |       | —     |       | Form of Management Agreement by and between Ensource Reserves  Management LLC and Ensource Energy Company LLC (Incorporated by reference to  Exhibit 10.1 to Amendment No. 2 to the Partnership’s Registration Statement  on Form S-4 (SEC File No. 333-126068), filed on October 17, 2005)                                                          |
|                |       |       |       |                                                                                                                                                                                                                                                                                                                                                      |
| 10.2*†         |       | —     |       | Form of Management Agreement by and between Ensource Energy Partners,  LP and Ensource Energy Company LLC (Incorporated by reference to Exhibit 10.2  to Amendment No. 2 to the Partnership’s Registration Statement on Form S-4  (SEC File No. 333-126068), filed on October 17, 2005)                                                              |
|                |       |       |       |                                                                                                                                                                                                                                                                                                                                                      |
| 10.3*               |       | —     |       | Form of Warrant to Purchase Common Units issued by Ensource Energy  Income Fund LP in favor of Ensource Energy Partners, LP (Incorporated by  reference to Exhibit 10.3 of Amendment No. 4 to the Partnership’s  Registration Statement on Form S-4 (SEC File No. 333-126068), filed on  November 15, 2005)                                          |
|                |       |       |       |                                                                                                                                                                                                                                                                                                                                                      |
| 10.4*               |       | —     |       | Form of Conveyance of Net Profits Overriding Royalty Interest, by  Ensource Reserves Management LLC, in favor of Ensource Energy Income Fund LP  (Incorporated by reference to Exhibit 10.4 to Amendment No. 1 to the  Partnership’s Registration Statement on Form S-4 (SEC File No. 333-126068),  filed on September 15, 2005)                |
|                |       |       |       |                                                                                                                                                                                                                                                                                                                                                      |
| 10.5*               |       | —     |       | Form of Agreement and Plan of Merger by and between Ensource Energy  Income Fund LP and Eastern American Natural Gas Trust (for Partnership  Merger) (Incorporated by reference to Exhibit 10.5 to Amendment No. 2 to the  Partnership’s Registration Statement on Form S-4 (SEC File No. 333-126068),  filed on October 17, 2005)              |
|                |       |       |       |                                                                                                                                                                                                                                                                                                                                                      |
| 10.6*†         |       | —     |       | Form of Ensource Energy Partners, LP Long-Term Incentive Plan  (Incorporated by reference to Exhibit 10.6 to Amendment No. 1 to the  Partnership’s Registration Statement on Form S-4 (SEC File No. 333-126068),  filed on September 15, 2005)                                                                                                       |
|                |       |       |       |                                                                                                                                                                                                                                                                                                                                                      |
| 10.7*               |       | —     |       | Form of Agreement and Plan of Merger by and between Merger Sub, a  subsidiary of the Partnership, and Eastern American Natural Gas Trust (for  Subsidiary Merger) (Incorporated by reference to Exhibit 10.7 to Amendment  No. 2 to the Partnership’s Registration Statement on Form S-4 (SEC File No.  333-126068), filed on October 17, 2005) |
|                |       |       |       |                                                                                                                                                                                                                                                                                                                                                      |
| 10.8*               |       | —     |       | Redemption Agreement by and between Ensource Energy Partners, LP and  Ensource Energy Investors LLC dated as of February 10, 2006  (Incorporated by reference to Exhibit 10.8 to the Partnership’s Current  Report on Form 8-K (SEC File No. 001-32683), filed on February 13, 2006)                                                            |
|                |       |       |       |                                                                                                                                                                                                                                                                                                                                                      |
| 31.1                |       | —     |       | Certification by Chief Executive Officer required by Rule 13a-14(a)  and 15d-14(a) under the Exchange Act                                                                                                                                                                                                                                                 |
|                |       |       |       |                                                                                                                                                                                                                                                                                                                                                      |
| 31.2                |       | —     |       | Certification by Chief Financial Officer required by Rule 13a-14(a)  and 15d-14(a) under the Exchange Act                                                                                                                                                                                                                                                 |
|                |       |       |       |                                                                                                                                                                                                                                                                                                                                                      |
| 32.1                |       | —     |       | Certification by Chief Executive Officer pursuant to 18 U.S.C.  Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of  2002                                                                                                                                                                                                       |

 

61

----

 
| **Exhibit  Number** | ** ** | ** ** | ** ** | **Description**                                                                                                                                     |
|---------------------|------------|------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------|
|                |       |       |       |                                                                                                                                                |
| 32.2                |       | —     |       | Certification of Chief Financial Officer pursuant to 18 U.S.C.  Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of  2002 |

 

----

*              Incorporated byreference

†              Management contractor compensatory plan

 

62

----