**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

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**Form 10-Q**

**x**                              Quarterlyreport under Section 13 or 15 (d) of the Securities Exchange Act of 1934

**forthe quarterly period ended June 30, 2006**

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

**forthe transition period from                    to                    **

**CommissionFile No. 01-32683**

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

 

**(713)659-1794**

Issuer’s Telephone Number, Including Area Code

Securities registeredpursuant to Section 12(b) of the Act:
| Title of each class | ** ** | **Name of each exchange on which registered** |
|------------------------------------|------------|-----------------------------------------------------------------------------|
| Common Units                       |       | None                                                                        |

 

Securities registered pursuant to Section 12(g) of theAct:

**None**

Indicate by check markwhether the Registrant (1) has filed all reports required to be filed bySection 13 or 15 (d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the Registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. Yes  xNo  o

Indicate by check mark ifthe Registrant is an accelerated filer (as defined in Rule 12b-2 of theExchange Act). Yes  oNo  x

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act). Yes  xNo  o
| Large Accelerated Filer  o |   | Accelerated Filer  o |   | Non-Accelerated Filer  x |
|--------------------------------------|--------|--------------------------------|--------|------------------------------------|

 

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

As of August 7, 2006, theregistrant had not issued any registered common units.

 

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**ENSOURCEENERGY INCOME FUND L.P.**

**Table ofContents**
|                                                                  |   | Page                                                                                        |
|-----------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------|
| Part I Significant  Relationships Referenced in this Quarterly Report |   | 3                                                                                           |
| Item 1.                                                               |   | Financial Information                                                                       |   | 5 |
|                                                                  |   | Balance  Sheets                                                                             |   | 5 |
|                                                                  |   | Statements of Operations                                                                    |   | 6 |
|                                                                  |   | Statement of  Partners’ Capital                                                        |   | 7 |
|                                                                  |   | Statements  of Cash Flows                                                                   |   | 8 |
|                                                                  |   | Notes to Financial  Statements                                                              |   | 9 |
| Item 2.                                                               |   | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |   | 11 |
| Item 3.                                                               |   | Quantitative  and Qualitative Disclosures about Market Risk                                 |   | 15 |
| Item 4.                                                               |   | Controls and  Procedures                                                                    |   | 15 |
| Part II Other  Information                                            |   | 16                                                                                          |
| Item 1A.                                                              |   | Risk  Factors                                                                               |   | 16 |
| Item 6.                                                               |   | Exhibits                                                                                    |   | 22 |

 

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**PARTISIGNIFICANT RELATIONSHIPS REFERENCED IN THIS QUARTERLY REPORT**

Unless the context requires otherwise, throughout thisreport, we use the terms set forth below:

·                                          “we”, “us”, “our”,the “Partnership” or “Ensource Energy Income Fund” refers to Ensource EnergyIncome Fund LP.

·                                          “EnsourceEnergy Partners” refers to Ensource Energy Partners, LP.

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

·                                          “EnsourceEnergy Company” refers to Ensource Energy Company LLC.

·                                          “EnsourceEnergy” or the “General Partner” refers to Ensource Energy LLC, the generalpartner of the Partnership.

**CautionaryNote Regarding Forward-Looking Statements**

This quarterly 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 other variations on suchterms or comparable terminology. Similarly, statements that describe EnsourceEnergy Income Fund’s objectives, plans or goals are forward-looking. ThePartnership’s forward-looking statements are based on management’s currentintent, belief, expectations, estimates and projections regarding thePartnership and Eastern American Natural Gas Trust, or NGT, as well asprojections regarding the oil and gas industry. These statements are notguarantees of future performance and involve risks, uncertainties, assumptionsand other factors that are difficult to predict, including those discussedbelow. Therefore, actual results may vary materially from what is expressed inor indicated by the forward-looking statements. In particular, forward-lookingstatements as to the Partnership’s financial and business performance followingthe proposed acquisition of NGT should be understood as qualified by theabsence of any opportunity for the Partnership to perform comprehensive duediligence on NGT. These forward-looking statements might have beensignificantly different had such due diligence been undertaken. Readers of thisreport 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.

**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-Q. You may read and copy any materials we file with

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the SEC at the SEC’s public reference room at 100 FStreet NE, Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 forfurther information regarding the public reference room.

**NOTE ONNGT 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 NGT withthe SEC. Information publicly filed by NGT is available to the public fromcommercial document retrieval services and at the Internet website maintainedby the SEC at http://www.sec.gov.

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**ITEM 1.****                             FINANCIALINFORMATION**

**ENSOURCEENERGY INCOME FUND LP**

**BALANCE SHEETS**
| ** **                                     | ** ** | **June 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                                     | ** ** | **(unaudited)**         | ** ** | ** **                  | ** ** |
| **ASSETS**                                     |       |                    |       |                        |       |
| Cash                                           |       | $                       | 1,000      |                        | $          | 1,000 |   |
| Deferred  Exchange Offering Costs              |       | 1,576,954               |       | 1,142,293                   |       |
| Total assets                                   |       | $                       | 1,577,954  |                        | $          | 1,143,293 |   |
| Capital  Contribution subject to reimbursement |       | 1,576,954               |       | 1,142,293                   |       |
| **PARTNERS’  CAPITAL**                    |       |                    |       |                        |       |
| **Partners’ Capital**                     |       | $                       | 1,000      |                        | $          | 1,000 |   |

 

See accompanying notes tofinancial statements.

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**ENSOURCEENERGY INCOME FUND LP**

**STATEMENTSOF OPERATIONS**

**(Unaudited)**
| ** **                                         | ** ** | ** **                                          | ** ** | ** **                                        | ** ** | ** **      | ** ** | ** ** | ** ** | **May 26, 2005**          | ** ** |
|----------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|-----------------|------------|------------|------------|-------------------------------------|------------|
| ** **                                         | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** | **(INCEPTION)** | ** ** |
| ** **                                         | ** ** | **2006**                                            | ** ** | **2005**                                          | ** ** | **2006**        | ** ** | **2005**   | ** ** | **to June 30, 2006** | ** ** |
|                                               |       |                                                |       |                                              |       |            |       |       |       |                                |       |
| Expenses — start  up and organizational costs |       | $                                                   | 194,779    |                                              | $          | 101,022         |       | $          | 300,955    |                                | $          | 101,022 |   | $ | 491,593 |   |
|                                               |       |                                                |       |                                              |       |            |       |       |       |                                |       |
| Net loss                                           |       | $                                                   | (194,779   | )                                                 | $          | (101,022        | )          | $          | (300,955   | )                                   | $          | (101,022 | ) | $ | (491,593 | ) |

 

See accompanying notes tofinancial statements.

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**ENSOURCEENERGY INCOME FUND LP**

**STATEMENT OF PARTNERS’ CAPITAL(Unaudited)**
| ** **                    | ** ** | **For the Six  Months  Ended  June 30,  2006** | ** ** | **May 26, 2005  (INCEPTION)  to June 30,  2006** | ** ** |
|-------------------------------|------------|---------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|
| Balance, beginning  of period |       | $                                                             | 1,000      |                                                                 | $          | — |   |
| Cash  contributions           |       |                                                          |       | 1,000                                                                |       |
| Noncash  contributions        |       | 300,995                                                       |       | 491,593                                                              |       |
| Net loss                      |       | (300,995                                                      | )          | (491,593                                                             | )          |
| Balance June 30, 2006         |       | $                                                             | 1,000      |                                                                 | $          | 1,000 |   |

 

See accompanying notes tofinancial statements.

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**ENSOURCEENERGY INCOME FUND LP**

**STATEMENTSOF CASH FLOWS(Unaudited)**
| ** **                                                                                                                                     | ** ** | ** **                                        | ** ** | ** **                              | ** ** | **May 26, 2005**               | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|-----------------------------------------|------------|-------------------------------------|------------|
| ** **                                                                                                                                     | ** ** | **Six Months Ended June 30,** | ** ** | **  (INCEPTION)  ** | ** ** |
| ** **                                                                                                                                     | ** ** | **2006**                                          | ** ** | **2005**                                | ** ** | **to June 30, 2006** | ** ** |
| Net loss                                                                                                                                       |       | $                                                 | (300,955   | )                                       | $          | (101,022                            | )          | $ | (491,593 | ) |
|                                                                                                                                           |       |                                              |       |                                    |       |                                |       |
| Adjustments to  reconcile net loss to net cash used by operating activities — noncash start  up and organizational costs                  |       | 300,955                                           |       | 101,022                                 |       | 491,593                             |       |
| Net cash used by  operating activities                                                                                                         |       |                                              |       |                                    |       |                                |       |
|                                                                                                                                           |       |                                              |       |                                    |       |                                |       |
| Financing  activities — cash contributions                                                                                                |       | —                                            |       | 1,000                                   |       | 1,000                               |       |
| Increase in cash  and cash at end of period                                                                                                    |       | —                                            |       | $                                       | 1,000      |                                | $          | 1,000 |   |
| Cash beginning  of period                                                                                                                      |       | $                                                 | 1,000      |                                    | —     |                                | —     |   |
| Cash end of  period                                                                                                                            |       | $                                                 | 1,000      |                                    | $          | 1,000                               |       | $ | 1,000 |   |
|                                                                                                                                           |       |                                              |       |                                    |       |                                |       |
| **Supplemental Disclosure of  Noncash Investing and Financing Activities** — Noncash  contributions for deferred securities issuance cost |       | $                                                 | 434,661    |                                    | $          | 472,413                             |       | $ | 1,576,954 |   |

 

See accompanying notes tofinancial statements.

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**ENSOURCEENERGY INCOME FUND LP**

**NOTESTO FINANCIAL STATEMENTS(Unaudited)**

**June 30,2006**

**1.****                                      Organization,Business Operations**

The condensed financialstatements of Ensource Energy Income Fund LP (“the Partnership”) includedherein, are unaudited for the three and six month periods ended June 30, 2006and 2005 and for the period beginning May 26, 2005 (inception) through June 30,2006. These financial statements reflect all adjustments (consisting of normalrecurring adjustments), which are, in the opinion of management, necessary tofairly present the results for the periods presented. Certain information andnote disclosures, normally included in financial statements prepared inaccordance with accounting principles generally accepted in the United States ofAmerica, have been condensed or omitted pursuant to rules and regulations ofthe Securities and Exchange Commission. It is suggested that these condensedfinancial statements be read in conjunction with the Partnership’s auditedfinancial statements for the period ended December 31, 2005, which are includedin the Partnership’s annual report on Form 10-K for the period ended December31, 2005. The Partnership believes that the disclosures made herein areadequate to make the information presented not misleading.

Ensource Energy IncomeFund LP (the “Partnership”) was formed in Delaware on May 26, 2005 asa master limited partnership by Ensource Energy Partners, LP, its formergeneral partner (“Ensource Energy Partners”). The objective of the Partnershipis to conduct and consummate an exchange offer and subsequent merger withEastern American Natural Gas Trust (“NGT”). On November 21, 2005, ThePartnership made an offer to acquire all of the outstanding depositary units ofNGT in exchange for common units of the Partnership and a pro rata share of thespecial cash distribution of $5.9 million that is to be paid promptly aftercompletion of the exchange offer.

On May 15, 2006, thePartnership filed with the SEC an amendment to its previous offer to exchangeone whole newly issued common unit of the Partnership and to pay a pro ratashare of a special cash distribution of $5.9 million for each outstandingdepositary unit of NGT. This revised offer, which will commence after thePartnership receives SEC clearance of its amended registration statement, willinclude an offer to pay $31.00 in cash to purchase up to 2,950,001 of theoutstanding depositary units of NGT. The Partnership has entered into anagreement with Third Point Partners LP and Third Point Partners Qualified,L.P., collectively the Third Point Parties, to participate in the cash portionof the tender offer. This revised offer will allow current NGT unitholders theopportunity to sell their units at a premium to the average market price forthe past 30 trading days or elect to exchange their depositary units for onecommon unit of the Partnership. The Partnership intends, promptly aftercompletion of the exchange offer, to seek to have NGT consummate a second-stepmerger with and into the Partnership, or alternatively, a newly-formed,wholly-owned subsidiary of the Partnership. See Note 4 “Subsequent Events” fora description of the current exchange offer and related transactions.

Ensource Energy LLC, anewly formed Delaware limited liability company, has been assigned all ofEnsource Energy Partners’ general partnership interests in the Partnership.Ensource Energy has been capitalized with up to $40 million of committedcapital primarily from Lehman Brothers Inc., the global investment bank,affiliates of the investment firm Ospraie Management, and Ensource Energymanagement.

The Partnership’s abilityto commence operations is contingent upon funding of capital commitments by thePartnership’s general partner. The proceeds by the Partnership’s general partnerwill be used to purchase a 1.0% general partnership interest, incentivedistribution rights, a warrant, common units 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.

**2.****                                      Summaryof Significant Accounting Policies**

***Basis of Presentation***

The financial statementsinclude the accounts of the Partnership. The Partnership had not commencedoperations effective June 30, 2006. The Partnership has selectedDecember 31 as its fiscal year end.

***Use of Estimates***

The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States of America requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities anddisclosure of contingencies at the date of the financial statements and thereported amounts of expenses during the reporting period. Actual amounts coulddiffer from those estimates.

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***Cash Equivalents***

The Partnership considers all highly liquidinvestments with original maturities of three months or less to be cashequivalents.

***Income Taxes***

For tax purposes, the Partnership is treated as apartnership. As such, income or loss of the Partnership is reported in theincome tax returns of the partners.

***Start Up andOrganization Costs***

Start up and organization costs are expensed asincurred.

***Deferred ExchangeOffering Costs***

Deferred exchange offer costs are being deferred untilthe exchange offer is consummated, or the exchange offer is significantlydelayed or cancelled. These costs will become part of the cost of the exchangeoffer or will reduce the fair value of the common units issued by thePartnership upon consummation of the exchange offer. In the event the exchangeoffer is significantly delayed or cancelled, these costs will be expensed inthe period either of these events occurs.

**3.****                                   Commitmentand Related Party Transactions**

As of June 30, 2006, attorney’s fees and otherout-of-pocket and overhead costs related to start-up and organization costs andthe proposed transaction were incurred on behalf of the Partnership by thelimited partners of Ensource Energy Partners and a former affiliate of thePartnership, Ensource Energy Company LLC, which was formed by principals of thePartnership. These costs have been recorded as noncash capital contributions tothe Partnership. Management believes the recorded costs approximate the coststhat would have been incurred for these purposes with unaffiliated parties.Such costs have been reported as start-up and organizational costs and deferredsecurities issuance costs in the accompanying financial statements. Thedeferred exchange offer costs of $1,576,954 are a noncash financing activity.

Upon closing of the exchange offer and second-stepmerger, the Partnership has agreed to make a special expense reimbursementdistribution to its general partner for costs and expenses of the exchangeoffer and second-step merger.

On February 10, 2006, Ensource Energy Partnersentered into a Redemption Agreement with Ensource Energy Investors, LLC, one ofthe limited partners in Ensource Energy Partners. As a result of thatagreement, Ensource Energy Investors, LLC, or EEI, withdrew from EnsourceEnergy Partners as a limited partner, and Ensource Energy Partners redeemedfrom EEI its limited partner interest in it. Prior to such redemption, EEI heldan approximately 62% limited partner interest in Ensource Energy Partners andhad the right under the limited partnership agreement governing Ensource EnergyPartners to appoint four of the five members to its board of directors. Theredemption resulted in the payment of $12,460,832.38 to EEI from the escrowaccount that was established by Ensource Energy Partners and its investors tofund the $20.05 million contribution by the general partner to be made upon thesuccessful closing of the exchange offer being made pursuant to theRegistration Statement on Form S-4 (file no. 333-126068) previously filed bythe Partnership. Also on February 10, 2006, Ensource Energy Partners andits remaining limited partners entered into an amendment to its limitedpartnership agreement. As a result of this amendment, such limited partnersagreed to contribute to Ensource Energy Partners a total of approximately$20.1 million to be used to fund the $20.05 million contribution tobe made upon the successful closing of the exchange offer. In connection withthe amendment, one of the remaining limited partners, 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 Ensource Energy Partners. As a result of this increased capitalcommitment, REN held a majority in

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interest of Ensource Energy Partners and consequentlyhad the right to designate four of the five members its board of directors.

Ensource Energy LLC, a newly formed Delaware limitedliability company, with $40.0 million of capital commitments from LehmanBrothers Inc., affiliates of the investment firm Ospraie Management, andEnsource Energy management, has been assigned all of Ensource Energy Partners’general partnership interests in the Partnership. Ensource Energy Partners hasbeen dissolved.

**4.****                                      SubsequentEvents**

On July 31, 2006, the Partnership received SECclearance of its amended registration statement filed May 15, 2006, and thePartnership subsequently commenced its (1) offer to purchase for cashconsideration of $31.00 per depository unit for up to 2,950,001 units of NGT or(2) offer to exchange each outstanding depository unit of NGT for one wholeunit of the Partnership and pro rata portion of a special cash distribution of$5.9 million for depository units exchanged. The offer will expire at 5:00p.m., New York City time, on August 25, 2006 unless extended.

**ITEM 2.**                          **MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS**

**General**

We are a Delaware limited partnership formed in May2005. We were formed by Ensource Energy Partners, our former general partner,for the purpose of conducting and consummating the exchange offer andsubsequent merger as more fully described below. Our primary business model,after the consummation of the transactions described in this report, is toincrease unitholder value in terms of cash distributions per common unit andcapital appreciation through the acquisition of net profits interests in oiland natural gas properties that the Operating Company, a wholly-ownedsubsidiary of the General Partner, will acquire in the future and to manageeffectively the current assets of NGT, including reinvesting the proceeds fromthe sale of the zero coupon bonds that constitute a part of the depositaryunits.

**ExchangeOffer and Second-Step Merger**

On November 21, 2005, we made an offer, which we referto in this report as the “exchange offer,” to acquire all of the outstandingdepositary units of NGT in exchange for our common units and a pro rata shareof the special cash distribution of $5.9 million that is to be paid promptlyafter completion of the exchange offer. We intend, promptly after completion ofthe exchange offer, to seek to have NGT consummate a second-step merger withand into the Partnership, or alternatively, a newly-formed, wholly-ownedsubsidiary of the Partnership. In the second-step merger,

·                                                                                          eachremaining depositary unit that was not validly tendered to and accepted by thePartnership for the cash consideration or the exchange consideration in the exchangeoffer would be converted into the right to receive one whole common unitof the Partnership; and

·                                                                                          eachtrust unit that is not evidenced by an NGT receipt, referred to as a withdrawntrust unit, would be converted into the right to receive 0.4 of a common unitof the Partnership.

According to NGT’sQuarterly Report on Form 10-Q for the quarter ended June 30, 2006, therewere 5,880,100 depositary units outstanding (which excludes 19,900 withdrawntrust units, or 0.03% of the 5,900,000 total outstanding NGT trust units).Withdrawn units 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

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plan to acquire all of NGT’s outstanding trust units,including the number of depositary units that would constitute at least amajority of the outstanding trust units.

It is a condition to our obligation to acceptdepositary units validly tendered, and not withdrawn, for exchange in the exchangeoffer that on the expiration date of the exchange offer, as that date may beextended, we receive valid tenders of depositary units, that are not properlywithdrawn as of the expiration date of the exchange offer, evidencing not lessthan a majority of the total trust units that are outstanding. We refer to thiscondition as the “minimum tender condition.” As a result, valid tenders ofdepositary units for exchange must be received by us from the holders of atleast 2,950,001 depositary units that are not withdrawn, by the expirationdate, as that date may be extended, for the minimum tender condition to besatisfied.

**Revised Exchange Offer**

On May 15, 2006, we filed with the SEC an amendment toour current offer to exchange one whole newly issued common unit of thePartnership and to pay a pro rata share of a special cash distribution of $5.9million for each outstanding depositary unit of NGT. This revised offer,commenced on July 31, 2006 after we received SEC clearance of our amendedregistration statement, includes an offer to pay $31.00 in cash to purchase upto 2,950,001 of the outstanding depositary units of NGT. We have entered intoan agreement with affiliates of the investment firm Third Point LLC toparticipate in the cash portion of the tender offer. This revised cash tenderand exchange offer, which we refer to as the Offer, will allow current NGTunitholders the opportunity to sell their units at a premium to the averagemarket price for the past 30 trading days or elect to exchange their depositaryunits for one common unit of the Partnership. See Note 4 “Subsequent Events”for a description of the current exchange offer and related transactions.

**Operations**

We do not own any properties and we currently do notconduct any operations. If the exchange offer and second-step merger aresuccessfully consummated, our business plan is to own and hold the legacyassets acquired from NGT in the second-step merger, which will provide thesource for ongoing distributions to our limited partners. Upon consummation ofthe exchange offer, we plan to sell the zero coupon bonds underlying thedepositary units that are accepted by us for exchange. Also at that time, ourGeneral Partner will contribute up to $40.0 million (with a minimumcontribution of $20.0 million if no depositary units are accepted for the cashconsideration) for its 1% general partner interest, the incentive distributionrights, common units, subordinated units and the warrant to purchase a total of1,000,000 common units at an exercise price of $38.00 per common unit.

The General Partner owns all the limited liabilitycompany interests of the Operating Company, which will be an operating companythat will acquire and hold title to any oil and natural gas properties acquiredafter the second-step merger. We will invest a portion of the net proceeds fromthe capital contributions of the General Partner, along with net proceeds fromthe sale of zero coupon bonds (which could total up to approximately $82.2million based on quoted prices as of May 1, 2006 and assuming the sale of thefull $117.6 million face amount of zero coupon bonds underlying all outstandingdepositary units), to acquire up to 99% net profits interests in oil and gasproperties purchased by the Operating Company. The Operating Company intends toset up a borrowing base facility with a lender to manage working capitalrequirements and to fund acquisitions.

We also plan to distribute on a quarterly basis allavailable cash from operating surplus that we receive from the ownership ofthose interests beyond that required to pay our costs and fund reasonableworking capital reserves. We do not anticipate incurring any debt at thePartnership other than trade accounts payable incurred in the ordinary courseof our business.

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***Critical AccountingPolicies***

We expect to make estimates and assumptions thataffect the reported amounts of our assets, liabilities, revenues and expensesand related disclosure of contingent assets and liabilities. Certain accountingpolicies involve judgments and uncertainties to such an extent that there isreasonable likelihood that materially different amounts could have beenreported under different conditions, or if different assumptions had been used.We plan to evaluate our estimates and assumptions on a regular basis. We willbase our estimates on our management’s experience in the energy industry andvarious other assumptions we believe to be reasonable under the circumstances,the results 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 financialstatements, which are prepared in accordance with accounting principlesgenerally accepted in the United States of America, due to the following: (i)certain cash reserves may be established for contingencies which were notaccrued in the financial statements; (ii) amortization of the legacy assets ischarged directly to NGT’s trust corpus; and (iii) the sale of percent of thenet profits interests is reflected in NGT’s statements of distributable incomeas cash proceeds to NGT.

***Net ProfitsInterests in Gas Properties***

We plan to periodically assess our net profitsinterests, including the legacy assets, to determine whether their netcapitalized cost is impaired. We will determine if a writedown is necessary toits investment in the net profits interests in gas properties to the extentthat total capitalized costs, less accumulated amortization, exceedundiscounted future net revenues attributable to proved gas reserves of theunderlying properties. We will then provide a writedown to the extent that thenet capitalized costs exceed the discounted future net revenues attributable toproved gas reserves of the underlying properties. Any such writedown would notreduce distributable income.

Amortization of the net profits interests in gasproperties will be calculated on a units-of-production basis, whereby our costbasis in the properties will be divided by total proved reserves to derive anamortization rate per reserve unit. Such amortization will not reducedistributable income, rather it is charged directly to properties. Revisions toestimated future units-of-production will be treated on a prospective basisbeginning on the date significant revisions are known.

The net profits interest impairment test and thedetermination of amortization rates will be dependent on estimates of provedgas reserves attributable to our net profits interests. Numerous uncertaintiesare inherent in estimating reserve volumes and values, including economic andoperating conditions, and such estimates are subject to change as additionalinformation becomes available.

***Income Taxes***

Our tax counsel have advised us that, under thencurrent tax laws, we will be classified as partnership for federal and stateincome tax purposes and, therefore, would not be subject to taxation at thePartnership level. Accordingly, no provision for federal or state income taxeshas been made. However, the opinion of tax counsel is not binding on taxingauthorities.

***Oil and Natural GasReserve Quantities***

Our estimate of proved reserves will be based on thequantities of natural gas and oil that engineering and geological analysisdemonstrate, with reasonable certainty, to be recoverable from establishedreservoirs in the

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future under current operating and economicparameters. We expect to engage an independent reservoir engineer to prepare anannual reserve and economic evaluation of all our properties on a well-by-wellbasis.

Reserves and their relation to estimated future netcash flows impact our depletion and impairment calculations. As a result,adjustments to depletion and impairment will be made concurrently with changesto reserve estimates. We will prepare our reserve estimates, and the projectedcash flows derived from these reserve estimates, in accordance with SECguidelines. The independent engineering firm described above will adhere to thesame guidelines when preparing their reserve reports. The accuracy of ourreserve estimates will be a function of many factors including the following:the quality and quantity of available data, the interpretation of that data,the accuracy of various mandated economic assumptions, and the judgments of theindividuals preparing the estimates.

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

***Revenue Recognition***

Under our business plan, we will hold net profitsinterests in underlying properties owned by others. We will use the salesmethod to account for natural gas imbalances. Under this method, revenue willbe recorded on the basis of natural gas and oil actually sold by us. Inaddition, we will record revenue for our share of natural gas and oil sold byother owners that cannot be volumetrically balanced in the future due toinsufficient remaining reserves. We will also reduce revenue for other owners’natural gas sold by us that cannot be volumetrically balanced in the future dueto insufficient remaining reserves. Our remaining over- and underproducednatural gas balancing positions will be considered in our proved reserves.

***DerivativeInstruments and Hedging Activities***

We plan to use derivative financial instruments toachieve a more predictable cash flow from our natural gas production byreducing our exposure to price fluctuations. We currently have no such hedges.We plan to use swaps, collars, floors or any combination thereof. We willaccount for these activities pursuant to SFAS No. 133 — Accounting forDerivative Instruments and Hedging Activities, as amended. This statementestablishes accounting and reporting standards requiring that derivativeinstruments (including certain derivative instruments embedded in othercontracts) be recorded at fair market value and included in the balance sheetas assets or liabilities.

The accounting for changes in the fair value of aderivative instrument depends on the intended use of the derivative and theresulting designation, which is established at the inception of a derivative.SFAS No. 133 requires that a company formally document, at the inception of ahedge, the hedging relationship and the entity’s risk management objective andstrategy for undertaking the hedge, including identification of the hedginginstrument, the hedged item or transaction, the nature of the risk beinghedged, the method that will be used to assess effectiveness and the methodthat will be used to measure hedge ineffectiveness of derivative instrumentsthat receive hedge accounting treatment.

For derivative instruments designated as cash flowhedges, changes in fair value, to the extent the hedge is effective, will berecognized in other comprehensive income until the hedged item are recognizedin earnings. Hedge effectiveness is assessed at least quarterly based on totalchanges in the derivative’s fair value. Any ineffective portion of thederivative instrument’s change in fair value will be recognized immediately inearnings.

In December 2004, FASB issued a revised version ofSFAS 123, Share-based Payment. The statement requires public entities tomeasure the costs of employee services received in exchange for an award ofequity instrument based on the grant-date fair value of the award. The costswill be recognized over the period during which an employee is required toprovide service in exchange for the award, generally the vesting period. Thegrant date fair value of employee share options and similar instruments will beestimated using option pricing models and adjusted for the uniquecharacteristics of those instruments. We do not expect that the adoption ofthis interpretation to have an impact on our financial position, results ofoperations or cash flows.

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In March 2005, FASB issued Interpretation (FIN) No.47, Accounting for Conditional Asset Retirement Obligations, which providesadditional guidance for SFAS 143, Asset Retirement Obligation. The statementprovides clarification that the term asset obligation refers to a legalobligation to perform asset retirement activity in which the timing and (or)method of the settlement conditional on a future event that may or may not bewithin the control of the entity. The statement also clarifies when an entitywould have sufficient information to reasonably estimate the fair value of anasset retirement obligation. We will prepare our financial statementsaccordingly.

**Liquidityand Capital Resources**

Immediately after the second-step merger, we expect tohave net cash resources of approximately $95 million and no indebtedness. Wewill generate cash from the contribution of the General Partner, net ofexpenses, the net proceeds from the sale of the zero coupon bonds (which couldtotal up to approximately $84.8 million based on quoted prices as of August 7,2006 and assuming the sale of the full $117.6 million face amount of zerocoupon bonds underlying all outstanding depositary units), and cash flows fromthe legacy net profits interests and on our financial assets, includinginterest earned from the temporary investment of our cash assets in U.S.government securities and other high-quality debt maturing in one year or less.Our primary use of our financial assets will be acquisitions of net profitsinterests burdening producing properties that are acquired in the future by theOperating Company and cash distributions to holders of our common andsubordinated units.

**ITEM 3.****                             QUANTITATIVE ANDQUALITATIVE DISCLOSURES ABOUT MARKET RISK**

We plan to use derivative financial instruments toachieve a more predictable cash flow from our natural gas production byreducing our exposure to price fluctuations. We currently have no such hedges.We do not plan to incur debt at the Partnership level. The primary objective ofthe following information is to provide forward-looking quantitative andqualitative information 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 pricingapplicable to the natural gas production attributable to our net profitsinterests. Realized pricing is primarily driven by the spot market pricesapplicable to our natural gas production and the prevailing price for crudeoil. Pricing for natural gas production has been volatile and unpredictable forseveral years, and we expect this volatility to continue in the future. Theprices we receive for production depend on many factors outside of our control.

We plan to enter into hedging activities with respectto a portion of our projected natural gas production through varioustransactions which hedge the future prices received. These transactions mayinclude price swaps whereby we will receive a fixed price for our productionand pay a variable market price to the contract counterparty. These hedgingactivities are intended to support natural gas prices at targeted levels and tomanage our exposure to natural gas price fluctuations. We do not plan to holdor issue derivative instruments for speculative trading purposes.

**ITEM 4.****                             CONTROLS AND PROCEDURES**

We maintain a set of disclosure controls andprocedures that are designed to ensure that information required to bedisclosed by us in the reports filed by us under the Exchange Act is recorded,processed, summarized and reported within the time periods specified in the SEC’srules and forms. As of the end of the period covered by this report, weevaluated, under the supervision and with the participation of our management,including our President and Chief Executive Officer and our Executive VicePresident and Chief Financial Officer, the effectiveness of our disclosurecontrols and procedures pursuant to Rule 13a-15 of the Exchange Act. Based onthat evaluation, our President and Chief Executive Officer and our ExecutiveVice President and Chief Financial Officer concluded that our disclosurecontrols and procedures are effective.

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During the most recent fiscal quarter, there have beenno changes in our internal control over financial reporting that has materiallyaffected, or is reasonably likely to materially affect, our internal controlover financial reporting.

**PARTIIOTHER INFORMATION**

**ITEM 1A.****                    RISK FACTORS**

You should consider carefully the following risksdescribed below, together with the other information contained in thisquarterly report on Form 10-Q and in our other filings with the SEC. Ifany of these risks actually occur, our business, financial condition oroperating results could be materially adversely affected and the trading priceof our common stock could decline. The risks described below are either inaddition to or include certain revisions to the risk factors set forth in ourannual report on Form 10-K for the fiscal year ended December 31,2005.

**Risk Factors Relating to the Offerand Second-Step Merger**

***Depending on the number of depositary unitholders who electto receive the cash consideration instead of the exchange consideration, theThird Point Parties may beneficially own a majority of the Partnership’s commonunits after the Offer, but before the second-step merger, and a substantialportion of the common units after the second-step merger.***

The Third Point Parties will contribute up to $71.5million to the Partnership to fund the cash consideration, subject to specifiedconditions. In return for such contribution, the Partnership will issue to theThird Point Parties the number of common units of the Partnership equal thenumber of depositary units tendered and accepted for the cash consideration. Asa result of such issuance, after the consummation of the Offer, the Third PointParties may beneficially own more than a majority of the common units of thePartnership if few depositary units are accepted by us for the exchangeconsideration. If this situation occurs, the Third Point Parties will be ableto determine any issue requiring a majority vote of the holders of common unitsof the Partnership.

Similarly, upon consummation of the second-stepmerger, the Third Point Parties may beneficially own a substantial percentagewhich we estimate to be 39.1% of the Partnership’s common units if the maximumof 2,950,001 depositary units are accepted for the cash consideration. Thissubstantial ownership will allow the Third Point Parties to have a substantialvote in any matter requiring approval of the common unitholders of thePartnership.

***Depending on the number of depositary unitholders who electto receive the cash consideration instead of the exchange consideration, theGeneral Partner may own up to 645,161 common units of the Partnership after theOffer and the second-step merger and thus be able to vote in any matter subjectto the approval of limited partners of the Partnership.***

Each of the Third Point Parties and the GeneralPartner have agreed that, subject to specified conditions, after the expirationof the Offer they will contribute to the Partnership the cash necessary to fundin full our acceptance of a maximum of 2,950,001 depository units validlytendered to us for the cash consideration and not withdrawn. The amounts thatwill be so contributed to us by the Third Point Parties and the General Partnerwill be in the same proportion that such person’s maximum commitment (up to$71.5 million in the case of the Third Point Parties and up to $20.0 million inthe case of the General Partner) bears to $91.5 million. The contribution tothe Partnership by the Third Point Parties and the General Partner will be madein exchange for a number of common units to be issued to each of them at aprice of $31.00 per common unit based on their respective contribution. Thus,the General Partner may receive up to 645,161 common units of the Partnership.

The General Partner’s ownership of up to 645,161 commonunits will allow it to vote in any matter subject to the vote of the holders ofcommon units of the Partnership. Thus, the General Partner will be able tomanage the

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operations of the Partnership in its role as thegeneral partner and will also be able to influence the matters reservedexclusively for the limited partners of the Partnership.

**Risk Factors Related to Our Businessand the Oil and Natural Gas Industry**

***Reserve estimates of NGT include reserves attributable tothe legacy royalty net profits interest that will be produced after NGT isliquidated and it sells such royalty net profits interest.***

The legacy assets of NGT include a royalty net profitsinterest that is not limited in term or amount. Under NGT’s trust agreement,the trustee is required to sell such royalty net profits interest after May 12,2012 and before May 15, 2013. The proceeds from such sale are required to bedistributed by NGT. The reserve report of NGT as of December 31, 2005 includesestimated reserves attributable to production from the royalty net profitsinterest that will be produced after May 15, 2013. Although the Partnership hasnot been provided access to NGT’s reserve report and the estimates ofproduction attributable to the royalty net profits interest after May 15, 2013,we estimate that up to 6.5 MMcf of NGT’s reported approximately 11.3 MMcf ofestimated reserves as of December 31, 2005 would be produced over a 20-25 yearperiod commencing in 2014 (or up to approximately $18.8 million of theapproximately $59.3 million discounted estimated future net reserves for theroyalty net profits interest as of December 31, 2005 as reported by NGT).Neither trust unitholders nor, if the Offer is successfully consummated, ourcommon unitholders will participate in the proceeds from productionattributable to reserves produced from the royalty net profit interest unlessthe Partnership is the purchaser of same. However, trust unitholders and, ifthe Offer is successfully consummated, the Partnership would participate in theproceeds from the sale of such royalty net profits interest, the value of whichwill be a function of, among other factors, the then estimated reservesattributable to same and the expected production rate.

***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 investment activity and business is toacquire net profits interests burdening properties to be acquired by theOperating Company in the future. While we intend for our investments to beallocated among a substantial number of properties, there is no limit on theamount of the Operating Company’s capital that it may invest in any one assetor group of assets if the board of directors of our General Partner approvessuch acquisition. In addition, upon closing of this Offer and the second-stepmerger, our operating assets will consist of the legacy net profits interestsof NGT, together with cash from the capital contribution by our General Partnerand the Third Point Parties and proceeds form the sale of the zero couponbonds. A consequence of this concentration is that the aggregate returns weinitially realize may be adversely affected if a small number of the propertiesunderlying the legacy NGT net profits interests perform poorly or if any suchproperties otherwise become impaired or require substantial capital to maintainproduction. 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 a greaterrisk of loss than would be the case if the Operating Company were to invest ina more diverse set of assets. To the extent that the Operating Company makes alarge investment in a small number of properties, our net asset value and thusthe market price of our common units may fluctuate as a result of changes inthe financial condition or in the market’s assessment of the property basesubject to our net profits interests. These factors could negatively impact ourability to pay you distributions and could cause you to lose all or part ofyour investment.

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**Risks Inherent to an Investment inthe Partnership**

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

Our performance and the Operating Company’s ability toexecute its business plans depend largely on the efforts and abilities of themembers of senior management of our General Partner. These executives havesubstantial experience and expertise in the energy business. The unexpectedloss of services of one or more of these individuals could have an adverseeffect on our business and the business of the Operating Company. As we grow,the General Partner will need to attract and retain additional qualifiedpersonnel and develop, train and manage an increasing number ofmanagement-level employees. We cannot assure you that our General Partner willbe able to attract and retain personnel as needed in the future. In particular,we depend on the performance of Scott W. Smith, President and Chief ExecutiveOfficer, and Marshall M. Eubank, Executive Vice President and Chief FinancialOfficer, of our General Partner.

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

There is no established trading market for our commonunits. The Partnership’s common units have been approved for listing on theNYSE Arca, subject to official notice of issuance, under the symbol “ENF”.. Weexpect that upon consummation of the Offer, our common units will be initiallytraded on NYSE Arca; however, upon consummation of the second-step merger, weintend to request that our common units be transferred for trading on the NYSE.However, we cannot assure you that regular trading of our common units willdevelop on either exchange or elsewhere or, if developed, that any such marketwill be sustained. Accordingly, we cannot assure 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 common units are not equivalent to shares of commonstock. Even if common unitholders are dissatisfied, they cannot easily removeour General Partner.***

The common units should not be viewed by investors asshares in a corporation. The common units represent a limited partnershipinterest in the Partnership. After completion of the Offer and second stepmerger, the Partnership’s assets will be the net profits interests constitutingthe legacy assets we acquire from NGT, cash from the General Partner’scontribution and sale of the zero coupon bonds underlying the depositary unitsaccepted by us for exchange and net profits royalty interests we acquire in thefuture on producing properties to be acquired by the Operating Company in thefuture.

Unlike the holders of common stock in a corporation,common unitholders have only limited voting rights on matters affecting ourbusiness and, therefore, limited ability to influence management’s decisionsregarding our business. Common unitholders did not elect our General Partner orthe board of directors of our General Partner and will have no right to electour General Partner or the board of directors of our General Partner on anannual or other continuing basis.

The board of directors of our General Partner isappointed by the members of our General Partner. The General Partner’s board ofdirectors has a fiduciary duty to manage the General Partner on behalf of itsmembers. The General Partner, in turn, has a fiduciary duty to manage thePartnership on behalf of its partners. These differing duties could result inconflicts of interest.

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Furthermore,if common unitholders are dissatisfied with the performance of our GeneralPartner, they will have little ability to remove our General Partner. First,our General Partner generally may not be removed except upon the vote of theholders of at least 66 2/3% of the outstanding units voting together as asingle class. Also, if our General Partner is removed without cause during thesubordination 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.

Accordingto our amended and restated limited partnership agreement, cause is narrowlydefined to 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 us will most likely result in the termination of the subordinationperiod.

Furthermore,common unitholders’ voting rights are further restricted by our partnershipagreement provision providing that any common units held by a person that owns20% or more of any class of common units then outstanding, other than theGeneral Partner, its affiliates, their transferees and persons who acquiredsuch units with the prior approval of the board of directors of the GeneralPartner, cannot be voted on any matter. In addition, the partnership agreementcontains provisions limiting the ability of common unitholders to call meetingsor to acquire information about our operations, as well as other provisionslimiting the common unitholders’ ability to influence the manner or directionof management.

As aresult of these provisions, the price at which our common units will trade maybe lower because of the absence or reduction of a takeover premium in thetakeover price.

***The board of directors of the General Partner may changemost of our operating policies and strategies without prior notice or commonunitholder approval, the effects of which could adversely affect our results ofoperations, financial condition or the amount of cash available fordistribution to unitholders.***

Theboard of directors of our General Partner has the authority to modify or waivemost of our current operating policies and our strategies without prior noticeand without common unitholder approval, except the members of our GeneralPartner will have approval rights of certain changes. We cannot predict theeffect that any changes to our current operating policies and strategies wouldhave on our business, operating results or value of our common units. However,the effects might be adverse, which could negatively impact our ability to payyou distributions and cause you to lose all or part of your investment. In theevent that such board of directors determines that we cannot economicallypursue our investment objectives, they may at some future date decide to seekto convert us to an operating company, pursue investments outside of theupstream oil and gas industry or cause us to liquidate. Such a conversion orelection to liquidate may not be effected without approval of a requisitepercentage of the General Partner’s board of directors and the holders of amajority of our common units.

Certainactions may not be taken without the approval of the members of the GeneralPartner, many of which overlap certain actions that may not be taken withoutalso having the approval of the board of directors. The following actions maynot be taken by the General Partner without the approval of at least 66 2¤3% of the membership interests of its members (and to the extent it has thelegal power and authority) the General Partner shall cause the OperatingCompany, its subsidiaries and the Partnership not to take the followingactions:

·                          expenditures during any one-year periodin excess of $15 million for one or more acquisitions;

·                          transfers, during any one-year period,of or abandonment of any properties or other assets or any interest in suchproperties or other assets, involving assets valued at or involving netproceeds of more than $15 million in the aggregate;

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·                          incurrence of any indebtedness forborrowed money (not including trade payables incurred in the Partnership’s orin the General Partner’s (or any of its subsidiaries) ordinary course ofbusiness) on behalf of the Partnership or the General Partner (or any of itssubsidiaries) of more than $5 million outstanding at any one time;

·                          mortgage, pledge, assignment in trust orotherwise encumber any property or assets of the General Partner, or assign anymonies owed or to be owed to the General Partner, except for customary liensgranted in the ordinary course of business to secure indebtedness for borrowedmoney as described immediately above;

·                          enter into any merger, exchange orconsolidation; effect a recapitalization or reorganization; commence adissolution, liquidation or winding up of affairs; or commence, consent to orpermit a bankruptcy;

·                          authorize, offer, issue or sell anysecurities (other than to an eligible officer, manager or other employeepursuant to the terms and conditions set forth in the limited liability companyagreement) or a new class or series of any securities resulting, in anyone-year period, in proceeds in excess of $1.0 million, or make one or morerequests of the members for capital contributions in excess of $1.0 million inany one-year period;

·                          approve, or otherwise modify any existingarrangements with respect to, compensation for members of the board ofdirectors of the General Partner;

·                          appoint or remove any executive officer,enter into or modify or amend in any material respect any employment agreementwith any officer or hire any person on other than an at “at-will” basis orterminate any person employed on other than such basis;

·                          admit any new partner, member,shareholder or other equity interest owner to any subsidiary of the GeneralPartner;

·                          authorize material transactions not inthe ordinary course of business;

·                          redeem or repurchase any securities;

·                          amend the formation documents or othergoverning documents of such persons;

·                          approve of any transaction with anyaffiliate of such persons, or any officer, director or employee of suchpersons, or any affiliate of any officer, director or employee of such persons;or

·                          any action, authorization or approval,or the entry into any binding agreement, or to otherwise obligate the GeneralPartner, any of its subsidiaries or the Partnership, with respect to theforegoing.

**RisksRelated to Our General Partner**

***Our General Partner will have conflicts of interest.***

OurGeneral Partner will provide, or cause to be provided, management andsupervisory services to the Partnership in consideration for reimbursement ofthe costs incurred. In addition, the incentive distribution rights held by ourGeneral Partner will entitle our General Partner to an increased share (anadditional 24.75%) of cash distributed by the Partnership in excess ofspecified threshold levels. In addition, our General Partner will be entitledto a fee to be paid by the Operating Company that will be used to fund anemployee bonus pool, which we refer to as the Employee Bonus Pool Fee, underthe direction of the board of directors. The incentive distribution rights maycreate an incentive for our General Partner to maximize the short-term paymentsto us in respect of our net profits

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interests rather thanmanaging the Partnership in a manner better suited to the long term benefits ofall the unitholders. This arrangement may also create an incentive for Ensourceto selectively invest the Partnership’s assets in net profits interestsburdening short-lived producing assets that generate significant cash flow overa relatively short time frame, thereby resulting in increased cashdistributions by the Partnership in the short term.

Anyexpenses which Ensource incurs in relation to the business of the OperatingCompany are required to be paid by the Operating Company and will be deductedin calculating the net profits interests payable to us. These expenses are notsubject to a limit other than as may be provided under a periodic review by theboard of directors of our General Partner.

***We will pay our General Partner incentive distributionsbased on the level of cash we distribute to our unitholders. This arrangementmay lead to riskier or more speculative investments for the Operating Companyin an effort to maximize the General Partner’s incentive compensation.***

To theextent that the available cash from operating surplus that is distributed inany quarter during the period specified below exceeds the amount which must bedistributed (or set aside for distribution) to each holder of common units andsubordinated units outstanding as of the record date for distribution beforeany amount is distributed in respect of incentive distribution rights, which werefer to herein as the Distribution Threshold Amount, the General Partner willparticipate in such excess by receiving 24.75% of such excess in respect of itsincentive distribution rights (which is in addition to its 1% share of suchexcess distributions in respect of its 1% general partner interest).

Weexpect that the quarterly Distribution Threshold Amount of $0.625 per unit willoccur in 2012, so incentive distribution rights will thereafter share inquarterly distributions of available cash from operating surplus in excess of$0.625 per unit.

Theway in which the distributions payable to our General Partner in respect of theincentive distribution rights is determined may encourage the OperatingCompany, under management of the General Partner, to use leverage to increasethe return on its investments. Under certain circumstances, the use of leverageby the Operating Company may increase the likelihood of default, which wouldadversely affect our common unitholders, including common unitholdersconsidering this Offer, because payments in respect of the net profitsinterests burdening the properties would be subordinate to those of debtholders. Other key criteria related to determining appropriate investments andinvestment strategies, including the preservation of capital, might beunder-weighted by our General Partner if it were to focus disproportionately onmaximizing the incentive distributions. Such a practice could result in ourGeneral Partner causing the Operating Company to invest in more high cash flowproperties with a shorter reserve life than would otherwise be the case, whichcould affect our ability to pay distributions at expected levels over the longterm.

***Ensource’s liability will be limited under the partnershipagreement, and we will agree to indemnify Ensource against certain liabilities,which may lead Ensource to act in a riskier manner on our behalf than it wouldwhen acting for its own account.***

Ensourcehas not assumed any responsibility to us other than the responsibility toprovide the services specified in our partnership agreement and they will notbe responsible for any action of the board of directors of Ensource, as ourgeneral partner. Ensource and its directors, members, officers and employeeswill not be liable to us for their acts, absent willful misfeasance, bad faith,gross negligence or reckless disregard in the performance of their duties. Wehave agreed to indemnify, defend and protect Ensource and its members,directors, officers and employees with respect to all expenses, losses,damages, liabilities, demands, charges and claims arising from their acts onour behalf not constituting bad faith, fraud or willful misconduct or, in thecase of criminal acts, did not act with knowledge that the conduct wasunlawful. These protections may lead Ensource to act in a riskier manner whenacting on our behalf by virtue of its status as the General Partner, than itwould when acting for its own account.

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***The Operating Company will pay Ensource an Employee BonusPool Fee based on base net profits interests proceeds. This arrangement maylead the management of Ensource to recommend riskier or more speculativeinvestments for the Operating Company in an effort to maximize its incentivecompensation.***

As anincentive to attract and maintain key employees that will be engaged in theacquisition, development and operation of oil and natural gas properties andperforming its other duties, Ensource will be entitled to receive a fee,payable by the Operating Company in arrears, based on a sliding percentage ofbase net profits interests proceeds that will be used to fund the employeebonus pool under the guidance of the board of directors.

Theway in which the bonus pool fee payable to Ensource is determined may encourageEnsource to cause the Operating Company to use indebtedness to increase thebase net profits interests proceeds payable to us. Under certain circumstances,the use of indebtedness by the Operating Company may increase the likelihood ofdefault by the Operating Company in its obligations for such indebtedness,which would adversely affect our common unitholders, including commonunitholders considering this Offer, because payments in respect of the netprofits interests burdening the properties would be subordinate to those ofdebt holders. Other key criteria related to determining appropriate investmentsand investment strategies, including the preservation of capital, might beunder-weighted by Ensource if it were to focus disproportionately on maximizingthe bonus pool fee income. Such a practice could result in Ensource causing theOperating Company to invest in more high cash flow properties with a shorterreserve life than would otherwise be the case, which could affect our abilityto pay distributions at expected levels over the long term.

Thebonus pool fee will not be payable by the Operating Company in respect of anycalendar quarter in respect of which the cash distribution to our common andsubordinated unitholders from operating surplus (excluding the use of any cashcontributed by our General Partner) for such quarter is less than the minimumquarterly distribution per unit, or $0.50 per unit. The Partnership is notobligated to make this payment to the Operating Company, but the amount of suchfee will be deducted each quarter in respect of which it is paid from, and suchdeduction will have the effect of reducing the applicable percentage of, BaseNPI Net Proceeds otherwise payable to the Partnership in connection with thenet profits interest purchased from the Operating Company.

**ITEM 6.****                             EXHIBITS**

(a)           Each of the following exhibits isfiled herewith:
| Exhibit  Number | ** ** | ** ** | **Description**                                                                                                                                     |
|-----------------|------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------|
|            |       |       |                                                                                                                                                |
| 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 |

 

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**SIGNATURES**

Pursuant to the requirements of Section 13 or 15(d) ofthe Securities Exchange Act of 1934, the registrant has duly caused thisquarterly report on Form 10-Q to be signed on its behalf by the undersignedthereto duly authorized.
|                        | ENSOURCE ENERGY INCOME FUND LP |
|------------------------|--------------------------------|
|                   |                           |   |
|                   | By:                            | Ensource Energy LLC,  its general partner |
|                   |                           |   |
| Date: August 14,  2006 |                           |   |
| * *               | * *                       | * * |
|                   |                           | By: | /s/ Scott W. Smith |   |
|                   |                           |   | Scott W. Smith |
|                   |                           |   | Chief Executive Officer |
|                   |                           |   |
| Date: August 14,  2006 |                           |   |
| * *               | * *                       | * * |
|                   |                           | By: | /s/ Marshall M. Eubank |   |
|                   |                           |   | Marshall M. Eubank |
|                   |                           |   | Chief Financial Officer |

 

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**Index to Exhibits**

Each of the followingexhibits is filed herewith:
| Exhibit  Number | ** ** | ** ** | **Description**                                                                                                                                     |
|-----------------|------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **      | ** ** | ** ** | ** **                                                                                                                                          |
| 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 |

 

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