##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 (Mark One)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2008
 or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission File Number: 001-33676
 ENCORE ENERGY PARTNERS LP
  Delaware
    
    20-8456807(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)777 Main Street, Suite 1400, Fort Worth, Texas
    
    76102(Address of principal executive offices)
    
    (Zip Code)
 (817) 877-9955  (Registrants telephone number, including area code)
 Not applicable  (Former name, former address and former fiscal year, if changed since last report)
 þ o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer þ(Do not check if a smaller reporting company)
    
    Smaller reporting company o
 o þ
 Number of common units outstanding as of October 28, 2008
    
    31,356,155




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##### 



ENCORE ENERGY PARTNERS LP
 INDEX
 PagePART I. FINANCIAL INFORMATIONItem 1. Financial StatementsConsolidated Balance Sheets as of September 30, 2008 and December 31, 2007
    
    
    1Consolidated Statements of Operations for the three and nine months ended September 30, 2008 and 2007
    
    
    2Consolidated Statement of Partners Equity for the nine months ended September 30, 2008
    
    
    3Consolidated Statements of Cash Flows for the nine months ended September 30, 2008 and 2007
    
    
    4Notes to Consolidated Financial Statements
    
    
    5Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    17Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    30Item 4. Controls and Procedures
    
    
    31PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    32Item 1A. Risk Factors
    
    
    32Item 6. Exhibits
    
    
    32Signature
    
    
    33EX-31.1EX-31.2EX-32.1EX-32.2EX-99.1
  CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
  i




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ENCORE ENERGY PARTNERS LP
 GLOSSARY
  
    
    Bbl.One stock tank barrel, or 42 U.S. gallons liquid volume, used in reference to oil
or other liquid hydrocarbons.
    
    Bbl/D. One Bbl per day.
    
    BOE.One barrel of oil equivalent, calculated by converting natural gas to oil
equivalent barrels at a ratio of six Mcf of natural gas to one Bbl of oil.
    
    BOE/D. One BOE per day.
    
    Completion.The installation of permanent equipment for the production of oil or
natural gas.
    
    Council of Petroleum Accountants Societies (COPAS). A professional organization of
oil and gas accountants that maintains consistency in accounting procedures and
interpretations, including the procedures that are part of most joint operating agreements.
These procedures establish a drilling rate and an overhead rate to reimburse the operator
of a well for overhead costs, such as accounting and engineering.
    
    Delay Rentals. Fees paid to the lessor of an oil and natural gas lease during the
primary term of the lease prior to commencement of production from a well.
    
    Development Well. A well drilled within the proved area of an oil or natural gas
reservoir to the depth of a stratigraphic horizon known to be productive.
    
    EAC.Encore Acquisition Company, a publicly traded Delaware corporation, together with
its subsidiaries.
    
    ENP. Encore Energy Partners LP, a Delaware limited partnership, together with its
subsidiaries.
    
    Exploratory Well. A well drilled to find and produce oil or natural gas in an unproved
area, to find a new reservoir in a field previously producing oil or natural gas in another
reservoir, or to extend a known reservoir.
    
    Field. An area consisting of a single reservoir or multiple reservoirs, all grouped on
or related to the same individual geological structural feature and/or stratigraphic
condition.
    
    Gross Wells.The total number of wells in which an entity owns a working interest.
    
    Lease Operations Expense (LOE).All direct and allocated indirect costs of producing
oil and natural gas after completion of drilling. Such costs include labor,
superintendence, supplies, repairs, maintenance, and direct overhead charges.
    
    LIBOR.London Interbank Offered Rate.
    
    MBbl.One thousand Bbls.
    
    MBOE.One thousand BOE.
    
    Mcf.One thousand cubic feet, used in reference to natural gas.
    
    Mcf/D.One Mcf per day.
    
    MMcf.One million cubic feet, used in reference to natural gas.
    
    Natural Gas Liquids (NGLs).The combination of ethane, propane, butane, and natural
gasolines that when removed from natural gas become liquid under various levels of higher
pressure and lower temperature.
    
    Net Profits Interest.An interest that entitles the owner to a specified share of net
profits from production of hydrocarbons.
    
    Net Wells.Gross wells multiplied by the percentage working interest owned by an
entity.
    
    NYMEX.New York Mercantile Exchange.
    
    Oil.Crude oil, condensate, and NGLs.
    
    Operator.The entity responsible for the exploration, development, and production of an
oil or natural gas well or lease.
    
    Production Margin.Oil and natural gas revenues less LOE and production, ad valorem,
and severance taxes.
    
    Proved Developed Reserves.Proved reserves that can be expected to be recovered through
existing wells with existing equipment and operating methods.
    
    Proved Reserves.The estimated quantities of crude oil, natural gas, and NGLs which
geological and engineering data demonstrate with reasonable certainty to be recoverable in
future years from known reservoirs under existing economic and operating conditions.
    
    Proved Undeveloped Reserves.Proved reserves that are expected to be recovered from new
wells on undrilled acreage for which the existence and recoverability of such reserves can
be estimated with reasonable certainty, or from existing wells where a relatively major
expenditure is required for recompletion. Proved undeveloped reserves include unrealized
production response from enhanced recovery techniques that have been proved effective by
actual tests in the area and in the same reservoir.
    
    Recompletion.The completion for production of an existing well bore in another
formation from that in which the well has
 ii




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ENCORE ENERGY PARTNERS LP
 been previously completed.
    
    Reservoir.A porous and permeable underground formation containing a natural
accumulation of producible oil and/or natural gas that is confined by impermeable rock or
water barriers and is individual and separate from other reservoirs.
    
    Successful Well.A well capable of producing oil and/or natural gas in commercial
quantities.
    
    Working Interest.An interest in an oil or natural gas lease that gives the owner the
right to drill for and produce oil and natural gas on the leased acreage and requires the
owner to pay a share of the production and development costs.
    
    Workover.Operations on a producing well to restore or increase production.
 iii




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 ENCORE ENERGY PARTNERS LP
 
 CONSOLIDATED BALANCE SHEETS
  September 30,
    
    
    December 31,2008
    
    
    2007 *(unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    157
    
    
    $
    3Accounts receivable:Trade
    
    
    23,453
    
    
    
    21,595Affiliate
    
    
    864
    
    
    
    3,290Derivatives
    
    
    17,729
    
    
    
    3,713Other
    
    
    536
    
    
    
    448Total current assets
    
    
    42,739
    
    
    
    29,049Properties and equipment, at cost  successful efforts method:Proved properties, including wells and related equipment
    
    
    519,047
    
    
    
    500,470Unproved properties
    
    
    78
    
    
    
    298Accumulated depletion, depreciation, and amortization
    
    
    (90,448
    )
    
    
    (63,295
    )428,677
    
    
    
    437,473Other property and equipment
    
    
    815
    
    
    
    510Accumulated depreciation
    
    
    (205
    )
    
    
    (68
    )610
    
    
    
    442Goodwill
    
    
    2,648
    
    
    
    2,648Other intangibles, net
    
    
    3,739
    
    
    
    3,969Derivatives
    
    
    15,324
    
    
    
    21,875Other
    
    
    1,420
    
    
    
    2,263Total assets
    
    $
    495,157
    
    
    $
    497,719LIABILITIES AND PARTNERS EQUITYCurrent liabilities:Accounts payable:Trade
    
    $
    4,520
    
    
    $
    1,915Affiliate
    
    
    2,839
    
    
    
    6,709Accrued liabilities:Lease operations expense
    
    
    3,569
    
    
    
    2,903Development capital
    
    
    324
    
    
    
    3,012Interest
    
    
    199
    
    
    
    147Production, ad valorem, and severance taxes
    
    
    12,990
    
    
    
    6,272Marketing
    
    
    592
    
    
    
    1,578Derivatives
    
    
    10,245
    
    
    
    865Other
    
    
    3,712
    
    
    
    2,898Total current liabilities
    
    
    38,990
    
    
    
    26,299Derivatives
    
    
    24,663
    
    
    
    20,447Future abandonment cost, net of current portion
    
    
    8,456
    
    
    
    8,314Long-term debt
    
    
    140,000
    
    
    
    47,500Other
    
    
    132
    
    
    
    146Total liabilities
    
    
    212,241
    
    
    
    102,706Commitments and contingencies (see Note 13)Partners equity:Limited partners - 31,356,155 and 24,187,679 common units issued and
outstanding, respectively
    
    
    282,332
    
    
    
    391,956General partner - 504,851 general partner units outstanding
    
    
    197
    
    
    
    3,057Accumulated other comprehensive income
    
    
    387
    
    
    
    Total partners equity
    
    
    282,916
    
    
    
    395,013Total liabilities and partners equity
    
    $
    495,157
    
    
    $
    497,719
 
 *
    
    Recast as discussed in Note 2.  1




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ENCORE ENERGY PARTNERS LP
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
   Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,2008
    
    
    2007 *
    
    
    2008
    
    
    2007 *Revenues:Oil
    
    $
    44,442
    
    
    $
    25,272
    
    
    $
    128,778
    
    
    $
    55,644Natural gas
    
    
    9,816
    
    
    
    6,139
    
    
    
    28,626
    
    
    
    16,441Marketing
    
    
    1,445
    
    
    
    2,134
    
    
    
    5,207
    
    
    
    6,986Total revenues
    
    
    55,703
    
    
    
    33,545
    
    
    
    162,611
    
    
    
    79,071Expenses:Production:Lease operations
    
    
    8,842
    
    
    
    6,366
    
    
    
    21,822
    
    
    
    14,785Production, ad valorem, and severance taxes
    
    
    5,741
    
    
    
    3,387
    
    
    
    16,321
    
    
    
    7,996Depletion, depreciation, and amortization
    
    
    9,064
    
    
    
    10,161
    
    
    
    27,399
    
    
    
    23,040Exploration
    
    
    46
    
    
    
    31
    
    
    
    113
    
    
    
    93General and administrative
    
    
    2,597
    
    
    
    6,941
    
    
    
    8,452
    
    
    
    8,574Marketing
    
    
    1,316
    
    
    
    1,300
    
    
    
    5,318
    
    
    
    5,655Derivative fair value (gain) loss
    
    
    (70,443
    )
    
    
    2,989
    
    
    
    21,572
    
    
    
    9,486Other operating
    
    
    344
    
    
    
    333
    
    
    
    1,026
    
    
    
    766Total expenses
    
    
    (42,493
    )
    
    
    31,508
    
    
    
    102,023
    
    
    
    70,395Operating income
    
    
    98,196
    
    
    
    2,037
    
    
    
    60,588
    
    
    
    8,676Other income (expenses):Interest
    
    
    (1,767
    )
    
    
    (4,873
    )
    
    
    (5,316
    )
    
    
    (11,681
    )Other
    
    
    10
    
    
    
    47
    
    
    
    92
    
    
    
    74Total other expenses
    
    
    (1,757
    )
    
    
    (4,826
    )
    
    
    (5,224
    )
    
    
    (11,607
    )Income (loss) before income taxes
    
    
    96,439
    
    
    
    (2,789
    )
    
    
    55,364
    
    
    
    (2,931
    )Income tax provision
    
    
    (322
    )
    
    
    (31
    )
    
    
    (160
    )
    
    
    (96
    )Net income (loss)
    
    $
    96,117
    
    
    $
    (2,820
    )
    
    $
    55,204
    
    
    $
    (3,027
    )Net income (loss) allocation (see Note 10):Limited partners interest in net income (loss)
    
    $
    91,981
    
    
    $
    (7,656
    )
    
    $
    48,566
    
    
    $
    (7,656
    )General partners interest in net income (loss)
    
    $
    1,481
    
    
    $
    (160
    )
    
    $
    826
    
    
    $
    (160
    )Net income (loss) per common unit:Basic
    
    $
    2.93
    
    
    $
    (0.33
    )
    
    $
    1.60
    
    
    $
    (0.33
    )Diluted
    
    $
    2.87
    
    
    $
    (0.33
    )
    
    $
    1.60
    
    
    $
    (0.33
    )Weighted average common units outstanding:Basic
    
    
    31,356
    
    
    
    23,062
    
    
    
    30,300
    
    
    
    23,062Diluted
    
    
    32,960
    
    
    
    23,062
    
    
    
    30,305
    
    
    
    23,062
 
 *
    
    Recast as discussed in Note 2.  2




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ENCORE ENERGY PARTNERS LP
 
 CONSOLIDATED STATEMENT
OF PARTNERS EQUITY
  AccumulatedOther
    
    
    TotalLimited
    
    
    General
    
    
    Comprehensive
    
    
    PartnersPartners
    
    
    Partner
    
    
    Income
    
    
    EquityBalance at December 31, 2007 *
    
    $
    391,956
    
    
    $
    3,057
    
    
    $
    
    
    
    $
    395,013Deemed distributions to affiliates in connection with acquisition of Permian
and Williston Basin Assets
    
    
    (121,774
    )
    
    
    (2,944
    )
    
    
    
    
    
    
    (124,718
    )Issuance of common units in exchange for net profits interest in certain
Crockett County properties
    
    
    5,748
    
    
    
    
    
    
    
    
    
    
    
    5,748Non-cash unit-based compensation
    
    
    3,504
    
    
    
    57
    
    
    
    
    
    
    
    3,561Cash distributions to unitholders
    
    
    (51,405
    )
    
    
    (834
    )
    
    
    
    
    
    
    (52,239
    )Other
    
    
    (39
    )
    
    
    (1
    )
    
    
    
    
    
    
    (40
    )Components of comprehensive income:Net income attributable to affiliates related to pre-partnership
operations of the Permian and Williston Basin Assets
    
    
    3,321
    
    
    
    80
    
    
    
    
    
    
    
    3,401Net income attributable to unitholders
    
    
    51,021
    
    
    
    782
    
    
    
    
    
    
    
    51,803Change in unrealized hedge gain on interest rate swap agreements, net
of tax of $1
    
    
    
    
    
    
    
    
    
    
    387
    
    
    
    387Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    55,591Balance at September 30, 2008
    
    $
    282,332
    
    
    $
    197
    
    
    $
    387
    
    
    $
    282,916
 
 *
    
    Recast as discussed in Note 2.  3




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ENCORE ENERGY PARTNERS LP
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
   Nine months endedSeptember 30,2008
    
    
    2007*Cash flows from operating activities:Net income (loss)
    
    $
    55,204
    
    
    $
    (3,027
    )Adjustments to reconcile net income (loss) to net cash provided
by operating activities:Depletion, depreciation, and amortization
    
    
    27,399
    
    
    
    23,040Non-cash exploration expense
    
    
    52
    
    
    
    17Non-cash unit-based compensation expense
    
    
    3,528
    
    
    
    5,746Non-cash derivative fair value loss
    
    
    19,943
    
    
    
    10,337Deferred taxes
    
    
    (42
    )
    
    
    9Other
    
    
    765
    
    
    
    522Changes in operating assets and liabilities, net of effects from acquisitions:Accounts receivable
    
    
    505
    
    
    
    (9,888
    )Current derivatives
    
    
    (8,100
    )
    
    
    (571
    )Other current assets
    
    
    (45
    )
    
    
    (425
    )Long-term derivatives
    
    
    (5,308
    )
    
    
    (6,269
    )Other assets
    
    
    712
    
    
    
    (836
    )Accounts payable
    
    
    (3,867
    )
    
    
    4,982Other current liabilities
    
    
    7,351
    
    
    
    6,152Net cash provided by operating activities
    
    
    98,097
    
    
    
    29,789Cash flows from investing activities:Purchases of other property and equipment
    
    
    (302
    )
    
    
    (127
    )Acquisition of oil and natural gas properties
    
    
    (88
    )
    
    
    (357,654
    )Development of oil and natural gas properties
    
    
    (15,468
    )
    
    
    (12,952
    )Net cash used in investing activities
    
    
    (15,858
    )
    
    
    (370,733
    )Cash flows from financing activities:Proceeds from issuance of common units, net of issuance costs
    
    
    
    
    
    
    171,220Proceeds from long-term debt, net of issuance costs
    
    
    205,310
    
    
    
    248,758Payments on long-term debt
    
    
    (113,000
    )
    
    
    (184,000
    )Deemed distributions to affiliates in connection with acquisition of Permian and Williston Basin Assets
    
    
    (124,718
    )
    
    
    Distributions to unitholders
    
    
    (52,239
    )
    
    
    Change in cash overdrafts and other
    
    
    2,562
    
    
    
    Net contributions from owner
    
    
    
    
    
    
    112,080Net cash provided by (used in) financing activities
    
    
    (82,085
    )
    
    
    348,058Increase in cash and cash equivalents
    
    
    154
    
    
    
    7,114Cash and cash equivalents, beginning of period
    
    
    3
    
    
    
    Cash and cash equivalents, end of period
    
    $
    157
    
    
    $
    7,114Non-cash investing and financing activities:Issuance of common units in connection with acquisition of net profits interest in certain Crockett
County properties
    
    $
    5,748
    
    
    $
    Issuance of common units in connection with acquisition of Permian and
Williston Basin Assets (see Note 3)
 
 *
    
    Recast as discussed in Note 2.  4




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ENCORE ENERGY PARTNERS LP
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  Note 1. Description of Business
  
    
    the Big Horn Basin of Wyoming and Montana, primarily in the Elk Basin field (the Elk
Basin Assets);
    
    the Permian Basin of West Texas; and
    
    the Williston Basin of North Dakota.
 Note 2. Basis of Presentation
      New Accounting Pronouncements
 Statement of Financial Accounting Standards (SFAS) No. 157, Fair Value Measurements (SFAS
157)
 5




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ENCORE ENERGY PARTNERS LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  Continued
 Effective Date of FASB Statement No. 157
 SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities  including an
amendment of FASB Statement No. 115 (SFAS 159)
  FSP Interpretation 39-1, Amendment of FASB Interpretation No. 39 (FSP FIN 39-1)
 Offsetting of Amounts Related to Certain Contracts
 SFAS No. 141 (revised 2007), Business Combinations (SFAS 141R)
 Business
Combinations .
 SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities  an amendment of
FASB Statement No. 133 (SFAS 161)
 Accounting for Derivative
Instruments and Hedging Activities,
 6




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ENCORE ENERGY PARTNERS LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  Continued
  Emerging Issues Task Force (EITF) Issue No. 07-4, Application of the Two-Class Method under FASB
Statement No. 128, Earnings per Share, to Master Limited Partnerships (EITF 07-4)
 Earnings per Share
 SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles (SFAS 162)
 The Meaning of Present Fairly in Conformity with Generally Accepted
Accounting Principles.
 FSP No. EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions
Are Participating Securities (FSP EITF 03-6-1)
  Note 3. Acquisitions
 Permian and Williston Basin Assets
   Elk Basin Assets
  7




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ENCORE ENERGY PARTNERS LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  Continued
    Nine months endedSeptember 30, 2007(in thousands)Pro forma total revenues
    
    $
    93,232Pro forma net loss
    
    $
    (5,087
    )Pro forma net loss per common unit:Basic
    
    $
    (0.33
    )Diluted
    
    $
    (0.33
    )
 Note 4. Proved Properties
  September 30,
    
    
    December 31,2008
    
    
    2007(in thousands)Proved leasehold costs
    
    $
    378,073
    
    
    $
    372,076Wells and related equipment  Completed
    
    
    139,456
    
    
    
    124,381Wells and related equipment  In process
    
    
    1,518
    
    
    
    4,013Total proved properties
    
    $
    519,047
    
    
    $
    500,470
 Note 5. Derivative Financial Instruments
 Commodity Derivative Contracts  Mark-to-Market Accounting
  8




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ENCORE ENERGY PARTNERS LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  Continued
  Oil Derivative Contracts
 Average
    
    
    Weighted
    
    
    
    Average
    
    
    Weighted
    
    
    
    Average
    
    
    Weighted
    
    
    
    AssetDaily
    
    
    Average
    
    
    
    Daily
    
    
    Average
    
    
    
    Daily
    
    
    Average
    
    
    
    (Liability)Floor
    
    
    Floor
    
    
    
    Cap
    
    
    Cap
    
    
    
    Swap
    
    
    Swap
    
    
    
    Fair MarketPeriod
    
    Volume
    
    
    Price
    
    
    
    Volume
    
    
    Price
    
    
    
    Volume
    
    
    Price
    
    
    
    Value(Bbls)
    
    
    (per Bbl)
    
    
    
    (Bbls)
    
    
    (per Bbl)
    
    
    
    (Bbls)
    
    
    (per Bbl)
    
    
    
    (in thousands)Oct.  Dec. 2008
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    28880
    
    
    $
    80.00
    
    
    
    
    440
    
    
    $
    107.60
    
    
    
    
    
    
    
    $
    2,000
    
    
    
    75.00
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    500
    
    
    
    65.00
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2009 (a)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,4603,130
    
    
    
    110.00
    
    
    
    
    440
    
    
    
    97.75
    
    
    
    
    1,000
    
    
    
    68.702010
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8,226
    )880
    
    
    
    80.00
    
    
    
    
    440
    
    
    
    93.80
    
    
    
    
    
    
    
    
    2,000
    
    
    
    75.00
    
    
    
    
    1,000
    
    
    
    77.23
    
    
    
    
    
    
    
    
    2011
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,731
    )1,880
    
    
    
    80.00
    
    
    
    
    1,440
    
    
    
    95.41
    
    
    
    
    
    
    
    
    1,000
    
    
    
    70.00
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (6,469
    )
 
 (a)
    
    In addition, ENP has a floor contract for 1,000 Bbls/D at $63.00 per Bbl and a short
floor contract for 1,000 Bbls/D at $65.00 per Bbl. Natural Gas Derivative Contracts
 Average
    
    
    Weighted
    
    
    
    Average
    
    
    Weighted
    
    
    
    Average
    
    
    WeightedDaily
    
    
    Average
    
    
    
    Daily
    
    
    Average
    
    
    
    Daily
    
    
    Average
    
    
    
    AssetFloor
    
    
    Floor
    
    
    
    Cap
    
    
    Cap
    
    
    
    Swap
    
    
    Swap
    
    
    
    Fair MarketPeriod
    
    Volume
    
    
    Price
    
    
    
    Volume
    
    
    Price
    
    
    
    Volume
    
    
    Price
    
    
    
    Value(Mcf)
    
    
    (per Mcf)
    
    
    
    (Mcf)
    
    
    (per Mcf)
    
    
    
    (Mcf)
    
    
    (per Mcf)
    
    
    
    (in thousands)Oct.  Dec. 2008
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    5573,800
    
    
    $
    8.20
    
    
    
    
    3,800
    
    
    $
    9.83
    
    
    
    
    
    
    
    $
    3,800
    
    
    
    7.20
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2009
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,9693,800
    
    
    
    8.20
    
    
    
    
    3,800
    
    
    
    9.83
    
    
    
    
    
    
    
    
    3,800
    
    
    
    7.20
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2010
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,3033,800
    
    
    
    8.20
    
    
    
    
    3,800
    
    
    
    9.58
    
    
    
    
    
    
    
    
    3,800
    
    
    
    7.20
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    3,829
 Interest Rate Swaps
  Notional
    
    Fixed
    
    FloatingTerm
    
    Amount
    
    Rate
    
    Rate(in thousands)October 2008-January 2011
    
    $
    50,000
    
    
    
    3.1610
    %
    
    1-month LIBOROctober 2008-January 2011
    
    
    25,000
    
    
    
    2.9650
    %
    
    1-month LIBOROctober 2008-January 2011
    
    
    25,000
    
    
    
    2.9613
    %
    
    1-month LIBOR
  9




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##### Table of Contents



ENCORE ENERGY PARTNERS LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  Continued
 Current Period Impact
  Three months ended September 30,
    
    
    Nine months ended September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(in thousands)Mark-to-market (gain) loss on derivative contracts
    
    $
    (73,534
    )
    
    $
    2,214
    
    
    $
    13,281
    
    
    $
    7,704Premium amortization
    
    
    2,275
    
    
    
    1,440
    
    
    
    6,662
    
    
    
    2,633Settlements on commodity derivative contracts
    
    
    816
    
    
    
    (665
    )
    
    
    1,629
    
    
    
    (851
    )Total derivative fair value (gain) loss
    
    $
    (70,443
    )
    
    $
    2,989
    
    
    $
    21,572
    
    
    $
    9,486
 Accumulated Other Comprehensive Income (AOCI)
  Note 6. Fair Value Measurements
  
    
    Level 1  Unadjusted quoted prices are available in active markets for identical
assets or liabilities.
    
    Level 2  Pricing inputs, other than quoted prices within Level 1, that are either
directly or indirectly observable.
    
    Level 3  Pricing inputs that are unobservable requiring the use of valuation
methodologies that result in managements best estimate of fair value.
  
    
    Level 2  Fair values of oil swaps were estimated using a combined income and
market-based valuation methodology based upon forward commodity price curves obtained
from independent pricing services reflecting broker market quotes. Fair values of
interest rate swaps were estimated using a combined income and market-based valuation
methodology based upon credit ratings and forward interest rate yield curves obtained
from independent pricing services reflecting broker market quotes.
    
    Level 3  Fair values of oil and natural gas floors and caps are estimated using
pricing models and discounted cash flow methodologies based on inputs that are not
readily available in public markets.
 10




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##### Table of Contents



ENCORE ENERGY PARTNERS LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  Continued
  Fair Value Measurements at Reporting Date UsingQuoted Prices inActive Markets for
    
    
    Significant Other
    
    
    SignificantIdentical Assets
    
    
    Observable Inputs
    
    
    Unobservable InputsTotal
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)(in thousands)Oil derivative contracts  swaps
    
    $
    (11,841
    )
    
    $
    
    
    
    $
    (11,841
    )
    
    $
    Oil derivative contracts  floors and caps
    
    
    5,372
    
    
    
    
    
    
    
    
    
    
    
    5,372Natural gas derivative contracts  floors and caps
    
    
    3,829
    
    
    
    
    
    
    
    
    
    
    
    3,829Interest rate swaps
    
    
    785
    
    
    
    
    
    
    
    785
    
    
    
    Total
    
    $
    (1,855
    )
    
    $
    
    
    
    $
    (11,056
    )
    
    $
    9,201
  Fair Value Measurements Using SignificantUnobservable Inputs (Level 3)Oil Derivative
    
    
    Natural GasContracts - Floors
    
    
    Derivative Contractsand Caps
    
    
    - Floors and Caps
    
    
    Total(in thousands)Balance at January 1, 2008
    
    $
    6,466
    
    
    $
    4,533
    
    
    $
    10,999Total gains (losses):Included in earnings
    
    
    (15,636
    )
    
    
    (1,199
    )
    
    
    (16,835
    )Purchases, issuances, and settlements
    
    
    14,542
    
    
    
    495
    
    
    
    15,037Balance at September 30, 2008
    
    $
    5,372
    
    
    $
    3,829
    
    
    $
    9,201The amount of total losses for the period included in earnings
attributable to the change in unrealized gains or losses relating
to assets still held at the reporting date
    
    $
    (15,636
    )
    
    $
    (1,199
    )
    
    $
    (16,835
    )
  Note 7. Asset Retirement Obligations
  Future abandonment liability at January 1, 2008
    
    $
    8,704Wells drilled
    
    
    28Accretion of discount
    
    
    329Revision of previous estimates
    
    
    (316
    )Future abandonment liability at September 30, 2008
    
    $
    8,745
  11




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##### Table of Contents



ENCORE ENERGY PARTNERS LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  Continued
  Note 8. Debt
  Note 9. Partners Equity and Distributions
   Note 10. Earnings Per Common Unit (EPU)
   12




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##### Table of Contents



ENCORE ENERGY PARTNERS LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  Continued
  Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(in thousands, except per unit data)Net income (loss)
    
    $
    96,117
    
    
    $
    (2,820
    )
    
    $
    55,204
    
    
    $
    (3,027
    )Less: Net income prior to IPO and pre-partnership
operations of the Permian and Williston Basin Assets
    
    
    
    
    
    
    4,996
    
    
    
    3,401
    
    
    
    4,789Net income (loss) attributable to unitholders
    
    $
    96,117
    
    
    $
    (7,816
    )
    
    $
    51,803
    
    
    $
    (7,816
    )Numerator:Numerator for basic EPU:Net income (loss) attributable to unitholders
    
    $
    96,117
    
    
    $
    (7,816
    )
    
    $
    51,803
    
    
    $
    (7,816
    )Less: Distributions to participating securities
    
    
    1,525
    
    
    
    
    
    
    
    3,244
    
    
    
    Less: Undistributed income (loss) allocated to
participating securities
    
    
    2,611
    
    
    
    (160
    )
    
    
    (7
    )
    
    
    (160
    )Net income (loss) allocation to limited partners
    
    
    91,981
    
    
    
    (7,656
    )
    
    
    48,566
    
    
    
    (7,656
    )Plus: Incremental income allocated to limited partners due
to assumed conversion of management incentive units
    
    
    2,656
    
    
    
    
    
    
    
    
    
    
    
    Numerator for diluted EPU
    
    $
    94,637
    
    
    $
    (7,656
    )
    
    $
    48,566
    
    
    $
    (7,656
    )Denominator:Denominator for basic EPU:Weighted average common units outstanding
    
    
    31,356
    
    
    
    23,062
    
    
    
    30,300
    
    
    
    23,062Effect of dilutive management incentive units (a)
    
    
    1,590
    
    
    
    
    
    
    
    
    
    
    
    Effect of dilutive phantom units (b)
    
    
    14
    
    
    
    
    
    
    
    5
    
    
    
    Denominator for diluted EPU (c)
    
    
    32,960
    
    
    
    23,062
    
    
    
    30,305
    
    
    
    23,062Net income (loss) per common unit:Basic
    
    $
    2.93
    
    
    $
    (0.33
    )
    
    $
    1.60
    
    
    $
    (0.33
    )Diluted
    
    $
    2.87
    
    
    $
    (0.33
    )
    
    $
    1.60
    
    
    $
    (0.33
    )
 
 (a)
    
    For the three months ended September 30, 2007 and the nine months ended September 30,
2008 and 2007, a total of 550,000 management incentive units were outstanding but were
excluded from the diluted EPU calculations because their effect would have been
antidilutive. See additional discussion of management incentive units in Note 11.
Unit-Based Compensation Plans.(b)
    
    Prior to October 2007, there were no phantom units outstanding. See additional
discussion of phantom units in Note 11. Unit-Based Compensation Plans.(c)
    
    For the three and nine months ended September 30, 2007, the underwriters
over-allotment option to purchase an additional 1,350,000 common units was outstanding but
excluded from the diluted EPU calculations because their effect would have been
antidilutive. Note 11. Unit-Based Compensation Plans
 Management Incentive Units (MIUs)
  
    
    a change in control;
    
    at the option of the holder, when ENPs aggregate quarterly distributions to unitholders
over four consecutive quarters are at least $2.05 per unit; or
    
    the holders death or disability.
 13




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ENCORE ENERGY PARTNERS LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  Continued
  
    
    the holders of MIUs are not entitled to receive, in the aggregate, common units upon
conversion of the MIUs that exceed a maximum limit of 5.1 percent of all ENPs
then-outstanding units; and
    
    the holders of MIUs are not entitled to receive, in the aggregate, distributions of
ENPs available cash in an amount that exceeds a maximum limit of 5.1 percent of all such
distributions to all unitholders at the time of any such distribution.
   ENP Incentive Plan
    14




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##### Table of Contents



ENCORE ENERGY PARTNERS LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  Continued
 Note 12. Comprehensive Income (Loss)
  Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(in thousands)Net income (loss)
    
    $
    96,117
    
    
    $
    (2,820
    )
    
    $
    55,204
    
    
    $
    (3,027
    )Change in deferred hedge (loss) gain on interest rate swaps
    
    
    (597
    )
    
    
    
    
    
    
    387
    
    
    
    Comprehensive income (loss)
    
    $
    95,520
    
    
    $
    (2,820
    )
    
    $
    55,591
    
    
    $
    (3,027
    )
 Note 13. Commitments and Contingencies
   Note 14. Related Party Transactions
    15




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##### Table of Contents



ENCORE ENERGY PARTNERS LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  Continued
      Note 15. Subsequent Events
   16




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##### Table of Contents



ENCORE ENERGY PARTNERS LP
 
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 The following discussion and analysis contains forward-looking statements, which give our
current expectations or forecasts of future events. Actual results could differ materially from
those discussed in the forward-looking statements due to many factors, including, but not limited
to, those set forth under Item 1A. Risk Factors in our 2007 Annual Report on Form 10-K . The
following discussion and analysis should be read in conjunction with the consolidated financial
statements and notes thereto included in Item 1. Financial Statements of this Report and in Item
8. Financial Statements and Supplementary Data of our 2007 Annual Report on Form 10-K and in our
Current Report on Form 8-K filed with the SEC on September 22, 2008.
 Introduction
  
    
    Overview of Business
    
    Results of Operations
 
    
    Comparison of Quarter Ended September 30, 2008 to Quarter Ended September 30, 2007
    
    Comparison of Nine Months Ended September 30, 2008 to Nine Months Ended September 30, 2007
 
    
    Capital Commitments, Capital Resources, and Liquidity
    
    Critical Accounting Policies and Estimates
    
    New Accounting Pronouncements
 Overview of Business
   17




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##### Table of Contents



ENCORE ENERGY PARTNERS LP
 Results of Operations
 Comparison of Quarter Ended September 30, 2008 to Quarter Ended September 30, 2007
 Revenues.
 Three months ended September 30,
    
    
    Increase / (Decrease)2008
    
    
    2007
    
    
    $
    
    
    %Revenues (in thousands):Oil
    
    $
    44,442
    
    
    $
    25,272
    
    
    $
    19,170
    
    
    
    76
    %Natural gas
    
    
    9,816
    
    
    
    6,139
    
    
    
    3,677
    
    
    
    60
    %Total combined oil and natural gas revenues
    
    
    54,258
    
    
    
    31,411
    
    
    
    22,847
    
    
    
    73
    %Marketing
    
    
    1,445
    
    
    
    2,134
    
    
    
    (689
    )
    
    
    -32
    %Total revenues
    
    $
    55,703
    
    
    $
    33,545
    
    
    $
    22,158
    
    
    
    66
    %Average realized prices:Oil ($/Bbl)
    
    $
    110.06
    
    
    $
    60.14
    
    
    $
    49.92
    
    
    
    83
    %Natural gas ($/Mcf)
    
    $
    9.88
    
    
    $
    6.11
    
    
    $
    3.77
    
    
    
    62
    %Combined ($/BOE)
    
    $
    95.29
    
    
    $
    53.46
    
    
    $
    41.83
    
    
    
    78
    %Total production volumes:Oil (MBbls)
    
    
    404
    
    
    
    420
    
    
    
    (16
    )
    
    
    -4
    %Natural gas (MMcf)
    
    
    994
    
    
    
    1,004
    
    
    
    (10
    )
    
    
    -1
    %Combined (MBOE)
    
    
    569
    
    
    
    588
    
    
    
    (19
    )
    
    
    -3
    %Average daily production volumes:Oil (Bbls/D)
    
    
    4,389
    
    
    
    4,567
    
    
    
    (178
    )
    
    
    -4
    %Natural gas (Mcf/D)
    
    
    10,799
    
    
    
    10,915
    
    
    
    (116
    )
    
    
    -1
    %Combined (BOE/D)
    
    
    6,189
    
    
    
    6,386
    
    
    
    (197
    )
    
    
    -3
    %Average NYMEX prices:Oil (per Bbl)
    
    $
    118.67
    
    
    $
    75.17
    
    
    $
    43.50
    
    
    
    58
    %Natural gas (per Mcf)
    
    $
    10.27
    
    
    $
    6.16
    
    
    $
    4.11
    
    
    
    67
    %
     18




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##### Table of Contents



ENCORE ENERGY PARTNERS LP
 Three months ended September 30,2008
    
    2007Average realized oil price ($/Bbl)
    
    $
    110.06
    
    
    $
    60.14Average NYMEX ($/Bbl)
    
    $
    118.67
    
    
    $
    75.17Differential to NYMEX
    
    $
    (8.61
    )
    
    $
    (15.03
    )Average realized oil price to NYMEX percentage
    
    
    93
    %
    
    
    80
    %Average realized natural gas price ($/Mcf)
    
    $
    9.88
    
    
    $
    6.11Average NYMEX ($/Mcf)
    
    $
    10.27
    
    
    $
    6.16Differential to NYMEX
    
    $
    (0.39
    )
    
    $
    (0.05
    )Average realized natural gas price to NYMEX percentage
    
    
    96
    %
    
    
    99
    %
   19




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##### Table of Contents



ENCORE ENERGY PARTNERS LP
 Expenses.
 Three months ended September 30,
    
    
    Increase / (Decrease)2008
    
    
    2007
    
    
    $
    
    
    %Expenses (in thousands):Production:Lease operations
    
    $
    8,842
    
    
    $
    6,366
    
    
    $
    2,476Production, ad valorem, and severance taxes
    
    
    5,741
    
    
    
    3,387
    
    
    
    2,354Total production expenses
    
    
    14,583
    
    
    
    9,753
    
    
    
    4,830
    
    
    
    50
    %Other:Depletion, depreciation, and amortization
    
    
    9,064
    
    
    
    10,161
    
    
    
    (1,097
    )Exploration
    
    
    46
    
    
    
    31
    
    
    
    15General and administrative
    
    
    2,597
    
    
    
    6,941
    
    
    
    (4,344
    )Marketing
    
    
    1,316
    
    
    
    1,300
    
    
    
    16Derivative fair value (gain) loss
    
    
    (70,443
    )
    
    
    2,989
    
    
    
    (73,432
    )Other operating
    
    
    344
    
    
    
    333
    
    
    
    11Total operating
    
    
    (42,493
    )
    
    
    31,508
    
    
    
    (74,001
    )
    
    
    -235
    %Interest
    
    
    1,767
    
    
    
    4,873
    
    
    
    (3,106
    )Income tax provision
    
    
    322
    
    
    
    31
    
    
    
    291Total expenses
    
    $
    (40,404
    )
    
    $
    36,412
    
    
    $
    (76,816
    )
    
    
    -211
    %Expenses (per BOE):Production:Lease operations
    
    $
    15.53
    
    
    $
    10.83
    
    
    $
    4.70Production, ad valorem, and severance taxes
    
    
    10.08
    
    
    
    5.76
    
    
    
    4.32Total production expenses
    
    
    25.61
    
    
    
    16.59
    
    
    
    9.02
    
    
    
    54
    %Other:Depletion, depreciation, and amortization
    
    
    15.92
    
    
    
    17.29
    
    
    
    (1.37
    )Exploration
    
    
    0.08
    
    
    
    0.05
    
    
    
    0.03General and administrative
    
    
    4.56
    
    
    
    11.81
    
    
    
    (7.25
    )Marketing
    
    
    2.31
    
    
    
    2.21
    
    
    
    0.10Derivative fair value (gain) loss
    
    
    (123.72
    )
    
    
    5.09
    
    
    
    (128.81
    )Other operating
    
    
    0.61
    
    
    
    0.57
    
    
    
    0.04Total operating
    
    
    (74.63
    )
    
    
    53.61
    
    
    
    (128.24
    )
    
    
    -239
    %Interest
    
    
    3.10
    
    
    
    8.29
    
    
    
    (5.19
    )Income tax provision
    
    
    0.57
    
    
    
    0.05
    
    
    
    0.52Total expenses
    
    $
    (70.96
    )
    
    $
    61.95
    
    
    $
    (132.91
    )
    
    
    -215
    %
 Production expenses.
   20




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##### Table of Contents



ENCORE ENERGY PARTNERS LP
  Depletion, depreciation, and amortization (DD&A) expense.
 G&A expense.
 Derivative fair value (gain) loss.
 Three months ended September 30,
    
    
    Increase /2008
    
    
    2007
    
    
    (Decrease)(in thousands)Mark-to-market (gain) loss on commodity derivative contracts
    
    $
    (73,534
    )
    
    $
    2,214
    
    
    $
    (75,748
    )Premium amortization
    
    
    2,275
    
    
    
    1,440
    
    
    
    835Settlements on commodity derivative contracts
    
    
    816
    
    
    
    (665
    )
    
    
    1,481Total derivative fair value (gain) loss
    
    $
    (70,443
    )
    
    $
    2,989
    
    
    $
    (73,432
    )
 Interest expense.
 Income taxes.
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ENCORE ENERGY PARTNERS LP
 Comparison of Nine Months Ended September 30, 2008 to Nine Months Ended September 30, 2007
 Revenues.
 Nine months ended September 30,
    
    
    Increase / (Decrease)2008
    
    
    2007
    
    
    $
    
    
    %Revenues (in thousands):Oil
    
    $
    128,778
    
    
    $
    55,644
    
    
    $
    73,134
    
    
    
    131
    %Natural gas
    
    
    28,626
    
    
    
    16,441
    
    
    
    12,185
    
    
    
    74
    %Total combined oil and natural gas revenues
    
    
    157,404
    
    
    
    72,085
    
    
    
    85,319
    
    
    
    118
    %Marketing
    
    
    5,207
    
    
    
    6,986
    
    
    
    (1,779
    )
    
    
    -25
    %Total revenues
    
    $
    162,611
    
    
    $
    79,071
    
    
    $
    83,540
    
    
    
    106
    %Average realized prices:Oil ($/Bbl)
    
    $
    102.81
    
    
    $
    54.51
    
    
    $
    48.30
    
    
    
    89
    %Natural gas ($/Mcf)
    
    $
    9.71
    
    
    $
    6.76
    
    
    $
    2.95
    
    
    
    44
    %Combined ($/BOE)
    
    $
    90.25
    
    
    $
    50.54
    
    
    $
    39.71
    
    
    
    79
    %Total production volumes:Oil (MBbls)
    
    
    1,253
    
    
    
    1,021
    
    
    
    232
    
    
    
    23
    %Natural gas (MMcf)
    
    
    2,949
    
    
    
    2,433
    
    
    
    516
    
    
    
    21
    %Combined (MBOE)
    
    
    1,744
    
    
    
    1,426
    
    
    
    318
    
    
    
    22
    %Average daily production volumes:Oil (Bbls/D)
    
    
    4,571
    
    
    
    4,611
    
    
    
    (40
    )
    
    
    -1
    %Natural gas (Mcf/D)
    
    
    10,763
    
    
    
    9,159
    
    
    
    1,604
    
    
    
    18
    %Combined (BOE/D)
    
    
    6,365
    
    
    
    6,138
    
    
    
    227
    
    
    
    4
    %Average NYMEX prices:Oil (per Bbl)
    
    $
    113.59
    
    
    $
    66.24
    
    
    $
    47.35
    
    
    
    71
    %Natural gas (per Mcf)
    
    $
    9.74
    
    
    $
    6.83
    
    
    $
    2.91
    
    
    
    43
    %
     22




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ENCORE ENERGY PARTNERS LP
  Nine months ended September 30,2008
    
    2007Average realized oil price ($/Bbl)
    
    $
    102.81
    
    
    $
    54.51Average NYMEX ($/Bbl)
    
    $
    113.59
    
    
    $
    66.24Differential to NYMEX
    
    $
    (10.78
    )
    
    $
    (11.73
    )Average realized oil price to NYMEX percentage
    
    
    91
    %
    
    
    82
    %Average realized natural gas price ($/Mcf)
    
    $
    9.71
    
    
    $
    6.76Average NYMEX ($/Mcf)
    
    $
    9.74
    
    
    $
    6.83Differential to NYMEX
    
    $
    (0.03
    )
    
    $
    (0.07
    )Average realized natural gas price to NYMEX percentage
    
    
    100
    %
    
    
    99
    %
   23




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ENCORE ENERGY PARTNERS LP
 Expenses.
 Nine months ended September 30,
    
    
    Increase / (Decrease)2008
    
    
    2007
    
    
    $
    
    
    %Expenses (in thousands):Production:Lease operations
    
    $
    21,822
    
    
    $
    14,785
    
    
    $
    7,037Production, ad valorem, and severance taxes
    
    
    16,321
    
    
    
    7,996
    
    
    
    8,325Total production expenses
    
    
    38,143
    
    
    
    22,781
    
    
    
    15,362
    
    
    
    67
    %Other:Depletion, depreciation, and amortization
    
    
    27,399
    
    
    
    23,040
    
    
    
    4,359Exploration
    
    
    113
    
    
    
    93
    
    
    
    20General and administrative
    
    
    8,452
    
    
    
    8,574
    
    
    
    (122
    )Marketing
    
    
    5,318
    
    
    
    5,655
    
    
    
    (337
    )Derivative fair value loss
    
    
    21,572
    
    
    
    9,486
    
    
    
    12,086Other operating
    
    
    1,026
    
    
    
    766
    
    
    
    260Total operating
    
    
    102,023
    
    
    
    70,395
    
    
    
    31,628
    
    
    
    45
    %Interest
    
    
    5,316
    
    
    
    11,681
    
    
    
    (6,365
    )Income tax provision
    
    
    160
    
    
    
    96
    
    
    
    64Total expenses
    
    $
    107,499
    
    
    $
    82,172
    
    
    $
    25,327
    
    
    
    31
    %Expenses (per BOE):Production:Lease operations
    
    $
    12.51
    
    
    $
    10.37
    
    
    $
    2.14Production, ad valorem, and severance taxes
    
    
    9.36
    
    
    
    5.61
    
    
    
    3.75Total production expenses
    
    
    21.87
    
    
    
    15.98
    
    
    
    5.89
    
    
    
    37
    %Other:Depletion, depreciation, and amortization
    
    
    15.71
    
    
    
    16.15
    
    
    
    (0.44
    )Exploration
    
    
    0.06
    
    
    
    0.07
    
    
    
    (0.01
    )General and administrative
    
    
    4.85
    
    
    
    6.01
    
    
    
    (1.16
    )Marketing
    
    
    3.05
    
    
    
    3.96
    
    
    
    (0.91
    )Derivative fair value loss
    
    
    12.37
    
    
    
    6.65
    
    
    
    5.72Other operating
    
    
    0.59
    
    
    
    0.54
    
    
    
    0.05Total operating
    
    
    58.50
    
    
    
    49.36
    
    
    
    9.14
    
    
    
    19
    %Interest
    
    
    3.05
    
    
    
    8.19
    
    
    
    (5.14
    )Income tax provision
    
    
    0.09
    
    
    
    0.07
    
    
    
    0.02Total expenses
    
    $
    61.64
    
    
    $
    57.62
    
    
    $
    4.02
    
    
    
    7
    %
 Production expenses.
   24




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ENCORE ENERGY PARTNERS LP
  DD&A expense.
 G&A expense.
 Marketing expense.
 Derivative fair value loss.
 Nine months ended September 30,
    
    
    Increase /2008
    
    
    2007
    
    
    (Decrease)(in thousands)Mark-to-market loss on derivative contracts
    
    $
    13,281
    
    
    $
    7,704
    
    
    $
    5,577Premium amortization
    
    
    6,662
    
    
    
    2,633
    
    
    
    4,029Settlements on commodity derivative contracts
    
    
    1,629
    
    
    
    (851
    )
    
    
    2,480Total derivative fair value loss
    
    $
    21,572
    
    
    $
    9,486
    
    
    $
    12,086
 Interest expense.
 Income taxes.
 Capital Commitments, Capital Resources, and Liquidity
  
    
    Distributions to unitholders;
    
    Development, exploitation, and exploration of oil and natural gas properties;
    
    Acquisitions of oil and natural gas properties;
    
    Funding of necessary working capital; and
    
    Contractual obligations.
 Distributions to unitholders.
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ENCORE ENERGY PARTNERS LP
   Development, exploitation, and exploration of oil and natural gas properties.
 Three months ended September 30,
    
    
    Nine months ended September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(in thousands)Development and exploitation
    
    $
    1,477
    
    
    $
    1,716
    
    
    $
    11,833
    
    
    $
    10,975Exploration
    
    
    50
    
    
    
    1,761
    
    
    
    1,238
    
    
    
    3,167Total
    
    $
    1,527
    
    
    $
    3,477
    
    
    $
    13,071
    
    
    $
    14,142
   Acquisitions of oil and natural gas properties.
  Funding of necessary working capital.
 Off-balance sheet arrangements.
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ENCORE ENERGY PARTNERS LP
 Contractual obligations.
 Payments Due by PeriodContractual Obligations and
    
    
    
    
    
    Three Months EndingCommitments
    
    Total
    
    
    December 31, 2008
    
    
    2009 - 2010
    
    
    2011 - 2012
    
    
    Thereafter(in thousands)Revolving credit facility (a)
    
    $
    158,464
    
    
    $
    1,351
    
    
    $
    10,808
    
    
    $
    146,305
    
    
    $
    Commodity derivative contracts (b)
    
    
    19,426
    
    
    
    
    
    
    
    14,725
    
    
    
    4,701
    
    
    
    Development commitments (c)
    
    
    1,451
    
    
    
    363
    
    
    
    1,088
    
    
    
    
    
    
    
    Operating leases and commitments (d)
    
    
    2,746
    
    
    
    172
    
    
    
    1,373
    
    
    
    1,201
    
    
    
    Asset retirement obligations (e)
    
    
    32,619
    
    
    
    73
    
    
    
    579
    
    
    
    579
    
    
    
    31,388Total
    
    $
    214,706
    
    
    $
    1,959
    
    
    $
    28,573
    
    
    $
    152,786
    
    
    $
    31,388
 
 (a)
    
    Amounts include principal and projected interest payments. Please read Note 8 of Notes
to Consolidated Financial Statements included in Item 1. Financial Statements for
additional information regarding our long-term debt.(b)
    
    Represents net liabilities for commodity derivative contracts, the ultimate settlement
of which are unknown because they are subject to continuing market risk. Please read Item
3. Quantitative and Qualitative Disclosures about Market Risk and Note 5 of Notes to
Consolidated Financial Statements included in Item 1. Financial Statements for additional
information regarding our commodity derivative contracts.(c)
    
    Development commitments represent authorized purchases for work in process. Also at
September 30, 2008, we had $10.4 million of authorized purchases not placed to vendors
(authorized AFEs), which were not accrued and are excluded from the above table, but are
budgeted for and expected to be made unless circumstances change.(d)
    
    Operating leases and commitments include equipment obligations that have non-cancelable
lease terms in excess of one year.(e)
    
    Asset retirement obligations represent the undiscounted future plugging and abandonment
expenses on oil and natural gas properties and related facilities disposal at the
completion of field life. Please read Note 7 of Notes to Consolidated Financial Statements
included in Item 1. Financial Statements for additional information regarding our asset
retirement obligations. Other contingencies and commitments
  
    
    beginning on the first day of April in each year by an amount equal to the product of
the then-current administrative fee multiplied by the COPAS Wage Index Adjustment for the
current year;
    
    if we or one of our subsidiaries acquires any additional assets, Encore Operating may
propose an increase in its administrative fee that covers the provision of services for
such additional assets; however, such proposal must be approved by our General Partner upon
the recommendation of the conflicts committee of our General Partner; and
    
    otherwise as agreed upon by Encore Operating and our General Partner, with the approval
of the conflicts committee of our General Partner.
  Capital Resources
 Cash flows from operating activities
 Cash flows from investing activities
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ENCORE ENERGY PARTNERS LP
  Cash flows from financing activities
   Liquidity
    Internally generated cash flows.
 Revolving credit facility.
 28




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ENCORE ENERGY PARTNERS LP
      Applicable Margin for
    
    Applicable Margin forRatio of Total Outstanding Borrowings to Borrowing Base
    
    Eurodollar Loans
    
    Base Rate LoansLess than .50 to 1
    
    
    1.000
    %
    
    
    0.000
    %Greater than or equal to .50 to 1 but less than .75 to 1
    
    
    1.250
    %
    
    
    0.000
    %Greater than or equal to .75 to 1 but less than .90 to 1
    
    
    1.500
    %
    
    
    0.250
    %Greater than or equal to .90 to 1
    
    
    1.750
    %
    
    
    0.500
    %
    
    
    a prohibition against incurring debt, subject to permitted exceptions;
    
    a prohibition against purchasing or redeeming capital stock, or prepaying indebtedness,
subject to permitted exceptions;
    
    a restriction on creating liens on our assets and the assets of our subsidiaries,
subject to permitted exceptions;
    
    restrictions on merging and selling assets outside the ordinary course of business;
    
    restrictions on use of proceeds, investments, transactions with affiliates, or change of
principal business;
    
    a provision limiting oil and natural gas hedging transactions (other than puts) to a
volume not exceeding 75 percent of anticipated production from proved producing reserves;
    
    a requirement that OLLC maintain a ratio of consolidated current assets (as defined in
the credit agreement) to consolidated current liabilities (as defined in the credit
agreement) of not less than 1.0 to 1.0;
    
    a requirement that OLLC maintain a ratio of consolidated EBITDA (as defined in the
credit agreement) to the sum of consolidated net interest expense plus letter of credit
fees of not less than 1.5 to 1.0;
    
    a requirement that OLLC maintain a ratio of consolidated EBITDA (as defined in the
credit agreement) to consolidated senior interest expense of not less than 2.5 to 1.0; and
 29




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ENCORE ENERGY PARTNERS LP
 
    
    a requirement that OLLC maintain a ratio of consolidated funded debt (excluding certain
related party debt) to consolidated adjusted EBITDA (as defined in the credit agreement) of
not more than 3.5 to 1.0.
   CommitmentRatio of Total Outstanding Borrowings to Borrowing Base
    
    Fee PercentageLess than .50 to 1
    
    
    0.250
    %Greater than or equal to .50 to 1 but less than .75 to 1
    
    
    0.300
    %Greater than or equal to .75 to 1
    
    
    0.375
    %
  Current capitalization.
 Critical Accounting Policies and Estimates
  New Accounting Pronouncements
  
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
   Commodity Price Sensitivity
  30




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ENCORE ENERGY PARTNERS LP
  Interest Rate Sensitivity
   
 Item 4. Controls and Procedures
   31




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ENCORE ENERGY PARTNERS LP
 
 PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
 Oil and natural gas prices are very volatile. A decline in commodity prices could materially and
adversely affect our financial condition, results of operations, and cash flows.
  
    
    negatively impact the value of our reserves, because declines in oil and natural gas
prices would reduce the amount of oil and natural gas that we can produce economically;
    
    reduce the amount of cash flow available for capital expenditures, repayment of
indebtedness and other corporate purposes; and
    
    result in a decrease in the borrowing base under our revolving credit facility or
otherwise limit our ability to borrow money or raise additional capital.
 The counterparties to our commodity derivative contracts may not be able to perform their
obligations to us, which could materially affect our cash flows and results of operations.
   
 Item 6. Exhibits
 Exhibits3.1
    
    Certificate of Limited Partnership of Encore Energy Partners LP (incorporated by reference to
Exhibit 3.1 to Form S-1 (File No. 333-142847) for Encore Energy Partners LP, filed with the
SEC on May 11, 2007).3.2
    
    Second Amended and Restated Agreement of Limited Partnership of Encore Energy Partners LP,
dated as of September 17, 2007 (incorporated by reference to Exhibit 3.1 to the Current Report
on Form 8-K, filed with the SEC on September 21, 2007).31.1*
    
    Rule 13a-14(a)/15d-14(a) Certification (Principal Executive Officer of our General Partner).31.2*
    
    Rule 13a-14(a)/15d-14(a) Certification (Principal Financial Officer of our General Partner).32.1*
    
    Section 1350 Certification (Principal Executive Officer of our General Partner).32.2*
    
    Section 1350 Certification (Principal Financial Officer of our General Partner).99.1*
    
    Statement showing computation of ratio of earnings to fixed charges.
 
 *
    
    Filed herewith. 32




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ENCORE ENERGY PARTNERS LP
 
 SIGNATURE
  ENCORE ENERGY PARTNERS LP
By: Encore Energy Partners GP LLC, its General PartnerDate:  October 31, 2008
    /s/ Andrea HunterAndrea HunterVice President, Controller, and Principal Accounting Officer 33