**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

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**Form10-Q**

 

**ý****   Quarterly report under Section 13 or 15 (d) of theSecurities Exchange Act of 1934**

 

**for thequarterly period ended March 31, 2006**

 

**o****   Transition report under Section 13 or 15 (d) of theSecurities 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 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 registeredpursuant to Section 12(g) of the Act:

**None**

 

Indicate by check mark whether the Registrant (1) has filed all reportsrequired to be filed by Section 13 or 15 (d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theRegistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days. Yes  ý No  o

 

Indicate by check mark if the Registrant is an accelerated filer (asdefined in Rule 12b-2 of the Exchange Act). Yes  o No  ý

 

Indicate by check mark whether the registrant is a shell company (asdefined in Rule 12b-2 of the Exchange Act). Yes  ý No  o

 

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

 

Indicate by check mark whether the registrant is a shell company (asdefined in Rule 12b-2 of the Exchange Act). Yes  ý  No  o

 

As of May 2, 2006, the registrant had not issued any registered commonunits.

 

 

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

 

**Tabl**e** of Contents**

 
| Part I Significant Relationships Referenced in this  Quarterly Report |                                                                                        |
|-----------------------------------------------------------------------|---------------------------------------------------------------------------------------------|
| Item 1.                                                               | Financial Information                                                                       |   |
|                                                                  | Balance Sheet                                                                               |   |
|                                                                  | Statement of  Operations                                                                    |   |
|                                                                  | Statement of  Partners’ Capital                                                        |   |
|                                                                  | Statement of Cash  Flows                                                                    |   |
|                                                                  | Notes to  Financial Statements                                                              |   |
| Item 2.                                                               | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |   |
| Item 3.                                                               | Quantitative and Qualitative  Disclosures about Market Risk                                 |   |
| Item 4.                                                               | Controls and Procedures                                                                     |   |
| Part II  Other Information                                            |                                                                                        |
| Item  1A.                                                             | Risk  Factors                                                                               |   |
| Item  6.                                                              | Exhibits                                                                                    |   |

 

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# **PART ISIGNIFICANT 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 toEnsource Energy Income 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.

 

**Cautionary Note Regarding Forward-Looking Statements**

 

This quarterly report contains “forward-lookingstatements” within the meaning of the Private Securities Litigation Reform Actof 1995. Specific forward-looking statements can be identified by the fact thatthey do not relate strictly to historical or current facts and include, withoutlimitation, words such as “may,” “will,” “expects,” “believes,” “anticipates,” “plans,”“estimates,” “projects,” “targets,” “forecasts,” “seeks,” “could” or thenegative of such terms or other variations on such terms or comparableterminology. Similarly, statements that describe Ensource Energy Income Fund’sobjectives, plans or goals are forward-looking. The Partnership’sforward-looking statements are based on management’s current intent, belief,expectations, estimates and projections regarding the Partnership and EasternAmerican Natural Gas Trust, or NGT, as well as projections regarding the oiland gas industry. These statements are not guarantees of future performance andinvolve risks, uncertainties, assumptions and other factors that are difficultto predict, including those discussed below. Therefore, actual results may varymaterially from what is expressed in or indicated by the forward-lookingstatements. In particular, forward-looking statements as to the Partnership’sfinancial and business performance following the proposed acquisition of NGTshould be understood as qualified by the absence of any opportunity for thePartnership to perform comprehensive due diligence on NGT. Theseforward-looking statements might have been significantly different had such duediligence been undertaken. Readers of this report are cautioned not to placeundue reliance on these forward-looking statements since, while the Partnershipbelieves the assumptions on which the forward-looking statements are based arereasonable, there can be no assurance that these forward-looking statementswill prove to be accurate. If one or more of these risks or uncertaintiesmaterialize, or if underlying assumptions prove incorrect, our actual resultsmay vary materially from those anticipated, estimated, projected or expected.You should not put under reliance on these forward-looking statements. Theforward looking-statements included in this report are only made as of the dateof this report and we undertake no obligation to publicly updateforward-looking statements to reflect subsequent events or circumstances.

 

**Where You Can Find More Information**

 

As a registrant, we file certain documentselectronically with the Securities and Exchange Commission, or SEC, includingannual reports on Form 10-K, quarterly reports on Form 10-Q and current reportson Form 8-K (as appropriate). Our principal executive offices are located at7500 San Felipe, Houston, Texas 77063 and our telephone number is (713)659-1794. Our internet address is www.ensource-energy.com. We do not make copiesof our reports filed under the Securities Exchange Act of 1934, as amended,(“Exchange Act”), available on our website because we currently do not conductany operations. These reports may be accessed free of charge through ourinternet website (located at www.ensource-energy.com), where we provide a linkto the SEC’s website (at www.sec.gov). We will also provide electronic or papercopies of our filings free of charge upon request. We make our website contentavailable for informational purposes only. The website should not be reliedupon for investment purposes nor is it incorporated by reference into this Form10-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 ON NGT INFORMATION**

 

NGT has not cooperated with the Partnership in, andhas not been involved in, the preparation of this report and has not verifiedthe information contained in this report relating to NGT. In respect ofinformation relating to NGT’s business and operations presented in, or omittedfrom, this report, the Partnership has relied upon publicly availableinformation, primarily information publicly filed by NGT with the SEC.Information publicly filed by NGT is available to the public from commercialdocument retrieval services and at the Internet website maintained by the SECat http://www.sec.gov.

 

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## **ITEM 1.**                             FINANCIAL INFORMATION

## ** **

**ENSOURCE ENERGY INCOME FUND LP**

 

### **BALANCE SHEET**

 
| ** **                                    | ** ** | **March 31,  2006** | ** ** | **December 31,  2005** | ** ** |
|-----------------------------------------------|------------|---------------------|------------|------------------------|------------|
| ** **                                    | ** ** | **(unaudited)**     | ** ** | ** **             | ** ** |
| **ASSETS**                                    |       |                |       |                   |       |
| Cash                                          |       | $                   | 1,000      |                   | $          | 1,000 |   |
| Deferred Exchange Offering Costs              |       | 1,164,695           |       | 1,142,293              |       |
| Total assets                                  |       | $                   | 1,165,695  |                   | $          | 1,143,293 |   |
| Capital Contribution subject to reimbursement |       | 1,164,695           |       | 1,142,293              |       |
| **PARTNERS’ CAPITAL**                    |       |                |       |                   |       |
| **Partners’ Capital**                    |       | $                   | 1,000      |                   | $          | 1,000 |   |

 

See accompanying notes tofinancial statements.

 

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**ENSOURCE ENERGY INCOME FUND LP**

 

### **STATEMENT OFOPERATIONS**

 
| ** **                                        | ** ** | **For the Three  Months  Ended  March 31,  2006** | ** ** | **May 26, 2005  (INCEPTION)  to March 31,  2006** | ** ** |
|---------------------------------------------------|------------|---------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                        | ** ** | **(unaudited)**                                   | ** ** |
| Expenses — start up and organizational costs |       | $                                                 | 106,176    |                                              | $          | 296,814 |   |
| Net loss                                          |       | $                                                 | (106,176   | )                                                 | $          | (296,814 | ) |

 

See accompanying notes tofinancial statements.

 

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**ENSOURCE ENERGY INCOME FUND LP**

 

### **STATEMENT OFPARTNERS’ CAPITAL**

 
| ** **                   | ** ** | **For the Three  Months  Ended  March 31,  2006** | ** ** | **May 26, 2005  (INCEPTION)  to March 31,  2006** | ** ** |
|------------------------------|------------|---------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                   | ** ** | **(unaudited)**                                   | ** ** |
| Balance, beginning of period |       | $                                                 | 1,000      |                                              | $          | — |   |
| Cash contributions           |       |                                              |       | 1,000                                             |       |
| Noncash contributions        |       | 106,176                                           |       | 296,814                                           |       |
| Net loss                     |       | (106,176                                          | )          | (296,814                                          | )          |
| Balance March 31, 2006       |       | $                                                 | 1,000      |                                              | $          | 1,000 |   |

 

See accompanying notes tofinancial statements.

 

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**ENSOURCE ENERGY INCOME FUND LP**

** **

### **STATEMENT OF CASHFLOWS**

 
| ** **                                                                                                                                     | ** ** | **For the Three  Months  Ended  March 31,  2006** | ** ** | **May 26, 2005  (INCEPTION)  to March 31,  2006** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                                                                                     | ** ** | **(unaudited)**                                   | ** ** |
| Net loss                                                                                                                                       |       | $                                                 | (106,176   | )                                                 | $          | (296,814 | ) |
| Adjustments to  reconcile net loss to net cash used by operating activities — noncash start  up and organizational costs                  |       | 106,176                                           |       | $                                                 | 296,814    |   |
| 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                                                                                                                       |       | —                                            |       | $                                                 | 0          |   |
| Cash end of period                                                                                                                             |       | $                                                 | 1,000      |                                              | $          | 1,000 |   |
| **Supplemental  Disclosure of Noncash Investing and Financing Activities —**  Noncash contributions for deferred securities issuance cost |       | $                                                 | 22,402     |                                              | $          | 1,164,695 |   |

 

See accompanying notes tofinancial statements.

 

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**ENSOURCE ENERGY INCOME FUND LP**

 

### **NOTES TO FINANCIALSTATEMENTS**

 

**March 31, 2006**

** **

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

 

The condensed financial statements of Ensource EnergyIncome Fund LP (“the Partnership”) included herein, are unaudited for thethree-month periods ended March 31, 2006 and for the period beginning May 26,2005 (inception) through March 31, 2006. These financial statements reflect alladjustments (consisting of normal recurring adjustments), which are, in theopinion of management, necessary to fairly present the results for the periodspresented. Certain information and note disclosures, normally included infinancial statements prepared in accordance with accounting principlesgenerally accepted in the United States of America, have been condensed oromitted pursuant to rules and regulations of the Securities and ExchangeCommission. It is suggested that these condensed financial statements be readin conjunction with the Partnership’s audited financial statements for the periodended December 31, 2005, which are included in the Partnership’s annual reporton Form 10-K for the period ended December 31, 2005. The Partnership believesthat the disclosures made herein are adequate to make the information presentednot misleading.

 

Ensource Energy Income Fund LP (the “Partnership”)was formed in Delaware on May 26, 2005 as a master limited partnership byEnsource Energy Partners, LP, its former general partner (“Ensource EnergyPartners”). The objective of the Partnership is to conduct and consummate anexchange offer and subsequent merger with Eastern American Natural Gas Trust (“NGT”).On November 21, 2005, The Partnership made an offer to acquire all of theoutstanding depositary units of NGT in exchange for common units of thePartnership 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. ThePartnership intends, promptly after completion of the exchange offer, to seekto have NGT consummate a second-step merger with and into the Partnership, oralternatively, a newly-formed, wholly-owned subsidiary of the Partnership. SeeNote 4 “Subsequent Events” for a description of the current exchange offer andrelated transactions.

 

The Partnership’s ability to commence operations iscontingent upon funding of capital commitments by the Partnership’s generalpartner. The proceeds by the Partnership’s general partner will be used topurchase a 1.0% general partnership interest, incentive distribution rights, awarrant and subordinated units in the Partnership upon the Partnershipreceiving and accepting a majority of the total voting power of all of theoutstanding trust units of NGT. See Note 4 “Subsequent Events” for informationregarding the Partnership’s general partner.

 

#### **2.**                                      Summary of Significant Accounting Policies

 

***Basis of Presentation***

 

The financial statements include the accounts of thePartnership. The Partnership had not commenced operations effective March 31,2006. The Partnership has selected December 31 as its fiscal year end.

 

***Use of Estimates***

 

The preparation of financial statements in conformitywith accounting principles generally accepted in the United States of Americarequires management to make estimates and assumptions that affect the reportedamounts of assets and liabilities and disclosure of contingencies at the dateof the financial statements and the reported amounts of expenses during thereporting period. Actual amounts could differ 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 and Organization Costs***

 

Start up and organization costs are expensed asincurred.

 

***Deferred Exchange Offering 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.**                                      Commitment and Related Party Transactions

 

As of March 31, 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. Suchcosts have been reported as start-up and organizational costs and deferredsecurities issuance costs in the accompanying financial statements. Thedeferred exchange offer costs of $1,164,695 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 capital commitment,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.

 

**4.****                                      SubsequentEvents**

 

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 the opportunityto sell their units at a premium to the average market price for the past 30trading days****or elect to exchange theirdepositary units for one common unit of the Partnership.

 

Ensource Energy LLC, a newly formed Delaware limitedliability company, has been assigned all of Ensource Energy Partners’ generalpartnership interests in the Partnership. Ensource Energy has been capitalizedwith up to $40 million of committed capital primarily from Lehman BrothersInc., the global investment bank, affiliates of the investment firm OspraieManagement, and Ensource Energy management.

 
| **ITEM 2.** | **MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION 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-owned subsidiaryof the General Partner, will acquire in the future and to manage effectivelythe current assets of NGT, including reinvesting the proceeds from the sale ofthe zero coupon bonds that constitute a part of the depositary units.

 

**Exchange Offer and Second-StepMerger**

 

OnNovember 21, 2005, we made an offer, which we refer to in this report as the “exchangeoffer,” to acquire all of the outstanding depositary units of NGT in exchangefor our common units and a pro rata share of the special cash distribution of$5.9 million that is to be paid promptly after completion of the exchange offer.We intend, promptly after completion of the exchange offer, to seek to have NGTconsummate a second-step merger with and into the Partnership, oralternatively, a newly-formed, wholly-owned subsidiary of the Partnership. Inthe second-step merger,

 

•                                          eachremaining depositary unit that was not validly tendered to and accepted by thePartnership for the cash consideration or the exchange consideration inthe exchange offer would be converted into the right to receive onewhole common unit of 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 unit ofthe Partnership.

 

According to NGT’s Quarterly Report on Form 10-Qfor the quarter ended March 31, 2006, there were 5,880,100 depositary unitsoutstanding (which excludes 19,900 withdrawn trust units, or 0.03% of the5,900,000 total outstanding NGT trust units). Withdrawn units that arereconstituted as depositary units under the depositary arrangement with thedepositary may participate in the exchange offer. The exchange offer is thefirst 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 theexchange offer that on the expiration date of the exchange offer, as that datemay be extended, we receive valid tenders of depositary units, that are notproperly withdrawn as of the expiration date of the exchange offer, evidencingnot less than a majority of the total trust units that are outstanding. Werefer to this condition as the “minimum tender condition.”  As a result, valid tenders of depositaryunits for exchange must be received by us from the holders of at least2,950,001 depositary units that are not withdrawn, by the expiration date, asthat date may be extended, for the minimum tender condition to be satisfied.

 

**Revised Exchange Offer**

 

On May 15, 2006, we filedwith the SEC an amendment to our current offer to exchange one whole newlyissued common unit of the Partnership and to pay a pro rata share of a specialcash distribution of $5.9 million for each outstanding depositary unit of NGT. Thisrevised offer, which we will commence after we receive SEC clearance of ouramended registration statement, will include an offer to pay $31.00 in cash topurchase up to 2,950,001 of the outstanding depositary units of NGT. We haveentered into an agreement with affiliates of the investment firm Third PointLLC to participate in the cash portion of the tender offer. This revised cashtender and exchange offer, which we refer to as the Offer, will allow currentNGT unitholders the opportunity to sell their units at a premium to the averagemarket price for the past 30 trading days****or elect toexchange their depositary units for one common unit of the Partnership.

 

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

 

**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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***CriticalAccounting Policies***

 

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 thecarrying values of assets and liabilities that are not readily apparent fromother sources. 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 ofAccounting***

 

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 gas propertieswill be calculated on a units-of-production basis, whereby our cost basis inthe 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 NaturalGas Reserve 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 net cashflows 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 derivative instruments(including certain derivative instruments embedded in other contracts) berecorded at fair market value and included in the balance sheet as assets orliabilities.

 

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.

 

**Liquidity and CapitalResources**

 

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 $82.2 million based on quoted prices as of May 1, 2006and assuming the sale of the full $117.6 million face amount of zero couponbonds underlying all outstanding depositary units), and cash flows from thelegacy net profits interests and on our financial assets, including interestearned from the temporary investment of our cash assets in U.S. governmentsecurities and other high-quality debt maturing in one year or less. Our primaryuse of our financial assets will be acquisitions of net profits interestsburdening producing properties that are acquired in the future by the OperatingCompany and cash distributions to holders of our common and subordinated units.

 

## **ITEM 3.**                             QUANTITATIVE AND QUALITATIVE 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 prices applicableto our natural gas production and the prevailing price for crude oil. Pricingfor natural gas production has been volatile and unpredictable for severalyears, and we expect this volatility to continue in the future. The prices wereceive 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 may includeprice swaps whereby we will receive a fixed price for our production and pay avariable market price to the contract counterparty. These hedging activitiesare intended to support natural gas prices at targeted levels and to manage ourexposure to natural gas price fluctuations. We do not plan to hold or issuederivative 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.

 

# **PART IIOTHER INFORMATION**

 

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

 

You should consider carefully the following risks described below, together with the otherinformation contained in this quarterly report on Form 10-Q and in ourother filings with the SEC. If any of these risks actually occur, our business, financialcondition or operating results could be materially adversely affected and thetrading price of our common stock could decline. The risks described below areeither in addition to or includecertain revisions to the risk factors set forth in our annual report on Form10-K for the fiscal year ended December 31, 2005.

 

**Risk Factors Relating to theOffer and Second-Step Merger**

 

***Depending on thenumber of depositary unitholders who elect to receive the cash considerationinstead of the exchange consideration, the Third Point Parties may beneficiallyown a majority of the Partnership’s common units after the Offer, but beforethe second-step merger, and a substantial portion of the common units after thesecond-step merger.***

 

The ThirdPoint Parties will contribute up to $71.5 million to the Partnership to fundthe cash consideration, subject to specified conditions. In return for suchcontribution, the Partnership will issue to the Third Point Parties the numberof common units of the Partnership equal the number of depositary unitstendered and accepted for the cash consideration. As a result of such issuance,after the consummation of the Offer, the Third Point Parties may beneficiallyown more than a majority of the common units of the Partnership if fewdepositary units are accepted by us for the exchange consideration. If thissituation occurs, the Third Point Parties will be able to determine any issuerequiring a majority vote of the holders of common units of the Partnership.

 

Similarly,upon consummation of the second-step merger, the Third Point Parties maybeneficially own a substantial percentage which we estimate to be 39.1% of thePartnership’s common units if the maximum of 2,950,001 depositary units areaccepted for the cash consideration. This substantial ownership will allow theThird Point Parties to have a substantial vote in any matter requiring approvalof the common unitholders of the Partnership.

 

***Depending on thenumber of depositary unitholders who elect to receive the cash considerationinstead of the exchange consideration, the General Partner may own up to645,161 common units of the Partnership after the Offer and the second-stepmerger and thus be able to vote in any matter subject to the approval oflimited 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 645,161common units will allow it to vote in any matter subject to the vote of theholders of common units of the Partnership. Thus, the General Partner will beable to manage 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 OurBusiness and the Oil and Natural Gas Industry**

 

***Reserve estimatesof NGT include reserves attributable to the legacy royalty net profits interestthat will be produced after NGT is liquidated and it sells such royalty netprofits interest.***

 

The legacy assets of NGTinclude a royalty net profits interest that is not limited in term or amount.Under NGT’s trust agreement, the trustee is required to sell such royalty netprofits interest after May 12, 2012 and before May 15, 2013. The proceeds fromsuch sale are required to be distributed by NGT. The reserve report of NGT asof December 31, 2005 includes estimated reserves attributable to productionfrom the royalty net profits interest that will be produced after May 15, 2013.Although the Partnership has not been provided access to NGT’s reserve reportand the estimates of production attributable to the royalty net profitsinterest after May 15, 2013, we estimate that up to 6.5 MMcf of NGT’s reportedapproximately 11.3 MMcf of estimated reserves as of December 31, 2005 would beproduced over a 20-25 year period commencing in 2014 (or up to approximately$18.8 million of the approximately $59.3 million discounted estimated futurenet reserves for the royalty net profits interest as of December 31, 2005 asreported by NGT). Neither trust unitholders nor, if the Offer is successfullyconsummated, our common unitholders will participate in the proceeds fromproduction attributable to reserves produced from the royalty net profitinterest unless the Partnership is the purchaser of same. However, trustunitholders and, if the Offer is successfully consummated, the Partnershipwould participate in the proceeds from the sale of such royalty net profitsinterest, the value of which will be a function of, among other factors, thethen estimated reserves attributable to same and the expected production rate.

 

***Our net profitsinterests may initially burden a limited number of producing assets, whichwould magnify the effect if one of those assets were to suffer a significantloss. This could negatively impact our net profits interest in such assets, ourability to pay you distributions and cause you to lose all or part of yourinvestment.***

 

Our primary investmentactivity and business is to acquire net profits interests burdening properties tobe 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 this Offer andthe second-step merger, our operating assets will consist of the legacy netprofits interests of NGT, together with cash from the capital contribution byour General Partner and the Third Point Parties and proceeds form the sale ofthe zero coupon bonds. A consequence of this concentration is that theaggregate returns we initially realize may be adversely affected if a smallnumber of the properties underlying the legacy NGT net profits interestsperform poorly or if any such properties otherwise become impaired or requiresubstantial capital to maintain production. While the Operating Company willhave fixed guidelines for diversification, our future investments in additionalnet profits interests could be concentrated in relatively few producing assetsor in a few production regions even if the Operating Company is successful inachieving what it believes constitutes appropriate diversification. In suchcases, financial difficulty on the part of any single producing property willexpose us to a greater risk of loss than would be the case if the OperatingCompany were to invest in a more diverse set of assets. To the extent that theOperating Company makes a large investment in a small number of properties, ournet asset value and thus the market price of our common units may fluctuate asa result of changes in the financial condition or in the market’s assessment ofthe property 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.

 

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**RisksInherent to an Investment in the Partnership**

 

***If the GeneralPartner loses key senior management or is unable to attract and retain thetalent required for our business or the business of the Operating Company, ouroperating results could suffer.***

 

Our performance and theOperating Company’s ability to execute its business plans depend largely on theefforts and abilities of the members of senior management of our GeneralPartner. These executives have substantial experience and expertise in theenergy business. The unexpected loss of services of one or more of theseindividuals could have an adverse effect on our business and the business ofthe Operating Company. As we grow, the General Partner will need to attract andretain additional qualified personnel and develop, train and manage anincreasing number of management-level employees. We cannot assure you that ourGeneral Partner will be able to attract and retain personnel as needed in thefuture. In particular, we depend on the performance of Scott W. Smith, Presidentand Chief Executive Officer, and Marshall M. Eubank, Executive Vice Presidentand Chief Financial Officer, of our General Partner.

 

***A regular tradingmarket for our common units might not develop, which would harm the liquidityand 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”. The Partnership has made application for listing of thecommon units on NYSE Arca. We expect that upon consummation of the Offer, ourcommon units will be initially traded on NYSE Arca; however, upon consummationof the second-step merger, we intend to request that our common units betransferred for trading on the NYSE. However, we cannot assure you that regular trading of our common unitswill develop on either exchange or elsewhere or, if developed, that any suchmarket will be sustained. Accordingly, we cannot assure you of:

 

•                  the liquidity of any trading market forour common units;

 

•                  the ability of our unitholders to selltheir common units; or

 

•                  the prices that our unitholders mayobtain for their common units.

 

***The common unitsare not equivalent to shares of common stock. Even if common unitholders aredissatisfied, they cannot easily remove our General Partner.***

 

The common units should notbe viewed by investors as shares in a corporation. The common units represent alimited partnership interest in the Partnership. After completion of the Offerand second step merger, the Partnership’s assets will be the net profitsinterests constituting the legacy assets we acquire from NGT, cash from theGeneral Partner’s contribution and sale of the zero coupon bonds underlying thedepositary units accepted by us for exchange and net profits royalty interestswe acquire in the future on producing properties to be acquired by theOperating Company in the future.

 

Unlike the holders of commonstock in a corporation, common unitholders have only limited voting rights onmatters affecting our business and, therefore, limited ability to influencemanagement’s decisions regarding our business. Common unitholders did not electour General Partner or the board of directors of our General Partner and willhave no right to elect our General Partner or the board of directors of ourGeneral Partner on an annual or other continuing basis.

 

The board of directors ofour General Partner is appointed by the members of our General Partner. TheGeneral Partner’s board of directors has a fiduciary duty to manage the GeneralPartner on behalf of its members. The General Partner, in turn, has a fiduciaryduty to manage the Partnership on behalf of its partners. These differingduties could result in conflicts of interest.

 

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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 66 2/3% of the outstanding units voting together as a single class. Also,if our General Partner is removed without cause during the subordination periodand common units held by the General Partner and its affiliates are not votedin favor of that removal, all remaining subordinated units will automaticallybe converted into common units and any existing arrearages on the common unitswill be extinguished. A removal of the General Partner under these circumstanceswould adversely affect the common units by prematurely eliminating theirdistribution and liquidation preference over the subordinated units, whichwould otherwise have continued until we had met certain distribution andperformance tests.

 

According to our amended andrestated limited partnership agreement, cause is narrowly defined to mean thata court of competent jurisdiction has entered a final, non-appealable judgmentfinding the General Partner liable for actual fraud, gross negligence, or willfulor wanton misconduct in its capacity as our General Partner. Cause does notinclude most cases of charges of poor management of the business, so theremoval of the General Partner because of the common unitholders’dissatisfaction with the General Partner’s performance in managing us will mostlikely result in the termination of the subordination period.

 

Furthermore, commonunitholders’ voting rights are further restricted by our 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.

 

***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 ofour General Partner has the authority to modify or waive most of our currentoperating policies and our strategies without prior notice and without commonunitholder approval, except the members of our General Partner will haveapproval rights of certain changes. We cannot predict the effect that anychanges to our current operating policies and strategies would have on ourbusiness, operating results or 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. 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.

 

Certain actions may not be taken without the approvalof the members of the General Partner, many of which overlap certain actionsthat may not be taken without also having the approval of the board ofdirectors. The following actions may not be taken by the General Partnerwithout the approval of at least 662/3% of the membershipinterests of its members (and to the extent it has the legal power andauthority) the General Partner shall cause the Operating Company, itssubsidiaries and the Partnership not to take the following actions:

 

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

 

•                  transfers, during any one-year period, ofor 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, orthe 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 GeneralPartner will have conflicts of interest.***

 

Our General Partner willprovide, or cause to be provided, management and supervisory services to thePartnership in consideration for reimbursement of the costs incurred. Inaddition, the incentive distribution rights held by our General Partner willentitle our General Partner to an increased share (an additional 24.75%) ofcash distributed by the Partnership in excess of specified threshold levels. Inaddition, our General Partner will be entitled to a fee to be paid by theOperating Company that will be used to fund an employee bonus pool, which werefer to as the Employee Bonus Pool Fee, under the direction of the board ofdirectors. The incentive distribution rights may create an incentive for ourGeneral Partner to maximize the short-term payments to us in respect of our netprofits

 

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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.

 

Any expenses which Ensourceincurs in relation to the business of the Operating Company are required to bepaid by the Operating Company and will be deducted in calculating the netprofits interests payable to us. These expenses are not subject to a limitother than as may be provided under a periodic review by the board of directorsof our General Partner.

 

***We will pay ourGeneral Partner incentive distributions based on the level of cash wedistribute to our unitholders. This arrangement may lead to riskier or morespeculative investments for the Operating Company in an effort to maximize theGeneral Partner’s incentive compensation.***

 

To the extent that theavailable cash from operating surplus that is distributed in any quarter duringthe period specified below 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 toherein 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).

 

We expect that the quarterlyDistribution Threshold Amount of $0.625 per unit will occur in 2012, soincentive distribution rights will thereafter share in quarterly distributions ofavailable cash from operating surplus in excess of $0.625 per unit.

 

The way in which thedistributions payable to our General Partner in respect of the incentivedistribution rights is determined may encourage the Operating Company, undermanagement of the General Partner, to use leverage to increase the return onits 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 thisOffer, because payments in respect of the net profits interests burdening theproperties would be subordinate to those of debt holders. Other key criteriarelated to determining appropriate investments and investment strategies,including the preservation of capital, might be under-weighted by our GeneralPartner if it were to focus disproportionately on maximizing the incentivedistributions. Such a practice could result in our General Partner 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.

 

***Ensource’sliability will be limited under the partnership agreement, and we will agree toindemnify Ensource against certain liabilities, which may lead Ensource to actin a riskier manner on our behalf than it would when acting for its ownaccount.***

 

Ensource has not assumed anyresponsibility to us other than the responsibility to provide the servicesspecified in our partnership agreement and they will not be responsible for anyaction of the board of directors of Ensource, as our general partner. Ensourceand its directors, members, officers and employees will not be liable to us fortheir acts, absent willful misfeasance, bad faith, gross negligence or recklessdisregard in the performance of their duties. We have agreed to indemnify,defend and protect Ensource and its members, directors, officers and employeeswith respect to all expenses, losses, damages, liabilities, demands, chargesand claims arising from their acts on our behalf not constituting bad faith,fraud or willful misconduct or, in the case of criminal acts, did not act withknowledge that the conduct was unlawful. These protections may lead Ensource toact in a riskier manner when acting on our behalf by virtue of its status asthe General Partner, than it would when acting for its own account.

 

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***The OperatingCompany will pay Ensource an Employee Bonus Pool Fee based on base net profitsinterests proceeds. This arrangement may lead the management of Ensource torecommend riskier or more speculative investments for the Operating Company inan effort to maximize its incentive compensation.***

 

As an incentive to attractand maintain key employees that will be engaged in the acquisition, developmentand operation of oil and natural gas properties and performing its otherduties, Ensource will be entitled to receive a fee, payable by the OperatingCompany in arrears, based on a sliding percentage of base net profits interestsproceeds that will be used to fund the employee bonus pool under the guidanceof the board of directors.

 

The way in which the bonuspool fee payable to Ensource is determined may encourage Ensource to cause theOperating Company to use indebtedness to increase the base net profitsinterests proceeds payable to us. Under certain circumstances, the use ofindebtedness by the Operating Company may increase the likelihood of default bythe Operating Company in its obligations for such indebtedness, 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 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.

 

The bonus poolfee will not be payable by the Operating Company in respect of any calendarquarter 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)                                  Eachof the following exhibits 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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**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:  May 15, 2006* | * *                        |
| * *              | * *                        |
|                  |                            | By: | /s/ Scott W.  Smith |   |
|                  |                            |   | Scott W. Smith |
|                  |                            |   | Chief Executive  Officer |
|                  |                            |
| *Date:  May 15, 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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