UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C.
20549
  Form 10-Q
  (Mark One)x
              
              QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934For
      the quarterly period ended March 31, 2009ORo
              
              TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934For
      the transition period
      from          toCommission
      File Number:  001-33756
  Vanguard
Natural Resources, LLC
 (Exact
Name of Registrant as Specified in Its Charter)
  Delaware
              
              61-1521161(State
      or Other Jurisdiction of
                Incorporation
      or Organization)
              
              (I.R.S.
      Employer
                Identification
      No.)
  7700
      San Felipe, Suite 485
                Houston,
      Texas
              
              77063(Address
      of Principal Executive Offices)
              
              (Zip
      Code)
  Telephone
Number: (832) 327-2255
  Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.  Yesx   Noo
 
 Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
 Yeso   Noo
 
 Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definitions of “large
accelerated filer,” “accelerated filer” and “smaller reporting company” in
Rule 12b-2 of the Exchange Act. (Check one):
  Large
      accelerated filero
              Accelerated
      filerxNon-accelerated
      filero
              Smaller
      reporting companyo(Do
      not check if a smaller reporting company)
  Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).  Yeso  Nox
   Common
units outstanding on May 5, 2009: 12,145,873.
 
 
 
  
  VANGUARD
NATURAL RESOURCES, LLC
 TABLE
OF CONTENTS
 PageGLOSSARY OF TERMSPART I - FINANCIAL INFORMATIONItem 1.
                  Unaudited Financial StatementsConsolidated Statements of
      Operations
                  3Consolidated Balance Sheets
                  4Consolidated Statements of Cash Flows
                  5Consolidated Statements of Comprehensive
    Loss
                  6Notes to Consolidated Financial
    Statements
                  7Item 2.
                  Management’s Discussion and Analysis of Financial Condition
      and Results of Operations
                  19Item 3.
                  Quantitative and Qualitative Disclosures about Market
      Risk
                  32Item 4.
                  Controls and Procedures
                  34PART II – OTHER INFORMATIONItem 1.
                  Legal Proceedings
                  35Item 1A.
                  Risk Factors
                  35Item 2.
                  Unregistered Sales of Equity Securities and Use of
      Proceeds
                  38Item 3.
                  Defaults Upon Senior
    Securities
                  38Item 4.
                  Submission of Matters to a Vote of Securities
      Holders
                  38Item 5.
                  Other Information
                  38Item 6.
                  Exhibits
                  38
  
  
  GLOSSARY OF TERMS
 
 Below is
a list of terms that are common to our industry and used throughout this
document:
  /day
              =
              per
      day
              
              Mcf
              =
              thousand
      cubic feetBbls
              =
              barrels
              
              Mcfe
              =
              thousand
      cubic feet of natural gas equivalentsBcfe
              =
              billion
      cubic feet of natural gas equivalents
              
              MMBtu
              =
              million
      British thermal unitsBtu
              =
              British
      thermal unit
              
              MMcf
              =
              million
      cubic feet
  When we
refer to natural gas and oil in “equivalents,” we are doing so to compare
quantities of oil with quantities of natural gas or to express these different
commodities in a common unit. In calculating equivalents, we use a generally
recognized standard in which one Bbl of oil is equal to six Mcf of natural gas.
Also, when we refer to cubic feet measurements, all measurements are at a
pressure of 14.73 pounds per square inch.
  References
in this report to (1) “us,” “we,” “our,” “the Company,” “Vanguard” or “VNR” are
to Vanguard Natural Resources, LLC and its subsidiaries, including Vanguard
Natural Gas, LLC, Trust Energy Company, LLC (“TEC”), VNR Holdings, Inc.
(“VNRH”), Ariana Energy, LLC (“Ariana Energy”) and Vanguard Permian, LLC
(“Vanguard Permian”) and (2) “Vanguard Predecessor,” “Predecessor,” “our
operating subsidiary” or “VNG” are to Vanguard Natural Gas,
LLC.
  
  
 
 PART I – FINANCIAL INFORMATION
  Item 1. Financial Statements
  VANGUARD NATURAL RESOURCES, LLC AND
SUBSIDIARIES
 CONSOLIDATED STATEMENTS OF OPERATIONS
 (in thousands, except per unit data)
 (Unaudited)
 
 Three Months
      Ended
                                                                                                                                                                                                      March
      31,2009
                                                                                                                                                                                                    
                                                                                                                                                                                                    
                                                                                                                                                                                                    2008Revenues:Natural
      gas and oil sales
                                                                                                                                                                                                    
                                                                                                                                                                                                    $
                                                                                                                                                                                                    9,202
                                                                                                                                                                                                    
                                                                                                                                                                                                    
                                                                                                                                                                                                    $
                                                                                                                                                                                                    14,002Gain
      (loss) on commodity cash flow hedges
                                                                                                                                                                                                    
                                                                                                                                                                                                    
                                                                                                                                                                                                    (896
                                                                                                                                                                                                    )
                                                                                                                                                                                                    
                                                                                                                                                                                                    
                                                                                                                                                                                                    416Gain
      (loss) on other commodity derivative contracts
                                                                                                                                                                                                    
                                                                                                                                                                                                    
                                                                                                                                                                                                    17,649
                                                                                                                                                                                                    
                                                                                                                                                                                                    
                                                                                                                                                                                                    
                                                                                                                                                                                                    (21,772
                                                                                                                                                                                                    )Total
      revenues
                                                                                                                                                                                                    
                                                                                                                                                                                                    
                                                                                                                                                                                                    25,955
                                                                                                                                                                                                    
                                                                                                                                                                                                    
                                                                                                                                                                                                    
                                                                                                                                                                                                    (7,354
                                                                                                                                                                                                    )Costs
      and expenses:Lease
      operating expenses
                                                                                                                                                                                                    
                                                                                                                                                                                                    
                                                                                                                                                                                                    3,133
                                                                                                                                                                                                    
                                                                                                                                                                                                    
                                                                                                                                                                                                    
                                                                                                                                                                                                    2,015Depreciation,
      depletion, amortization, and accretion
                                                                                                                                                                                                    
                                                                                                                                                                                                    
                                                                                                                                                                                                    3,783
                                                                                                                                                                                                    
                                                                                                                                                                                                    
                                                                                                                                                                                                    
                                                                                                                                                                                                    2,824Impairment
      of natural gas and oil properties
                                                                                                                                                                                                    
                                                                                                                                                                                                    
                                                                                                                                                                                                    63,818
                                                                                                                                                                                                    
                                                                                                                                                                                                    
                                                                                                                                                                                                    
                                                                                                                                                                                                    —Selling,
      general and administrative expenses
                                                                                                                                                                                                    
                                                                                                                                                                                                    
                                                                                                                                                                                                    3,152
                                                                                                                                                                                                    
                                                                                                                                                                                                    
                                                                                                                                                                                                    
                                                                                                                                                                                                    1,646Production
      and other taxes
                                                                                                                                                                                                    
                                                                                                                                                                                                    
                                                                                                                                                                                                    642
                                                                                                                                                                                                    
                                                                                                                                                                                                    
                                                                                                                                                                                                    
                                                                                                                                                                                                    966Total
      costs and expenses
                                                                                                                                                                                                    
                                                                                                                                                                                                    
                                                                                                                                                                                                    74,528
                                                                                                                                                                                                    
                                                                                                                                                                                                    
                                                                                                                                                                                                    
                                                                                                                                                                                                    7,451Loss
      from operations
                                                                                                                                                                                                    
                                                                                                                                                                                                    
                                                                                                                                                                                                    (48,573
                                                                                                                                                                                                    )
                                                                                                                                                                                                    
                                                                                                                                                                                                    
                                                                                                                                                                                                    (14,805
                                                                                                                                                                                                    )Other
      income and (expense):Interest
      income
                                                                                                                                                                                                    
                                                                                                                                                                                                    
                                                                                                                                                                                                    —
                                                                                                                                                                                                    
                                                                                                                                                                                                    
                                                                                                                                                                                                    
                                                                                                                                                                                                    8Interest
      expense
                                                                                                                                                                                                    
                                                                                                                                                                                                    
                                                                                                                                                                                                    (1,013
                                                                                                                                                                                                    )
                                                                                                                                                                                                    
                                                                                                                                                                                                    
                                                                                                                                                                                                    (1,130
                                                                                                                                                                                                    )Loss
      on interest rate derivative contracts
                                                                                                                                                                                                    
                                                                                                                                                                                                    
                                                                                                                                                                                                    (379
                                                                                                                                                                                                    )
                                                                                                                                                                                                    
                                                                                                                                                                                                    
                                                                                                                                                                                                    (5
                                                                                                                                                                                                    )Total
      other expense
                                                                                                                                                                                                    
                                                                                                                                                                                                    
                                                                                                                                                                                                    (1,392
                                                                                                                                                                                                    )
                                                                                                                                                                                                    
                                                                                                                                                                                                    
                                                                                                                                                                                                    (1,127
                                                                                                                                                                                                    )Net
      loss
                                                                                                                                                                                                    
                                                                                                                                                                                                    $
                                                                                                                                                                                                    (49,965
                                                                                                                                                                                                    )
                                                                                                                                                                                                    
                                                                                                                                                                                                    $
                                                                                                                                                                                                    (15,932
                                                                                                                                                                                                    )Net
      loss per unit:Common
      & Class B units – basic
                                                                                                                                                                                                    
                                                                                                                                                                                                    $
                                                                                                                                                                                                    (3.98
                                                                                                                                                                                                    )
                                                                                                                                                                                                    
                                                                                                                                                                                                    $
                                                                                                                                                                                                    (1.42
                                                                                                                                                                                                    )Common
      & Class B units – diluted
                                                                                                                                                                                                    
                                                                                                                                                                                                    $
                                                                                                                                                                                                    (3.98
                                                                                                                                                                                                    )
                                                                                                                                                                                                    
                                                                                                                                                                                                    $
                                                                                                                                                                                                    (1.42
                                                                                                                                                                                                    )Weighted
      average units outstanding:Common
      units – basic & diluted
                                                                                                                                                                                                    
                                                                                                                                                                                                    
                                                                                                                                                                                                    12,145,873
                                                                                                                                                                                                    
                                                                                                                                                                                                    
                                                                                                                                                                                                    
                                                                                                                                                                                                    10,795,000Class
      B units – basic & diluted
                                                                                                                                                                                                    
                                                                                                                                                                                                    
                                                                                                                                                                                                    420,000
                                                                                                                                                                                                    
                                                                                                                                                                                                    
                                                                                                                                                                                                    
                                                                                                                                                                                                    420,000
  See
accompanying notes to consolidated financial statements
  3
  VANGUARD NATURAL RESOURCES, LLC AND SUBSIDIARIES
 CONSOLIDATED BALANCE SHEETS
 (in
thousands)
 March
      31,
                                                                                                                                                          2009
                                                                                                                                                        
                                                                                                                                                        
                                                                                                                                                        December 31,
                                                                                                                                                          2008(Unaudited)AssetsCurrent
      assetsCash
      and cash equivalents
                                                                                                                                                        
                                                                                                                                                        $
                                                                                                                                                        2,924
                                                                                                                                                        
                                                                                                                                                        
                                                                                                                                                        $
                                                                                                                                                        3Trade
      accounts receivable, net
                                                                                                                                                        
                                                                                                                                                        
                                                                                                                                                        4,204
                                                                                                                                                        
                                                                                                                                                        
                                                                                                                                                        
                                                                                                                                                        6,083Derivative
      assets
                                                                                                                                                        
                                                                                                                                                        
                                                                                                                                                        28,106
                                                                                                                                                        
                                                                                                                                                        
                                                                                                                                                        
                                                                                                                                                        22,184Other
      receivables
                                                                                                                                                        
                                                                                                                                                        
                                                                                                                                                        3,797
                                                                                                                                                        
                                                                                                                                                        
                                                                                                                                                        
                                                                                                                                                        2,763Other
      current assets
                                                                                                                                                        
                                                                                                                                                        
                                                                                                                                                        637
                                                                                                                                                        
                                                                                                                                                        
                                                                                                                                                        
                                                                                                                                                        845Total
      current assets
                                                                                                                                                        
                                                                                                                                                        
                                                                                                                                                        39,668
                                                                                                                                                        
                                                                                                                                                        
                                                                                                                                                        
                                                                                                                                                        31,878Natural gas and oil properties, at cost
                                                                                                                                                        
                                                                                                                                                        
                                                                                                                                                        286,632
                                                                                                                                                        
                                                                                                                                                        
                                                                                                                                                        
                                                                                                                                                        284,447Accumulated depletion
                                                                                                                                                        
                                                                                                                                                        
                                                                                                                                                        (169,739
                                                                                                                                                        )
                                                                                                                                                        
                                                                                                                                                        
                                                                                                                                                        (102,178
                                                                                                                                                        )Natural
      gas and oil properties evaluated, net – full cost
    method
                                                                                                                                                        
                                                                                                                                                        
                                                                                                                                                        116,893
                                                                                                                                                        
                                                                                                                                                        
                                                                                                                                                        
                                                                                                                                                        182,269Other
      assetsDerivative assets
                                                                                                                                                        
                                                                                                                                                        
                                                                                                                                                        19,087
                                                                                                                                                        
                                                                                                                                                        
                                                                                                                                                        
                                                                                                                                                        15,749Deferred financing costs
                                                                                                                                                        
                                                                                                                                                        
                                                                                                                                                        805
                                                                                                                                                        
                                                                                                                                                        
                                                                                                                                                        
                                                                                                                                                        882Other assets
                                                                                                                                                        
                                                                                                                                                        
                                                                                                                                                        1,053
                                                                                                                                                        
                                                                                                                                                        
                                                                                                                                                        
                                                                                                                                                        1,784Total
      assets
                                                                                                                                                        
                                                                                                                                                        $
                                                                                                                                                        177,506
                                                                                                                                                        
                                                                                                                                                        
                                                                                                                                                        $
                                                                                                                                                        232,562Liabilities
      and members’ equityCurrent
      liabilitiesAccounts payable – trade
                                                                                                                                                        
                                                                                                                                                        $
                                                                                                                                                        883
                                                                                                                                                        
                                                                                                                                                        
                                                                                                                                                        $
                                                                                                                                                        2,148Accounts payable – natural gas and oil
                                                                                                                                                        
                                                                                                                                                        
                                                                                                                                                        871
                                                                                                                                                        
                                                                                                                                                        
                                                                                                                                                        
                                                                                                                                                        1,327Payables to affiliates
                                                                                                                                                        
                                                                                                                                                        
                                                                                                                                                        1,263
                                                                                                                                                        
                                                                                                                                                        
                                                                                                                                                        
                                                                                                                                                        2,555Derivative liabilities
                                                                                                                                                        
                                                                                                                                                        
                                                                                                                                                        244
                                                                                                                                                        
                                                                                                                                                        
                                                                                                                                                        
                                                                                                                                                        486Accrued expenses
                                                                                                                                                        
                                                                                                                                                        
                                                                                                                                                        2,311
                                                                                                                                                        
                                                                                                                                                        
                                                                                                                                                        
                                                                                                                                                        1,248Total
      current liabilities
                                                                                                                                                        
                                                                                                                                                        
                                                                                                                                                        5,572
                                                                                                                                                        
                                                                                                                                                        
                                                                                                                                                        
                                                                                                                                                        7,764Long-term debt
                                                                                                                                                        
                                                                                                                                                        
                                                                                                                                                        136,500
                                                                                                                                                        
                                                                                                                                                        
                                                                                                                                                        
                                                                                                                                                        135,000Derivative liabilities
                                                                                                                                                        
                                                                                                                                                        
                                                                                                                                                        2,599
                                                                                                                                                        
                                                                                                                                                        
                                                                                                                                                        
                                                                                                                                                        2,313Asset retirement obligations
                                                                                                                                                        
                                                                                                                                                        
                                                                                                                                                        2,159
                                                                                                                                                        
                                                                                                                                                        
                                                                                                                                                        
                                                                                                                                                        2,134Total
      liabilities
                                                                                                                                                        
                                                                                                                                                        
                                                                                                                                                        146,830
                                                                                                                                                        
                                                                                                                                                        
                                                                                                                                                        
                                                                                                                                                        147,211Commitments
      and contingenciesMembers’
      equityMembers’ capital, 12,145,873 common units issued and outstanding at March
      31, 2009 and December 31, 2008
                                                                                                                                                        
                                                                                                                                                        
                                                                                                                                                        32,399
                                                                                                                                                        
                                                                                                                                                        
                                                                                                                                                        
                                                                                                                                                        88,550Class B units, 420,000 issued and outstanding at March 31, 2009 and
      December 31, 2008
                                                                                                                                                        
                                                                                                                                                        
                                                                                                                                                        5,195
                                                                                                                                                        
                                                                                                                                                        
                                                                                                                                                        
                                                                                                                                                        4,606Accumulated other comprehensive loss
                                                                                                                                                        
                                                                                                                                                        
                                                                                                                                                        (6,918
                                                                                                                                                        )
                                                                                                                                                        
                                                                                                                                                        
                                                                                                                                                        (7,805
                                                                                                                                                        )Total
      members’ equity
                                                                                                                                                        
                                                                                                                                                        
                                                                                                                                                        30,676
                                                                                                                                                        
                                                                                                                                                        
                                                                                                                                                        
                                                                                                                                                        85,351Total
      liabilities and members’ equity
                                                                                                                                                        
                                                                                                                                                        $
                                                                                                                                                        177,506
                                                                                                                                                        
                                                                                                                                                        
                                                                                                                                                        $
                                                                                                                                                        232,562
 
 See
accompanying notes to consolidated financial statements
  4
  
 VANGUARD NATURAL RESOURCES, LLC AND SUBSIDIARIES
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited)
 (in
thousands)
 Three Months Ended
                                            March
      31,2009
                                          
                                          
                                          2008Operating
      activitiesNet
      loss
                                          
                                          $
                                          (49,965
                                          )
                                          
                                          $
                                          (15,932
                                          )Adjustments
      to reconcile net loss to net cash provided by operating
      activities:Depreciation,
      depletion, amortization, and accretion
                                          
                                          
                                          3,783
                                          
                                          
                                          
                                          2,824Impairment
      of natural gas and oil properties
                                          
                                          
                                          63,818
                                          
                                          
                                          
                                          —Amortization
      of deferred financing costs
                                          
                                          
                                          100
                                          
                                          
                                          
                                          84Unit-based
      compensation
                                          
                                          
                                          2,188
                                          
                                          
                                          
                                          915Amortization
      of premiums paid and non-cash settlements on derivative
      contracts
                                          
                                          
                                          1,465
                                          
                                          
                                          
                                          1,301Unrealized
      (gains) losses on other commodity and interest rate derivative
      contracts
                                          
                                          
                                          (9,786
                                          )
                                          
                                          
                                          20,210Changes
      in operating assets and liabilities:Trade
      accounts receivable
                                          
                                          
                                          1,879
                                          
                                          
                                          
                                          (5,615
                                          )Other
      receivables
                                          
                                          
                                          (1,034
                                          )
                                          
                                          
                                          —Payables
      to affiliates
                                          
                                          
                                          (1,292
                                          )
                                          
                                          
                                          (108
                                          )Other
      current assets
                                          
                                          
                                          208
                                          
                                          
                                          
                                          (306
                                          )Price
      risk management activities, net
                                          
                                          
                                          (9
                                          )
                                          
                                          
                                          (183
                                          )Accounts
      payable
                                          
                                          
                                          (1,721
                                          )
                                          
                                          
                                          253Accrued
      expenses
                                          
                                          
                                          (236
                                          )
                                          
                                          
                                          598Net
      cash provided by operating activities
                                          
                                          
                                          9,398
                                          
                                          
                                          
                                          4,041Investing
      activitiesAdditions
      to property and equipment
                                          
                                          
                                          (7
                                          )
                                          
                                          
                                          (32
                                          )Additions
      to natural gas and oil properties
                                          
                                          
                                          (1,260
                                          )
                                          
                                          
                                          (1,238
                                          )Acquisitions
      of natural gas and oil properties
                                          
                                          
                                          (202
                                          )
                                          
                                          
                                          (65,662
                                          )Deposits
      and prepayments of natural gas and oil properties
                                          
                                          
                                          (1
                                          )
                                          
                                          
                                          (1,120
                                          )Net
      cash used in investing activities
                                          
                                          
                                          (1,470
                                          )
                                          
                                          
                                          (68,052
                                          )Financing
      activitiesProceeds
      from borrowings
                                          
                                          
                                          6,500
                                          
                                          
                                          
                                          71,400Repayment
      of debt
                                          
                                          
                                          (5,000
                                          )
                                          
                                          
                                          (6,300
                                          )Distributions
      to members
                                          
                                          
                                          (6,283
                                          )
                                          
                                          
                                          (3,263
                                          )Financing
      costs
                                          
                                          
                                          (23
                                          )
                                          
                                          
                                          (178
                                          )Purchase
      of units for issuance as unit-based compensation
                                          
                                          
                                          (201
                                          )
                                          
                                          
                                          —Net
      cash provided by (used in) financing activities
                                          
                                          
                                          (5,007
                                          )
                                          
                                          
                                          61,659Net
      increase (decrease) in cash and cash equivalents
                                          
                                          
                                          2,921
                                          
                                          
                                          
                                          (2,352
                                          )Cash and cash
      equivalents, beginning of period
                                          
                                          
                                          3
                                          
                                          
                                          
                                          3,109Cash and cash
      equivalents, end of period
                                          
                                          $
                                          2,924
                                          
                                          
                                          $
                                          757Supplemental
      cash flow information:Cash
      paid for interest
                                          
                                          $
                                          1,010
                                          
                                          
                                          $
                                          1,106Non-cash
      financing and investing activities:Asset
      retirement obligations
                                          
                                          $
                                          —
                                          
                                          
                                          $
                                          1,260Accrued
      dividends declared
                                          
                                          $
                                          —
                                          
                                          
                                          $
                                          4,991Derivative
      liabilities assumed in acquisition of natural gas and oil
      properties
                                          
                                          $
                                          —
                                          
                                          
                                          $
                                          1,128Transfer
      of deposit for natural gas and oil properties
                                          
                                          $
                                          —
                                          
                                          
                                          $
                                          7,830
 See
accompanying notes to consolidated financial statements
 
  5
  VANGUARD NATURAL RESOURCES, LLC AND SUBSIDIARIES
 CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
 (Unaudited)
 (in
thousands)
 
 Three Months
      Ended
                                                              March 31,2009
                                                            
                                                            
                                                            2008Net
      loss
                                                            
                                                            $
                                                            (49,965
                                                            )
                                                            
                                                            $
                                                            (15,932
                                                            )Net
      gains (losses) from derivative contracts:Unrealized
      mark-to-market gains arising during the period
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            1,490Reclassification
      adjustments for settlements
                                                            
                                                            
                                                            887
                                                            
                                                            
                                                            
                                                            (416
                                                            )Other
      comprehensive income
                                                            
                                                            
                                                            887
                                                            
                                                            
                                                            
                                                            1,074Comprehensive
      loss
                                                            
                                                            $
                                                            (49,078
                                                            )
                                                            
                                                            $
                                                            (14,858
                                                            )
  See
accompanying notes to consolidated financial statements
 
  6
 VANGUARD NATURAL RESOURCES, LLC AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
  
 Description
of the Business:
 
 Vanguard
Natural Resources, LLC is a publicly-traded limited liability company focused on
the acquisition and development of mature, long-lived natural gas and oil
properties in the United States. Through our operating subsidiaries, we own
properties in the southern portion of the Appalachian Basin, primarily in
southeast Kentucky and northeast Tennessee, in the Permian Basin, primarily in
west Texas and southeastern New Mexico, and in south Texas.
  References
in this report to (1) “us,” “we,” “our,” “the Company,” “Vanguard” or “VNR” are
to Vanguard Natural Resources, LLC and its subsidiaries, including Vanguard
Natural Gas, LLC, Trust Energy Company, LLC (“TEC”), VNR Holdings, Inc.
(“VNRH”), Ariana Energy, LLC (“Ariana Energy”) and Vanguard Permian, LLC
(“Vanguard Permian”) and (2) “Vanguard Predecessor,” “Predecessor,” “our
operating subsidiary” or “VNG” are to Vanguard Natural Gas, LLC.
  We were
formed in October 2006 but effective January 5, 2007, Vanguard Natural Gas, LLC
(formerly Nami Holding Company, LLC) was separated into our operating subsidiary
and Vinland Energy Eastern, LLC ("Vinland"). As part of the separation, we
retained all of our Predecessor’s proved producing wells and associated
reserves. We also retained 40% of our Predecessor’s working interest in the
known producing horizons in approximately 95,000 gross undeveloped acres and a
contract right to receive approximately 99% of the net proceeds from the sale of
production from certain producing gas and oil wells. In the separation, Vinland
was conveyed the remaining 60% of our Predecessor’s working interest in the
known producing horizons in this acreage, 100% of our Predecessor’s working
interest in depths above and 100 feet below our known producing horizons, all of
our gathering and compression assets, and all employees other than our President
and Chief Executive Officer and our Executive Vice President and Chief Financial
Officer. Vinland operates all of our existing wells in Appalachia and all of the
wells that we drill in Appalachia. We refer to these events as the
"Restructuring."
  1.
              Summary
      of Significant Accounting Policies
 
 The
accompanying financial statements are unaudited and were prepared from our
records. We derived the consolidated balance sheet as of December 31, 2008,
from the audited financial statements filed in our 2008 Annual Report on
Form 10-K.  Because this is an interim period filing presented
using a condensed format, it does not include all of the disclosures required by
U.S. generally accepted accounting principles (“GAAP”). You should read
this Quarterly Report on Form 10-Q along with our 2008 Annual Report on
Form 10-K, which contains a summary of our significant accounting policies and
other disclosures. In our opinion, we have made all adjustments which are of a
normal, recurring nature to fairly present our interim period results.
Information for interim periods may not be indicative of our operating results
for the entire year. Additionally, our financial statements for prior periods
include reclassifications that were made to conform to the current period
presentation. Those reclassifications did not impact our reported net income,
members’ equity, or net cash flows.
 
 As of
March 31, 2009, our significant accounting policies are consistent with those
discussed in Note 1 of our consolidated financial statements contained in our
2008 Annual Report on Form 10-K.
 
 (a)
              Basis
      ofPresentation
      andPrinciples
      ofConsolidation:
 
 The
consolidated financial statements as of March 31, 2009 and December 31, 2008 and
for the three months ended March 31, 2009 and 2008 include our accounts and
those of our wholly owned subsidiaries. We present our financial statements
in accordance with GAAP.  All intercompany transactions and balances
have been eliminated upon consolidation.
 
 (b)
              Recently
      Adopted Accounting Pronouncements:
 
 On
January 1, 2008, we adopted Statement of Financial Accounting Standards No. 157
“FairValue Measurements” (“SFAS
157”) as it relates to financial assets and financial liabilities. In February
2008, the Financial Accounting Standards Board (FASB) issued FASB Staff Position
No. FAS 157-2, “Effective Date
of FASB Statement No. 157” (“FSP 157-2”), which delayed the effective
date of SFAS 157 for all non-financial assets and non-financial liabilities,
except those that are recognized or disclosed at fair value in the financial
statements on at least an annual basis, until January 1, 2009 for calendar
year-end entities. Also in February 2008, the FASB issued FASB Staff Position
No. FAS 157-1, “Application of
FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting
Pronouncements That Address Fair Value Measurements for Purposes of Lease
Classification or Measurement under Statement 13” (“FSP 157-1”),which states that
Statement of Financial Accounting Standards No. 13, “Accounting for Leases,”
(“SFAS 13”) and other accounting pronouncements that address fair value
measurements for purposes of lease classification or measurement under SFAS 13
are excluded from the provisions of SFAS 157, except for assets and liabilities
related to leases assumed in a business combination that are required to be
measured at fair value under Statement of Financial Accounting Standards No.
141, “Business
Combinations,” (“SFAS 141”) or Statement of Financial Accounting
Standards No. 141 (revised 2007), “Business Combinations,”
(“SFAS 141(R)”). In October 2008, the FASB issued FASB Staff Position No. FAS
157-3, “Determining the Fair
value of a Financial Asset in a Market That Is Not Active” (“FSP 157-3”),
which clarifies the application of SFAS 157 when the market of a financial asset
is inactive and provides an example to illustrate key considerations in
determining the fair value of a financial asset when the market for that
financial asset is not active. The guidance in FSP 157-3 was effective
immediately upon issuance and had no impact on our consolidated financial
statements.
 7
 VANGUARD
NATURAL RESOURCES, LLC AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 SFAS 157
defines fair value, establishes a framework for measuring fair value and expands
disclosures about fair value measurements. The provisions of this standard apply
to other accounting pronouncements that require or permit fair value
measurements and are to be applied prospectively with limited exceptions. In
adopting SFAS 157 on January 1, 2008, as it relates to financial assets and
financial liabilities, we determined that the impact of these additional
assumptions on fair value measurements did not have a material effect on our
financial position or results of operations. The adoption of SFAS 157 on January
1, 2009, as it relates to nonfinancial assets and nonfinancial liabilities, did
not have a material impact on our financial position or results
of operations. See Note 5. Fair Value Measurements for
further discussion.
 
 In April
2009, the FASB issued FASB Staff Position No. FAS 157-4, “Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly” (“FSP
157-4”). FSP 157-4 provides additional guidance on estimating fair value when
the volume and level of activity for an asset or liability have significantly
decreased in relation to normal activity for the asset or liability. FSP 157-4
also provides additional guidance on circumstances that may indicate that a
transaction is not orderly. FSP 157-4 is effective for interim and annual
periods ending after June 15, 2009. We do not believe the adoption of FSP
157-4 will materially impact our consolidated financial statements.
 
 In
December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations”(“SFAS
141(R)”), which replaces SFAS No. 141“Business Combinations”
(“SFAS 141.”) SFAS 141(R) establishes principles and requirements for how an
acquirer recognizes and measures in its financial statements the identifiable
assets acquired, the liabilities assumed, any non-controlling interest in the
acquiree and the goodwill acquired. The Statement also establishes disclosure
requirements that will enable users to evaluate the nature and financial effects
of the business combination. SFAS 141(R) is effective for acquisitions that
occur in an entity’s fiscal year that begins after December 15, 2008. Effective
January 1, 2009, we adopted SFAS 141(R). However, since we did not consummate
any business combinations during the three months ended March 31, 2009, the
adoption did not affect our consolidated financial statements.
 
 In April
2009, the FASB issued FASB Staff Position No. FAS 141(R)-1, “Accounting for Assets Acquired and
Liabilities Assumed in a Business Combination That Arise from
Contingencies.” This Staff Position amends the provisions related to the
initial recognition and measurement, subsequent measurement and disclosure of
assets and liabilities arising from contingencies in a business combination
under SFAS No. 141(R.) This Staff Position carries forward the requirements in
SFAS 141 for acquired contingencies, which would require that such contingencies
be recognized at fair value on the acquisition date if fair value can be
reasonably estimated during the allocation period. Otherwise, companies would
typically account for the acquired contingencies in accordance with SFAS No. 5,
“Accounting for
Contingencies.”This Staff Position has the same effective date as SFAS
141(R), and the adoption did not affect our consolidated financial
statements.
 
 In
December 2007, the FASB issued SFAS No. 160,“Non-controlling Interests in
Consolidated Financial Statements—an amendment of ARB No. 51” (“SFAS
160”). SFAS 160 requires that accounting and reporting for minority interests
will be recharacterized as non-controlling interests and classified as a
component of equity. SFAS 160 also establishes reporting requirements that
provide sufficient disclosures that clearly identify and distinguish between the
interests of the parent and the interests of the non-controlling
owners. SFAS 160 applies to all entities that prepare consolidated
financial statements, except not-for-profit organizations, but will affect only
those entities that have an outstanding non-controlling interest in one or more
subsidiaries or that deconsolidate a subsidiary. This statement is effective as
of the beginning of an entity’s first fiscal year beginning after December 15,
2008. Effective January 1, 2009, we adopted SFAS 160; however, since we do not
own any “non-controlling interests,” the adoption did not affect our
consolidated financial statements.
 
 In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative
Instruments and Hedging Activities” (“SFAS 161”). SFAS 161 is intended to
improve financial reporting about derivative instruments and hedging activities
by requiring enhanced disclosures to enable investors to better understand their
effects on an entity’s financial position, financial performance, and cash
flows. SFAS 161 achieves these improvements by requiring disclosure of the fair
values of derivative instruments and their gains and losses in a tabular format.
It also provides more information about an entity’s liquidity by requiring
disclosure of derivative features that are credit risk-related. Finally, it
requires cross-referencing within footnotes to enable financial statement users
to locate important information about derivative instruments. SFAS 161 is
effective for financial statements issued for fiscal years and interim periods
beginning after November 15, 2008. Effective January 1, 2009, we adopted SFAS
161. The adoption did not have a material impact on our consolidated financial
statements. See Note 4. Price
Risk Management Activitiesfor further discussion.
  8
 VANGUARD
NATURAL RESOURCES, LLC AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles” (“SFAS 162”). This statement identifies the
sources of accounting principles and the framework for selecting the principles
to be used in the preparation of financial statements in conformity with GAAP in
the United States. This statement became effective on November 15, 2008.
The adoption of SFAS 162 did not have a material effect on our consolidated
financial statements.
 (c)
              New
      Pronouncements Issued But Not Yet
Adopted:
  In
December 2008, the SEC published a Final Rule, “Modernization of Oil and Gas
Reporting.”The new rule permits the use of new technologies to determine
proved reserves if those technologies have been demonstrated to lead to reliable
conclusions about reserves volumes. The new requirements also will allow
companies to disclose their probable and possible reserves to investors. In
addition, the new disclosure requirements require companies to: (i) report the independence
and qualifications of its reserves preparer or auditor, (ii) file reports when a third
party is relied upon to prepare reserves estimates or conducts a reserves audit,
and (iii) report oil
and gas reserves using an average price based upon the prior 12-month period
rather than year-end prices. The use of average prices will affect future
impairment and depletion calculations. The new disclosure requirements are
effective for annual reports on Forms 10-K for fiscal years ending on or after
December 31, 2009. A company may not apply the new rules to disclosures in
quarterly reports prior to the first annual report in which the revised
disclosures are required. We have not yet determined the impact of this Final
Rule, which will vary depending on changes in commodity prices, on our
disclosures, financial position, or results of operations.
 
 In April
2009, the FASB issued FSP SFAS 107-1 and APB 28-1, “Interim Disclosures About Fair
Value of Financial Instruments” (“FSP 107-1.”) FSP 107-1 amends SFAS No.
107, “Disclosures about Fair
Values of Financial Instruments” and Accounting Principles Board Opinion
No. 28, “Interim Financial
Reporting,” to require disclosures about fair value of financial
instruments in interim financial statements. FSP 107-1 is effective for interim
periods ending after June 15, 2009, with early adoption permitted for periods
ending after March 15, 2009. We will adopt the disclosure requirements of FSP
107-1 in the third quarter of fiscal 2009.
 
 (d)
              Use
      of Estimates:
 
 The
preparation of financial statements in conformity with GAAP requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. The most significant estimates pertain to proved
natural gas and oil reserves and related cash flow estimates used in impairment
tests of natural gas and oil properties, the fair value of derivative contracts
and asset retirement obligations, accrued natural gas and oil revenues and
expenses, as well as estimates of expenses related to depreciation, depletion,
amortization, and accretion. Actual results could differ from those
estimates.
 
 2.
              Acquisition
 
 On
December 21, 2007, we entered into a Purchase and Sale Agreement with the Apache
Corporation for the purchase of certain oil and natural gas properties located
in ten separate fields in the Permian Basin of west Texas and southeastern New
Mexico. The purchase price for said assets was $78.3 million with an effective
date of October 1, 2007. We completed this acquisition on January 31, 2008 for
an adjusted purchase price of $73.4 million, subject to customary post closing
adjustments. The post closing adjustments reduced the final purchase price to
$71.5 million and included a purchase price adjustment of $6.8 million for the
cash flow from the acquired properties for the period between the effective
date, October 1, 2007, and the final settlement date. As part of this
acquisition, we assumed fixed-price oil swaps covering approximately 90% of the
estimated proved developed producing oil reserves through 2011 at a weighted
average price of $87.29. The fair value of these fixed-price oil swaps was a
liability of $1.1 million at January 31, 2008. This acquisition was funded with
borrowings under our existing reserve-based credit facility.
 
 On July
18, 2008, we entered into a Purchase and Sale Agreement with Segundo Navarro
Drilling, Ltd., a wholly owned subsidiary of the Lewis Energy Group, for the
acquisition of certain natural gas and oil properties located in the Dos
Hermanos Field in Webb County, Texas. The purchase price for said assets was
$53.4 million with an effective date of June 1, 2008. We completed this
acquisition on July 28, 2008 for an adjusted purchase price of $51.4 million,
subject to customary post-closing adjustments to be determined. This acquisition
was funded with $30.0 million of borrowings under our reserve-based credit
facility and through the issuance of 1,350,873 common units of the Company
valued at $21.4 million. Upon closing this transaction, we assumed natural gas
swaps and collars based on Houston Ship Channel pricing for approximately 85% of
the estimated gas production from existing producing wells for the period
beginning July 2008 through December 2011 which had a fair value of $3.6 million
on July 28, 2008.
  9
 VANGUARD
NATURAL RESOURCES, LLC AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 The
following unaudited pro forma results for the three months ended March 31, 2008
show the effect on our consolidated results of operations as if the January 2008
acquisition and July 2008 acquisition had occurred on January 1, 2008. The pro
forma results for the 2008 period presented are the results of combining our
statement of operations with the revenues and direct operating expenses of the
oil and gas properties acquired adjusted for (1) assumption of asset retirement
obligations and accretion expense for the properties acquired, (2) depletion
expense applied to the adjusted basis of the properties acquired using the
purchase method of accounting, (3) interest expense on added borrowings
necessary to finance the acquisition, and (4) the impact of common units issued
to partially finance the July 2008 acquisition. The pro forma information is
based upon numerous assumptions, and is not necessarily indicative of future
results of operations:
 Three
      Months Ended
                                  March
      31, 2008
                                  Proforma
                                  (in
      thousands,
                                  except
      per unit data)
                                  (unaudited)Total
      revenues
                                
                                $
                                (2,700
                                )Net
      loss
                                
                                $
                                (14,331
                                )Net
      loss per unit:Common &
      Class B units – basic
                                
                                $
                                (1.14
                                )Common &
      Class B units – diluted
                                
                                $
                                (1.14
                                )
 
 3.
              Credit
      Facility and Long-Term Debt
 
 Our
credit facility and long-term debt consisted of the following:
  Amount Outstanding
                                                                      (in
      thousands)Description
                                                                    InterestRate
                                                                    MaturityDate
                                                                    
                                                                    March
      31,
                                                                      2009
                                                                    
                                                                    
                                                                    December31,
                                                                      2008Senior secured
      reserve-based credit facility
                                                                    Variable
                                                                    March 31, 2011
                                                                    
                                                                    $
                                                                    136,500
                                                                    
                                                                    
                                                                    $
                                                                    135,000
  Senior
Secured Reserve-Based Credit Facility
  In
January 2007, we entered into a four-year revolving credit facility
(“reserve-based credit facility”) with Citibank, N.A. and BNP Paribas. All of
our Predecessor’s outstanding debt was repaid with borrowings under this
reserve-based credit facility. The available credit line (“Borrowing Base”) is
subject to adjustment from time to time but not less than on a semi-annual basis
based on the projected discounted present value (as determined by independent
petroleum engineers) of estimated future net cash flows from certain of our
proved natural gas and oil reserves. The reserve-based credit facility is
secured by a first lien security interest in all of our natural gas and oil
properties. Additional borrowings were made in January 2008 pursuant to the
acquisition of natural gas and oil properties in the Permian Basin. In February
2008, our reserve-based credit facility was amended and restated to extend the
maturity from January 3, 2011 to March 31, 2011, increase the facility amount
from $200.0 million to $400.0 million, increase our borrowing base from $110.5
million to $150.0 million and add two additional financial institutions as
lenders, Wachovia Bank, N.A. and The Bank of Nova Scotia. In May 2008, our
reserved-based credit facility was amended in response to a potential
acquisition that, ultimately, did not occur. As a result, none of the
provisions included in this amendment went into effect. In October 2008, we
amended our reserve-based credit facility, which set our borrowing base under
the facility at $175.0 million pursuant to our semi-annual redetermination and
added a new lender, BBVA Compass Bank. In February 2009, our reserve-based
credit facility was amended to allow us to repurchase up to $5.0 million of our
own units. Indebtedness under the reserve-based credit facility totaled $136.5
million at March 31, 2009.
 
 10
 VANGUARD
NATURAL RESOURCES, LLC AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 Interest
rates under the reserve-based credit facility are based on Eurodollar (LIBOR) or
ABR (Prime) indications, plus a margin. At March 31, 2009 the applicable margin
and other fees increase as the utilization of the borrowing base increases as
follows:
  Borrowing
      Base Utilization Percentage
                      
                      <33%
                      
                      >33%
      <66%
                      
                      >66%
      <85%
                      
                      >85%Eurodollar
      Loans
                      
                      1.500%
                      
                      1.750%
                      
                      2.000%
                      
                      2.125%ABR
      Loans
                      
                      0.000%
                      
                      0.250%
                      
                      0.500%
                      
                      0.750%Commitment
      Fee Rate
                      
                      0.250%
                      
                      0.300%
                      
                      0.375%
                      
                      0.375%Letter
      of Credit Fee
                      
                      1.000%
                      
                      1.250%
                      
                      1.500%
                      
                      1.750%
 
 Our
reserve-based credit facility contains a number of customary covenants that
require us to maintain certain financial ratios, limit our ability to incur
additional debt, sell assets, create liens, or make distributions to our
unitholders when our outstanding borrowings exceed 90% of our borrowing base.
Additionally, our reserve-based credit facility stipulates that a change of
control is not permitted, which includes (1) an acquisition of ownership,
directly or indirectly, beneficially or of record, by any person or group
(within the meaning of the Securities Exchange Act of 1934 and the rules of the
SEC) of equity interests representing more than 25% of the aggregate ordinary
voting power represented by our issued and outstanding equity interests other
than by Majeed S. Nami or his affiliates or (2) the replacement of a majority of
our directors by persons not approved by our board of directors. At March 31,
2009, we were in compliance with our debt covenants.
 
 The
Credit Agreement required us to enter into a commodity price hedge position
establishing certain minimum fixed prices for anticipated future production
equal to approximately 84% of our projected production from proved developed
producing reserves from the second half of 2007 through 2011. Also, the Credit
Agreement required that certain production put option contracts for the years
2007, 2008, and 2009 be put in place to create a price floor for anticipated
production from new wells drilled. SeeNote 4.Price Risk Management
Activities for further discussion.
 
 4.
              Price
      Risk Management Activities
 
 We have
entered into derivative contracts with counterparties that are lenders under our
reserve-based credit facility, Citibank N.A., BNP Paribas, The Bank of Nova
Scotia, and Wachovia Bank, N.A., to hedge price risk associated with a portion
of our natural gas and oil production. While it is never management’s intention
to hold or issue derivative instruments for speculative trading purposes,
conditions sometimes arise where actual production is less than estimated which
has, and could, result in overhedged volumes. Under fixed-priced commodity swap
agreements, we receive a fixed price on a notional quantity in exchange for
paying a variable price based on a market index, such as the Columbia Gas
Appalachian Index (‘TECO Index”), Henry Hub, or Houston Ship Channel for natural
gas production and the West Texas Intermediate Light Sweet for oil production.
Under put option agreements, we pay the counterparty an option premium, equal to
the fair value of the option at the purchase date. At settlement date we receive
the excess, if any, of the fixed floor over floating rate. Under collar
contracts, we pay the counterparty if the market price is above the ceiling
price and the counterparty pays us if the market price is below the floor price
on a notional quantity. The collars and put options for natural gas are settled
based on the NYMEX price for natural gas at Henry Hub or Houston Ship
Channel.
 
 Under
SFAS 133, all derivative instruments are recorded on the consolidated balance
sheets at fair value as either short-term or long-term assets or liabilities
based on their anticipated settlement date. We net derivative assets and
liabilities for counterparties where we have a legal right of
offset. Changes in the derivatives’ fair value are recognized currently in
earnings unless specific hedge accounting criteria are met. For qualifying
cash flow hedges, the unrealized gain or loss on the derivative is deferred in
accumulated other comprehensive income (loss) in the equity section of the
consolidated balance sheets to the extent the hedge is effective. Gains and
losses on cash flow hedges included in accumulated other comprehensive income
(loss) are reclassified to gains (losses) on commodity cash flow hedges or
gains (losses) on interest rate derivative contracts in the period that the
related production is delivered or the contract settles. The unrealized
gains (losses) on derivative contracts that do not qualify for hedge accounting
treatment are recorded as gains (losses) on other commodity derivative contracts
or gains (losses) on interest rate derivative contracts in the consolidated
statements of operations.
 
 In
February 2008, as part of the Permian Basin acquisition, we assumed fixed-price
oil swaps covering approximately 90% of the estimated proved developed producing
oil production through 2011 at a weighted average price of $87.29. Also, in
February 2008, we sold calls (or set a ceiling price) which effectively collared
2,000,000 MMBtu of gas production in 2008 through 2009 which was previously only
subject to a put (or price floor), we reset the price on 2,387,640 MMBtu of
natural gas swaps settling in 2010 from $7.53 to $8.76 per MMBtu, and we entered
into a 2012 fixed-price oil swap at $80.00 for 87% of our estimated proved
developed production. In April 2008, we reset the price on 800,000 MMBtu of
natural gas puts settling from May 1, 2008 to December 31, 2008 from $7.50 to
$9.00 per MMBtu at a cost to us of $0.3 million which was funded with cash on
hand. In July 2008, in connection with the south Texas acquisition, we assumed
natural gas swaps and collars based on Houston Ship Channel pricing for
approximately 85% of the estimated gas production from our existing producing
wells for the period beginning July 2008 through December 2011.
 
 11
 VANGUARD
NATURAL RESOURCES, LLC AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 In
November 2008, in connection with preparing our quarterly report for third
quarter 2008 and discussion with BDO Seidman, LLP, our independent registered
public accounting firm, our management and the Audit Committee of our Board of
Directors concluded that the contemporaneous formal documentation we had
prepared to support our initial hedge designations and subsequent assessments
for ineffectiveness in connection with our natural gas and oil hedging program
in 2008 did not meet the technical requirements to qualify for cash flow hedge
accounting treatment in accordance with SFAS 133. The primary reasons for this
determination were that our formal hedge documentation lacked specificity of the
hedged cash flow and the quantitative subsequent assessments for ineffectiveness
were insufficient. Therefore, the cash flow designations failed to meet hedge
documentation requirements for cash flow hedge accounting treatment. In
addition, the natural gas derivative swap contracts entered into in 2007 were
de-designated as cash flow hedges in the first quarter of 2008 due to an
overhedged position in natural gas which made them ineffective. As a result, we
now recognize changes in our derivatives’ fair values in current earnings under
gains (losses) on other commodity derivative contracts. In addition, the net
derivative loss at December 31, 2007 related to the de-designated natural gas
derivate swap contracts entered into in 2007 is reported in accumulated other
comprehensive income until the month in which the transactions settle, at which
time it is recognized as gains (losses) on commodity cash flow
hedges.
 
 In
February 2009, we liquidated our 2012 oil swap and entered into new 2010 and
2011 natural gas swap and collar transactions. Specifically, a fixed price NYMEX
natural gas swap for January through September 2010 and April through September
2011 at $8.04 and $7.85, respectively, was executed for 2,000 MMBtu/day. In
addition, a 2,000 MMBtu/day NYMEX natural gas collar with a floor price of $7.50
and a ceiling price of $9.00 for October 2010 through March 2011 and October
2011 through December 2011 was executed. These natural gas derivatives were
obtained at prices above the current market by using the proceeds of the
liquidation of the 2012 oil swap.
 
 As of
March 31, 2009, we have open commodity derivative contracts covering our
anticipated future production as follows:
  Swap
Agreements
  Gas
                                                                                                                                  
                                                                                                                                  OilContract
      Period
                                                                                                                                  MMBtu
                                                                                                                                  
                                                                                                                                  Weighted
                                                                                                                                    Average
                                                                                                                                    FixedPrice
                                                                                                                                  
                                                                                                                                  Bbls
                                                                                                                                  
                                                                                                                                  WTI
                                                                                                                                    PriceApril
      1, 2009 - December 31, 2009
                                                                                                                                  2,672,864
                                                                                                                                  
                                                                                                                                  $
                                                                                                                                  9.30
                                                                                                                                  
                                                                                                                                  135,000
                                                                                                                                  
                                                                                                                                  $
                                                                                                                                  87.23January
      1, 2010 - December 31, 2010
                                                                                                                                  3,782,040
                                                                                                                                  
                                                                                                                                  $
                                                                                                                                  8.95
                                                                                                                                  
                                                                                                                                  164,250
                                                                                                                                  
                                                                                                                                  $
                                                                                                                                  85.65January
      1, 2011 - December 31, 2011
                                                                                                                                  3,328,312
                                                                                                                                  
                                                                                                                                  $
                                                                                                                                  7.83
                                                                                                                                  
                                                                                                                                  151,250
                                                                                                                                  
                                                                                                                                  $
                                                                                                                                  85.50
 
 Put Option
Contracts
 
 Contract
      Period
                        Volume in MMBtu
                        
                        Purchased NYMEX
                          Price FloorApril
      1, 2009 - December 31, 2009
                        613,041
                        
                        $
                        7.50
 
 Collars
 
 Gas
                    
                    
                    OilMMBtu
                    
                    
                    Floor
                    
                    
                    Ceiling
                    
                    
                    Bbls
                    
                    
                    Floor
                    
                    
                    CeilingProduction
      Period:April
      1, 2009 - December 31, 2009
                    
                    
                    749,997
                    
                    
                    $
                    7.50
                    
                    
                    $
                    9.00
                    
                    
                    
                    27,500
                    
                    
                    $
                    100.00
                    
                    
                    $
                    127.00January
      1, 2010 - December 31, 2010
                    
                    
                    914,000
                    
                    
                    $
                    7.90
                    
                    
                    $
                    9.24
                    
                    
                    
                    —
                    
                    
                    $
                    —
                    
                    
                    $
                    —January
      1, 2011 - December 31, 2011
                    
                    
                    364,000
                    
                    
                    $
                    7.50
                    
                    
                    $
                    9.00
                    
                    
                    
                    —
                    
                    
                    $
                    —
                    
                    
                    $
                    —
  12
 VANGUARD
NATURAL RESOURCES, LLC AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 Interest Rate
Swaps
 
 We enter
into interest rate swap agreements, which require exchanges of cash flows that
serve to synthetically convert a portion of our variable interest rate exposures
to fixed interest rates.
 
 From
December 2007 through March 2008, we entered into interest rate swap agreements
which effectively fixed the LIBOR rate at 2.66 % to 3.88% on $60.0 million of
borrowings. In August 2008, we entered into two interest rate basis swaps which
changed the reset option from three month LIBOR to one month LIBOR on the total
$60.0 million of outstanding interest rate swaps. By doing so, we reduced our
borrowing cost based on three month LIBOR by 14 basis points on $20.0 million of
borrowings for a one year period starting September 10, 2008 and 12 basis points
on $40.0 million of borrowings for a one year period starting October 31, 2008.
As a result of these two basis swaps, we chose to de-designate the interest rate
swaps as cash flow hedges as the terms of the new contracts no longer matched
the terms of the original contracts, thus causing the interest rate hedges to be
ineffective. Beginning in the third quarter of 2008, we recorded changes in the
fair value of our interest rate derivatives in current earnings under gains
(losses) on interest rate derivative contracts. The net unrealized gain at June
30, 2008 related to the de-designated cash flow hedges is reported in
accumulated other comprehensive income and later reclassified to earnings in the
month in which the transactions settle. In December 2008, we amended three
existing interest rate swap agreements and entered into one new agreement which
fixed the LIBOR rate at 1.85% on $10.0 million of borrowings through December
2010. The first amended agreement reduced the fixed LIBOR rate from 3.88% to
3.35% on $20.0 million and the maturity was extended two additional years to
December 10, 2012. In addition, the second amended agreement reset the notional
amount on the March 31, 2011 swap from $10.0 million to $20.0 million and also
reduced the rate from 2.66% to 2.08%. The final amended agreement reset the
notional amount on the January 31, 2011 swap from $10.0 million to $20.0
million, reduced the rate from 3.00% to 2.38% and also extended the maturity two
additional years to 2013.
 
 As of
March 31, 2009, we have open interest rate derivative contracts as
follows:
 
 Notional
                            Amount
                            (in
      thousands)
                          
                          Fixed
                            Libor
                            RatesPeriod:April
      1, 2009 to December 10, 2010
                          
                          $
                          10,000
                          
                          
                          
                          1.50
      %April
      1, 2009 to December 20, 2010
                          
                          $
                          10,000
                          
                          
                          
                          1.85
      %April
      1, 2009 to January 31, 2011
                          
                          $
                          20,000
                          
                          
                          
                          3.00
      %April
      1, 2009 to March 31, 2011
                          
                          $
                          20,000
                          
                          
                          
                          2.08
      %April
      1, 2009 to December 10, 2012
                          
                          $
                          20,000
                          
                          
                          
                          3.35
      %April
      1, 2009 to January 31, 2013
                          
                          $
                          20,000
                          
                          
                          
                          2.38
      %April
      1, 2009 to September 10, 2009 (Basis Swap)
                          
                          $
                          20,000
                          
                          
                          LIBOR
      1M vs. LIBOR 3MApril
      1, 2009 to October 31, 2009 (Basis Swap)
                          
                          $
                          40,000
                          
                          
                          LIBOR
      1M vs. LIBOR 3M
 
 Balance Sheet
Presentation
 
 Our
commodity derivatives and interest rate swap derivatives are presented on a net
basis in “derivative assets” and “derivative liabilities” on the consolidated
balance sheets. The following summarizes the fair value of derivatives
outstanding on a gross basis.
 
 March
      31, 2009
                                                                                                                                        December
      31, 2008(in
      thousands)Assets:Commodity
      derivatives
                                                                                                                                        
                                                                                                                                        $
                                                                                                                                        51,452
                                                                                                                                        
                                                                                                                                        $
                                                                                                                                        39,875$
                                                                                                                                        51,452
                                                                                                                                        
                                                                                                                                        $
                                                                                                                                        39,875Liabilities:Commodity
      derivatives
                                                                                                                                        
                                                                                                                                        $
                                                                                                                                        (4,259
                                                                                                                                        )
                                                                                                                                        $
                                                                                                                                        (1,942
                                                                                                                                        )Interest
      rate swaps
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        (2,843
                                                                                                                                        )
                                                                                                                                        
                                                                                                                                        (2,799
                                                                                                                                        )$
                                                                                                                                        (7,102
                                                                                                                                        )
                                                                                                                                        $
                                                                                                                                        (4,741
                                                                                                                                        )
 13
 VANGUARD
NATURAL RESOURCES, LLC AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 By using
derivative instruments to economically hedge exposures to changes in commodity
prices and interest rates, we expose ourselves to credit risk and market
risk. Credit risk is the failure of the counterparty to perform under the
terms of the derivative contract. When the fair value of a derivative
contract is positive, the counterparty owes us, which creates credit risk. Our
counterparties are participants in our reserve-based credit facility (See Note
3. Credit Facilities and
Long-Term Debt for further discussion) which is secured by
our natural gas and oil properties; therefore, we are not required to post
any collateral. The maximum amount of loss due to credit risk that we would
incur if our counterparties failed completely to perform according to the terms
of the contracts, based on the gross fair value of financial instruments, was
approximately $51.5 million at March 31, 2009.
 
 We
minimize the credit risk in derivative instruments by: (i) entering into
derivative instruments only with counterparties that are also lenders in
our reserve-based credit facility and (ii) monitoring the
creditworthiness of our counterparties on an ongoing basis. In accordance
with our standard practice, our commodity and interest rate swap derivatives are
subject to counterparty netting under agreements governing such derivatives and
therefore the risk of such loss is somewhat mitigated as of March 31,
2009.
  Gain (Loss) on
Derivatives
  Gains and
losses on derivatives are reported on the consolidated statement of operations
in “gain (loss) on other commodity derivative contracts” and “loss on interest
rate derivative contracts” and include realized and unrealized gains
(losses). Realized gains (losses) represent amounts related to the
settlement of derivative instruments. Unrealized gains (losses) represent
the change in fair value of the derivative instruments and are non-cash
items.
  The
following presents our reported gains and losses on derivative
instruments:
 
 Three Months Ended
                        March
      31,2009
                      
                      
                      2008(in
      thousands)Realized
      gains (losses):Other
      commodity derivatives
                      
                      $
                      7,820
                      
                      
                      $
                      (1,562
                      )Interest
      rate swaps
                      
                      
                      (336
                      )
                      
                      
                      (5
                      )$
                      7,484
                      
                      
                      $
                      (1,567
                      )Unrealized
      gains (losses):Other
      commodity derivatives
                      
                      $
                      9,829
                      
                      
                      $
                      (20,210
                      )Interest
      rate swaps
                      
                      
                      (43
                      )
                      
                      
                      —$
                      9,786
                      
                      
                      $
                      (20,210
                      )Total
      gains (losses):Other
      commodity derivatives
                      
                      $
                      17,649
                      
                      
                      $
                      (21,772
                      )Interest
      rate swaps
                      
                      
                      (379
                      )
                      
                      
                      (5
                      )$
                      17,270
                      
                      
                      $
                      (21,777
                      )
  5.
              Fair
      Value Measurements
 
 As
discussed inNote 1.Summary of Significant
Accounting Policies (b), we adopted SFAS 157 for financial assets and financial
liabilities as of January 1, 2008 and for non-financial assets and liabilities
as of January 1, 2009. SFAS 157 does not expand the use of fair value
measurements, but rather, provides a framework for consistent measurement of
fair value for those assets and liabilities already measured at fair value under
other accounting pronouncements. Certain specific fair value measurements, such
as those related to share-based compensation, are not included in the scope of
SFAS 157. Primarily, SFAS 157 is applicable to assets and liabilities related to
financial instruments, to some long-term investments and liabilities, to initial
valuations of assets and liabilities acquired in a business combination, and to
long-lived assets carried at fair value subsequent to an impairment write-down.
It does not apply to oil and natural gas properties accounted for under the full
cost method, which are subject to impairment based on SEC rules. SFAS 157
applies to assets and liabilities carried at fair value on the consolidated
balance sheet, as well as to supplemental fair value information about financial
instruments not carried at fair value.
 
 The
estimated fair values of our financial instruments closely approximate the
carrying amounts as discussed below:
 14
 VANGUARD
NATURAL RESOURCES, LLC AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 Cash and cash equivalents, accounts
receivable, other current assets, accounts payable, payables to affiliates, and
accrued expenses.The carrying amounts approximate fair value due to the
short maturity of these instruments.
 
 Long-term debt.The carrying
amount of our reserve-based credit facility approximates fair value because our
current borrowing rate does not materially differ from market rates for similar
bank borrowings.
 
 We have
applied the provisions of SFAS 157 to assets and liabilities measured at fair
value on a recurring basis. This includes natural gas, oil and interest rate
derivatives contracts. SFAS 157 provides a definition of fair value and a
framework for measuring fair value, as well as expanding disclosures regarding
fair value measurements. The framework requires fair value measurement
techniques to include all significant assumptions that would be made by willing
participants in a market transaction. These assumptions include certain factors
not consistently provided for previously by those companies utilizing fair value
measurement; examples of such factors would include our own credit standing
(when valuing liabilities) and the buyer’s risk premium. In adopting SFAS 157,
we determined that the impact of these additional assumptions on fair value
measurements did not have a material effect on our financial position or results
of operations.
 
 SFAS 157
defines fair value as the exchange price that would be received for an asset or
paid to transfer a liability (an exit price) in the principal or most
advantageous market for the asset or liability in an orderly transaction between
market participants on the measurement date. SFAS 157 provides a hierarchy of
fair value measurements, based on the inputs to the fair value estimation
process. It requires disclosure of fair values classified according to the
“levels” described below. The hierarchy is based on the reliability of the
inputs used in estimating fair value and requires an entity to maximize the use
of observable inputs and minimize the use of unobservable inputs when measuring
fair value. The framework for fair value measurement assumes that transparent
“observable” (Level 1) inputs generally provide the most reliable evidence of
fair value and should be used to measure fair value whenever available. The
classification of a fair value measurement is determined based on the lowest
level (with Level 3 as the lowest) of significant input to the fair value
estimation process.
 
 The
standard describes three levels of inputs that may be used to measure fair
value:
 Level
      1
              
              Quoted
      prices for identical instruments in active markets.Level 
      2
              
              Quoted
      market prices for similar instruments in active markets; quoted prices for
      identical or similar instruments in markets that are not active; and
      model-derived valuations in which all significant inputs and significant
      value drivers are observable in active markets.Level 3
              
              Valuations
      derived from valuation techniques in which one or more significant inputs
      or significant value drivers are unobservable. Level 3 assets and
      liabilities generally include financial instruments whose value is
      determined using pricing models, discounted cash flow methodologies, or
      similar techniques, as well as instruments for which the determination of
      fair value requires significant management judgment or estimation or for
      which there is a lack of transparency as to the inputs
    used.
 
 As
required by SFAS 157, financial assets and liabilities are classified based on
the lowest level of input that is significant to the fair value measurement. Our
assessment of the significance of a particular input to the fair value
measurement requires judgment and may affect the valuation of the fair value of
assets and liabilities and their placement within the fair value hierarchy
levels. Our commodity derivative instruments consist of swaps and options. We
estimate the fair values of the swaps based on published forward commodity price
curves for the underlying commodities as of the date of the estimate. We
estimate the option value of the contract floors and ceilings using an option
pricing model which takes into account market volatility, market prices and
contract parameters. The discount rate used in the discounted cash flow
projections is based on published LIBOR rates, Eurodollar futures rates and
interest swap rates. In order to estimate the fair value of our interest rate
swaps, we use a yield curve based on money market rates and interest rate swaps,
extrapolate a forecast of future interest rates, estimate each future cash flow,
derive discount factors to value the fixed and floating rate cash flows of each
swap, and then discount to present value all known (fixed) and forecasted
(floating) swap cash flows. Curve building and discounting techniques used to
establish the theoretical market value of interest bearing securities are based
on readily available money market rates and interest rate swap market data. To
extrapolate future cash flows, discount factors incorporating our
counterparties’ and our credit standing are used to discount future cash flows.
We have classified the fair values of all its derivative contracts as Level
2.
 
 15
 VANGUARD
NATURAL RESOURCES, LLC AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 Financial
assets and financial liabilities measured at fair value on a recurring basis are
summarized below:
  March 31, 2009
                      (in
      thousands)Fair Value Measurements Using
                    
                    
                    Assets/LiabilitiesLevel
      1
                    
                    
                    Level
      2
                    
                    
                    Level
      3
                    
                    
                    at Fair valueAssets:Commodity
      price derivative contracts
                    
                    $
                    —
                    
                    
                    $
                    47,193
                    
                    
                    $
                    —
                    
                    
                    $
                    47,193Total
      derivative instruments
                    
                    $
                    —
                    
                    
                    $
                    47,193
                    
                    
                    $
                    —
                    
                    
                    $
                    47,193Liabilities:Interest
      rate derivative contracts
                    
                    $
                    —
                    
                    
                    $
                    (2,843
                    )
                    
                    $
                    —
                    
                    
                    $
                    (2,843
                    )Total
      derivative instruments
                    
                    $
                    —
                    
                    
                    $
                    (2,843
                    )
                    
                    $
                    —
                    
                    
                    $
                    (2,843
                    )
  On
January 1, 2009, we adopted the previously-deferred provisions of SFAS 157 for
nonfinancial assets and liabilities, which are comprised primarily of asset
retirement costs and obligations initially measured at fair value in accordance
with SFAS No. 143, “Accounting
for Asset Retirement Obligations” (“SFAS 143”).  These assets
and liabilities are recorded at fair value when incurred but not re-measured at
fair value in subsequent periods.  We classify such initial
measurements as Level 3 since certain significant unobservable inputs are
utilized in their determination.  A reconciliation of the beginning
and ending balance of our asset retirement obligations is presented in Note 6,
in accordance with SFAS 143.  During the three months ended March 31,
2009, we did not incur asset retirement obligations. The adoption of SFAS 157 on
January 1, 2009, as it relates to nonfinancial assets and nonfinancial
liabilities, did not have a material impact on our financial position or results
of operations.
 6.
              Asset
      Retirement Obligations
 
 The asset
retirement obligations as of March 31 reported on our consolidated balance
sheets and the changes in the asset retirement obligations for the three months
ended March 31, were as follows:
 
 2009
                      
                      
                      2008(in
      thousands)Asset
      retirement obligations at January 1,
                      
                      $
                      2,134
                      
                      
                      $
                      190Liabilities
      added during the current period
                      
                      
                      —
                      
                      
                      
                      1,260Accretion
      expense
                      
                      
                      25
                      
                      
                      
                      14Asset
      retirement obligation at March 31,
                      
                      $
                      2,159
                      
                      
                      $
                      1,464
 
 7.
              Related
      Party Transactions
 
 In
Appalachia, we rely on Vinland to execute our drilling program, operate our
wells and gather our natural gas. We reimburse Vinland $60 per well per month,
which increased to $95 per well per month beginning March 1, 2009 through
December 31, 2009 (in addition to normal third party operating costs) for
operating our current natural gas and oil properties in Appalachia under a
Management Services Agreement (“MSA”) which costs are reflected in our lease
operating expenses. Also, Vinland received a $0.25 per Mcf transportation fee on
existing wells drilled at December 31, 2006 and $0.55 per Mcf transportation fee
on any new wells drilled after December 31, 2006 within the area of mutual
interest or “AMI.” This gathering and compression agreement has been amended for
the period beginning March 1, 2009 through December 31, 2009, to provide for a
fee based upon the actual costs incurred by Vinland to provide gathering and
transportation services plus a $0.05 per mcf margin. This transportation fee
only encompasses transporting the natural gas to third party pipelines at which
point additional transportation fees to natural gas markets would apply. These
transportation fees are outlined under a Gathering and Compression Agreement
(“GCA”) with Vinland and are reflected in our lease operating expenses. Costs
incurred under the MSA were $0.2 million and $0.1 million for the three months
ended March 31, 2009 and 2008, respectively. Costs incurred under the GCA were
$0.2 million and $0.3 million for the three months March 31, 2009 and 2008,
respectively. A payable of $1.3 million and $2.5 million, respectively, is
reflected on our March 31, 2009 and December 31, 2008 consolidated balance
sheets in connection with these agreements and direct expenses incurred by
Vinland related to the drilling of new wells and operations of all of our
existing wells in Appalachia.
 
 16
 VANGUARD
NATURAL RESOURCES, LLC AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 8.
              Common
      Units and Net Income per Unit
 
 Basic
earnings per unit is computed in accordance with SFAS No. 128,“Earnings Per Share”
(“SFAS 128”) by dividing net income (loss) attributable to unitholders by
the weighted average number of units outstanding during the period. Diluted
earnings per unit is computed by adjusting the average number of units
outstanding for the dilutive effect, if any, of unit equivalents.  We use
the treasury stock method to determine the dilutive effect. As of March 31,
2009, we have two classes of units outstanding:  (i) units
representing limited liability company interests (“common units”) listed on NYSE
Arca, Inc. under the symbol VNR and (ii) Class B units, issued to
management and an employee as discussed inNote 9. Unit-Based Compensation. The
Class B units participate in distributions and no forfeiture is expected;
therefore, all Class B units were considered in the computation of basic
earnings per unit. The 175,000 options granted to officers under our long-term
incentive plan had no dilutive effect as the exercise price is higher than the
market price; therefore, they have been excluded from the computation of diluted
earnings per unit. In addition, the phantom units granted to officers under our
long-term incentive plan will have no dilutive effect unless there is a
liability at December 31, 2009 and it is satisfied in units; therefore, they
have been excluded from the computation of diluted earnings per
unit.
 
 In
accordance with SFAS 128, dual presentation of basic and diluted earnings
per unit has been presented in the consolidated statements of operations for the
three months ended March 31, 2009 and 2008 including each class of units issued
and outstanding at that date: common units and Class B units. Net
income (loss) per unit is allocated to the common units and the Class B
units on an equal basis.
 
 9.
              Unit-Based
      Compensation
 
 In April
2007, the sole member at that time reserved 460,000 restricted Class B units in
VNR for issuance to employees. Certain members of management were granted
365,000 restricted Class B units in VNR in April 2007, which vest two years from
the date of grant. In addition, another 55,000 restricted VNR Class B units were
issued in August 2007 to two other employees that were hired in April and May of
2007, which will vest after three years. The remaining 40,000 restricted Class B
units are available to be awarded to new employees or members of our board of
directors as they are retained.
 
 In
October 2007 and February 2008, four board members were granted 5,000 common
units each of which vested after one year. Additionally, in October 2007, two
officers were granted options to purchase an aggregate of 175,000 units under
our long-term incentive plan with an exercise price equal to the initial public
offering price of $19.00 which vested immediately upon being granted and had a
fair value of $0.1 million on the date of grant.
 
 On
January 1, 2009, in accordance with their previously negotiated employment
agreement, phantom units were granted to two officers in amounts equal to 1% of
our units outstanding at January 1, 2009 and the amount paid in either cash or
units will equal the appreciation in value of the units, if any, from the date
of the grant until the determination date (December 31, 2009), plus cash
distributions paid on the units, less an 8% hurdle rate. As of March 31, 2009, a
liability and non-cash compensation expense totaling $1.3 million has been
recognized.
 
 Furthermore,
on January 7, 2009, four board members were granted 5,000 common units each of
which will vest after one year and on February 27, 2009, employees were granted
17,950 units which will vest after one year.
 
 These
common units, Class B units, options and phantom units were granted as partial
consideration for services to be performed under employment contracts and thus
will be subject to accounting for these grants under SFAS No. 123(R),Share-Based Payment.The
fair value of restricted units issued is determined based on the fair market
value of common units on the date of the grant. This value is amortized over the
vesting period as referenced above. A summary of the status of the non-vested
units as of March 31, 2009 is presented below:
 
 Number of
                            Non-vested Units
                          
                          
                          Weighted Average
                            Grant Date Fair ValueNon-vested
      units at December 31, 2008
                          
                          
                          440,000
                          
                          
                          $
                          18.10Granted
                          
                          
                          37,950
                          
                          
                          
                          8.07Vested
                          
                          
                          (20,000
                          )
                          
                          
                          (17.34
                          )Non-vested
      units at March 31, 2009
                          
                          
                          457,950
                          
                          
                          $
                          17.30
 
 At March
31, 2009, there was approximately $1.8 million of unrecognized compensation cost
related to non-vested restricted units. The cost is expected to be recognized
over an average period of approximately 0.8 years. Our consolidated statements
of operations reflects non-cash compensation of $2.2 million and $0.9 million in
the selling, general and administrative line item for the three months ended
March 31, 2009 and 2008, respectively.
 
 17
 VANGUARD
NATURAL RESOURCES, LLC AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 10.
              Subsequent
      Event
 
 On April
1, 2009, we and our wholly-owned subsidiary, TEC, exchanged several wells
and lease interests (the “Asset Exchange”) with Vinland, Appalachian
Royalty Trust, LLC, and Nami Resources Company, L.L.C. (collectively, the “Nami
Companies”). Each of the Nami Companies is beneficially owned by
Majeed S. Nami, who beneficially owns 26.8% of our common units representing
limited liability company interests. In the Asset Exchange, we assigned
well, strata and leasehold interests with internal estimated future
cash flows of approximately $2.8 million discounted at ten percent, and received
well, strata, and leasehold interests with an approximately equal
value.
  18
   Item 2.  Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
  The
following discussion and analysis should be read in conjunction with the
financial statements and related notes presented in Item 1 of this Quarterly
Report on Form 10-Q and information disclosed in our 2008 Annual Report on
Form 10-K.
  Forward-Looking
Statements
  This
report contains “forward-looking statements” intended to qualify for the safe
harbors from liability established by the Private Securities Litigation Reform
Act of 1995. Statements included in this quarterly report that are not
historical facts (including any statements concerning plans and objectives of
management for future operations or economic performance, or assumptions or
forecasts related thereto), including, without limitation, the information set
forth in Management’s Discussion and Analysis of Financial Condition and Results
of Operations, are forward-looking statements. These statements can be
identified by the use of forward-looking terminology including “may,” “believe,”
“expect,” “intend,” “anticipate,” “estimate,” “continue,” or other similar
words. These statements discuss future expectations, contain projections of
results of operations or of financial condition, or state other
“forward-looking” information. We and our representatives may from time to time
make other oral or written statements that are also forward-looking
statements.
  Such
forward-looking statements are subject to various risks and uncertainties that
could cause actual results to differ materially from those anticipated as of the
date of this report. Although we believe that the expectations reflected in
these forward-looking statements are based on reasonable assumptions, no
assurance can be given that these expectations will prove to be correct.
Important factors that could cause our actual results to differ materially from
the expectations reflected in these forward-looking statements include, among
other things, those set forth in the Risk Factor section of the 2008 Annual
Report on Form 10-K and this Quarterly Report on Form 10-Q, and those set forth
from time to time in our filings with the SEC, which are available on our
website at www.vnrllc.com and through the SEC’s Electronic Data Gathering and
Retrieval System (“EDGAR”) at http://www.sec.gov.
  All
forward-looking statements included in this report are based on information
available to us on the date of this report. We undertake no obligation to
publicly update or revise any forward-looking statement, whether as a result of
new information, future events or otherwise. All subsequent written and oral
forward-looking statements attributable to us or persons acting on our behalf
are expressly qualified in their entirety by the cautionary statements contained
throughout this report.
  Overview
  We are a
publicly-traded limited liability company focused on the acquisition and
development of mature, long-lived natural gas and oil properties in the United
States. Our primary business objective is to generate stable cash flows allowing
us to make quarterly cash distributions to our unitholders and over time to
increase our quarterly cash distributions through the acquisition of new natural
gas and oil properties. Our properties are located in the southern portion of
the Appalachian Basin, primarily in southeast Kentucky and northeast Tennessee,
the Permian Basin, primarily in west Texas and southeastern New Mexico, and in
south Texas.
  We owned
working interests in 1,444 gross (958 net) productive wells at March 31, 2009,
and our average net production for the twelve months ended December 31,
2008 and for the three months ended March 31, 2009 was 16,206 Mcfe per day and
17,815 Mcfe per day, respectively. In addition to these productive wells, we own
leasehold acreage allowing us to drill new wells. We have an approximate 40%
working interest in the known producing horizons in approximately 109,500 gross
undeveloped acres surrounding or adjacent to our existing wells located in
southeast Kentucky and northeast Tennessee. Furthermore, in south Texas, we own
working interest ranging from 45-50% in approximately 5,300 undeveloped acres
surrounding our existing wells. Based on internal reserve estimates at March 31,
2009, approximately 26% or 24.8 Bcfe of our estimated proved reserves were
attributable to our working interests in undeveloped acreage.
 
 Disruption
to Functioning of Capital Markets
 
 Multiple
events during 2008 involving numerous financial institutions have effectively
restricted current liquidity within the capital markets throughout the United
States and around the world. Despite efforts by treasury and banking regulators
in the United States, Europe and other nations around the world to provide
liquidity to the financial sector, capital markets currently remain constrained.
We expect that our ability to raise debt and equity at prices that are similar
to offerings in recent years will be limited as long as capital markets remain
constrained.
 
 During
the first three months of 2009, our unit price increased from a closing low of
$6.35 on January 2, 2009 to a closing high of $11.00 on March 24, 2009. Also,
during the three months ended March 31, 2009, we did not drill any wells on our
operated properties and there was limited drilling on non-operated properties.
We intend to move forward with our development drilling program when market
conditions allow for an adequate return on the drilling investment and only when
we have sufficient liquidity to do so. Maintaining adequate liquidity may
involve the issuance of debt and equity at less attractive terms, could involve
the sale of non-core assets, and could require reductions in our capital
spending. In the near-term we will focus on maximizing returns on existing
assets by managing our costs and selectively deploying capital to improve
existing conditions.
 19
 Permian
Basin Acquisition
 
 On
December 21, 2007, we entered in to a Purchase and Sale Agreement with the
Apache Corporation for the purchase of certain oil and natural gas properties
located in ten separate fields in the Permian Basin of west Texas and
southeastern New Mexico. The purchase price for said assets was $78.3 million
with an effective date of October 1, 2007. We completed this acquisition on
January 31, 2008 for an adjusted purchase price of $73.4 million, subject to
customary post closing adjustments. The post closing adjustments reduced the
final purchase price to $71.5 million and included a purchase price adjustment
of $6.8 million for the cash flow from the acquired properties for the period
between the effective date, October 1, 2007, and the final settlement date. This
acquisition was funded with borrowings under our reserve-based credit facility.
Through this acquisition, we acquired working interests in 390 gross wells (67
net wells), 49 of which we operate. With respect to operations, we have
established two district offices, one in Lovington, New Mexico and the other in
Christoval, Texas to manage these assets. Our operating focus will be on
maximizing existing production and looking for complementary acquisitions that
we can add to this operating platform. At March 31, 2009, based on internal
reserve estimates, we own 3.7 million barrels of oil equivalent, 86% of which is
oil and 89% of which is proved developed producing.
 
 South
Texas Acquisition
 
 On July
18, 2008, we entered into a Purchase and Sale Agreement with Segundo Navarro
Drilling, Ltd., a wholly owned subsidiary of the Lewis Energy Group, for the
acquisition of certain natural gas and oil properties located in the Dos
Hermanos Field in Webb County, Texas. The purchase price for said assets was
$53.4 million with an effective date of June 1, 2008. We completed this
acquisition on July 28, 2008 for an adjusted purchase price of $51.4 million,
subject to customary post-closing adjustments to be determined. This acquisition
was funded with $30.0 million of borrowings under our reserve-based credit
facility and through the issuance of 1,350,873 common units of the Company. In
this purchase, we acquired an average of a 98% working interest in 91 producing
wells and an average 47.5% working interest in approximately 4,705 gross acres
with 41 identified proved undeveloped locations. An affiliate of Lewis Energy
Group operates all the properties and is contractually obligated to drill seven
wells each year from 2009 through 2011 unless mutually agreed not do so. Upon
closing this transaction, we assumed natural gas swaps and collars based on
Houston Ship Channel pricing for approximately 85% of the estimated gas
production from existing producing wells for the period beginning July 2008
through December 2011 which had a fair value of $3.6 million on July 28, 2008.
At March 31, 2009, based on internal reserve estimates, we own 14 Bcfe of proved
reserves, 100% of which is natural gas and 55% of which is proved developed
producing.
 
 Our
Relationship with Vinland
  On
April 18, 2007 but effective as of January 5, 2007, we entered into
various agreements with Vinland, under which we rely on Vinland to operate our
existing producing wells in Appalachia and coordinate our development drilling
program in Appalachia. We expect to benefit from the substantial development and
operational expertise of Vinland management in the Appalachian Basin. Under a
management services agreement, Vinland advises and consults with us regarding
all aspects of our production and development operations in Appalachia and
provides us with administrative support services as necessary for the operation
of our business. In addition, Vinland may, but does not have any obligation to,
provide us with acquisition services under the management services agreement.
Under a gathering and compression agreement that we entered into with Vinland
Energy Gathering, LLC (“VEG”), VEG gathers, compresses, delivers, and provides
the services necessary for us to market our natural gas production in the area
of mutual interest, or “AMI.” VEG delivers our natural gas production to certain
designated interconnects with third-party transporters.
  Restructuring
Plan
  Prior to
the separation, our Predecessor owned all of the assets in Appalachia that are
currently owned by us and Vinland. As part of the separation of our operating
company and Vinland, effective January 5, 2007, we conveyed to Vinland 60%
of our Predecessor’s working interest in the known producing horizons in
approximately 95,000 gross undeveloped acres in the AMI, 100% of our
Predecessor’s interest in an additional 125,000 undeveloped acres and certain
coalbed methane rights located in the Appalachian Basin, the rights to any
natural gas and oil located on our acreage at depths above and 100 feet below
our known producing horizons, all of our gathering and compression assets, and
all employees except, our President and Chief Executive Officer and our
Executive Vice President and Chief Financial Officer. We retained all of our
Predecessor’s proved producing wells and associated reserves. We also retained
40% of our Predecessor’s working interest in the known producing horizons in
approximately 95,000 gross undeveloped acres in the AMI and a contract right to
receive approximately 99% of the net proceeds, after deducting royalties paid to
other parties, severance taxes, third-party transportation costs, costs incurred
in the operation of wells and overhead costs, from the sale of production from
certain producing natural gas and oil wells, which accounted for approximately
2.6% of our estimated proved reserves as of December 31, 2008. In addition,
we changed the name of our operating company from Nami Holding Company, LLC to
Vanguard Natural Gas, LLC. Collectively, we refer to these events as the
“Restructuring.”
 20
 Reserve-Based
Credit Facility
  On
January 3, 2007, we entered into a reserve-based credit facility which
is available for our general limited liability company purposes, including,
without limitation, capital expenditures and acquisitions. Our obligations under
the reserve-based credit facility are secured by substantially all of our
assets. Our initial borrowing base under the reserve-based credit facility was
set at $115.5 million. However, the borrowing base was subject to $1.0 million
reductions per month starting on July 1, 2007 through November 1, 2007, which
resulted in a borrowing base of $110.5 million as reaffirmed in November 2007
pursuant to a semi-annual borrowing base redetermination. We applied $80.0
million of the net proceeds from our IPO in October 2007 to reduce our
indebtedness under the reserve-based credit facility. In February 2008, our
reserve-based credit facility was amended and restated to extend the maturity
from January 3, 2011 to March 31, 2011, increase the facility amount from $200.0
million to $400.0 million, increase our borrowing base from $110.5 million to
$150.0 million and add two additional financial institutions as lenders,
Wachovia bank, N.A., and The Bank of Nova Scotia. Additional borrowings were
made in January 2008 pursuant to the acquisition of natural gas and oil
properties in the Permian Basin, and in July 2008 an additional $30.0 million
was borrowed to fund a portion of the cash consideration paid in the south Texas
acquisition. In May 2008, our reserve-based credit facility was amended in
response to a potential acquisition that ultimately did not occur. As a result,
none of the provisions included in this amendment went into effect. In October
2008, we amended our reserve-based credit facility which set our borrowing base
under the facility at $175.0 million pursuant to our semi-annual redetermination
and added a new lender, BBVA Compass Bank. In February 2009, a third amendment
was entered into which amended covenants to allow us to repurchase up to $5.0
million of our own units. Indebtedness under the reserve-based credit facility
totaled $136.5 million at March 31, 2009 and the applicable margins and other
fees increase as the utilization of the borrowing base increases as
follows:
  Borrowing
      Base Utilization Percentage
                
                <33%
                
                >33%
      <66%
                
                >66%
      <85%
                
                >85%Eurodollar
      Loans
                
                1.500%
                
                1.750%
                
                2.000%
                
                2.125%ABR
      Loans
                
                0.000%
                
                0.250%
                
                0.500%
                
                0.750%Commitment
      Fee Rate
                
                0.250%
                
                0.300%
                
                0.375%
                
                0.375%Letter
      of Credit Fee
                
                1.000%
                
                1.250%
                
                1.500%
                
                1.750%
 The
borrowing base is currently under review pursuant to our semi-annual
redetermination and we are anticipating a reduction. We anticipate the review
process will be completed during May 2009.
 
 Outlook
  Our
revenue, cash flow from operations, and future growth depend substantially on
factors beyond our control, such as access to capital, economic, political and
regulatory developments, and competition from other sources of energy. Multiple
events during 2008 involving numerous financial institutions have effectively
restricted current liquidity within the capital markets throughout the United
States and around the world. Despite efforts by treasury and banking regulators
in the United States, Europe, and other nations around the world to provide
liquidity to the financial sector, capital markets currently remain constrained.
We expect that our ability to raise debt and equity at prices that are similar
to offerings in recent years to be limited as long as the capital markets remain
constrained.
 
 Natural
gas and oil prices historically have been volatile and may fluctuate widely in
the future. Sustained periods of low prices for natural gas or oil could
materially and adversely affect our financial position, our results of
operations, the quantities of natural gas and oil reserves that we can
economically produce and our access to capital. As required by our reserve-based
credit facility, we have mitigated this volatility for the years 2007 through
2011 by implementing a hedging program on a portion of our proved producing and
a portion of our total anticipated production during this time
frame.
  We face
the challenge of natural gas and oil production declines. As a given well’s
initial reservoir pressures are depleted, natural gas and oil production
decreases, thus reducing our total reserves. We attempt to overcome this natural
decline both by drilling on our properties and acquiring additional reserves. We
will maintain our focus on controlling costs to add reserves through drilling
and acquisitions, as well as controlling the corresponding costs necessary to
produce such reserves. During the three months ended March 31, 2009, we did not
drill any wells on our operated properties and there was limited drilling on
non-operated properties. Our ability to add reserves through drilling is
dependent on our capital resources and can be limited by many factors, including
the ability to timely obtain drilling permits and regulatory approvals and
voluntary reductions in capital spending in a low commodity price environment.
Any delays in drilling, completion or connection to gathering lines of our new
wells will negatively impact the rate of our production, which may have an
adverse effect on our revenues and as a result, cash available for distribution.
In accordance with our business plan, we intend to invest the capital necessary
to maintain our production at existing levels over the long-term provided that
it is economical to do so based on the commodity price environment. However, we
cannot be certain that we will be able to issue our debt and equity securities
on favorable terms, or at all, and we may be unable to refinance our
reserve-based credit facility when it expires. Additionally, due to the
significant decline in commodity prices, our borrowing base under our
reserve-based credit facility may be redetermined such that it will not provide
for the working capital necessary to fund our capital spending program and could
affect our ability to make distributions.
 21
 Results
of Operations
  The
following table sets forth selected financial and operating data for the periods
indicated:
 
 Three Months Ended
                                                                                                                                                                            March
      31,2009
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          2008
      (a) (b)Revenues:Gas
      sales
                                                                                                                                                                          
                                                                                                                                                                          $
                                                                                                                                                                          6,322
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          $
                                                                                                                                                                          9,020Oil
      sales
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          2,880
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          4,982Natural
      gas and oil sales
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          9,202
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          14,002Gain
      (loss) on commodity cash flow hedges
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          (896
                                                                                                                                                                          )
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          416Gain
      (loss) on other commodity derivative contracts
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          17,649
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          (21,772
                                                                                                                                                                          )Total
      revenues
                                                                                                                                                                          
                                                                                                                                                                          $
                                                                                                                                                                          25,955
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          $
                                                                                                                                                                          (7,354
                                                                                                                                                                          )Costs
      and expenses:Lease
      operating expenses
                                                                                                                                                                          
                                                                                                                                                                          $
                                                                                                                                                                          3,133
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          $
                                                                                                                                                                          2,015Depreciation,
      depletion, amortization, and accretion
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          3,783
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          2,824Impairment
      of natural gas and oil properties
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          63,818
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          —Selling,
      general and administrative expenses
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          3,152
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          1,646Production
      and other taxes
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          642
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          966Total
      costs and expenses
                                                                                                                                                                          
                                                                                                                                                                          $
                                                                                                                                                                          74,528
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          $
                                                                                                                                                                          7,451Other
      income and (expense):Interest
      expense, net
                                                                                                                                                                          
                                                                                                                                                                          $
                                                                                                                                                                          (1,013
                                                                                                                                                                          )
                                                                                                                                                                          
                                                                                                                                                                          $
                                                                                                                                                                          (1,122
                                                                                                                                                                          )Loss
      on interest rate derivative contracts
                                                                                                                                                                          
                                                                                                                                                                          $
                                                                                                                                                                          (379
                                                                                                                                                                          )
                                                                                                                                                                          
                                                                                                                                                                          $
                                                                                                                                                                          (5
                                                                                                                                                                          )
  (a)
              The
      Permian acquisition closed on January 31, 2008 and, as such, only two
      months of operations are included in the three month period ended March
      31, 2008.(b)
              The
      south Texas acquisition closed on July 28, 2008 and, as such, no
      operations are included in the three month period ended March 31,
      2008.
  Three
Months Ended March 31, 2009 Compared to Three Months Ended March 31,
2008
  Revenues
  Natural
gas and oil sales decreased $4.8 million to $9.2 million during the three months
ended March 31, 2009 as compared to the same period in 2008. The key revenue
measurements were as follows:
 22
 Three Months Ended
                                                    March
      31,
                                                  
                                                  Percentage
                                                    Increase
                                                    (Decrease)2009
                                                  
                                                  2008Net
      Natural Gas Production:Appalachian
      gas (MMcf)
                                                  
                                                  
                                                  805
                                                  
                                                  867
                                                  
                                                  (7)
                                                  %Permian
      gas (MMcf)
                                                  
                                                  
                                                  59
                                                  
                                                  42
                                                  (a)
                                                  N/ASouth
      Texas gas (MMcf)
                                                  
                                                  
                                                  276
                                                  
                                                  —
                                                  (b)
                                                  N/ATotal
      natural gas production (MMcf)
                                                  
                                                  
                                                  1,140
                                                  
                                                  909Average
      Appalachian daily gas production (Mcf/day)
                                                  
                                                  
                                                  8,949
                                                  
                                                  9,527
                                                  
                                                  (6)
                                                  %Average
      Permian daily gas production (Mcf/day)
                                                  
                                                  
                                                  658
                                                  
                                                  693
                                                  (a)
                                                  (5)
                                                  %Average
      south Texas daily gas production (Mcf/day)
                                                  
                                                  
                                                  3,062
                                                  
                                                  —
                                                  (b)
                                                  N/AAverage
      Vanguard daily gas production (Mcf/day)
                                                  
                                                  
                                                  12,669
                                                  
                                                  10,220Average
      Natural Gas Sales Price per Mcf:Net
      realized gas price, including hedges
                                                  
                                                  
                                                  $10.65
                                                  (c)
                                                  $10.47
                                                  (c)
                                                  2
                                                  %Net
      realized gas price, excluding hedges
                                                  
                                                  
                                                  $5.55
                                                  
                                                  $9.93
                                                  
                                                  (44)
                                                  %Net
      Oil Production:Appalachian
      oil (Bbls)
                                                  
                                                  
                                                  16,511
                                                  
                                                  10,991
                                                  
                                                  50
                                                  %Permian
      oil (Bbls)
                                                  
                                                  
                                                  60,680
                                                  
                                                  40,722
                                                  (a)
                                                  N/ATotal
      oil (Bbls)
                                                  
                                                  
                                                  77,191
                                                  
                                                  51,713Average
      Appalachian daily oil production (Bbls/day)
                                                  
                                                  
                                                  183
                                                  
                                                  121
                                                  
                                                  51
                                                  %Average
      Permian daily oil production (Bbls/day)
                                                  
                                                  
                                                  674
                                                  
                                                  679
                                                  (a)
                                                  (1)
                                                  %Average
      Vanguard daily oil production (Bbls/day)
                                                  
                                                  
                                                  857
                                                  
                                                  800Average
      Oil Sales Price per Bbl:Net
      realized oil price, including hedges
                                                  
                                                  
                                                  $70.53
                                                  
                                                  $89.65
                                                  
                                                  (21)
                                                  %Net
      realized oil price, excluding hedges
                                                  
                                                  
                                                  $37.31
                                                  
                                                  $96.33
                                                  
                                                  (61)
                                                  %
  (a)
              The
      Permian acquisition closed on January 31, 2008 and, as such, only two
      months of operations are included in the three month period ended March
      31, 2008.(b)
              The
      south Texas acquisition closed on July 28, 2008 and, as such, no
      operations are included in the three month period ended March 31,
      2008.(c)
              Excludes
      amortization of premiums paid and non-cash settlements on derivative
      contracts.
 
 The
decrease in natural gas and oil sales during the three months ended March 31,
2009 compared to the same period in 2008 was due primarily to the decreases in
commodity prices. In Appalachia, we experienced a 7% decrease in natural gas
production which was partially offset by a 50% increase in oil production during
the three months ended March 31, 2009 compared to the same period in 2008 for a
net production decline of 3% on a Mcfe basis. The 50% increase in Appalachian
oil production was primarily due to the focus on the completion of oil zones as
oil prices increased during the first three quarters of 2008 which adversely
affected the amount of natural gas produced.  We experienced a 44%
decrease in the average realized natural gas sales price received (excluding
hedges) and a 61% decrease in the average realized oil price (excluding hedges).
The decrease in commodity prices was partially offset by a 31% increase in our
total production on a Mcfe basis. The increase in production for the three
months ended March 31, 2009 over the comparable period in 2008 was primarily
attributable to the inclusion of a complete quarter’s production from the
Permian Basin acquisition completed in January 2008 and the south Texas
acquisition completed in July 2008.
 23
 Hedging
and Price Risk Management Activities
 
 During
the three months ended March 31, 2009, we recognized $0.9 million related
to losses on commodity cash flow hedges compared to $0.4 million related to
gains on commodity cash flow hedges during the same period in 2008. These
amounts relate to derivative contracts that we entered into in order to mitigate
commodity price exposure on a portion of our expected production and designated
as cash flow hedges. The loss on commodity cash flow hedges for the three months
ended March 31, 2009 relates to the amount that settled in 2009 and has been
reclassified to earnings from accumulated other comprehensive loss. During the
three months ended March 31, 2009, we recognized $17.6 million related to
gains on other commodity derivative contracts compared to $21.8 million related
to losses on other commodity derivative contracts during the same period in
2008. The gain on other commodity derivative contracts for the three months
ended March 31, 2009 includes a $9.8 million unrealized gain related to the
change in fair value of derivative contracts not meeting the criteria for cash
flow hedge accounting and a $7.8 million realized gain related to the
settlements recognized during the period. The loss on other commodity derivative
contracts for the three months ended March 31, 2008 includes a $20.2 million
unrealized loss related to the change in fair value of derivative contracts not
meeting the criteria for cash flow hedge accounting and a $1.6 million realized
loss related to the settlements recognized during the period. The increase in
realized gains on other commodity derivative contracts during the three months
ended March 31, 2009 compared to the same period in 2008 resulted from the
increase in derivative contracts assumed or entered into as a result of the
Permian Basin and south Texas acquisitions as well as a decrease in commodity
prices. The increase in realized gains on other commodity derivative contracts
during the three months ended March 31, 2009 compared to the same period in 2008
also resulted from the decrease in commodity prices which increased the dollar
amount of settlements received.
 
 Costs
and Expenses
  Lease
operating expenses include third-party transportation costs, gathering and
compression fees, field personnel and other customary charges. Lease operating
expenses in Appalachia also historically included a $60 per well per month
administrative charge pursuant to a management services agreement with Vinland.
This fee was increased to $95 per well per month beginning March 1, 2009 through
December 31, 2009 pursuant to an agreement whereunder Vinland has agreed to
provide well-tending services on Vanguard owned wells under a turnkey pricing
contract. In addition, we historically have paid a $0.25 per Mcf and $0.55 per
Mcf gathering and compression charge for production from wells drilled pre and
post January 1, 2007, respectively, to Vinland pursuant to a gathering and
compression agreement with Vinland. This gathering and compression agreement has
been amended for the period beginning March 1, 2009 through December 31, 2009 to
provide for a fee based upon the actual costs incurred by Vinland to provide
gathering and transportation services plus a $0.05 per mcf margin. Lease
operating expenses increased by $1.1 million to $3.1 million for the three
months ended March 31, 2009 as compared to the three months ended March 31,
2008, of which $1.0 million of the increase was related to the inclusion of the
Permian and south Texas wells for the entire quarter in
2009.
  Depreciation,
depletion, amortization and accretion increased to approximately $3.8 million
for the three months ended March 31, 2009 from approximately $2.8 million for
the three months ended March 31, 2008 due primarily to the additional depletion
recorded on oil and gas properties acquired in the Permian Basin and south Texas
acquisitions.
 
 An
impairment of natural gas and oil properties in the amount of $63.8 million was
recognized during the three months ended March 31, 2009 as the unamortized cost
of natural gas and oil properties exceeded the sum of the estimated future net
revenues from proved properties using period-end prices, discounted at 10% and
the lower of cost or fair value of unproved properties as a result of a
decline in natural gas prices at the measurement date, March 31, 2009. The
impairment calculation did not consider the positive impact of our commodity
derivative positions as generally accepted accounting principles only allows the
inclusion of derivatives designated as cash flow hedges.
  Selling,
general and administrative expenses include the costs of our administrative
employees and executive officers, related benefits, office leases, professional
fees and other costs not directly associated with field operations. These
expenses for the three months ended March 31, 2009 increased $1.5 million as
compared to the three months ended March 31, 2008 principally due to an increase
in non-cash charges.  For the three months ended March 31, 2009 and
2008, non-cash compensation charges amounted to $2.2 million and $0.9
million, respectively, related to the grant of restricted Class B units to
officers and an employee, the grant of unit options to management, the grant of
phantom units to officers and the grant of common units to board members and
employees during 2007 through 2009. All other cash selling, general and
administrative expenses increased $0.2 million during the three months ended
March 31, 2009 as compared to the same period in 2008 principally due to
incremental costs associated with the company’s growth and
acquisitions.
  Production
and other taxes include severance, ad valorem, and other taxes. Severance taxes
are a function of volumes and revenues generated from production. Ad valorem
taxes vary by state/county and are based on the value of our reserves.
Production and other taxes decreased by $0.3 million for the three months ended
March 31, 2009 as compared to the same period in 2008 as a result of decreased
revenues.
 
 Interest
expense declined slightly to $1.0 million for the three months ended March 31,
2009 compared to $1.1 million for the three months ended March 31, 2008
primarily due to lower interest rates which more than offset the higher average
outstanding debt during the three months ended March 31, 2009.
 24
 Critical Accounting Policies and
Estimates
  The
preparation of financial statements in accordance with GAAP requires management
to select and apply accounting policies that best provide the framework to
report its results of operations and financial position. The selection and
application of those policies requires management to make difficult subjective
or complex judgments concerning reported amounts of revenue and expenses during
the reporting period and the reported amounts of assets and liabilities at the
date of the financial statements. As a result, there exists the likelihood
that materially different amounts would be reported under different conditions
or using different assumptions.
  As of
March 31, 2009, our critical accounting policies are consistent with those
discussed in our Annual Report on Form 10-K for the year ended December 31,
2008.
  Recently
Adopted Accounting Pronouncements
 
 On
January 1, 2008, we adopted Statement of Financial Accounting Standards No. 157
“FairValue Measurements” (“SFAS
157”) as it relates to financial assets and financial liabilities. In February
2008, the Financial Accounting Standards Board (FASB) issued FASB Staff Position
No. FAS 157-2, “Effective Date
of FASB Statement No. 157” (“FSP 157-2”), which delayed the effective
date of SFAS 157 for all non-financial assets and non-financial liabilities,
except those that are recognized or disclosed at fair value in the financial
statements on at least an annual basis, until January 1, 2009 for calendar
year-end entities. Also in February 2008, the FASB issued FASB Staff Position
No. FAS 157-1, “Application of
FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting
Pronouncements That Address Fair Value Measurements for Purposes of Lease
Classification or Measurement under Statement 13” (“FSP 157-1”),which states that
Statement of Financial Accounting Standards No. 13, “Accounting for Leases,”
(“SFAS 13”) and other accounting pronouncements that address fair value
measurements for purposes of lease classification or measurement under SFAS 13
are excluded from the provisions of SFAS 157, except for assets and liabilities
related to leases assumed in a business combination that are required to be
measured at fair value under Statement of Financial Accounting Standards No.
141, “Business
Combinations,” (“SFAS 141”) or Statement of Financial Accounting
Standards No. 141 (revised 2007), “Business Combinations,”
(“SFAS 141(R)”). In October 2008, the FASB issued FASB Staff Position No. FAS
157-3, “Determining the Fair
value of a Financial Asset in a Market That Is Not Active” (“FSP 157-3”),
which clarifies the application of SFAS 157 when the market of a financial asset
is inactive and provides an example to illustrate key considerations in
determining the fair value of a financial asset when the market for that
financial asset is not active. The guidance in FSP 157-3 was effective
immediately upon issuance and had no impact on our consolidated financial
statements.
 
 SFAS 157
defines fair value, establishes a framework for measuring fair value and expands
disclosures about fair value measurements. The provisions of this standard apply
to other accounting pronouncements that require or permit fair value
measurements and are to be applied prospectively with limited exceptions. In
adopting SFAS 157 on January 1, 2008, as it relates to financial assets and
financial liabilities, we determined that the impact of these additional
assumptions on fair value measurements did not have a material effect on our
financial position or results of operations. The adoption of SFAS 157 on January
1, 2009, as it relates to nonfinancial assets and nonfinancial liabilities, did
not have a material impact on our financial position or results
of operations. See Note 5 in Part 1—Item 1—Notes to Consolidated
Financial Statements for further discussion.
 
 In April
2009, the FASB issued FASB Staff Position No. FAS 157-4, “Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly” (“FSP
157-4”). FSP 157-4 provides additional guidance on estimating fair value when
the volume and level of activity for an asset or liability have significantly
decreased in relation to normal activity for the asset or liability. FSP 157-4
also provides additional guidance on circumstances that may indicate that a
transaction is not orderly. FSP 157-4 is effective for interim and annual
periods ending after June 15, 2009. We do not believe the adoption of FSP
157-4 will materially impact our consolidated financial statements.
 
 In
December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations”(“SFAS
141(R)”), which replaces SFAS No. 141“Business Combinations”
(“SFAS 141.”) SFAS 141(R) establishes principles and requirements for how an
acquirer recognizes and measures in its financial statements the identifiable
assets acquired, the liabilities assumed, any non-controlling interest in the
acquiree and the goodwill acquired. The Statement also establishes disclosure
requirements that will enable users to evaluate the nature and financial effects
of the business combination. SFAS 141(R) is effective for acquisitions that
occur in an entity’s fiscal year that begins after December 15, 2008. Effective
January 1, 2009, we adopted SFAS 141(R). However, since we did not consummate
any business combinations during the three months ended March 31, 2009, the
adoption did not affect our consolidated financial statements.
 
 In April
2009, the FASB issued FASB Staff Position No. FAS 141(R)-1, “Accounting for Assets Acquired and
Liabilities Assumed in a Business Combination That Arise from
Contingencies.” This Staff Position amends the provisions related to the
initial recognition and measurement, subsequent measurement and disclosure of
assets and liabilities arising from contingencies in a business combination
under SFAS No. 141(R.) This Staff Position carries forward the requirements in
SFAS 141 for acquired contingencies, which would require that such contingencies
be recognized at fair value on the acquisition date if fair value can be
reasonably estimated during the allocation period. Otherwise, companies would
typically account for the acquired contingencies in accordance with SFAS No. 5,
“Accounting for
Contingencies.”This Staff Position has the same effective date as SFAS
141(R), and the adoption did not affect our consolidated financial
statements.
 25
 In
December 2007, the FASB issued SFAS No. 160,“Non-controlling Interests in
Consolidated Financial Statements—an amendment of ARB No. 51” (“SFAS
160”). SFAS 160 requires that accounting and reporting for minority interests
will be recharacterized as non-controlling interests and classified as a
component of equity. SFAS 160 also establishes reporting requirements that
provide sufficient disclosures that clearly identify and distinguish between the
interests of the parent and the interests of the non-controlling
owners. SFAS 160 applies to all entities that prepare consolidated
financial statements, except not-for-profit organizations, but will affect only
those entities that have an outstanding non-controlling interest in one or more
subsidiaries or that deconsolidate a subsidiary. This statement is effective as
of the beginning of an entity’s first fiscal year beginning after December 15,
2008. Effective January 1, 2009, we adopted SFAS 160; however, since we do not
own any “non-controlling interests,” the adoption did not affect our
consolidated financial statements.
 
 In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative
Instruments and Hedging Activities” (“SFAS 161”). SFAS 161 is intended to
improve financial reporting about derivative instruments and hedging activities
by requiring enhanced disclosures to enable investors to better understand their
effects on an entity’s financial position, financial performance, and cash
flows. SFAS 161 achieves these improvements by requiring disclosure of the fair
values of derivative instruments and their gains and losses in a tabular format.
It also provides more information about an entity’s liquidity by requiring
disclosure of derivative features that are credit risk-related. Finally, it
requires cross-referencing within footnotes to enable financial statement users
to locate important information about derivative instruments. SFAS 161 is
effective for financial statements issued for fiscal years and interim periods
beginning after November 15, 2008. Effective January 1, 2009, we adopted SFAS
161. The adoption did not have a material impact on our consolidated financial
statements. See Note 4 in Part 1—Item 1—Notes to Consolidated
Financial Statements for further discussion.
 
 In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles” (“SFAS 162”). This statement identifies the
sources of accounting principles and the framework for selecting the principles
to be used in the preparation of financial statements in conformity with GAAP in
the United States. This statement became effective on November 15, 2008.
The adoption of SFAS 162 did not have a material effect on our consolidated
financial statements.
 
 New
Pronouncements Issued But Not Yet Adopted
 
 In
December 2008, the SEC published a Final Rule, “Modernization of Oil and Gas
Reporting.”The new rule permits the use of new technologies to determine
proved reserves if those technologies have been demonstrated to lead to reliable
conclusions about reserves volumes. The new requirements also will allow
companies to disclose their probable and possible reserves to investors. In
addition, the new disclosure requirements require companies to: (a) report the independence
and qualifications of its reserves preparer or auditor, (b) file reports when a third
party is relied upon to prepare reserves estimates or conducts a reserves audit,
and (c) report oil and
gas reserves using an average price based upon the prior 12-month period rather
than year-end prices. The use of average prices will affect future impairment
and depletion calculations. The new disclosure requirements are effective for
annual reports on Forms 10-K for fiscal years ending on or after
December 31, 2009. A company may not apply the new rules to disclosures in
quarterly reports prior to the first annual report in which the revised
disclosures are required. We have not yet determined the impact of this Final
Rule, which will vary depending on changes in commodity prices, on our
disclosures, financial position, or results of operations.
 
 In April
2009, the FASB issued FSP SFAS 107-1 and APB 28-1, “Interim Disclosures About Fair
Value of Financial Instruments” (“FSP 107-1.”) FSP 107-1 amends SFAS No.
107, “Disclosures about Fair
Values of Financial Instruments” and Accounting Principles Board Opinion
No. 28, “Interim Financial
Reporting,” to require disclosures about fair value of financial
instruments in interim financial statements. FSP 107-1 is effective for interim
periods ending after June 15, 2009, with early adoption permitted for periods
ending after March 15, 2009. We will adopt the disclosure requirements of FSP
107-1 in the third quarter of fiscal 2009.
 
 Use
of Estimates
 
 The
preparation of financial statements in conformity with GAAP requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. The most significant estimates pertain to proved
natural gas and oil reserves and related cash flow estimates used in impairment
tests of natural gas and oil properties, the fair value of derivative contracts
and asset retirement obligations, accrued natural gas and oil revenues and
expenses, as well as estimates of expenses related to depreciation, depletion,
amortization, and accretion. Actual results could differ from those
estimates.
 26
 Liquidity
and Capital Resources
 
 Disruption
to Functioning of Capital Markets
 
 Multiple
events during 2008 involving numerous financial institutions have effectively
restricted current liquidity within the capital markets throughout the United
States and around the world. Despite efforts by treasury and banking regulators
in the United States, Europe and other nations around the world to provide
liquidity to the financial sector, capital markets currently remain constrained.
We expect that our ability to issue debt and equity on favorable terms will be
limited as long as the capital markets remain constrained. During the three
months ended March 31, 2009, we did not drill any wells on our operated
properties and there was limited drilling on non-operated properties. We intend
to move forward with our development drilling program when market conditions
allow for an adequate return on the drilling investment and only when we have
sufficient liquidity to do so. The benefits expected to accrue to our
unitholders from our expansion activities may be muted by substantial cost of
capital increases during this period.
 
 Natural
gas and oil prices historically have been volatile and are likely to continue to
be volatile in the future, especially given current geopolitical and economic
conditions. For example, the NYMEX crude oil spot price per barrel for the
period between January 1, 2009 and March 31, 2009 ranged from a high of $53.87
to a low of $34.03 and the NYMEX natural gas spot price per MMBtu for the period
January 1, 2009 to March 31, 2009 ranged from a high of $6.07 to a low of $3.63.
As of May 5, 2009, the NYMEX crude oil spot price per barrel was $53.81 and the
NYMEX natural gas spot price per MMBtu was $3.62.
 
 Overview
 
 We have
utilized private equity, proceeds from bank borrowings, cash flow from
operations and the public equity markets for capital resources and
liquidity. To date, the primary use of capital has been for the acquisition
and development of natural gas and oil properties; however, we expect to
distribute to unitholders a significant portion of our free cash flow. As we
execute our business strategy, we will continually monitor the capital resources
available to us to meet future financial obligations, planned capital
expenditures, acquisition capital and distributions to our unitholders. Our
future success in growing reserves, production and cash flow will be highly
dependent on the capital resources available to us and our success in drilling
for and acquiring additional reserves. We expect to fund our drilling
capital expenditures and distributions to unitholders with cash flow from
operations, while funding any acquisition capital expenditures that we might
incur with borrowings under our reserve-based credit facility and publicly
offered equity, depending on market conditions. As of May 5, 2009, we have $41.0
million available to be borrowed under our reserve-based credit facility;
however, we are anticipating a reduction in our borrowing base as described
below.
 
 The
borrowing base is subject to adjustment from time to time but not less than on a
semi-annual basis based on the projected discounted present value (as determined
by independent petroleum engineers) of estimated future net cash flows
(utilizing the bank’s internal projection of future natural gas and oil prices)
from our proved natural gas and oil reserves. The borrowing base is currently
under review pursuant to our semi-annual redetermination, and we are
anticipating a reduction. Based on the current commodity price environment,
banks have lowered their internal projections of future natural gas and oil
prices which will decrease the borrowing base and thus decrease the amount
available to be borrowed under our reserve-based credit facility. We anticipate
the review process will be completed during May 2009. Our next borrowing base
redetermination is scheduled for October 2009 utilizing our September 30, 2009
reserve report. If commodity prices continue to decline and banks continue
to lower their internal projections of natural gas and oil prices, it is
possible that we will be subject to additional decreases in our borrowing base
availability in the future. If our outstanding borrowings under the
reserve-based credit facility exceed 90% of the borrowing base, we would be
required to suspend distributions to our unitholders until we have reduced our
borrowings to below the 90% threshold. As a result, absent accretive
acquisitions, to the extent available after unitholder distributions, debt
service, and capital expenditures, it is our current intention to utilize our
excess cash flow during 2009 to reduce our borrowings under our reserve-based
credit facility. Based upon current expectations, we believe existing liquidity
and capital resources will be sufficient for the conduct of our business and
operations for the foreseeable future.
 
 Cash
Flow from Operations
  Net cash
provided by operating activities for the three months ended March 31, 2008 was
$9.4 million, compared to $4.0 million for the three months ended March 31,
2008. The increase in cash provided by operating activities during the
three months ended March 31, 2009 was substantially due to increased income,
after adjusting for non-cash items, offset by a $2.2 million net decrease in
operating assets and liabilities. The increased income during the three months
ended March 31, 2009, was largely a result of realized gains on commodity
derivative contracts.
  Cash flow
from operations is subject to many variables, the most significant of which is
the volatility of natural gas and oil prices. Natural gas and oil prices
are determined primarily by prevailing market conditions, which are dependent on
regional and worldwide economic activity, weather, and other factors beyond our
control. Future cash flow from operations will depend on our ability to
maintain and increase production through our drilling program and acquisitions,
as well as the prices received for production. We enter into derivative
contracts to reduce the impact of commodity price volatility on
operations. Currently, we use a combination of fixed-price swaps and NYMEX
collars and put options to reduce our exposure to the volatility in natural gas
and oil prices. See Note 4 in Notes to Consolidated Financial
Statements and Part 1—Item 3—Quantitative and Qualitative Disclosures About
Market Risk—Commodity Price Risk for details about derivatives in place through
2011.
 27
 Cash
Flow from Investing Activities
 
 Cash used
in investing activities was approximately $1.5 million for the three months
ended March 31, 2009, compared to $68.1 million for the three months ended March
31, 2008. The decrease in cash used in investing activities was primarily
attributable to $65.6 million used for the acquisition of natural gas and oil
properties in the Permian Basin during the three months ended March 31, 2008. In
addition, the total for the three months ended March 31, 2009 includes $1.3
million for the drilling and development of natural gas and oil properties as
compared to $1.2 million for the three months ended March 31, 2008.
  Cash Flow from
Financing Activities
 
 Cash used
in financing activities was approximately $5.0 million for the three months
ended March 31, 2009, compared to cash provided by financing activities of $61.6
million for the three months ended March 31, 2008. During the three months ended
March 31, 2009, total net borrowings under our reserve-based credit facility
were $1.5 million and $6.3 million was used for distributions to
unitholders compared to $3.3 million in distribution to unitholders in the
comparable period in 2008. During the three months ended March 31, 2008, total
proceeds from borrowings under our reserve-based credit facility were $71.4
million, which were principally used to fund the Permian Basin
acquisition.
 
 Available
Credit
 
 Credit
markets in the United States and around the world remain constrained due to a
lack of liquidity and confidence in a number of financial institutions.
Investors continue to seek perceived safe investments in securities of the
United States government rather than individual entities. We may at times
experience difficulty accessing the long-term credit markets due to prevailing
market conditions. Additionally, existing constraints in the credit markets may
increase the rates we are charged for utilizing these markets. Notwithstanding
the continuing weakness in the United States credit markets, we expect that our
available liquidity will be sufficient to meet our operating and capital
requirements in 2009.
  Reserve-Based
Credit Facility
 
 On
January 3, 2007, we entered into a reserve-based credit facility under which our
initial borrowing base was set at $115.5 million. Our reserve-based credit
facility was amended and restated in February 2008 to extend the maturity date
from January 2011 to March 2011, increase the maximum facility amount from
$200.0 million to $400.0 million, increase our borrowing base from $110.5
million to $150.0 million and add two additional financial institutions as
lenders, Wachovia Bank, N.A. and the Bank of Nova Scotia. The increase in the
borrowing base was principally the result of inclusion of the reserves related
to the Permian Basin acquisition in January 2008. In May 2008, our reserve-based
credit facility was amended in response to a potential acquisition that
ultimately did not occur. As a result, none of the provisions included in this
amendment went into effect. As of October 22, 2008, our reserve-based credit
facility was amended to increase the borrowing base to $175.0 million and add
one lender, BBVA Compass Bank. The increase in the borrowing base was
principally the result of inclusion of the reserves related to the south Texas
acquisition in July 2008. In February 2009, a third amendment was entered into
which amended covenants to allow the company to repurchase up to $5.0 million of
our own units. At March 31, 2009, we had $136.5 million outstanding under our
reserve-based credit facility and as of May 5, 2009, we have $41.0 million
available to be borrowed under our reserve-based credit facility; however, we
are anticipating a reduction in our borrowing base as described
below.
 
 The
borrowing base is subject to adjustment from time to time but not less than on a
semi-annual basis based on the projected discounted present value (as determined
by independent petroleum engineers) of estimated future net cash flows
(utilizing the bank’s internal projection of future natural gas and oil prices)
from our proved natural gas and oil reserves. The borrowing base is currently
under review pursuant to our semi-annual redetermination and we are anticipating
a reduction. Based on the current commodity price environment, banks have
lowered their internal projections of future natural gas and oil prices which
will decrease the borrowing base and thus decrease the amount available to be
borrowed under our reserve-based credit facility. We anticipate the review
process will be completed during May 2009. Our next borrowing base
redetermination is scheduled for October 2009 utilizing our September 30, 2009
reserve report. If commodity prices continue to decline and banks continue to
lower their internal projections of natural gas and oil prices, it is possible
that we will be subject to additional decreases in our borrowing base
availability in the future. If our outstanding borrowings under the
reserve-based credit facility exceed 90% of the borrowing base, we would be
required to suspend distributions to our unitholders until we have reduced our
borrowings to below the 90% threshold. As a result, absent accretive
acquisitions, to the extent available after unitholder distributions, debt
service, and capital expenditures, it is our current intention to utilize our
excess cash flow during 2009 to reduce our borrowings under our reserve-based
credit facility.
 28
 Borrowings
under the reserve-based credit facility are available for the development and
acquisition of natural gas and oil properties, working capital, and general
limited liability company purposes. Our obligations under the reserve-based
credit facility are secured by substantially all of our assets.
  At our
election, interest is determined by reference to:
  ·
              the
      London interbank offered rate, or LIBOR, plus an applicable margin between
      1.50% and 2.125% per annum; or
 
 ·
              a
      domestic bank rate plus an applicable margin between 0.00% and 0.75% per
      annum.
  As of
March 31, 2009, we have elected for interest to be determined by reference to
the LIBOR method described above. Interest is generally payable quarterly for
domestic bank rate loans and at the applicable maturity date for LIBOR loans,
but not less frequently than quarterly.
  The
reserve-based credit facility contains various covenants that limit our ability
to:
  ·
              incur
      indebtedness;
  ·
              grant
      certain liens;
 
 ·
              make
      certain loans, acquisitions, capital expenditures and
      investments;
 
 ·
              make
      distributions;
 
 ·
              merge
      or consolidate; or
 
 ·
              engage
      in certain asset dispositions, including a sale of all or substantially
      all of our assets.
  The
reserve-based credit facility also contains covenants that, among other things,
require us to maintain specified ratios or conditions as follows:
  ·
              consolidated
      net income plus interest expense, income taxes, depreciation, depletion,
      amortization, accretion, changes in fair value of derivative instruments
      and other similar charges, minus all non-cash income added to consolidated
      net income, and giving pro forma effect to any acquisitions or capital
      expenditures, to interest expense of not less than 2.5 to
    1.0;
 
 ·
              consolidated
      current assets, including the unused amount of the total commitments, to
      consolidated current liabilities of not less than 1.0 to 1.0, excluding
      non-cash assets and liabilities under SFAS No. 133, which includes the
      current portion of derivative contracts;
and
  ·
              consolidated
      debt to consolidated net income plus interest expense, income taxes,
      depreciation, depletion, amortization, accretion, changes in fair value of
      derivative instruments and other similar charges, minus all non-cash
      income added to consolidated net income, and giving pro forma effect to
      any acquisitions or capital expenditures of not more than 4.0 to
      1.0.
 
 We
have the ability to borrow under the reserve-based credit facility to pay
distributions to unitholders as long as there has not been a default or event of
default. Also, distributions can only be made to unitholders if the amount of
borrowings outstanding under our reserve-based credit facility is less than 90%
of the borrowing base.
 
 We
believe that we are in compliance with the terms of our reserve-based credit
facility. If an event of default exists under the reserve-based credit
agreement, the lenders will be able to accelerate the maturity of the credit
agreement and exercise other rights and remedies. Among others, each of the
following will be an event of default:
  ·
              failure
      to pay any principal when due or any interest, fees or other amount within
      certain grace periods;
 29
 ·
              a
      representation or warranty is proven to be incorrect when
      made;
 
 ·
              failure
      to perform or otherwise comply with the covenants in the credit agreement
      or other loan documents, subject, in certain instances, to certain grace
      periods;
 
 ·
              default
      by us on the payment of any other indebtedness in excess of $2.0 million,
      or any event occurs that permits or causes the acceleration of the
      indebtedness;
 
 ·
              bankruptcy
      or insolvency events involving us or our
  subsidiaries;
 
 ·
              the
      entry of, and failure to pay, one or more adverse judgments in excess of
      $1.0 million or one or more non-monetary judgments that could reasonably
      be expected to have a material adverse effect and for which enforcement
      proceedings are brought or that are not stayed pending
    appeal;
 
 ·
              specified
      events relating to our employee benefit plans that could reasonably be
      expected to result in liabilities in excess of $1.0 million in any year;
      and
 
 ·
              a
      change of control, which includes (1) an acquisition of ownership,
      directly or indirectly, beneficially or of record, by any person or group
      (within the meaning of the Securities Exchange Act of 1934 and the rules
      of the Securities Exchange Commission) of equity interests representing
      more than 25% of the aggregate ordinary voting power represented by our
      issued and outstanding equity interests other than by Majeed S. Nami or
      his affiliates, or (2) the replacement of a majority of our directors by
      persons not approved by our board of
directors.
  Off-Balance
Sheet Arrangements
  At March
31, 2009, we did not have any off-balance sheet arrangements that have, or are
reasonably likely to have, an effect on our financial position or results of
operations.
  Contingencies
  We
regularly analyze current information and accrue for probable liabilities on the
disposition of certain matters, as necessary. Liabilities for loss contingencies
arising from claims, assessments, litigation and other sources are recorded when
it is probable that a liability has been incurred and the amount can be
reasonably estimated. As of March 31, 2009, there were no loss
contingencies.
  Commitments
and Contractual Obligations
  A summary
of our contractual obligations as of March 31, 2009 is provided in the following
table:
 
 Payments Due by Year (in thousands)2009
                                                                                                                                                                    
                                                                                                                                                                    
                                                                                                                                                                    2010
                                                                                                                                                                    
                                                                                                                                                                    
                                                                                                                                                                    2011
                                                                                                                                                                    
                                                                                                                                                                    
                                                                                                                                                                    2012
                                                                                                                                                                    
                                                                                                                                                                    
                                                                                                                                                                    2013
                                                                                                                                                                    
                                                                                                                                                                    
                                                                                                                                                                    After 2013
                                                                                                                                                                    
                                                                                                                                                                    
                                                                                                                                                                    TotalManagement
      compensation
                                                                                                                                                                    
                                                                                                                                                                    $
                                                                                                                                                                    506
                                                                                                                                                                    
                                                                                                                                                                    
                                                                                                                                                                    $
                                                                                                                                                                    113
                                                                                                                                                                    
                                                                                                                                                                    
                                                                                                                                                                    $
                                                                                                                                                                    —
                                                                                                                                                                    
                                                                                                                                                                    
                                                                                                                                                                    $
                                                                                                                                                                    —
                                                                                                                                                                    
                                                                                                                                                                    
                                                                                                                                                                    $
                                                                                                                                                                    —
                                                                                                                                                                    
                                                                                                                                                                    
                                                                                                                                                                    $
                                                                                                                                                                    —
                                                                                                                                                                    
                                                                                                                                                                    
                                                                                                                                                                    $
                                                                                                                                                                    619Asset
      retirement obligations
                                                                                                                                                                    
                                                                                                                                                                    
                                                                                                                                                                    —
                                                                                                                                                                    
                                                                                                                                                                    
                                                                                                                                                                    
                                                                                                                                                                    37
                                                                                                                                                                    
                                                                                                                                                                    
                                                                                                                                                                    
                                                                                                                                                                    185
                                                                                                                                                                    
                                                                                                                                                                    
                                                                                                                                                                    
                                                                                                                                                                    32
                                                                                                                                                                    
                                                                                                                                                                    
                                                                                                                                                                    
                                                                                                                                                                    14
                                                                                                                                                                    
                                                                                                                                                                    
                                                                                                                                                                    
                                                                                                                                                                    1,891
                                                                                                                                                                    
                                                                                                                                                                    
                                                                                                                                                                    
                                                                                                                                                                    2,159Derivative
      liabilities
                                                                                                                                                                    
                                                                                                                                                                    
                                                                                                                                                                    243
                                                                                                                                                                    
                                                                                                                                                                    
                                                                                                                                                                    
                                                                                                                                                                    4,081
                                                                                                                                                                    
                                                                                                                                                                    
                                                                                                                                                                    
                                                                                                                                                                    1,268
                                                                                                                                                                    
                                                                                                                                                                    
                                                                                                                                                                    
                                                                                                                                                                    1,105
                                                                                                                                                                    
                                                                                                                                                                    
                                                                                                                                                                    
                                                                                                                                                                    405
                                                                                                                                                                    
                                                                                                                                                                    
                                                                                                                                                                    
                                                                                                                                                                    —
                                                                                                                                                                    
                                                                                                                                                                    
                                                                                                                                                                    
                                                                                                                                                                    7,102Long-term
      debt (1)
                                                                                                                                                                    
                                                                                                                                                                    
                                                                                                                                                                    —
                                                                                                                                                                    
                                                                                                                                                                    
                                                                                                                                                                    
                                                                                                                                                                    —
                                                                                                                                                                    
                                                                                                                                                                    
                                                                                                                                                                    
                                                                                                                                                                    136,500
                                                                                                                                                                    
                                                                                                                                                                    
                                                                                                                                                                    
                                                                                                                                                                    —
                                                                                                                                                                    
                                                                                                                                                                    
                                                                                                                                                                    
                                                                                                                                                                    —
                                                                                                                                                                    
                                                                                                                                                                    
                                                                                                                                                                    
                                                                                                                                                                    —
                                                                                                                                                                    
                                                                                                                                                                    
                                                                                                                                                                    
                                                                                                                                                                    136,500Operating
      leases
                                                                                                                                                                    
                                                                                                                                                                    
                                                                                                                                                                    123
                                                                                                                                                                    
                                                                                                                                                                    
                                                                                                                                                                    
                                                                                                                                                                    41
                                                                                                                                                                    
                                                                                                                                                                    
                                                                                                                                                                    
                                                                                                                                                                    —
                                                                                                                                                                    
                                                                                                                                                                    
                                                                                                                                                                    
                                                                                                                                                                    —
                                                                                                                                                                    
                                                                                                                                                                    
                                                                                                                                                                    
                                                                                                                                                                    —
                                                                                                                                                                    
                                                                                                                                                                    
                                                                                                                                                                    
                                                                                                                                                                    —
                                                                                                                                                                    
                                                                                                                                                                    
                                                                                                                                                                    
                                                                                                                                                                    164Total
                                                                                                                                                                    
                                                                                                                                                                    $
                                                                                                                                                                    872
                                                                                                                                                                    
                                                                                                                                                                    
                                                                                                                                                                    $
                                                                                                                                                                    4,272
                                                                                                                                                                    
                                                                                                                                                                    
                                                                                                                                                                    $
                                                                                                                                                                    137,953
                                                                                                                                                                    
                                                                                                                                                                    
                                                                                                                                                                    $
                                                                                                                                                                    1,137
                                                                                                                                                                    
                                                                                                                                                                    
                                                                                                                                                                    $
                                                                                                                                                                    419
                                                                                                                                                                    
                                                                                                                                                                    
                                                                                                                                                                    $
                                                                                                                                                                    1,891
                                                                                                                                                                    
                                                                                                                                                                    
                                                                                                                                                                    $
                                                                                                                                                                    146,544
 
 (1)
              This
      table does not include interest to be paid on the principal balances shown
      as the interest rates on the reserve-based credit facility are
      variable.
 30
 Non-GAAP
Financial Measure
 
 Adjusted
EBITDA
 
 We define
Adjusted EBITDA as net income (loss) plus:
 
 •
              Net
      interest expense, including write-off of deferred financing fees and
      realized gains and losses on interest rate derivative
      contracts;
 
 •
              Depreciation,
      depletion, and amortization (including accretion of asset retirement
      obligations);
 
 •
              Impairment
      of natural gas and oil properties;
 
 •
              Amortization
      of premiums paid and non-cash settlement on derivative
      contracts;
 
 •
              Unrealized
      gains and losses on other commodity and interest rate derivative
      contracts;
 
 •
              Deferred
      taxes; and
 
 •
              Unit-based
      compensation expense.
  Adjusted
EBITDA is a significant performance metric used by management as a tool to
measure (prior to the establishment of any cash reserves by our board of
directors, debt service and capital expenditures) the cash distributions we
could pay our unitholders. Specifically, this financial measure indicates to
investors whether or not we are generating cash flow at a level that can sustain
or support an increase in our quarterly distribution rates. Adjusted EBITDA is
also used as a quantitative standard by our management and by external users of
our financial statements such as investors, research analysts, and others to
assess the financial performance of our assets without regard to financing
methods, capital structure, or historical cost basis; the ability of our assets
to generate cash sufficient to pay interest costs and support our indebtedness;
and our operating performance and return on capital as compared to those of
other companies in our industry.
  Our
Adjusted EBITDA should not be considered as an alternative to net income,
operating income, cash flow from operating activities, or any other measure of
financial performance or liquidity presented in accordance with GAAP. Our
Adjusted EBITDA excludes some, but not all, items that affect net income and
operating income, and these measures may vary among other companies. Therefore,
our Adjusted EBITDA may not be comparable to similarly titled measures of other
companies.
  For the
three months ended March 31, 2009 as compared to the three months ended March
31, 2008, Adjusted EBITDA increased 21%, from $10.4 million to $12.6 million.
The following table presents a reconciliation of consolidated net loss to
Adjusted EBITDA:
  Three
      Months Ended
                      March
      31,
                      (in
      thousands)2009
                    
                    
                    2008Net
      loss
                    
                    $
                    (49,965
                    )
                    
                    $
                    (15,932
                    )Plus:Interest expense, including realized losses on interest rate
      derivative contracts
                    
                    
                    1,349
                    
                    
                    
                    1,130Depreciation, depletion, amortization, and accretion
                    
                    
                    3,783
                    
                    
                    
                    2,824Impairment of natural gas and oil
      properties
                    
                    
                    63,818
                    
                    
                    
                    —Amortization of premiums paid and
      non-cash settlement on derivative contracts
                    
                    
                    1,465
                    
                    
                    
                    1,301Unrealized (gains) losses on other commodity and interest rate derivative
      contracts
                    
                    
                    (9,786
                    )
                    
                    
                    20,210Deferred
    taxes
                    
                    
                    (197
                    )
                    
                    
                    —Unit-based compensation expense
                    
                    
                    2,188
                    
                    
                    
                    915Less:Interest
    income
                    
                    
                    —
                    
                    
                    
                    8Adjusted
      EBITDA
                    
                    $
                    12,655
                    
                    
                    $
                    10,440
 31
 Item
3. Quantitative and
Qualitative Disclosures About Market Risk
 
 The
primary objective of the following information is to provide forward-looking
quantitative and qualitative information about our potential exposure to market
risks. The term “market risk” refers to the risk of loss arising from adverse
changes in natural gas and oil prices and interest rates. The disclosures are
not meant to be precise indicators of expected future losses, but rather
indicators of reasonably possible losses. This forward-looking information
provides indicators of how we view and manage our ongoing market risk exposures.
All of our market risk sensitive instruments were entered into for purposes
other than speculative trading. Conditions sometimes arise where actual
production is less than estimated, which has, and could result in overhedged
volumes.
  Commodity
Price Risk
  Our major
market risk exposure is in the pricing applicable to our natural gas and oil
production. Realized pricing is primarily driven by the Columbia Gas Appalachian
Index (“TECO Index”), Henry Hub, and Houston Ship Channel for natural gas
production and the West Texas Intermediate Light Sweet for oil production.
Pricing for natural gas production has been volatile and unpredictable for
several years, and we expect this volatility to continue in the future. The
prices we receive for production depend on many factors outside our control. In
addition, the potential exists that if commodity prices decline to a certain
level, the borrowing base can be decreased at the borrowing base redetermination
date to an amount lower than the amount of debt currently outstanding and,
because it would be uneconomical, production could decline to levels below our
hedged volumes.
  Furthermore,
the risk that we will be required to write down the carrying value of our
natural gas and oil properties increases when oil and gas prices are low or
volatile. In addition, write downs may occur if we experience substantial
downward adjustments to our estimated proved reserves, or if estimated future
development costs increase. For example, natural gas prices declined throughout
the first three months of 2009. We recorded a non-cash ceiling test impairment
of natural gas and oil properties for the three months ended March 31, 2009 of
$63.8 million as a result of a decline in natural gas prices at the measurement
date, March 31, 2009.  This impairment was calculated based on prices
of $3.65 per MMBtu for natural gas and $49.64 per barrel of crude
oil.
 
 We enter
into derivative contracts with respect to a portion of our projected natural gas
and oil production through various transactions that mitigate the volatility of
future prices received. These transactions may include price swaps whereby we
will receive a fixed-price for our production and pay a variable market price to
the contract counterparty. Additionally, we have put options for which we pay
the counterparty the fair value at the purchase date. At the settlement date we
receive the excess, if any, of the fixed floor over the floating rate.
Furthermore, we may enter into collars where we pay the counterparty if the
market price is above the ceiling price and the counterparty pays us if the
market price is below the floor price on a notional quantity. These activities
are intended to support our realized commodity prices at targeted levels and to
manage our exposure to natural gas and oil price fluctuations. It is never
management’s intention to hold or issue derivative instruments for speculative
trading purposes.
  At
March 31, 2009, the fair value of commodity derivative contracts was an
asset of approximately $47.2 million, of which $28.1 million settle during
the next twelve months.
 
 The
following table summarizes commodity derivative contracts in place at March 31,
2009:
 
 April
      1, -December 31, 2009
                  
                  
                  Year
                    2010
                  
                  
                  Year
                    2011Gas
      Positions:Fixed
      Price Swaps:Notional
      Volume (MMBtu)
                  
                  
                  2,672,864
                  
                  
                  
                  3,782,040
                  
                  
                  
                  3,328,312Fixed
      Price ($/MMBtu)
                  
                  $
                  9.30
                  
                  
                  $
                  8.95
                  
                  
                  $
                  7.83Puts:Notional
      Volume (MMBtu)
                  
                  
                  613,041
                  
                  
                  
                  —
                  
                  
                  
                  —Floor
      Price ($/MMBtu)
                  
                  $
                  7.50
                  
                  
                  $
                  —
                  
                  
                  $
                  —Collars:Notional
      Volume (MMBtu)
                  
                  
                  749,997
                  
                  
                  
                  914,000
                  
                  
                  
                  364,000Floor
      Price ($/MMBtu)
                  
                  $
                  7.50
                  
                  
                  $
                  7.90
                  
                  
                  $
                  7.50Ceiling
      Price ($/MMBtu)
                  
                  $
                  9.00
                  
                  
                  $
                  9.24
                  
                  
                  $
                  9.00Total:Notional
      Volume (MMBtu)
                  
                  
                  4,035,902
                  
                  
                  
                  4,696,040
                  
                  
                  
                  3,692,312Oil
      Positions:Fixed
      Price Swaps:Notional
      Volume (Bbls)
                  
                  
                  135,000
                  
                  
                  
                  164,250
                  
                  
                  
                  151,250Fixed
      Price ($/Bbl)
                  
                  $
                  87.23
                  
                  
                  $
                  85.65
                  
                  
                  $
                  85.50Collars:Notional
      Volume (Bbls)
                  
                  
                  27,500
                  
                  
                  
                  —
                  
                  
                  
                  —Floor
      Price ($/Bbl)
                  
                  $
                  100.00
                  
                  
                  $
                  —
                  
                  
                  $
                  —Ceiling
      Price ($/Bbl)
                  
                  $
                  127.00
                  
                  
                  $
                  —
                  
                  
                  $
                  —Total:Notional
      Volume (Bbls)
                  
                  
                  162,500
                  
                  
                  
                  164,250
                  
                  
                  
                  151,250
 32
 Interest
Rate Risks
 
 At March
31, 2009, we had debt outstanding of $136.5 million, which incurred interest at
floating rates based on LIBOR in accordance with our reserve-based credit
facility and, if the debt remains the same, a 1% increase in LIBOR would result
in an estimated $0.4 million increase in annual interest expense after
consideration of the interest rate swaps discussed below. We entered into
interest rate swaps, which require exchanges of cash flows that serve to
synthetically convert a portion of our variable interest rate exposures to fixed
interest rates.
 
 In August
2008, we entered into two interest rate basis swaps which changed the reset
option from three month LIBOR to one month LIBOR on the total $60.0 million of
outstanding interest rate swaps. By doing so, we reduced our borrowing cost
based on three month LIBOR by 14 basis points on $20.0 million of borrowings for
a one year period starting September 10, 2008 and 12 basis points on $40.0
million of borrowings for a one year period starting October 31, 2008. As a
result of these two basis swaps, we chose to de-designate the interest rate
swaps as cash flow hedges as the terms of the new contracts no longer matched
the terms of the original contracts, thus causing the interest rate hedges to be
ineffective. Beginning in the third quarter of 2008, we recorded changes in the
fair value of our interest rate derivatives in current earnings under
unrealized gains (losses) on interest rate derivative contracts. The net
unrealized gain related to the de-designated cash flow hedges is reported in
accumulated other comprehensive income and later reclassified to earnings in the
month in which the transactions settle. In December 2008, we amended three
existing interest rate swap agreements and entered into one new agreement which
fixed the LIBOR rate at 1.85% on $10.0 million of borrowings through December
2010. The first amended agreement reduced the fixed LIBOR rate from 3.88% to
3.35% on $20.0 million and the maturity was extended two additional years to
December 10, 2012. In addition, the second amended agreement reset the notional
amount on the March 31, 2011 swap from $10.0 million to $20.0 million and also
reduced the rate from 2.66% to 2.08%. The final amended agreement reset the
notional amount on the January 31, 2011 swap from $10.0 million to $20.0
million, reduced the rate from 3.00% to 2.38%, and also extended the maturity
two additional years to 2013.
 
 The
following summarizes information concerning our positions in open interest rate
derivative contracts at March 31, 2009:
 
 Notional
                      Amount
                      (in
      thousands)
                    
                    Fixed
                      Libor
                      RatesPeriod:April
      1, 2009 to December 10, 2010
                    
                    $
                    10,000
                    
                    1.50
                    %April
      1, 2009 to December 20, 2010
                    
                    $
                    10,000
                    
                    1.85
                    %April
      1, 2009 to January 31, 2011
                    
                    $
                    20,000
                    
                    3.00
                    %April
      1, 2009 to March 31, 2011
                    
                    $
                    20,000
                    
                    2.08
                    %April
      1, 2009 to December 10, 2012
                    
                    $
                    20,000
                    
                    3.35
                    %April
      1, 2009 to January 31, 2013
                    
                    $
                    20,000
                    
                    2.38
                    %April
      1, 2009 to September 10, 2009 (Basis Swap)
                    
                    $
                    20,000
                    
                    LIBOR
      1M vs. LIBOR 3MApril
      1, 2009 to October 31, 2009 (Basis Swap)
                    
                    $
                    40,000
                    
                    LIBOR
      1M vs. LIBOR 3M
  33
 Counterparty
Risk
 
 At March
31, 2009, based upon all of our open derivative contracts shown above and their
respective mark to market values, we had the following current and long-term
derivative assets and liabilities shown by counterparty with their current
S&P financial strength rating in parentheses (in thousands):
 
 Citibank,
      N.A.
                                            (A+)
                                          
                                          
                                          BNP
      Paribas
                                            (AA)
                                          
                                          
                                          The
      Bank of Nova Scotia
                                            (AA-)
                                          
                                          
                                          Wachovia
      Bank, N.A.
                                            (AA+)
                                          
                                          
                                          TotalCurrent
      Asset, net
                                          $
                                          1,011
                                          
                                          
                                          $
                                          25,980
                                          
                                          
                                          $
                                          1,115
                                          
                                          
                                          $
                                          —
                                          
                                          
                                          $
                                          28,106Current
      Liability, net
                                          
                                          (37
                                          )
                                          
                                          
                                          —
                                          
                                          
                                          
                                          —
                                          
                                          
                                          
                                          (207
                                          )
                                          
                                          
                                          (244
                                          )Long-Term
      Asset, net
                                          
                                          3,560
                                          
                                          
                                          
                                          15,527
                                          
                                          
                                          
                                          —
                                          
                                          
                                          
                                          —
                                          
                                          
                                          
                                          19,087Long-Term
      Liability, net
                                          
                                          —
                                          
                                          
                                          
                                          (1,510
                                          )
                                          
                                          
                                          (772
                                          )
                                          
                                          
                                          (317
                                          )
                                          
                                          
                                          (2,599
                                          )Total
      Amount Due from Counterparty/(Owed
      to Counterparty)
                                            at
      March 31, 2009
                                          $
                                          4,534
                                          
                                          
                                          $
                                          39,997
                                          
                                          
                                          $
                                          343
                                          
                                          
                                          $
                                          (524
                                          )
                                          
                                          $
                                          44,350
 
 We net
derivative assets and liabilities for counterparties where we have a legal right
of offset.  Our counterparties are participants in our reserve-based
credit facility.
 
 Item 4.  Controls and Procedures
  Evaluation
of Disclosure Controls and Procedures
  As of the
end of the period covered by this Quarterly Report on Form 10-Q, the
effectiveness of our disclosure controls and procedures (as defined in
Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended) was
evaluated by our management, with the participation of our Chief Executive
Officer and our Chief Financial Officer, in accordance with rules of the
Securities Exchange Act of 1934, as amended. Based on that evaluation, our Chief
Executive Officer and Chief Financial Officer have concluded that our disclosure
controls and procedures were effective as of March 31, 2009 to provide
reasonable assurance that information required to be disclosed in our reports
filed or submitted under the Securities Exchange Act of 1934, as amended, is
accumulated and communicated to management and recorded, processed, summarized
and reported within the time periods specified in the SEC’s rules and
forms.
 
 Changes
in Internal Control over Financial Reporting
  There were no changes in our internal
control over financial reporting that occurred during our last fiscal quarter
that have materially affected, or are reasonably likely to materially affect our
internal control over financial reporting.
 
 34
 PART II — OTHER INFORMATION
  Item 1.  Legal Proceedings
  Although
we may, from time to time, be involved in litigation and claims arising out of
our operations in the normal course of business, we are not currently a party to
any material legal proceedings. In addition, we are not aware of any legal or
government proceedings against us, or contemplated to be brought against us,
under the various environmental statutes to which we are subject.
  Item 1A.  Risk Factors
  Our
business faces many risks. Any of the risks discussed below or elsewhere in this
Form 10-Q or our other SEC filings, could have a material impact on our
business, financial position or results of operations. Additional risks and
uncertainties not presently known to us or that we currently believe to be
immaterial may also impair our business operations. For a detailed discussion of
the risk factors that should be understood by any investor contemplating
investment in our units, please refer to the section entitled “Item 1A. Risk
Factors” in our Annual Report on Form 10-K for the year ended December 31, 2008
as supplemented by the risk factors set forth below. There has been no material
change in the risk factors set forth in our Annual Report on Form 10-K for the
year ended December 31, 2008 other than those set forth below. For further
information, see Part I—Item 1A—Risk Factors in our Annual Report on Form 10-K
for the year ended December 31, 2008.
 
 Natural
gas and oil prices are volatile.  A decline in natural gas and oil
prices could adversely affect our credit availability, financial position,
financial results, cash flow, access to capital and ability to
grow.
 
 Our
future borrowing base under our reserve-based credit facility, financial
condition, revenues, results of operations, rate of growth and the carrying
value of our natural gas and oil properties depend primarily upon the prices we
receive for our natural gas and oil production and the prices prevailing from
time to time for natural gas and oil. Prices also affect our cash flow available
for capital expenditures and our ability to access funds under our reserve-based
credit facility and through the capital markets. The amount available for
borrowing under our reserve-based credit facility is subject to a borrowing
base, which is determined by our lenders taking into account our estimated
proved reserves and is subject to semi-annual redeterminations based on pricing
models determined by the lenders at such time. The decline in natural gas and
oil prices has adversely impacted the value of our estimated proved reserves
and, in turn, the market values used by our lenders to determine our borrowing
base. We expect a reduction in our borrowing base pursuant to our
redetermination currently in process and expect to be completed in May 2009. It
is possible that we will be subject to a further reduction in our borrowing base
at our next scheduled redetermination in October 2009. If our outstanding
borrowings under the reserve-based credit facility exceed 90% of our borrowing
base, we would be required to cease paying distributions to our unitholders
until we reduce our borrowings below the 90% threshold.
 
 Natural
gas and oil prices historically have been volatile and are likely to continue to
be volatile in the future, especially given current geopolitical and economic
conditions.  For example, the NYMEX crude oil spot price per barrel
for the period between January 1, 2009 and March 31, 2009 ranged from a high of
$53.87 to a low of $34.03 and the NYMEX natural gas spot price per MMBtu for the
period January 1, 2009 to March 31, 2009 ranged from a high of $6.07 to a low of
$3.63. As of May 5, 2009, the NYMEX crude oil spot price per barrel was $53.81
and the NYMEX natural gas spot price per MMBtu was $3.62. This price volatility
affects the amount of our cash flow we have available for capital expenditures
and our ability to borrow money or raise additional capital.  The
prices for natural gas and oil are subject to a variety of factors,
including:
 
 ·
              the
      level of consumer demand for natural gas and
  oil;
 
 ·
              the
      domestic and foreign supply of natural gas and
  oil;
 
 ·
              commodity
      processing, gathering and transportation availability, and the
      availability of refining capacity;
 
 ·
              the
      price and level of imports of foreign crude natural gas and
      oil;
 
 ·
              the
      ability of the members of the Organization of Petroleum Exporting
      Countries to agree to and to enforce crude oil price and production
      controls;
 
 ·
              domestic
      and foreign governmental regulations and
taxes;
 
 ·
              the
      price and availability of alternative fuel
  sources;
 35
 ·
              weather
      conditions;
 
 ·
              political
      conditions or hostilities in oil and gas producing regions, including the
      Middle East, Africa and South
America;
 
 ·
              technological
      advances affecting energy consumption;
and
 
 ·
              worldwide
      economic conditions.
 
 Declines
in natural gas and oil prices would not only reduce our revenue, but could
reduce the amount of natural gas and oil that we can produce economically and,
as a result, could have a material adverse effect on our financial condition,
results of operations, and reserves.  We use the full cost method of
accounting for natural gas and oil properties which requires us to perform a
“ceiling test” quarterly that is impacted by declining prices. Significant price
declines could cause us to take one or more ceiling test write downs, which
would be reflected as non-cash charges against current earnings. We recorded a
non-cash ceiling test impairment of natural gas and oil properties for the three
months ended March 31, 2009 of $63.8 million as a result of a decline in natural
gas prices at the measurement date, March 31, 2009. If the gas and oil industry
experiences significant price declines, we may, among other things, be unable to
maintain or increase our borrowing capacity, pay distributions to our
unitholders, repay current or future indebtedness or obtain additional capital
on attractive terms, all of which can affect the value of our
units.
 
 We
may not have sufficient cash from operations to pay quarterly distributions on
our common units following establishment of cash reserves and payment of
operating costs.
  We may
not have sufficient cash flow from operations each quarter to pay
distributions.  Under the terms of our limited liability company
agreement, the amount of cash otherwise available for distribution will be
reduced by our operating expenses and the amount of any cash reserve amounts
that our board of directors establishes to provide for future operations, future
capital expenditures, future debt service requirements and future cash
distributions to our unitholders. The amount of cash we can distribute on our
common units principally depends upon the amount of cash we generate from our
operations, which will fluctuate from quarter to quarter based on, among other
things:
  ·
              the
      amount of natural gas and oil we
produce;
  ·
              the
      price at which we are able to sell our natural gas and oil
      production;
  ·
              the
      level of our operating costs;
  ·
              the
      level of our interest expense which depends on the amount of our
      indebtedness and the interest payable thereon;
  and
  ·
              the
      level of our capital expenditures.
  In
addition, the actual amount of cash we will have available for distribution will
depend on other factors, some of which are beyond our control,
including:
  ·
              the
      level of our capital expenditures;
  ·
              our
      ability to make working capital borrowings under our credit facility to
      pay distributions;
  ·
              the
      cost of acquisitions, if any;
  ·
              our
      debt service requirements;
  ·
              fluctuations
      in our working capital needs;
  ·
              timing
      and collectibility of receivables;
  ·
              restrictions
      on distributions contained in our credit
  facility;
  ·
              prevailing
      economic conditions; and
  ·
              the
      amount of cash reserves established by our board of directors for the
      proper conduct of our business.
  As a
result of these factors, the amount of cash we distribute in any quarter to our
unitholders may fluctuate significantly from quarter to quarter. If we do not
achieve our expected operational results or our borrowing base is reduced to a
level where our outstanding borrowings exceed 90% of our borrowing base, we may
not be able to pay the full, or any, amount of the quarterly distribution, in
which event the market price of our common units may decline
substantially.
 36
 We
may not be able to obtain funding, obtain funding on acceptable terms or obtain
funding under our current credit facility because of the deterioration of the
credit and capital markets. This may hinder or prevent us from meeting our
future capital needs.
 
 Global
financial markets and economic conditions have been, and continue to be,
disrupted and volatile. The debt and equity capital markets have been
exceedingly distressed. These issues, along with significant write-offs in the
financial services sector, the re-pricing of credit risk and the current weak
economic conditions have made, and will likely continue to make, it difficult to
obtain funding.
 
 In
particular, the cost of raising money in the debt and equity capital markets has
increased substantially while the availability of funds from those markets
generally has diminished significantly. Also, as a result of concerns about the
stability of financial markets generally and the solvency of counterparties
specifically, the cost of obtaining money from the credit markets generally has
increased as many lenders and institutional investors have increased interest
rates, enacted tighter lending standards, refused to refinance existing debt at
maturity at all or on terms similar to our current debt and reduced, and, in
some cases, ceased to provide funding to borrowers.
 
 In
addition, we may be unable to obtain adequate funding under our current credit
facility because our lending counterparties may be unwilling or unable to meet
their funding obligations.
 
 Due to
these factors, we cannot be certain that funding will be available if needed and
to the extent required, on acceptable terms. If funding is not available when
needed, or is available only on unfavorable terms, we may be unable to grow our
existing business, complete acquisitions or otherwise take advantage of business
opportunities, or respond to competitive pressures any of which could have a
material adverse effect on our revenues and results of operations.
 
 Growing
the Company will require significant amounts of debt and equity financing which
may not be available to us on acceptable terms, or at all.
 
 We plan
to fund our growth through acquisitions with proceeds from sales of our debt and
equity securities and borrowings under our reserve-based credit facility;
however, we cannot be certain that we will be able to issue our debt and equity
securities on terms or in the proportions that we expect, or at all, and we may
be unable refinance our reserve-based credit facility when it
expires.
 
 The cost
of raising money in the debt and equity capital markets has increased
substantially while the availability of funds from those markets generally has
diminished significantly. Also, as a result of concerns about the stability of
financial markets generally and the solvency of counterparties specifically, the
cost of obtaining money from the credit markets generally has increased as many
lenders and institutional investors have increased interest rates, enacted
tighter lending standards, refused to refinance existing debt at maturity at all
or on terms similar to our current debt and reduced, and, in some cases, ceased
to provide funding to borrowers.
 
 A
significant increase in our indebtedness, or an increase in our indebtedness
that is proportionately greater than our issuances of equity, as well as the
credit market and debt and equity capital market conditions discussed above
could negatively impact our ability to remain in compliance with the financial
covenants under our reserve-based credit facility which could have a material
adverse effect on our financial condition, results of operations and cash flows.
If we are unable to finance our growth as expected, we could be required to seek
alternative financing, the terms of which may not be attractive to us, or not
purse growth opportunities.
 
 We
are exposed to trade credit risk in the ordinary course of our business
activities.
 
 We are
exposed to risks of loss in the event of nonperformance by our vendors,
customers and by counterparties to our hedging arrangements. Some of our
vendors, customers and counterparties may be highly leveraged and subject to
their own operating and regulatory risks. Many of our vendors, customers, and
counterparties finance their activities through cash flow from operations, the
incurrence of debt or the issuance of equity. Recently, there has been a
significant decline in the credit markets and the availability of credit.
Additionally, many of our vendors’, customers’, and counterparties' equity
values have substantially declined. The combination of reduction of cash
flow resulting from declines in commodity prices and the lack of availability of
debt or equity financing may result in a significant reduction in our vendors’,
customers’, and counterparties' liquidity and ability to make payments or
perform on their obligations to us. Even if our credit review and analysis
mechanisms work properly, we may experience financial losses in our dealings
with other parties. Any increase in the nonpayment or nonperformance by our
vendors, customers, and/or counterparties could reduce our ability to make
distributions to our unitholders.
 37
 Certain
federal income tax deductions currently available with respect to oil and gas
drilling and development may be eliminated as a result of future legislation.
Additionally, federal income tax rates may be increased for certain investors,
in which case any income resulting from an investment in us may result in higher
federal income tax payments.
  The White
House released a preview of its budget for Fiscal Year 2010 on February 26,
2009, entitled “A New Era of Responsibility: Renewing America’s Promise.” Among
the new administration’s proposed changes are the outright elimination of many
of the key federal income tax benefits historically associated with oil and gas.
Although presented in very summary form, among other significant energy tax
items, the administration’s budget appears to propose the complete elimination
of (i) expensing of intangible drilling costs, and (ii) the “percentage
depletion” method of deduction with respect to oil and gas wells. Additionally,
the budget proposes to reinstate for single individuals making greater than
$200,000 per year, and for couples making greater than $250,000 per year, the
maximum ordinary income rates of 36% and 39.6%, and the maximum long-term
capital gain rate of 20%.
  Although
no legislation has yet been formally introduced, the administration’s apparent
effective date would be January 1, 2011. It is unclear whether such proposal
will be proposed as actual legislation and, if so, whether it will actually be
enacted. In addition, there are other significant tax changes under discussion
in the Congress. If this proposal (or others) is enacted into law, it could
represent an extremely significant reduction in the tax benefits that have
historically applied to certain investments in oil and gas.
  Item 2.  Unregistered Sales of Equity Securities
and Use of Proceeds
  None.
  Item 3.  Defaults Upon Senior
Securities
  None.
  Item 4.  Submission of Matters to a Vote of
Security Holders
  None.
 
 Item 5.  Other Information
 Amendment
to Gathering and Compression Agreement
 
 On May 8,
2009, but effective March 1, 2009, we amended the Gathering and Compression
Agreement with Vinland (the “GCA”) to revise the transportation fee paid to
Vinland pursuant to the GCA. Historically, we have paid Vinland a $0.25 per Mcf
and $0.55 per Mcf gathering and compression charge for production from wells
drilled before January 1, 2007 and after January 1, 2007, respectively, pursuant
to the GCA.  The amendment to the GCA (the “GCA Amendment”) provides
for a gathering and compression charge based upon the actual cost incurred by
Vinland in providing the gathering and transportation services plus a $0.05 per
Mcf margin for the period beginning March 1, 2009 until December 31,
2009.
 
 The
foregoing description of the GCA Amendment is qualified in its entirety by
reference to the full text of the Amendment, which is attached as Exhibit 10.36
to this Form 10-Q and incorporated herein by reference.
 
 Amendment
to the Management Services Agreement
 
 On May 8,
2009, but effective March 1, 2009, we amended the Management Services Agreement
with Vinland (the “MSA”) to revise the administrative charges paid to Vinland
pursuant to the MSA.  Historically, we have paid Vinland $60 per well
per month for administrative services pursuant to the MSA.  The
amendment to the MSA (the “MSA Amendment”) increases this administrative charge
to $95 per well per month for the period beginning March 1, 2009 until December
31, 2009.
 
 The
foregoing description of the MSA Amendment is qualified in its entirety by
reference to the full text of the Amendment, which is attached as Exhibit 10.37
to this Form 10-Q and incorporated herein by reference.
  Item 6.  Exhibits
  EXHIBIT
INDEX
 Each
exhibit identified below is filed as a part of this Report.
  Exhibit
      No.
                  
                  Exhibit
      Title
                  
                  Incorporated
      by Reference to the Following3.1
                  
                  Certificate
      of Formation of Vanguard Natural Resources, LLC
                  
                  Form
      S-1/A, filed April 25, 2007 (File No. 333-142363)3.2
                  
                  Second
      Amended and Restated Limited Liability Company Agreement of Vanguard
      Natural Resources, LLC (including specimen unit certificate for the
      units)
                  
                  Form
      8-K, filed November 2, 2007 (File No. 001-33756)10.1
                  
                  Vanguard
      Natural Resources, LLC Long-Term Incentive Plan
                  
                  Form
      8-K, filed October 24, 2007 (File No. 001-33756)10.2
                  
                  Form of
      Vanguard Natural Resources, LLC Long-Term Incentive Plan Phantom Options
      Grant Agreement
                  
                  Form
      S-1/A, filed April 25, 2007 (File No. 333-142363)10.3
                  
                  Vanguard
      Natural Resources, LLC Class B Unit Plan
                  
                  Form
      8-K, filed October 24, 2007 (File No. 001-33756)10.4
                  
                  Form of
      Vanguard Natural Resources, LLC Class B Unit Plan Restricted
      Class B Unit Grant
                  
                  Form
      S-1/A, filed April 25, 2007 (File No. 333-142363)10.5
                  
                  Management
      Services Agreement, effective January 5, 2007, by and between Vinland
      Energy Operations, LLC, Vanguard Natural Gas, LLC, Trust Energy Company,
      LLC and Ariana Energy, LLC
                  
                  Form
      S-1/A, filed April 25, 2007 (File No. 333-142363)10.6
                  
                  Participation
      Agreement, effective January 5, 2007, by and between Vinland Energy
      Eastern, LLC, Vanguard Natural Gas, LLC, Trust Energy Company, LLC and
      Ariana Energy, LLC
                  
                  Form
      S-1/A, filed April 25, 2007 (File No. 333-142363)10.7
                  
                  Gathering
      and Compression Agreement, effective January 5, 2007, by and between
      Vinland Energy Gathering, LLC, Vinland Energy Eastern, LLC, Vanguard
      Natural Gas, LLC and Ariana Energy, LLC
                  
                  Form
      S-1/A, filed April 25, 2007 (File No. 333-142363)10.8
                  
                  Gathering
      and Compression Agreement, effective January 5, 2007, by and between
      Vinland Energy Gathering, LLC, Vinland Energy Eastern, LLC, Vanguard
      Natural Gas, LLC and Trust Energy Company
                  
                  Form
      S-1/A, filed April 25, 2007 (File No. 333-142363)10.9
                  
                  Gathering
      and Compression Agreement, effective January 5, 2007, by and between
      Vinland Energy Gathering, LLC and Nami Resources Company,
      L.L.C.
                  
                  Form
      S-1/A, filed April 25, 2007 (File No. 333-142363)10.10
                  
                  Well
      Services Agreement, effective January 5, 2007, by and between Vinland
      Energy Operations, LLC, Vanguard Natural Gas, LLC and Ariana Energy,
      LLC
                  
                  Form
      S-1/A, filed April 25, 2007 (File No. 333-142363)10.11
                  
                  Well
      Services Agreement, effective January 5, 2007, by and between Vinland
      Energy Operations, LLC, Vanguard Natural Gas, LLC and Trust Energy
      Company, LLC
                  
                  Form
      S-1/A, filed April 25, 2007 (File No. 333-142363)10.12
                  
                  Well
      Services Agreement, effective January 5, 2007, by and between Vinland
      Energy Operations, LLC and Nami Resources Company, L.L.C.
                  
                  Form
      S-1/A, filed April 25, 2007 (File No. 333-142363)10.13
                  
                  Amended
      and Restated Operating Agreement by and between Vinland Energy Operations,
      LLC, Vinland Energy Eastern, LLC and Ariana Energy, LLC, dated October 2,
      2007 and effective as of January 5, 2007
                  
                  Form
      S-1/A, filed October 22, 2007 (File No. 333-142363)10.14
                  
                  Operating
      Agreement, effective January 5, 2007, by and between Vinland Energy
      Operations, LLC, Vinland Energy Eastern, LLC and Trust Energy Company,
      LLC
                  
                  Form
      S-1/A, filed April 25, 2007 (File No. 333-142363)10.15
                  
                  Amended
      and Restated Indemnity Agreement by and between Nami Resources Company,
      L.L.C., Vinland Energy Eastern, LLC, Trust Energy Company, LLC, Vanguard
      Natural Gas, LLC and Vanguard Natural Resources, LLC, dated September 11,
      2007
                  
                  Form
      S-1/A, filed September 18, 2007 (File No. 333-142363)10.16
                  
                  Revenue
      Payment Agreement by and between Nami Resources Company, L.L.C. and Trust
      Energy Company, dated April 18, 2007 and effective as of January 5,
      2007
                  
                  Form
      S-1/A, filed August 21, 2007 (File No. 333-142363)10.17
                  
                  Gas
      Supply Agreement, dated April 18, 2007, by and between Nami Resources
      Company, L.L.C. and Trust Energy Company
                  
                  Form
      S-1/A, filed April 25, 2007 (File No. 333-142363)10.18
                  
                  Amended
      Employment Agreement, dated April 18, 2007, by and between Scott W.
      Smith, VNR Holdings, LLC and Vanguard Natural Resources,
    LLC
                  
                  Form
      S-1/A, filed April 25, 2007 (File No. 333-142363)10.19
                  
                  Amended
      Employment Agreement, dated April 18, 2007, by and between Richard A.
      Robert, VNR Holdings, LLC and Vanguard Natural Resources,
    LLC
                  
                  Form
      S-1/A, filed April 25, 2007 (File No. 333-142363)10.20
                  
                  Registration
      Rights Agreement, dated April 18, 2007, between Vanguard Natural
      Resources, LLC and the private investors named therein
                  
                  Form
      S-1/A, filed April 25, 2007 (File No. 333-142363)10.21
                  
                  Purchase
      Agreement, dated April 18, 2007, between Vanguard Natural Resources,
      LLC, Majeed S. Nami and the private investors named
therein
                  
                  Form
      S-1/A, filed April 25, 2007 (File No. 333-142363)10.22
                  
                  Omnibus
      Agreement, dated October 29, 2007, among Majeed S. Nami, Vanguard Natural
      Resources, LLC, Vanguard Natural Gas, LLC, Ariana Energy, LLC and Trust
      Energy Company, LLC.
                  
                  Form
      8-K, filed November 2, 2007 (File No. 001-33756)10.23
                  
                  Employment
      Agreement, dated May 15, 2007, by and between Britt Pence, VNR Holdings,
      LLC and Vanguard Natural Resources, LLC
                  
                  Form
      S-1/A, filed July 5, 2007 (File No. 333-142363)10.24
                  
                  Natural
      Gas Contract, dated May 26, 2003, between Nami Resources Company,
      Inc. and Osram Sylvania Products, Inc.
                  
                  Form
      S-1/A, filed August 21, 2007 (File No. 333-142363)10.25
                  
                  Natural
      Gas Purchase Contract, dated December 16, 2004, between Nami
      Resources Company, LLC and Dominion Field Services, Inc.
                  
                  Form
      S-1/A, filed August 21, 2007 (File No. 333-142363)10.26
                  
                  Natural
      Gas Purchase Contract, dated December 28, 2004, between Nami
      Resources Company, LLC and Dominion Field Services, Inc.
                  
                  Form
      S-1/A, filed August 21, 2007 (File No. 333-142363)10.27
                  
                  Director
      Compensation Agreement
                  
                  Form
      S-1/A, filed September 18, 2007 (File No. 333-142363)10.28
                  
                  Purchase
      and Sale Agreement, dated December 21, 2007, among Vanguard Permian, LLC
      and Apache Corporation
                  
                  Form
      8-K/A, filed February 13, 2008 (File No. 001-33756)10.29
                  
                  Amended
      Purchase and Sale Agreement, dated January 31, 2008, among Vanguard
      Permian, LLC and Apache Corporation
                  
                  Form
      8-K/A, filed February 4, 2008 (File No. 001-33756)10.30
                  
                  Amended
      and Restated Credit Agreement, dated February 14, 2008, by and between
      Nami Holding Company, LLC, Citibank, N.A., as administrative agent and L/C
      issuer and the lenders party thereto
                  
                  Previously
      filed with our Form 10-K on March 31, 200810.31
                  
                  Purchase
      and Sale Agreement, dated July 18, 2008, among Vanguard Permian, LLC and
      Segundo Navarro Drilling, Ltd.
                  
                  Form
      8-K, filed July 21, 2008 (File No. 001-33756)10.32
                  
                  Form
      of Indemnity Agreement dated August 7, 2008
                  
                  Previously
      filed with our Quarterly report on Form 10-Q on August 13,
      200810.33
                  
                  Second
      Amendment to First Amended and Restated Credit Agreement, dated October
      22, 2008, by and between Vanguard Natural Gas, LLC, Compass Bank, as
      lender, and Citibank, N.A., as administrative agent
                  
                  Previously
      filed with our Quarterly report on Form 10-Q on November 14,
      200810.34
                  
                  First
      Amendment to First Amended and Restated Credit Agreement, dated May 15,
      2008, by and between Vanguard Natural Gas, LLC, lenders party thereto, and
      Citibank, N.A., as administrative agent
                  
                  Previously
      filed with our Form 10-K on March 11, 200910.35
                  
                  Third
      Amendment to First Amended and Restated Credit Agreement, dated February
      18, 2009, by and between Vanguard Natural Gas, LLC, lenders party thereto,
      and Citibank, N.A., as administrative agent
                  
                  Previously
      filed with our Form 10-K on March 11, 200910.36
                  
                  First
      Amendment to Gathering and Compression Agreement, dated May 8, 2009,
      effective March 1, 2009, by and between Vinland Energy Gathering,
      LLC, Vinland Energy Eastern, LLC, Vanguard Natural Gas, LLC and Trust
      Energy Company
                  
                  Filed
      herewith10.37
                  
                  First
      Amendment to Management Services Agreement, dated May 8, 2009, effective
      March 1, 2009, by and between Vinland Energy Operations, LLC,
      Vanguard Natural Gas, LLC, Trust Energy Company, LLC and Ariana Energy,
      LLC
                  
                  Filed
      herewith31.1
                  
                  Certification
      of Chief Executive Officer Pursuant to Rule 13a — 14 of the
      Securities and Exchange Act of 1934, as Adopted Pursuant to
      Section 302 of the Sarbanes-Oxley Act of 2002
                  
                  Filed
      herewith31.2
                  
                  Certification
      of Chief Financial Officer Pursuant to Rule 13a — 14 of the
      Securities and Exchange Act of 1934, as Adopted Pursuant to
      Section 302 of the Sarbanes-Oxley Act of 2002
                  
                  Filed
      herewith32.1
                  
                  Certification
      of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350,
      as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002
                  
                  Filed
      herewith32.2
                  
                  Certification
      of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350,
      as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002
                  
                  Filed
      herewith
  38
  
 
 SIGNATURE
  Pursuant
to the requirements of the Securities Exchange Act of 1934, Vanguard Natural
Resources, LLC has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
  VANGUARD
      NATURAL RESOURCES, LLC(Registrant)Date:
      May 11, 2009/s/ Richard
      A. RobertRichard
      A. RobertExecutive
      Vice President andChief
      Financial Officer(Principal
      Financial Officer and Principal Accounting
  Officer)
   39
   Vanguard
Natural Resources, LLC
 EXHIBIT
INDEX
 Each
exhibit identified below is filed as a part of this Report.
  Exhibit
      No.
                  
                  Exhibit
      Title
                  
                  Incorporated
      by Reference to the Following3.1
                  
                  Certificate
      of Formation of Vanguard Natural Resources, LLC
                  
                  Form
      S-1/A, filed April 25, 2007 (File No. 333-142363)3.2
                  
                  Second
      Amended and Restated Limited Liability Company Agreement of Vanguard
      Natural Resources, LLC (including specimen unit certificate for the
      units)
                  
                  Form
      8-K, filed November 2, 2007 (File No. 001-33756)10.1
                  
                  Vanguard
      Natural Resources, LLC Long-Term Incentive Plan
                  
                  Form
      8-K, filed October 24, 2007 (File No. 001-33756)10.2
                  
                  Form of
      Vanguard Natural Resources, LLC Long-Term Incentive Plan Phantom Options
      Grant Agreement
                  
                  Form
      S-1/A, filed April 25, 2007 (File No. 333-142363)10.3
                  
                  Vanguard
      Natural Resources, LLC Class B Unit Plan
                  
                  Form
      8-K, filed October 24, 2007 (File No. 001-33756)10.4
                  
                  Form of
      Vanguard Natural Resources, LLC Class B Unit Plan Restricted
      Class B Unit Grant
                  
                  Form
      S-1/A, filed April 25, 2007 (File No. 333-142363)10.5
                  
                  Management
      Services Agreement, effective January 5, 2007, by and between Vinland
      Energy Operations, LLC, Vanguard Natural Gas, LLC, Trust Energy Company,
      LLC and Ariana Energy, LLC
                  
                  Form
      S-1/A, filed April 25, 2007 (File No. 333-142363)10.6
                  
                  Participation
      Agreement, effective January 5, 2007, by and between Vinland Energy
      Eastern, LLC, Vanguard Natural Gas, LLC, Trust Energy Company, LLC and
      Ariana Energy, LLC
                  
                  Form
      S-1/A, filed April 25, 2007 (File No. 333-142363)10.7
                  
                  Gathering
      and Compression Agreement, effective January 5, 2007, by and between
      Vinland Energy Gathering, LLC, Vinland Energy Eastern, LLC, Vanguard
      Natural Gas, LLC and Ariana Energy, LLC
                  
                  Form
      S-1/A, filed April 25, 2007 (File No. 333-142363)10.8
                  
                  Gathering
      and Compression Agreement, effective January 5, 2007, by and between
      Vinland Energy Gathering, LLC, Vinland Energy Eastern, LLC, Vanguard
      Natural Gas, LLC and Trust Energy Company
                  
                  Form
      S-1/A, filed April 25, 2007 (File No. 333-142363)10.9
                  
                  Gathering
      and Compression Agreement, effective January 5, 2007, by and between
      Vinland Energy Gathering, LLC and Nami Resources Company,
      L.L.C.
                  
                  Form
      S-1/A, filed April 25, 2007 (File No. 333-142363)10.10
                  
                  Well
      Services Agreement, effective January 5, 2007, by and between Vinland
      Energy Operations, LLC, Vanguard Natural Gas, LLC and Ariana Energy,
      LLC
                  
                  Form
      S-1/A, filed April 25, 2007 (File No. 333-142363)10.11
                  
                  Well
      Services Agreement, effective January 5, 2007, by and between Vinland
      Energy Operations, LLC, Vanguard Natural Gas, LLC and Trust Energy
      Company, LLC
                  
                  Form
      S-1/A, filed April 25, 2007 (File No. 333-142363)10.12
                  
                  Well
      Services Agreement, effective January 5, 2007, by and between Vinland
      Energy Operations, LLC and Nami Resources Company, L.L.C.
                  
                  Form
      S-1/A, filed April 25, 2007 (File No. 333-142363)10.13
                  
                  Amended
      and Restated Operating Agreement by and between Vinland Energy Operations,
      LLC, Vinland Energy Eastern, LLC and Ariana Energy, LLC, dated October 2,
      2007 and effective as of January 5, 2007
                  
                  Form
      S-1/A, filed October 22, 2007 (File No. 333-142363)10.14
                  
                  Operating
      Agreement, effective January 5, 2007, by and between Vinland Energy
      Operations, LLC, Vinland Energy Eastern, LLC and Trust Energy Company,
      LLC
                  
                  Form
      S-1/A, filed April 25, 2007 (File No. 333-142363)10.15
                  
                  Amended
      and Restated Indemnity Agreement by and between Nami Resources Company,
      L.L.C., Vinland Energy Eastern, LLC, Trust Energy Company, LLC, Vanguard
      Natural Gas, LLC and Vanguard Natural Resources, LLC, dated September 11,
      2007
                  
                  Form
      S-1/A, filed September 18, 2007 (File No. 333-142363)10.16
                  
                  Revenue
      Payment Agreement by and between Nami Resources Company, L.L.C. and Trust
      Energy Company, dated April 18, 2007 and effective as of January 5,
      2007
                  
                  Form
      S-1/A, filed August 21, 2007 (File No. 333-142363)10.17
                  
                  Gas
      Supply Agreement, dated April 18, 2007, by and between Nami Resources
      Company, L.L.C. and Trust Energy Company
                  
                  Form
      S-1/A, filed April 25, 2007 (File No. 333-142363)10.18
                  
                  Amended
      Employment Agreement, dated April 18, 2007, by and between Scott W.
      Smith, VNR Holdings, LLC and Vanguard Natural Resources,
    LLC
                  
                  Form
      S-1/A, filed April 25, 2007 (File No. 333-142363)10.19
                  
                  Amended
      Employment Agreement, dated April 18, 2007, by and between Richard A.
      Robert, VNR Holdings, LLC and Vanguard Natural Resources,
    LLC
                  
                  Form
      S-1/A, filed April 25, 2007 (File No. 333-142363)10.20
                  
                  Registration
      Rights Agreement, dated April 18, 2007, between Vanguard Natural
      Resources, LLC and the private investors named therein
                  
                  Form
      S-1/A, filed April 25, 2007 (File No. 333-142363)10.21
                  
                  Purchase
      Agreement, dated April 18, 2007, between Vanguard Natural Resources,
      LLC, Majeed S. Nami and the private investors named
therein
                  
                  Form
      S-1/A, filed April 25, 2007 (File No. 333-142363)10.22
                  
                  Omnibus
      Agreement, dated October 29, 2007, among Majeed S. Nami, Vanguard Natural
      Resources, LLC, Vanguard Natural Gas, LLC, Ariana Energy, LLC and Trust
      Energy Company, LLC.
                  
                  Form
      8-K, filed November 2, 2007 (File No. 001-33756)10.23
                  
                  Employment
      Agreement, dated May 15, 2007, by and between Britt Pence, VNR Holdings,
      LLC and Vanguard Natural Resources, LLC
                  
                  Form
      S-1/A, filed July 5, 2007 (File No. 333-142363)10.24
                  
                  Natural
      Gas Contract, dated May 26, 2003, between Nami Resources Company,
      Inc. and Osram Sylvania Products, Inc.
                  
                  Form
      S-1/A, filed August 21, 2007 (File No. 333-142363)10.25
                  
                  Natural
      Gas Purchase Contract, dated December 16, 2004, between Nami
      Resources Company, LLC and Dominion Field Services, Inc.
                  
                  Form
      S-1/A, filed August 21, 2007 (File No. 333-142363)10.26
                  
                  Natural
      Gas Purchase Contract, dated December 28, 2004, between Nami
      Resources Company, LLC and Dominion Field Services, Inc.
                  
                  Form
      S-1/A, filed August 21, 2007 (File No. 333-142363)10.27
                  
                  Director
      Compensation Agreement
                  
                  Form
      S-1/A, filed September 18, 2007 (File No. 333-142363)10.28
                  
                  Purchase
      and Sale Agreement, dated December 21, 2007, among Vanguard Permian, LLC
      and Apache Corporation
                  
                  Form
      8-K/A, filed February 13, 2008 (File No. 001-33756)10.29
                  
                  Amended
      Purchase and Sale Agreement, dated January 31, 2008, among Vanguard
      Permian, LLC and Apache Corporation
                  
                  Form
      8-K/A, filed February 4, 2008 (File No. 001-33756)10.30
                  
                  Amended
      and Restated Credit Agreement, dated February 14, 2008, by and between
      Nami Holding Company, LLC, Citibank, N.A., as administrative agent and L/C
      issuer and the lenders party thereto
                  
                  Previously
      filed with our Form 10-K on March 31, 200810.31
                  
                  Purchase
      and Sale Agreement, dated July 18, 2008, among Vanguard Permian, LLC and
      Segundo Navarro Drilling, Ltd.
                  
                  Form
      8-K, filed July 21, 2008 (File No. 001-33756)10.32
                  
                  Form
      of Indemnity Agreement dated August 7, 2008
                  
                  Previously
      filed with our Quarterly report on Form 10-Q on August 13,
      200810.33
                  
                  Second
      Amendment to First Amended and Restated Credit Agreement, dated October
      22, 2008, by and between Vanguard Natural Gas, LLC, Compass Bank, as
      lender, and Citibank, N.A., as administrative agent
                  
                  Previously
      filed with our Quarterly report on Form 10-Q on November 14,
      200810.34
                  
                  First
      Amendment to First Amended and Restated Credit Agreement, dated May 15,
      2008, by and between Vanguard Natural Gas, LLC, lenders party thereto, and
      Citibank, N.A., as administrative agent
                  
                  Previously
      filed with our Form 10-K on March 11, 200910.35
                  
                  Third
      Amendment to First Amended and Restated Credit Agreement, dated February
      18, 2009, by and between Vanguard Natural Gas, LLC, lenders party thereto,
      and Citibank, N.A., as administrative agent
                  
                  Previously
      filed with our Form 10-K on March 11, 200910.36
                  
                  First
      Amendment to Gathering and Compression Agreement, dated May 8, 2009,
      effective March 1, 2009, by and between Vinland Energy Gathering,
      LLC, Vinland Energy Eastern, LLC, Vanguard Natural Gas, LLC and Trust
      Energy Company
                  
                  Filed
      herewith10.37
                  
                  First
      Amendment to Management Services Agreement, dated May 8, 2009, effective
      March 1, 2009, by and between Vinland Energy Operations, LLC,
      Vanguard Natural Gas, LLC, Trust Energy Company, LLC and Ariana Energy,
      LLC
                  
                  Filed
      herewith31.1
                  
                  Certification
      of Chief Executive Officer Pursuant to Rule 13a — 14 of the
      Securities and Exchange Act of 1934, as Adopted Pursuant to
      Section 302 of the Sarbanes-Oxley Act of 2002
                  
                  Filed
      herewith31.2
                  
                  Certification
      of Chief Financial Officer Pursuant to Rule 13a — 14 of the
      Securities and Exchange Act of 1934, as Adopted Pursuant to
      Section 302 of the Sarbanes-Oxley Act of 2002
                  
                  Filed
      herewith32.1
                  
                  Certification
      of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350,
      as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002
                  
                  Filed
      herewith32.2
                  
                  Certification
      of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350,
      as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002
                  
                  Filed
      herewith
  40