##### 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, 2007
 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)
 o þ
  o o þ
 o þ




---



##### 



ENCORE ENERGY PARTNERS LP
 INDEX
 PagePART I. FINANCIAL INFORMATIONItem 1. Financial StatementsConsolidated Balance Sheets as of September 30, 2007 and December 31, 2006
    
    1Consolidated Statements of Operations for the three and nine months ended September 30, 2007 and 2006
    
    2Consolidated Statement of Partners Equity for the nine months ended September 30, 2007
    
    3Consolidated Statements of Cash Flows for the nine months ended September 30, 2007 and 2006
    
    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
    
    28Item 4. Controls and Procedures
    
    29PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    29Item 1A. Risk Factors
    
    29Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    29Item 6. Exhibits
    
    30Signature
    
    31Rule 13a-14(a)/15d-14(a) CertificationRule 13a-14(a)/15d-14(a) CertificationSection 1350 CertificationSection 1350 Certification
  CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION




---



##### Table of Contents



ENCORE ENERGY PARTNERS LP
 GLOSSARY OF CERTAIN TERMS
  
    
    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.
    
    Council of Petroleum Accountants Societies, or 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.
    
    EAC.Encore Acquisition Company, a publicly traded Delaware corporation, together with
its subsidiaries.
    
    ENP or the Partnership. Encore Energy Partners LP, a Delaware limited partnership,
together with its subsidiaries.
    
    Gross Wells.The total number of wells in which we own a working interest.
    
    IPO.Initial public offering of our common units, completed on September 17, 2007.
    
    LIBOR.London Interbank Offered Rate.
    
    MBbls.One thousand Bbls.
    
    MBOE.One thousand BOE.
    
    Mcf.One thousand cubic feet of natural gas.
    
    Mcf/D.One Mcf per day.
    
    MMBOE.One million BOE.
    
    MMcf.One thousand Mcf.
    
    Net Wells.Gross wells multiplied by the percentage of the working interest owned by
us.
    
    NYMEX.New York Mercantile Exchange.
    
    Prospectus.The Partnerships final prospectus dated September 11, 2007 (File No.
333-142847) and filed with the SEC on September 12, 2007.
    
    Proved Developed Reserves.Reserves that can be expected to be recovered through
existing wells with existing equipment and operating methods.
    
    Proved Reserves.The estimated quantities of oil, natural gas, and natural gas liquids
that geological and engineering data demonstrate with reasonable certainty are recoverable
in future years from known reservoirs under existing economic and operating conditions.




---



##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 ENCORE ENERGY PARTNERS LP
 
 CONSOLIDATED BALANCE SHEETS
  September 30,
    
    
    December 31,2007
    
    
    2006(unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    7,114
    
    
    $
    Accounts receivable:Trade
    
    
    11,821
    
    
    
    2,428Affiliate
    
    
    833
    
    
    
    Derivatives
    
    
    2,712
    
    
    
    Other
    
    
    425
    
    
    
    Total current assets
    
    
    22,905
    
    
    
    2,428Properties and equipment, at cost  successful efforts method:Proved properties, including wells and related equipment
    
    
    371,794
    
    
    
    36,414Accumulated depletion, depreciation, and amortization
    
    
    (30,510
    )
    
    
    (11,919
    )341,284
    
    
    
    24,495Intangibles, net
    
    
    4,046
    
    
    
    Derivatives
    
    
    7,540
    
    
    
    Debt issuance costs, net
    
    
    1,538
    
    
    
    Other
    
    
    898
    
    
    
    Total assets
    
    $
    378,211
    
    
    $
    26,923LIABILITIES AND PARTNERS EQUITYCurrent liabilities:Accounts payable:Trade
    
    $
    230
    
    
    $
    Affiliate
    
    
    4,752
    
    
    
    Accrued liabilities:Lease operations expense
    
    
    2,005
    
    
    
    317Development capital
    
    
    98
    
    
    
    Interest
    
    
    189
    
    
    
    Production, ad valorem, and severance taxes
    
    
    4,202
    
    
    
    463Derivatives
    
    
    187
    
    
    
    Other
    
    
    1,089
    
    
    
    15Total current liabilities
    
    
    12,752
    
    
    
    795Derivatives
    
    
    4,160
    
    
    
    Future abandonment cost
    
    
    6,895
    
    
    
    287Deferred taxes
    
    
    122
    
    
    
    122Long-term debt
    
    
    66,500
    
    
    
    Total liabilities
    
    
    90,429
    
    
    
    1,204Commitments and contingencies (see Note 10)Partners equity:Limited partners - 23,323,117 and 23,062,247 common units issued and outstanding,
respectively, at September 30, 2007
    
    
    286,350
    
    
    
    General partner (2 percent interest)
    
    
    1,432
    
    
    
    Owners net equity
    
    
    
    
    
    
    25,719Total partners equity
    
    
    287,782
    
    
    
    25,719Total liabilities and partners equity
    
    $
    378,211
    
    
    $
    26,923
  1




---



##### Table of Contents



ENCORE ENERGY PARTNERS LP
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
   Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Revenues:Oil
    
    $
    18,110
    
    
    $
    137
    
    
    $
    38,579
    
    
    $
    311Natural gas
    
    
    2,916
    
    
    
    2,997
    
    
    
    8,820
    
    
    
    9,716Marketing and other
    
    
    2,134
    
    
    
    
    
    
    
    6,986
    
    
    
    Total revenues
    
    
    23,160
    
    
    
    3,134
    
    
    
    54,385
    
    
    
    10,027Expenses:Production:Lease operations
    
    
    4,392
    
    
    
    404
    
    
    
    9,343
    
    
    
    1,197Production, ad valorem, and severance taxes
    
    
    2,571
    
    
    
    304
    
    
    
    5,857
    
    
    
    942Depletion, depreciation, and amortization
    
    
    8,358
    
    
    
    290
    
    
    
    18,770
    
    
    
    870General and administrative
    
    
    6,576
    
    
    
    178
    
    
    
    7,668
    
    
    
    504Marketing
    
    
    1,300
    
    
    
    
    
    
    
    5,655
    
    
    
    Derivative fair value loss
    
    
    2,989
    
    
    
    
    
    
    
    9,486
    
    
    
    Other operating
    
    
    243
    
    
    
    60
    
    
    
    534
    
    
    
    182Total expenses
    
    
    26,429
    
    
    
    1,236
    
    
    
    57,313
    
    
    
    3,695Operating income (loss)
    
    
    (3,269
    )
    
    
    1,898
    
    
    
    (2,928
    )
    
    
    6,332Other income (expenses):Interest
    
    
    (4,829
    )
    
    
    
    
    
    
    (11,273
    )
    
    
    Other
    
    
    47
    
    
    
    
    
    
    
    74
    
    
    
    Total other income (expenses)
    
    
    (4,782
    )
    
    
    
    
    
    
    (11,199
    )
    
    
    Income (loss) before income taxes
    
    
    (8,051
    )
    
    
    1,898
    
    
    
    (14,127
    )
    
    
    6,332Income tax provision
    
    
    (15
    )
    
    
    
    
    
    
    (54
    )
    
    
    Net income (loss)
    
    $
    (8,066
    )
    
    $
    1,898
    
    
    $
    (14,181
    )
    
    $
    6,332Net loss allocation (see Note 8):Limited partners interest in net loss
    
    $
    (7,597
    )
    
    
    
    
    
    $
    (7,597
    )General partners interest in net loss
    
    $
    (159
    )
    
    
    
    
    
    $
    (159
    )Net loss per common unit:Basic
    
    $
    (0.33
    )
    
    
    
    
    
    $
    (0.33
    )Diluted
    
    $
    (0.33
    )
    
    
    
    
    
    $
    (0.33
    )Weighted average common units outstanding:Basic
    
    
    23,062
    
    
    
    
    
    
    
    23,062Diluted
    
    
    23,062
    
    
    
    
    
    
    
    23,062
  2




---



##### Table of Contents



ENCORE ENERGY PARTNERS LP
 
 CONSOLIDATED STATEMENT OF PARTNERS EQUITY
   Owners
    
    
    
    
    
    
    
    
    
    
    TotalNet
    
    
    Limited
    
    
    General
    
    
    PartnersEquity
    
    
    Partners
    
    
    Partner
    
    
    EquityBalance at December 31, 2006
    
    $
    25,719
    
    
    $
    
    
    
    $
    
    
    
    $
    25,719Contributions by EAC in connection with acquisition of Elk Basin assets
    
    
    103,062
    
    
    
    
    
    
    
    
    
    
    
    103,062Distributions
    
    
    (3,784
    )
    
    
    
    
    
    
    
    
    
    
    (3,784
    )Net loss attributable to owner prior to IPO on September 17, 2007
    
    
    (6,365
    )
    
    
    
    
    
    
    
    
    
    
    (6,365
    )Allocation of owners net equity
    
    
    (91,956
    )
    
    
    90,118
    
    
    
    1,838
    
    
    
    Contribution of Permian Basin assets by EAC
    
    
    (26,676
    )
    
    
    26,676
    
    
    
    
    
    
    
    Issuance of common units to public in IPO
    
    
    
    
    
    
    189,000
    
    
    
    
    
    
    
    189,000Underwriting and offering costs in conjunction with IPO
    
    
    
    
    
    
    (17,416
    )
    
    
    (364
    )
    
    
    (17,780
    )Net loss attributable to unitholders subsequent to IPO
    
    
    
    
    
    
    (7,656
    )
    
    
    (160
    )
    
    
    (7,816
    )Non-cash unit-based compensation
    
    
    
    
    
    
    5,628
    
    
    
    118
    
    
    
    5,746Balance at September 30, 2007
    
    $
    
    
    
    $
    286,350
    
    
    $
    1,432
    
    
    $
    287,782
  3




---



##### Table of Contents



ENCORE ENERGY PARTNERS LP
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
   Nine months endedSeptember 30,2007
    
    
    2006Cash flows from operating activities:Net income (loss)
    
    $
    (14,181
    )
    
    $
    6,332Adjustments to reconcile net income (loss) to net
cash provided by operating activities:Depletion, depreciation, and amortization
    
    
    18,770
    
    
    
    870Non-cash unit-based compensation expense
    
    
    5,746
    
    
    
    Non-cash derivative fair value loss
    
    
    10,337
    
    
    
    Other
    
    
    477
    
    
    
    10Changes in operating assets and liabilities,
net of effects from acquisition:Accounts receivable
    
    
    (8,782
    )
    
    
    2,015Current derivatives
    
    
    (571
    )
    
    
    Other current assets
    
    
    (425
    )
    
    
    Long-term derivatives
    
    
    (6,269
    )
    
    
    Other assets
    
    
    (836
    )
    
    
    Accounts payable
    
    
    4,982
    
    
    
    Other current liabilities
    
    
    5,063
    
    
    
    (442
    )Net cash provided by operating activities
    
    
    14,311
    
    
    
    8,785Cash flows from investing activities:Purchases of other property and equipment
    
    
    (74
    )
    
    
    Acquisition of oil and natural gas properties
    
    
    (330,315
    )
    
    
    Development of oil and natural gas properties
    
    
    (2,660
    )
    
    
    (419
    )Net cash used in investing activities
    
    
    (333,049
    )
    
    
    (419
    )Cash flows from financing activities:Proceeds from issuance of common units, net of issuance costs
    
    
    171,220
    
    
    
    Proceeds from long-term debt, net of issuance costs
    
    
    248,758
    
    
    
    Payments on long-term debt
    
    
    (184,000
    )
    
    
    Contributions
    
    
    93,658
    
    
    
    Distributions
    
    
    (3,784
    )
    
    
    (8,366
    )Net cash provided by (used in) financing activities
    
    
    325,852
    
    
    
    (8,366
    )Increase in cash and cash equivalents
    
    
    7,114
    
    
    
    Cash and cash equivalents, beginning of period
    
    
    
    
    
    
    Cash and cash equivalents, end of period
    
    $
    7,114
    
    
    $
    
  4




---



##### Table of Contents



ENCORE ENERGY PARTNERS LP
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  Note 1. Formation of the Partnership and Description of Business
   Initial Public Offering and Concurrent Transactions
    (a)
    
    The Partnership entered into a contribution, conveyance and assumption agreement (the
Contribution Agreement) with the General Partner, OLLC, EAC, Encore Operating, L.P.
(Encore Operating), a wholly owned subsidiary of EAC, and Encore Partners LP Holdings
LLC. The following transactions, among others, occurred pursuant to the Contribution
Agreement:
 
    
    Encore Operating transferred the Permian Basin Assets to the Partnership in
exchange for 4,043,478 common units; and
    
    EAC agreed to indemnify the Partnership for certain environmental liabilities, tax
liabilities, and title defects, as well as defects relating to retained assets and
liabilities, occurring or existing before the closing.
 These transfers and distributions were made in a series of steps outlined in the
Contribution Agreement. In connection with the issuance of the common units by the
Partnership in exchange for the Permian Basin Assets, the IPO, and the exercise of the
underwriters option to purchase additional common units, the General Partner exchanged a
certain number of common units for general partner units to enable it to maintain its 2
percent general partner interest.(b)
    
    The Partnership entered into an amended and restated administrative services agreement
(the Administrative Services Agreement) with the General Partner, OLLC, Encore Operating,
and EAC. Encore Operating performs administrative services for the Partnership, such as
accounting, corporate development, finance, land, legal, and
 5




---



##### Table of Contents



ENCORE ENERGY PARTNERS LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 engineering. In addition, Encore Operating provides all personnel and any facilities, goods, and equipment necessary
to perform these services and not otherwise provided by the Partnership. Encore Operating
receives an administrative fee of $1.75 per BOE of the Partnerships production for such
services and reimbursement of actual third-party expenses incurred on the Partnerships
behalf. In addition, Encore Operating is entitled to retain any COPAS overhead charges
associated with drilling and operating wells that would otherwise be paid by non-operating
interest owners to the operator of a well.The Partnership reimburses EAC for any additional state income, franchise, or similar tax
paid by EAC resulting from the inclusion of the Partnership (and its subsidiaries) in a
combined state income, franchise, or similar tax report with EAC as required by
applicable law. The amount of any such reimbursement is limited to the tax that the
Partnership (and its subsidiaries) would have paid had it not been included in a combined
group with EAC. See Note 11. Related Party Transactions for additional discussion
regarding the Administrative Services Agreement.(c)
    
    The Encore Energy Partners GP LLC Long-Term Incentive Plan applies to employees,
consultants, and directors of Encore Operating, the General Partner, and any of their
affiliates who perform services for the Partnership. See Note 9. Unit-Based Compensation
Plans for additional discussion regarding this plan.
 Note 2. Basis of Presentation and Summary of Significant Accounting Policies
 Basis of Presentation
     Summary of Significant Accounting Policies
  Cash and Cash Equivalents
   6




---



##### Table of Contents



ENCORE ENERGY PARTNERS LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 Intangible Assets
 Goodwill and Other Intangible Assets
  Derivatives
  Accounting for Derivative Instruments
and Hedging Activities
 Shipping Costs
  Income Taxes
  Accounting for
Uncertainty in Income Taxes  an Interpretation of FASB Statement No. 109 Accounting for Income Taxes"
 7




---



##### Table of Contents



ENCORE ENERGY PARTNERS LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 Unit-Based Compensation
 Share Based Payment
 Allocation of Net Income (Loss)
  " Participating Securities and
the Two-Class Method under FASB Statement No. 128.
 Earnings Per Unit
 Earnings per Share
  Use of Estimates
   New Accounting Pronouncements
 SFAS No. 157, Fair Value Measurements (SFAS 157)
  8




---



##### Table of Contents



ENCORE ENERGY PARTNERS LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
  SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities  including an
amendment of FASB Statement No. 115 (SFAS 159)
  FASB Staff Position (FSP) on FASB Interpretation (FIN) 39-1, Amendment of FASB Interpretation
No. 39 (FSP FIN 39-1)
 Offsetting of
Amounts Related to Certain Contracts
 Note 3. Acquisition
   Calculation of total purchase price:Cash paid to Anadarko
    
    $
    329,205Estimated transaction costs
    
    
    1,110Total purchase price
    
    $
    330,315Allocation of purchase price to the fair value of net assets acquired:Proved properties, including wells and related equipment
    
    $
    332,570Intangibles
    
    
    4,225Accounts receivable
    
    
    1,444Total assets acquired
    
    
    338,239Accrued liabilities
    
    
    (1,141
    )Future abandonment cost
    
    
    (6,783
    )Total liabilities assumed
    
    
    (7,924
    )Fair value of net assets acquired
    
    $
    330,315
  9




---



##### Table of Contents



ENCORE ENERGY PARTNERS LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
     Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,2006
    
    
    2007
    
    
    2006(in thousands, except per unit amounts)Pro forma total revenues
    
    $
    23,764
    
    
    $
    68,546
    
    
    $
    62,316Pro forma net income (loss)
    
    $
    1,939
    
    
    $
    (16,287
    )
    
    $
    (2,355
    )Pro forma net loss per common unit:Basic
    
    
    
    
    
    $
    (0.33
    )Diluted
    
    
    
    
    
    $
    (0.33
    )
  Note 4. Proved Properties
  September 30,
    
    
    December 31,2007
    
    
    2006(in thousands)Proved leasehold costs
    
    $
    288,410
    
    
    $
    18,261Wells and related equipment  Completed
    
    
    83,384
    
    
    
    17,587Wells and related equipment  In process
    
    
    
    
    
    
    566Total proved properties
    
    $
    371,794
    
    
    $
    36,414
 Note 5. Derivative Financial Instruments
   10




---



##### Table of Contents



ENCORE ENERGY PARTNERS LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 Oil Derivative Instruments
 Weighted
    
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    
    WeightedDaily
    
    
    Average
    
    
    
    Daily
    
    
    Average
    
    
    
    Daily
    
    
    Average
    
    
    
    Asset (Liability)Floor
    
    
    Floor
    
    
    
    Cap
    
    
    Cap
    
    
    
    Swap
    
    
    Swap
    
    
    
    Fair MarketPeriod
    
    Volume
    
    
    Price
    
    
    
    Volume
    
    
    Price
    
    
    
    Volume
    
    
    Price
    
    
    
    Value(Bbl)
    
    
    (per Bbl)
    
    
    
    (Bbl)
    
    
    (per Bbl)
    
    
    
    (Bbl)
    
    
    (per Bbl)
    
    
    
    (in thousands)Oct.  Dec. 2007
    
    
    2,500
    
    
    $
    65.00
    
    
    
    
    
    
    
    $
    
    
    
    
    
    
    
    
    $
    
    
    
    
    $
    32Jan.  Dec. 2008
    
    
    2,500
    
    
    
    65.00
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,788Jan.  Dec. 2009
    
    
    1,250
    
    
    
    63.40
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,000
    
    
    
    68.70
    
    
    
    
    (65
    )Jan.  Dec. 2010
    
    
    2,000
    
    
    
    65.00
    
    
    
    
    1,000
    
    
    
    77.23
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,496$
    3,251
 Natural Gas Derivative Instruments
 Weighted
    
    
    
    
    
    
    
    WeightedDaily
    
    
    Average
    
    
    
    Daily
    
    
    Average
    
    
    
    AssetFloor
    
    
    Floor
    
    
    
    Cap
    
    
    Cap
    
    
    
    Fair MarketPeriod
    
    Volume
    
    
    Price
    
    
    
    Volume
    
    
    Price
    
    
    
    Value(Mcf)
    
    
    (per Mcf)
    
    
    
    (Mcf)
    
    
    (per Mcf)
    
    
    
    (in thousands)Oct.  Dec. 2007
    
    
    4,000
    
    
    $
    7.70
    
    
    
    
    2,000
    
    
    $
    9.85
    
    
    
    $
    458Jan.  Dec. 2008
    
    
    4,000
    
    
    
    7.70
    
    
    
    
    2,000
    
    
    
    9.85
    
    
    
    
    1,204Jan.  Dec. 2009
    
    
    4,000
    
    
    
    7.70
    
    
    
    
    2,000
    
    
    
    9.85
    
    
    
    
    992$
    2,654
  Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,2007
    
    
    2007(in thousands)Mark-to-market loss on commodity contracts
    
    $
    1,543
    
    
    $
    5,761Premium amortization
    
    
    2,111
    
    
    
    4,576Settlements on commodity contracts
    
    
    (665
    )
    
    
    (851
    )Total derivative fair value loss
    
    $
    2,989
    
    
    $
    9,486
 Note 6. Asset Retirement Obligations
  11




---



##### Table of Contents



ENCORE ENERGY PARTNERS LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 Future abandonment liability at January 1, 2007
    
    $
    296Wells drilled
    
    
    12Accretion of discount
    
    
    245Plugging and abandonment costs incurred
    
    
    (103
    )Revision of estimates
    
    
    3Liability assumed in Elk Basin acquisition
    
    
    6,783Future abandonment liability at September 30, 2007
    
    $
    7,236
 Note 7. Debt
 Revolving Credit Facility
     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
    %
    12




---



##### Table of Contents



ENCORE ENERGY PARTNERS LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued
  
    
    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 the assets of the Partnership, OLLC and its
restricted 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 to consolidated
current liabilities of not less than 1.0 to 1.0;
    
    a requirement that OLLC maintain a ratio of consolidated EBITDA (as defined in the OLLC
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 OLLC
Credit Agreement) to consolidated senior interest expense of not less than 2.5 to 1.0; and
    
    a requirement that OLLC maintain a ratio of consolidated funded debt (excluding certain
related party debt) to consolidated adjusted EBITDA (as defined in the OLLC 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 but less than .90 to 1
    
    
    0.375
    %Greater than or equal to .90 to 1
    
    
    0.375
    %
 Subordinated Credit Agreement
  Note 8. Earnings Per Common Unit (EPU)
   13




---



##### Table of Contents



ENCORE ENERGY PARTNERS LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued
   Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,2007
    
    
    2007(in thousands, except per unit data)Net loss
    
    $
    (8,066
    )
    
    $
    (14,181
    )Less: Net loss prior to IPO
    
    
    (250
    )
    
    
    (6,365
    )Net loss attributable to unitholders subsequent to IPO
    
    $
    (7,816
    )
    
    $
    (7,816
    )Numerator:Net loss attributable to unitholders subsequent to IPO
    
    $
    (7,816
    )
    
    $
    (7,816
    )Less: Net loss allocation to participating securities
    
    
    (219
    )
    
    
    (219
    )Net loss available to limited partners
    
    $
    (7,597
    )
    
    $
    (7,597
    )Denominator:Denominator for basic EPU:Weighted average common units outstanding
    
    
    23,062
    
    
    
    23,062Effect of dilutive management incentive units (a)
    
    
    
    
    
    
    Denominator for diluted EPU
    
    
    23,062
    
    
    
    23,062Net loss per common unit:Basic
    
    $
    (0.33
    )
    
    $
    (0.33
    )Diluted
    
    $
    (0.33
    )
    
    $
    (0.33
    )
 
 (a)
    
    Management incentive units representing 550,000 common units and the underwriters
over-allotment option to purchase an additional 1,350,000 common units were outstanding at
September 30, 2007 but not included in the above calculation of diluted EPU for the three and
nine months ended September 30, 2007 because their effect would have been antidilutive. Note 9. Unit-Based Compensation Plans
 Management Incentive Units
  
    
    the holders of management incentive units are not entitled to receive, in the aggregate,
common units upon conversion of the management incentive units that exceed a maximum limit
of 5.1 percent of all the Partnerships then-outstanding units; and
    
    the holders of management incentive units are not entitled to receive, in the aggregate,
distributions of the Partnership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.
   14




---



##### Table of Contents



ENCORE ENERGY PARTNERS LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued
  Long-Term Incentive Plan
   Note 10. Commitments and Contingencies
   Note 11. Related Party Transactions
   15




---



##### Table of Contents



ENCORE ENERGY PARTNERS LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued
    Note 12. Partners Equity and Distributions
   Note 13. Subsequent Events
    16




---



##### Table of Contents



ENCORE ENERGY PARTNERS LP
 
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
  Introduction
  
    
    Overview of Business
    
    Results of Operations Comparison of Quarter Ended September 30, 2007 to Quarter Ended September 30, 2006 Comparison of Nine Months Ended September 30, 2007 to Nine Months Ended September 30, 2006
 
    


    Capital Resources
    
    Capital Commitments and Contingencies
    
    Liquidity
    
    Critical Accounting Policies and Estimates
    
    New Accounting Pronouncements
 Overview of Business
    Results of Operations
 Comparison of Quarter Ended September 30, 2007 to Quarter Ended September 30, 2006
 Oil and natural gas revenues and production.
 17




---



##### Table of Contents



ENCORE ENERGY PARTNERS LP
 Three months ended September 30,
    
    
    Increase /2007
    
    
    2006
    
    
    (Decrease)Revenues (in thousands):Oil
    
    $
    18,110
    
    
    $
    137
    
    
    $
    17,973Natural gas
    
    
    2,916
    
    
    
    2,997
    
    
    
    (81
    )Total combined oil and natural gas revenues
    
    $
    21,026
    
    
    $
    3,134
    
    
    $
    17,892Average realized prices:Oil ($/Bbl)
    
    $
    56.79
    
    
    $
    63.30
    
    
    $
    (6.51
    )Natural gas ($/Mcf)
    
    $
    5.43
    
    
    $
    6.63
    
    
    $
    (1.20
    )Combined ($/BOE)
    
    $
    51.48
    
    
    $
    40.43
    
    
    $
    11.05Total production volumes:Oil (MBbls)
    
    
    319
    
    
    
    2
    
    
    
    317Natural gas (MMcf)
    
    
    537
    
    
    
    452
    
    
    
    85Combined (MBOE)
    
    
    408
    
    
    
    78
    
    
    
    330Average daily production volumes:Oil (Bbls/D)
    
    
    3,467
    
    
    
    24
    
    
    
    3,443Natural gas (Mcf/D)
    
    
    5,837
    
    
    
    4,915
    
    
    
    922Combined (BOE/D)
    
    
    4,439
    
    
    
    843
    
    
    
    3,596Average NYMEX prices:Oil (per Bbl)
    
    $
    75.21
    
    
    $
    70.62
    
    
    $
    4.59Natural gas (per Mcf)
    
    $
    6.16
    
    
    $
    6.58
    
    
    $
    (0.42
    )
    18




---



##### Table of Contents



ENCORE ENERGY PARTNERS LP
 Three months ended September 30,2007
    
    2006Average realized oil price ($/Bbl)
    
    $
    56.79
    
    
    $
    63.30Average NYMEX ($/Bbl)
    
    $
    75.21
    
    
    $
    70.62Differential to NYMEX
    
    $
    (18.42
    )
    
    $
    (7.32
    )Average realized oil price to NYMEX percentage
    
    
    76
    %
    
    
    90
    %Average realized natural gas price ($/Mcf)
    
    $
    5.43
    
    
    $
    6.63Average NYMEX ($/Mcf)
    
    $
    6.16
    
    
    $
    6.58Differential to NYMEX
    
    $
    (0.73
    )
    
    $
    0.05Average realized natural gas price to NYMEX percentage
    
    
    88
    %
    
    
    101
    %
   Marketing revenues and expenses.
 Marketing revenues
    
    $
    2,134Marketing expenses
    
    
    (1,300
    )Marketing, net
    
    $
    834Marketing revenues per BOE
    
    $
    5.22Marketing expenses per BOE
    
    
    (3.18
    )Marketing, net per BOE
    
    $
    2.04
 Expenses.
 19




---



##### Table of Contents



ENCORE ENERGY PARTNERS LP
 Three months ended September 30,
    
    
    Increase /2007
    
    
    2006
    
    
    (Decrease)Expenses (in thousands):Production:Lease operations
    
    $
    4,392
    
    
    $
    404
    
    
    $
    3,988Production, ad valorem, and severance taxes
    
    
    2,571
    
    
    
    304
    
    
    
    2,267Total production expenses
    
    
    6,963
    
    
    
    708
    
    
    
    6,255Other:Depletion, depreciation, and amortization
    
    
    8,358
    
    
    
    290
    
    
    
    8,068General and administrative
    
    
    6,576
    
    
    
    178
    
    
    
    6,398Derivative fair value loss
    
    
    2,989
    
    
    
    
    
    
    
    2,989Other operating
    
    
    243
    
    
    
    60
    
    
    
    183Total operating
    
    
    25,129
    
    
    
    1,236
    
    
    
    23,893Interest
    
    
    4,829
    
    
    
    
    
    
    
    4,829Income tax provision
    
    
    15
    
    
    
    
    
    
    
    15Total expenses
    
    $
    29,973
    
    
    $
    1,236
    
    
    $
    28,737Expenses (per BOE):Production:Lease operations
    
    $
    10.75
    
    
    $
    5.21
    
    
    $
    5.54Production, ad valorem, and severance taxes
    
    
    6.29
    
    
    
    3.92
    
    
    
    2.37Total production expenses
    
    
    17.04
    
    
    
    9.13
    
    
    
    7.91Other:Depletion, depreciation, and amortization
    
    
    20.46
    
    
    
    3.74
    
    
    
    16.72General and administrative
    
    
    16.10
    
    
    
    2.29
    
    
    
    13.81Derivative fair value loss
    
    
    7.32
    
    
    
    
    
    
    
    7.32Other operating
    
    
    0.60
    
    
    
    0.78
    
    
    
    (0.18
    )Total operating
    
    
    61.52
    
    
    
    15.94
    
    
    
    45.58Interest
    
    
    11.82
    
    
    
    
    
    
    
    11.82Income tax provision
    
    
    0.04
    
    
    
    
    
    
    
    0.04Total expenses
    
    $
    73.38
    
    
    $
    15.94
    
    
    $
    57.44
 Production expenses.
   20




---



##### Table of Contents



ENCORE ENERGY PARTNERS LP
 DD&A expense.
 G&A expense.
 Derivative fair value loss.
 Other operating expense.
 Interest expense.
 21




---



##### Table of Contents



ENCORE ENERGY PARTNERS LP
 Comparison of Nine Months Ended September 30, 2007 to Nine Months Ended September 30, 2006
 Oil and natural gas revenues and production.
 Nine months ended September 30,
    
    
    Increase /2007
    
    
    2006
    
    
    (Decrease)Revenues (in thousands):Oil
    
    $
    38,579
    
    
    $
    311
    
    
    $
    38,268Natural gas
    
    
    8,820
    
    
    
    9,716
    
    
    
    (896
    )Total combined oil and natural gas revenues
    
    $
    47,399
    
    
    $
    10,027
    
    
    $
    37,372Average realized prices:Oil ($/Bbl)
    
    $
    51.79
    
    
    $
    63.35
    
    
    $
    (11.56
    )Natural gas ($/Mcf)
    
    $
    6.35
    
    
    $
    7.11
    
    
    $
    (0.76
    )Combined ($/BOE)
    
    $
    48.53
    
    
    $
    43.08
    
    
    $
    5.45Total production volumes:Oil (MBbls)
    
    
    745
    
    
    
    5
    
    
    
    740Natural gas (MMcf)
    
    
    1,390
    
    
    
    1,367
    
    
    
    23Combined (MBOE)
    
    
    977
    
    
    
    233
    
    
    
    744Average daily production volumes:Oil (Bbls/D)
    
    
    3,478
    
    
    
    18
    
    
    
    3,460Natural gas (Mcf/D)
    
    
    5,298
    
    
    
    5,007
    
    
    
    291Combined (BOE/D)
    
    
    4,360
    
    
    
    853
    
    
    
    3,507Average NYMEX prices:Oil (per Bbl)
    
    $
    66.21
    
    
    $
    68.23
    
    
    $
    (2.02
    )Natural gas (per Mcf)
    
    $
    6.83
    
    
    $
    7.39
    
    
    $
    (0.56
    )
    22




---



##### Table of Contents



ENCORE ENERGY PARTNERS LP
 Nine months ended September 30,2007
    
    2006Average realized oil price ($/Bbl)
    
    $
    51.79
    
    
    $
    63.35Average NYMEX ($/Bbl)
    
    $
    66.21
    
    
    $
    68.23Differential to NYMEX
    
    $
    (14.42
    )
    
    $
    (4.88
    )Average realized oil price to NYMEX percentage
    
    
    78
    %
    
    
    93
    %Average realized natural gas price ($/Mcf)
    
    $
    6.35
    
    
    $
    7.11Average NYMEX ($/Mcf)
    
    $
    6.83
    
    
    $
    7.39Differential to NYMEX
    
    $
    (0.48
    )
    
    $
    (0.28
    )Average realized natural gas price to NYMEX percentage
    
    
    93
    %
    
    
    96
    %
   Marketing revenues and expenses.
 Marketing revenues
    
    $
    6,986Marketing expenses
    
    
    (5,655
    )Marketing, net
    
    $
    1,331Marketing revenues per BOE
    
    $
    7.15Marketing expenses per BOE
    
    
    (5.79
    )Marketing, net per BOE
    
    $
    1.36
 Expenses.
 23




---



##### Table of Contents



ENCORE ENERGY PARTNERS LP
 Nine months ended September 30,
    
    
    Increase /2007
    
    
    2006
    
    
    (Decrease)Expenses (in thousands):Production:Lease operations
    
    $
    9,343
    
    
    $
    1,197
    
    
    $
    8,146Production, ad valorem, and severance taxes
    
    
    5,857
    
    
    
    942
    
    
    
    4,915Total production expenses
    
    
    15,200
    
    
    
    2,139
    
    
    
    13,061Other:Depletion, depreciation, and amortization
    
    
    18,770
    
    
    
    870
    
    
    
    17,900General and administrative
    
    
    7,668
    
    
    
    504
    
    
    
    7,164Derivative fair value loss
    
    
    9,486
    
    
    
    
    
    
    
    9,486Other operating
    
    
    534
    
    
    
    182
    
    
    
    352Total operating
    
    
    51,658
    
    
    
    3,695
    
    
    
    47,963Interest
    
    
    11,273
    
    
    
    
    
    
    
    11,273Income tax provision
    
    
    54
    
    
    
    
    
    
    
    54Total expenses
    
    $
    62,985
    
    
    $
    3,695
    
    
    $
    59,290Expenses (per BOE):Production:Lease operations
    
    $
    9.57
    
    
    $
    5.14
    
    
    $
    4.43Production, ad valorem, and severance taxes
    
    
    6.00
    
    
    
    4.04
    
    
    
    1.96Total production expenses
    
    
    15.57
    
    
    
    9.18
    
    
    
    6.39Other:Depletion, depreciation, and amortization
    
    
    19.22
    
    
    
    3.74
    
    
    
    15.48General and administrative
    
    
    7.85
    
    
    
    2.17
    
    
    
    5.68Derivative fair value loss
    
    
    9.71
    
    
    
    
    
    
    
    9.71Other operating
    
    
    0.55
    
    
    
    0.78
    
    
    
    (0.23
    )Total operating
    
    
    52.90
    
    
    
    15.87
    
    
    
    37.03Interest
    
    
    11.54
    
    
    
    
    
    
    
    11.54Income tax provision
    
    
    0.06
    
    
    
    
    
    
    
    0.06Total expenses
    
    $
    64.50
    
    
    $
    15.87
    
    
    $
    48.63
 Production expenses.
   24




---



##### Table of Contents



ENCORE ENERGY PARTNERS LP
 DD&A expense.
 G&A expense.
 Derivative fair value loss.
 Other operating expense.
 Interest expense.
 Capital Resources
  
    
    Cash flows from operating activities; and
    
    Cash flows from financing activities.
 Cash flows from operating activities .
 Cash flows from financing activities .
  Current capitalization.
 25




---



##### Table of Contents



ENCORE ENERGY PARTNERS LP
  Capital Commitments and Contingencies
  
    
    Cash flows from investing activities including:
 - Development and exploitation of existing oil and natural gas properties; and- Acquisitions of oil and natural gas properties;
 
    
    Funding of necessary working capital;
    
    Distributions to unitholders; and
    
    Contractual obligations.
 Cash flows from investing activities .
 Development and exploitation of existing oil and natural gas properties.
 Acquisitions of oil and natural gas properties.
 Funding of necessary working capital.
  Distributions to unitholders.
 Contractual obligations.
 Contractual Obligations
    
    Payments Due by Periodand Commitments
    
    Total
    
    
    2007
    
    
    2008 - 2009
    
    
    2010 - 2011
    
    
    Thereafter(in thousands)Revolving credit facility (a)
    
    $
    88,254
    
    
    $
    2,331
    
    
    $
    9,323
    
    
    $
    9,323
    
    
    $
    67,277Derivative obligations (b)
    
    
    1,026
    
    
    
    
    
    
    
    1,026
    
    
    
    
    
    
    
    Asset retirement obligations (c)
    
    
    25,318
    
    
    
    118
    
    
    
    945
    
    
    
    945
    
    
    
    23,310Total
    
    $
    114,598
    
    
    $
    2,449
    
    
    $
    11,294
    
    
    $
    10,268
    
    
    $
    90,587
 
 (a)
    
    Amounts included in the table above include both principal and projected interest
payments. Please read Note 7 of Notes to Consolidated Financial Statements included in
Item 1. Financial Statements for additional information regarding our long-term debt. 26




---



##### Table of Contents



ENCORE ENERGY PARTNERS LP
 
 (b)
    
    Derivative obligations represent net liabilities for derivatives that were valued
as of September 30, 2007, 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
derivative obligations.(c)
    
    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 6 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 beginning in April 1, 2008 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.
 Liquidity
  Internally generated cash flows.
 Revolving credit facility.
  27




---



##### Table of Contents



ENCORE ENERGY PARTNERS LP
  Debt covenants.
 Letters of credit.
 Critical Accounting Policies and Estimates
  New Accounting Pronouncements
  
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
   Commodity Price Sensitivity
  Interest Rate Sensitivity
  28




---



##### Table of Contents



ENCORE ENERGY PARTNERS LP
 
 Item 4. Controls and Procedures
     
 PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 Use of Proceeds
    29




---



##### Table of Contents



ENCORE ENERGY PARTNERS LP
 
 Item 6. Exhibits
 Exhibits3.1
    
    
    Certificate of Limited Partnership of Encore Energy Partners LP (incorporated by reference
from 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 from Exhibit 3.1 to the Current
Report on Form 8-K, filed with the SEC on September 21, 2007).10.1
    
    
    Contribution, Conveyance and Assumption Agreement, dated as of September 17, 2007, by and
among Encore Energy Partners LP, Encore Energy Partners GP LLC, Encore Acquisition Company,
Encore Operating, L.P., Encore Partners GP Holdings LLC, Encore Partners LP Holdings LLC and
Encore Energy Partners Operating LLC (incorporated by reference from Exhibit 10.1 to the
Current Report on Form 8-K, filed with the SEC on September 21, 2007).10.2
    
    
    Amended and Restated Administrative Services Agreement, dated as of September 17, 2007, by
and among Encore Energy Partners GP LLC, Encore Energy Partners LP, Encore Energy Partners
Operating LLC, Encore Acquisition Company and Encore Operating, L.P. (incorporated by
reference from Exhibit 10.2 to the Current Report on Form 8-K, filed with the SEC on September
21, 2007).10.3
    
    
    Encore Energy Partners GP LLC Long-Term Incentive Plan, dated as of September 17, 2007
(incorporated by reference from Exhibit 10.3 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).
 
 *
    
    Filed herewith. 30




---



##### Table of Contents



ENCORE ENERGY PARTNERS LP
 
 SIGNATURE
  ENCORE ENERGY PARTNERS LPBy: Encore Energy Partners GP LLC, its General PartnerDate: November 5, 2007
    
    /s/ Robert C. ReevesRobert C. ReevesSenior Vice President, Chief FinancialOfficer, and Treasurer
 31