##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended June 30, 2007
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 Commission File No. 001-33016
 
 EAGLE ROCK ENERGY PARTNERS, L.P.
 (Exact Name of Registrant as Specified in Its Charter)
 Delaware(State or Other Jurisdiction of
Incorporation or Organization)
    
    68-0629883(I.R.S. Employer
Identification Number)
 16701 Greenspoint Park Drive, Suite 200
Houston, Texas 77060
 (281) 408-1200
 
 þ o
  o o þ
 o þ




---



##### 



EAGLE ROCK ENERGY PARTNERS, L.P.
 TABLE OF CONTENTS
 PagePART I. FINANCIAL INFORMATION
    
    
    1Item 1. Financial Statements
    
    
    1Condensed Consolidated Balance Sheets as of June 30, 2007 and December 31, 2006 (unaudited)
    
    
    1Condensed Consolidated Statements of Operations for the three months and six months ended June 30, 2007 and 2006 (unaudited)
    
    
    2Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2007 and 2006 (unaudited)
    
    
    3Condensed Consolidated Statements of Members Equity for the six months ended June 30, 2007 (unaudited)
    
    
    4Notes to the Condensed Consolidated Financial Statements (unaudited)
    
    
    5Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    22Cautionary Note Regarding Forward-Looking Statements
    
    
    23Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    40Item 4. Controls and Procedures
    
    
    40PART II.OTHER INFORMATION
    
    
    41Item 1. Legal Proceedings
    
    
    41Item 1A. Risk Factors
    
    
    41Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    55Item 3. Defaults Upon Senior Securities
    
    
    55Item 4. Submission of Matters to a Vote of Security Holders
    
    
    55Item 5. Other Information
    
    
    55Item 6. Exhibits
    
    
    55Certification Pursuant to Section 302Certification Pursuant to Section 302Certification Pursuant to Section 906Certification Pursuant to Section 906




---



##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 Item 1. Financial Statements.
 EAGLE ROCK ENERGY PARTNERS, L.P.
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
 June 30,
    
    
    December 31,($ in thousands)
    
    2007
    
    
    2006ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    2,296
    
    
    $
    10,581Cash advances to affiliates
    
    
    10,665
    
    
    
    Accounts receivable
    
    
    106,034
    
    
    
    43,567Risk management assets
    
    
    
    
    
    
    13,837Prepayments and other current assets
    
    
    1,626
    
    
    
    2,679Total current assets
    
    
    120,621
    
    
    
    70,664PROPERTY, PLANT AND EQUIPMENT  Net
    
    
    832,857
    
    
    
    554,063INTANGIBLE ASSETS  Net
    
    
    155,670
    
    
    
    130,001RISK MANAGEMENT ASSETS
    
    
    20,700
    
    
    
    17,373OTHER ASSETS
    
    
    12,076
    
    
    
    7,800TOTAL
    
    $
    1,141,924
    
    
    $
    779,901LIABILITIES AND MEMBERS EQUITYCURRENT LIABILITIES:Accounts payable
    
    $
    111,518
    
    
    $
    49,558Accrued liabilities
    
    
    15,099
    
    
    
    7,996Risk management liabilities
    
    
    7,802
    
    
    
    1,005Total current liabilities
    
    
    134,419
    
    
    
    58,559LONG-TERM DEBT
    
    
    422,131
    
    
    
    405,731ASSET RETIREMENT OBLIGATIONS
    
    
    1,947
    
    
    
    1,819DEFERRED STATE TAX LIABILITY
    
    
    1,822
    
    
    
    1,229RISK MANAGEMENT LIABILITIES
    
    
    38,526
    
    
    
    20,576OTHER
    
    
    145
    
    
    
    COMMITMENTS AND CONTINGENCIES (Note
11)MEMBERS EQUITY (DEFICIT):Common Unit Holders(1)
    
    
    395,981
    
    
    
    116,283Subordinated Unitholders(2)
    
    
    148,624
    
    
    
    176,248General Partner(3)
    
    
    (1,671
    )
    
    
    (544
    )Total members equity
    
    
    542,934
    
    
    
    291,987TOTAL
    
    $
    1,141,924
    
    
    $
    779,901
 
 (1)
    
    36,284,759 units were issued and outstanding as of June 30, 2007 and 20,691,495 for December
31, 2006. These numbers do not include 450,021 units and 122,450, respectively, issued to
employees as of June 30, 2007 and December 31, 2006, respectively, under the 2006 Long-Term
Incentive Plan and which are subject to vesting requirements.(2)
    
    20,691,495 units were issued and outstanding as of June 30, 2007 and December 31, 2006.(3)
    
    844,551 units were issued and outstanding as of June 30, 2007 and December 31, 2006.  1




---



##### Table of Contents



EAGLE ROCK ENERGY PARTNERS, L.P.
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
 Three Months
    
    
    Six MonthsEnded June 30,
    
    
    Ended June 30,($ in thousands except per share data)
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006REVENUE:Natural gas liquids sales
    
    $
    72,616
    
    
    $
    65,213
    
    
    $
    124,311
    
    
    $
    111,917Natural gas sales
    
    
    132,795
    
    
    
    45,905
    
    
    
    181,067
    
    
    
    99,186Condensate
    
    
    11,785
    
    
    
    14,867
    
    
    
    21,939
    
    
    
    29,069Gathering, compression and processing fees
    
    
    6,883
    
    
    
    3,925
    
    
    
    11,166
    
    
    
    5,946Loss on risk management instruments
    
    
    (27,255
    )
    
    
    (15,171
    )
    
    
    (34,897
    )
    
    
    (35,241
    )Royalty income
    
    
    3,121
    
    
    
    
    
    
    
    3,121
    
    
    
    Lease and rental income
    
    
    71
    
    
    
    
    
    
    
    71
    
    
    
    Other income
    
    
    
    
    
    
    147
    
    
    
    
    
    
    
    327Total revenue
    
    
    200,016
    
    
    
    114,886
    
    
    
    306,778
    
    
    
    211,204COSTS AND EXPENSES:Cost of natural gas and natural gas liquids
    
    
    189,939
    
    
    
    96,245
    
    
    
    280,575
    
    
    
    188,236Operations and maintenance
    
    
    11,397
    
    
    
    9,116
    
    
    
    19,320
    
    
    
    14,798General and administrative
    
    
    5,898
    
    
    
    3,557
    
    
    
    10,821
    
    
    
    6,010Other operating
    
    
    
    
    
    
    
    
    
    
    1,711
    
    
    
    Depreciation, depletion and amortization
    
    
    14,149
    
    
    
    11,001
    
    
    
    25,779
    
    
    
    20,215Total costs and expenses
    
    
    221,383
    
    
    
    119,919
    
    
    
    338,206
    
    
    
    229,259OPERATING LOSS
    
    
    (21,367
    )
    
    
    (5,033
    )
    
    
    (31,428
    )
    
    
    (18,055
    )OTHER (EXPENSE) INCOME:Interest income
    
    
    176
    
    
    
    
    
    
    
    300
    
    
    
    40Other income
    
    
    91
    
    
    
    
    
    
    
    91
    
    
    
    Interest expense
    
    
    (2,172
    )
    
    
    (3,428
    )
    
    
    (10,028
    )
    
    
    (5,963
    )Other expense
    
    
    (255
    )
    
    
    
    
    
    
    (1,966
    )
    
    
    Total other (expense) income
    
    
    (2,160
    )
    
    
    (3,428
    )
    
    
    (11,603
    )
    
    
    (5,923
    )STATE INCOME TAX PROVISION
    
    
    256
    
    
    
    508
    
    
    
    420
    
    
    
    508NET LOSS
    
    $
    (23,783
    )
    
    $
    (8,969
    )
    
    $
    (43,451
    )
    
    $
    (24,486
    )NET LOSS PER COMMON UNIT -BASIC AND DILUTED:Net lossCommon units
    
    $
    (0.28
    )
    
    $
    (0.31
    )
    
    $
    (0.55
    )
    
    $
    (0.91
    )Subordinated units
    
    
    (0.71
    )
    
    
    (0.31
    )
    
    
    (1.36
    )
    
    
    (0.91
    )General partner units
    
    
    (0.71
    )
    
    
    (0.31
    )
    
    
    (1.36
    )
    
    
    (0.91
    )Basic and Diluted (units in thousands)Common units
    
    
    30,613
    
    
    
    4,180
    
    
    
    25,680
    
    
    
    13,552Subordinated units
    
    
    20,691
    
    
    
    24,151
    
    
    
    20,691
    
    
    
    12,809General partner units
    
    
    845
    
    
    
    589
    
    
    
    845
    
    
    
    427
  2




---



##### Table of Contents



EAGLE ROCK ENERGY PARTNERS, L.P.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
 Six MonthsEnded June 30,($ in thousands)
    
    2007
    
    
    2006CASH FLOWS FROM OPERATING ACTIVITIES:Net loss
    
    $
    (43,451
    )
    
    $
    (24,486
    )Adjustments to reconcile net loss to net cash provided by operating activities:Depreciation and amortization
    
    
    25,779
    
    
    
    20,215Amortization of debt issuance costs
    
    
    
    
    
    
    432Reclassifying financing derivative settlements
    
    
    (100
    )
    
    
    (500
    )Equity-based compensation expense
    
    
    792
    
    
    
    Other
    
    
    2
    
    
    
    35Changes in assets and liabilities  net of acquisitions:Accounts receivable
    
    
    (24,943
    )
    
    
    1,021Prepayments and other current assets
    
    
    223
    
    
    
    546Risk management activities
    
    
    34,539
    
    
    
    26,724Accounts payable
    
    
    28,328
    
    
    
    (13,714
    )Accrued liabilities
    
    
    6,212
    
    
    
    4450Other assets
    
    
    738
    
    
    
    324Net cash provided by operating activities
    
    
    28,119
    
    
    
    15,047CASH FLOWS FROM INVESTING ACTIVITIES:Additions to property, plant and equipment
    
    
    (37,993
    )
    
    
    (12,931
    )Advances to affiliates
    
    
    (10,665
    )
    
    
    Acquisitions
    
    
    (118,475
    )
    
    
    (100,524
    )Cash accrued in acquisitions
    
    
    3,821
    
    
    
    Escrow cash
    
    
    
    
    
    
    7,643Purchase of intangible assets
    
    
    (1,199
    )
    
    
    (2,185
    )Other
    
    
    22
    
    
    
    Net cash used in investing activities
    
    
    (164,489
    )
    
    
    (107,997
    )CASH FLOWS FROM FINANCING ACTIVITIES:Proceeds from long-term debt
    
    
    34,400
    
    
    
    354Repayment of long-term debt
    
    
    (18,000
    )
    
    
    (10,600
    )Payment of debt issuance costs
    
    
    
    
    
    
    (862
    )Proceeds from derivative contracts
    
    
    100
    
    
    
    500Payment of deferred offering costs
    
    
    
    
    
    
    (1,267
    )Contribution by members
    
    
    
    
    
    
    98,390Proceeds from equity issuance
    
    
    127,500
    
    
    
    Distributions to members and affiliates
    
    
    (16,185
    )
    
    
    (5,833
    )Net cash (used in) provided by financing activities
    
    
    127,815
    
    
    
    80,682NET CHANGE IN CASH AND CASH EQUIVALENTS
    
    
    (8,555
    )
    
    
    (12,269
    )CASH AND CASH EQUIVALENTS  Beginning of period
    
    
    10,581
    
    
    
    19,372CASH AND CASH EQUIVALENTS  End of period
    
    $
    2,296
    
    
    $
    7,103Interest paid  net of amounts capitalized
    
    $
    7,925
    
    
    $
    17,339Investments in property, plant and equipment not paid
    
    $
    4,892
    
    
    $
    1,284Acquisition of assets for equity
    
    $
    182,291
    
    
    $
    
  3




---



##### Table of Contents



EAGLE ROCK ENERGY PARTNERS, L.P.
 
 CONDENSED CONSOLIDATED STATEMENTS OF MEMBERS EQUITY
FOR THE SIX MONTH PERIOD ENDED JUNE 30, 2007
(Unaudited)
 Number of
    
    
    
    
    
    
    Number ofGeneral
    
    
    Common
    
    
    Common
    
    
    Subordinated
    
    
    SubordinatedPartner
    
    
    Units
    
    
    Units
    
    
    Units
    
    
    Units
    
    
    Total($ in thousands, except unit amounts)BALANCE
 December 31, 2006
    
    $
    (544
    )
    
    
    20,691,495
    
    
    $
    116,283
    
    
    
    20,691,495
    
    
    $
    176,248
    
    
    $
    291,987Equity issued to
private investors
    
    
    
    
    
    
    7,005,495
    
    
    
    127,500
    
    
    
    
    
    
    
    
    
    
    
    127,500Equity issued in
acquisitions
    
    
    
    
    
    
    8,587,769
    
    
    
    182,291
    
    
    
    
    
    
    
    
    
    
    
    182,291Net loss
    
    
    (1,140
    )
    
    
    
    
    
    
    (14,371
    )
    
    
    
    
    
    
    (27,940
    )
    
    
    (43,451
    )Distributions
    
    
    
    
    
    
    
    
    
    
    (16,185
    )
    
    
    
    
    
    
    
    
    
    
    (16,185
    )Restricted unit
expense
    
    
    13
    
    
    
    
    
    
    
    463
    
    
    
    
    
    
    
    316
    
    
    
    792BALANCE 
June 30, 2007
    
    $
    (1,671
    )
    
    
    36,284,759
    
    
    $
    395,981
    
    
    
    20,691,495
    
    
    $
    148,624
    
    
    $
    542,934
  4




---



##### Table of Contents



EAGLE ROCK ENERGY PARTNERS, L.P.
 
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 1. ORGANIZATION AND DESCRIPTION OF BUSINESS
 Organization
 Initial Public Offering
 Basis of Presentation and Principles of Consolidation
 Description of Business
  5




---



##### Table of Contents



NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
   Oil and Natural Gas Accounting Policies
  Financial Accounting and Reporting for Oil and Gas Producing
Companies
   6




---



##### Table of Contents



Other Significant Accounting Policies
 Interim Condensed Disclosures
 Cash and Cash Equivalents
 Concentration and Credit Risk
  Certain Other Concentrations
 Property, Plant, and Equipment
 Pipelines and equipment
    
    20 yearsGas processing and equipment
    
    20 yearsOffice furniture and equipment
    
    5 years
  7




---



##### Table of Contents



Impairment of Long-Lived Assets
 
    
    significant adverse change in legal factors or in the business climate;
    
    a current-period operating or cash flow loss combined with a history of operating or
cash flow losses or a projection or forecast which demonstrates continuing losses
associated with the use of a long-lived asset;
    
    an accumulation of costs significantly in excess of the amount originally expected
for the acquisition or construction of a long-lived asset;
    
    significant adverse changes in the extent or manner in which an asset is used or in its
physical condition;
    
    a significant change in the market value of an asset; or
    
    a current expectation that, more likely than not, an asset will be sold or otherwise
disposed of before the end of its estimated useful life.
  Accounting for the Impairment or Disposal of Long-Lived
Assets,
 Intangible Assets
 June 30,
    
    
    December 31,($ in thousands)
    
    2007
    
    
    2006Rights-of-way and easements  at cost
    
    $
    68,550
    
    
    $
    66,801Less: accumulated amortization
    
    
    (5,208
    )
    
    
    (3,510
    )Contracts
    
    
    112,421
    
    
    
    80,210Less: accumulated amortization
    
    
    (20,093
    )
    
    
    (13,500
    )Net intangible assets
    
    $
    155,670
    
    
    $
    130,001
  8




---



##### Table of Contents



Other Assets
 Transportation and Exchange Imbalances
 Revenue Recognition
 
    
    sales of natural gas, NGLs and condensate;
    
    natural gas gathering, processing and transportation, from which Eagle Rock Energy
generates revenues primarily through the compression, gathering, treating, processing and
transportation of natural gas;
    
    NGL transportation from which we generate revenues from transportation fees;
    
    royalties, overriding royalties and lease bonuses.
     Environmental Expenditures
 9




---



##### Table of Contents



Income Taxes
 Derivatives Accounting for
Derivative Instruments and Hedging Activities,
 NOTE 3. NEW ACCOUNTING PRONOUNCEMENTS
 Accounting for Certain Hybrid Financial Instruments Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities,
 Fair Value Measurements.
 The Fair Value Option for Financial Assets and
Financial Liabilities
 10




---



##### Table of Contents



Accounting for Purchases and Sales of
Inventory with the Same Counterparty
 Accounting for Uncertainty in
Income Taxes  an interpretation of FASB Statement No. 109
 NOTE 4. ACQUISITIONS
  Financial Statements of Oil and Gas Exchange Offers
   ($ in thousands)Oil and gas properties
    
    $
    132,414Working capital, net
    
    
    4,551Equity investments in non-affiliates
    
    
    3,459$
    140,424
  11




---



##### Table of Contents



($ in thousands)Property, plant and equipment
    
    $
    107,183Intangibles
    
    
    32,210Working capital, net
    
    
    3,977$
    143,370
   ($ in thousands)
    
    June 30, 2007Pro forma earnings data:Revenues(a)
    
    $
    433,873Cost and expenses
    
    
    (471,867
    )Loss from continuing operations
    
    $
    (37,994
    )
 
 (a)
    
    Excludes non-realized revenues risk management los. NOTE 5. FIXED ASSETS AND ASSET RETIREMENT OBLIGATIONS
  June 30,
    
    
    December 31,($ in thousands)
    
    2007
    
    
    2006Land
    
    $
    1,064
    
    
    $
    853Plant
    
    
    112,463
    
    
    
    81,485Gathering and pipeline
    
    
    540,401
    
    
    
    433,779Equipment and machinery
    
    
    46,391
    
    
    
    37,185Vehicles and transportation equipment
    
    
    3,420
    
    
    
    2,740Office equipment, furniture, and fixtures
    
    
    1,079
    
    
    
    511Computer equipment
    
    
    4,628
    
    
    
    4,623Corporate
    
    
    126
    
    
    
    126Linefill
    
    
    4,157
    
    
    
    3,923Proved properties
    
    
    91,278
    
    
    
    Unproved properties
    
    
    60,069
    
    
    
    Construction in progress
    
    
    17,768
    
    
    
    19,677882,846
    
    
    
    584,902Less: accumulated depletion, depreciation and amortization
    
    
    (49,989
    )
    
    
    (30,839
    )Net fixed assets
    
    $
    832,857
    
    
    $
    554,063
  12




---



##### Table of Contents



Asset Retirement Obligations Accounting for Conditional Asset Retirement
Obligations, an interpretation of FASB Statement No. 143 Accounting for Asset Retirement
Obligations,
  ($ in thousands)Asset retirement obligations  December 31, 2006
    
    $
    1,819Additional liability on newly built assets
    
    
    49Accretion expense
    
    
    79Asset retirement obligations  June 30, 2007
    
    $
    1,947
 NOTE 6. LONG-TERM DEBT
  June 30,
    
    
    December 31,($ in thousands)
    
    2007
    
    
    2006Revolver
    
    $
    122,881
    
    
    $
    106,481Term loan
    
    
    299,250
    
    
    
    299,250Total debt
    
    
    422,131
    
    
    
    405,731Less: current portion
    
    
    
    
    
    
    Total long-term debt
    
    $
    422,131
    
    
    $
    405,731
      13




---



##### Table of Contents




    
    Adjusted EBITDA (as defined) to interest expense of not less than 2.5 to 1.0; and
    
    Total consolidated funded debt to Adjusted EBITDA (as defined) of not more than 5.0 to
1.0 and 5.25 to 1.0 for the three quarters following a material acquisition.
      14




---



##### Table of Contents



Principal($ in thousands)
    
    Amount2007
    
    $
    2008
    
    
    2009
    
    
    2010
    
    
    2011
    
    
    422,131$
    422,131
  NOTE 7. MEMBERS EQUITY
         15




---



##### Table of Contents



NOTE 8. RELATED PARTY TRANSACTIONS
        16




---



##### Table of Contents



NOTE 9. FAIR VALUE OF FINANCIAL INSTRUMENTS
   NOTE 10. RISK MANAGEMENT ACTIVITIES
  ($ in thousands)Fair ValueRoll Forward
    
    Expiration
    
    Notional
    
    Fixed
    
    June 30,Effective Date
    
    Date
    
    Amount
    
    Rate
    
    200701/03/2006
    
    
    01/03/2011
    
    
    $
    100,000,000
    
    
    
    4.9500
    %
    
    $
    1,96101/03/2006
    
    
    01/03/2011
    
    
    
    100,000,000
    
    
    
    4.9625
    
    
    
    1,90601/03/2006
    
    
    01/03/2011
    
    
    
    50,000,000
    
    
    
    4.8800
    
    
    
    1,09101/03/2006
    
    
    01/03/2011
    
    
    
    50,000,000
    
    
    
    4.8800
    
    
    
    1,091
    
    
    NGL puts, costless collar and swap transactions for the sale of Mont Belvieu natural
gas liquids with a combined notional amount of 195,000 Bbls per month, 17,000 Bbls per
month, 57,000 Bbls per month and 54,000 Bbls per month for 2007, 2008, 2009, and 2010,
respectively;
    
    Condensate puts and costless collar transactions for the sale of West Texas
Intermediate crude oil with a combined notional amount of 104,000 Bbls per month, 80,000
Bbls per month, 40,000 Bbls per month and 40,000 Bbls per month for 2007, 2008, 2009, and
2010, respectively;
    
    Natural gas calls for the purchase of Henry Hub natural gas with a notional amount of
100,000 MMBtu per month for 2007;
 17




---



##### Table of Contents




    
    Fixed swap agreements to hedge WTS-WTI basis differential in amount of 20,000 Bbls per
month for a term of January through December 2007; and
   
    
    Costless collar transactions for West Texas Intermediate crude oil with a combined
notional amount of 8,000 Bbls per month for 2007 and 6,000 Bbls per month for 2008; and
    
    Costless collar transactions for Henry Hub natural gas with a combined notional amount
of 45,000 MMBtu per month, 30,000 MMBtu per month, and 20,000 MMBtu per month for 2007,
2008 and 2009, respectively.
   NOTE 11. COMMITMENTS AND CONTINGENT LIABILITIES
 Litigation
 Insurance
 18




---



##### Table of Contents



Regulatory Compliance
 Environmental
 Other Commitments and Contingencies
 NOTE 12. SEGMENTS
  Midstream Segment
 (i)
    
    gathering, processing, transportation and marketing of natural gas in the Texas
Panhandle System;(ii)
    
    gathering, processing, transportation and marketing of natural gas in the south Texas
System;(iii)
    
    gathering, processing and marketing of natural gas and related NGL transportation in
the southeast Texas and Louisiana System;
 Upstream Segment
 (iv)
    
    crude oil and natural gas production (fee minerals, royalties and non-operated working
interest ownership, lease bonus and rental income and equity income in non-affiliates); and
 Corporate Segment
 (v)
    
    risk management and other corporate activities.
  Southeast($ in millions)
    
    
    
    
    
    South
    
    Texas andThree months ended June 30, 2007
    
    Panhandle
    
    Texas
    
    Louisiana
    
    Upstream
    
    Corporate
    
    TotalSales to external customers
    
    $
    110.0
    
    
    $
    76.4
    
    
    $
    37.6
    
    
    $
    3.2
    
    
    $
    (27.2
    )(a)
    
    $
    200.0Interest expense-net and other financing costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2.2
    
    
    
    2.2Depreciation, depletion and amortization
    
    
    10.0
    
    
    
    0.4
    
    
    
    2.0
    
    
    
    1.5
    
    
    
    0.2
    
    
    
    14.1Segment profit (loss)(b)
    
    
    24.0
    
    
    
    1.6
    
    
    
    8.4
    
    
    
    3.2
    
    
    
    (27.1
    )
    
    
    10.1Capital expenditures
    
    
    10.4
    
    
    
    0.8
    
    
    
    2.5
    
    
    
    
    
    
    
    0.1
    
    
    
    13.8Segment assets
    
    
    581.8
    
    
    
    75.5
    
    
    
    277.7
    
    
    
    162.2
    
    
    
    44.7
    
    
    
    1,141.9
 19




---



##### Table of Contents



Southeast($ in millions)
    
    
    
    
    
    South
    
    Texas andThree months ended June 30, 2006
    
    Panhandle
    
    Texas
    
    Louisiana
    
    Upstream
    
    Corporate
    
    TotalSales to external customers
    
    $
    105.7
    
    
    $
    
    
    
    $
    24.3
    
    
    $
    
    
    
    $
    (15.2
    )(a)
    
    $
    114.8Interest expense-net and other financing costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3.4
    
    
    
    3.4Depreciation, depletion and amortization
    
    
    8.6
    
    
    
    
    
    
    
    2.4
    
    
    
    
    
    
    
    
    
    
    
    11.0Segment profit (loss)(b)
    
    
    27.6
    
    
    
    
    
    
    
    6.2
    
    
    
    
    
    
    
    (15.2
    )
    
    
    18.6Capital expenditures
    
    
    3.3
    
    
    
    
    
    
    
    1.8
    
    
    
    
    
    
    
    1.6
    
    
    
    6.7Segment assets
    
    
    566.3
    
    
    
    
    
    
    
    121.0
    
    
    
    
    
    
    
    81.8
    
    
    
    769.1
 Southeast($ in millions)
    
    
    
    
    
    South
    
    Texas andSix months ended June 30, 2007
    
    Panhandle
    
    Texas
    
    Louisiana
    
    Upstream
    
    Corporate
    
    TotalSales to external customers
    
    $
    204.9
    
    
    $
    76.4
    
    
    $
    57.0
    
    
    $
    3.2
    
    
    $
    (34.7
    )(a)
    
    $
    306.8Interest expense-net and other financing costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10.0
    
    
    
    10.0Depreciation, depletion and amortization
    
    
    19.8
    
    
    
    0.4
    
    
    
    3.7
    
    
    
    1.5
    
    
    
    0.4
    
    
    
    25.8Segment profit (loss)(b)
    
    
    43.2
    
    
    
    1.6
    
    
    
    12.9
    
    
    
    3.2
    
    
    
    (34.7
    )
    
    
    26.2Capital expenditures
    
    
    22.5
    
    
    
    1.8
    
    
    
    14.9
    
    
    
    
    
    
    
    0.3
    
    
    
    39.5Segment assets
    
    
    581.8
    
    
    
    75.5
    
    
    
    277.7
    
    
    
    162.2
    
    
    
    44.7
    
    
    
    1,141.9
 Southeast($ in millions)
    
    
    
    
    
    South
    
    Texas andSix months ended June 30, 2006
    
    Panhandle
    
    Texas
    
    Louisiana
    
    Upstream
    
    Corporate
    
    TotalSales to external customers
    
    $
    212.2
    
    
    $
    
    
    
    $
    34.2
    
    
    $
    
    
    
    $
    (35.2
    )(a)
    
    $
    211.2Interest expense-net and other financing costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5.9
    
    
    
    5.9Depreciation, depletion and amortization
    
    
    17.5
    
    
    
    
    
    
    
    2.7
    
    
    
    
    
    
    
    
    
    
    
    20.2Segment profit (loss)(b)
    
    
    50.1
    
    
    
    
    
    
    
    8.1
    
    
    
    
    
    
    
    (35.2
    )
    
    
    23.0Capital expenditures
    
    
    5.4
    
    
    
    
    
    
    
    4.5
    
    
    
    
    
    
    
    3.0
    
    
    
    12.9Segment assets
    
    
    566.3
    
    
    
    
    
    
    
    121.0
    
    
    
    
    
    
    
    81.8
    
    
    
    769.1
 
 (a)
    
    Represents results of our derivatives activity.(b)
    
    Segment profit (loss) is defined as sales to external customers minus cost of natural gas and
natural gas liquids and other cost of sales for the midstream segments and royalty income and
lease bonus income less production taxes and depletion for the upstream segment. Sales to
external customers for the corporate column include the impact of the risk management
activities.  Three Months
    
    
    Three Months
    
    
    Six Months
    
    
    Six MonthsEnded
    
    
    Ended
    
    
    Ended
    
    
    EndedJune 30,
    
    
    June 30,
    
    
    June 30,
    
    
    June 30,($ in millions)
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006Segment profit
    
    $
    10.1
    
    
    $
    18.6
    
    
    $
    26.2
    
    
    $
    23.0Operations and maintenance
    
    
    (11.4
    )
    
    
    (9.1
    )
    
    
    (19.3
    )
    
    
    (14.8
    )General and administrative
    
    
    (5.9
    )
    
    
    (3.6
    )
    
    
    (10.8
    )
    
    
    (6.0
    )Depreciation, depletion and amortization
    
    
    (14.1
    )
    
    
    (11.0
    )
    
    
    (25.8
    )
    
    
    (20.2
    )Interest expense, net
    
    
    (2.2
    )
    
    
    (3.4
    )
    
    
    (13.4
    )
    
    
    (6.0
    )State income tax provision
    
    
    (0.3
    )
    
    
    (0.5
    )
    
    
    (0.4
    )
    
    
    (0.5
    )Net loss
    
    $
    (23.8
    )
    
    $
    (9.0
    )
    
    $
    (43.5
    )
    
    $
    (24.5
    )
 NOTE 13. INCOME TAXES
  20




---



##### Table of Contents



NOTE 14. EQUITY-BASED COMPENSATION
   Number ofRestricted
    

Weighted AverageUnits
    
FairValueOutstanding at December 31, 2006
    
    
    122,450
    
    
    $
    18.75Granted
    
    
    345,271
    
    
    $
    23.35Vested
    
    
    Forfeitures
    
    
    (17,700
    )
    
    $
    21.45Outstanding at June 30, 2007
    
    
    450,021
    
    
    $
    22.22
   NOTE 15. SUBSEQUENT EVENTS
  21




---



##### Table of Contents



Financial Statements of Oil and Gas Exchange Offers
    
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
 Overview
    22




---



##### Table of Contents



Cautionary Note Regarding Forward-Looking Statements
  Our Operations
   
    
    Fee-Based Arrangements.Under these arrangements, we generally are paid a fixed cash
fee for performing the gathering and processing service. This fee is directly related to
the volume of natural gas that flows through our systems and is not directly dependent on
commodity prices. A sustained decline, however, in commodity prices could result in a
decline in volumes and, thus, a decrease in our fee revenues. These arrangements provide
stable cash flows, but minimal, if any, upside in higher commodity price environments. As
of June 30, 2007, these arrangements accounted for approximately 35% of our natural gas
volumes.
    
    Percent-of-Proceeds Arrangements.Under these arrangements, we generally gather raw
natural gas from producers at the wellhead, transport the gas through our gathering system,
process the gas and sell the processed gas and/or NGLs at prices based on published index
prices. These arrangements provide upside in high commodity price environments, but result
in lower margins in low commodity price environments. We regard the margin from this type
of arrangement, that is, the sale proceeds less amounts remitted to the producers, as an
important analytical measure of these arrangements. The price paid to producers is based on
an agreed percentage of one of the following: (1) the actual sale proceeds; (2) the
proceeds based on an index price; or (3) the proceeds from the sale of processed natural
gas or NGLs or both. We refer to contracts in which we share only in specified percentages
of the proceeds from the sale of NGLs and in which the producer receives 100% of the
proceeds from natural gas sales, as percent-of-liquids arrangements. Under
percent-of-proceeds arrangements, our margin correlates directly with the prices of natural
gas and NGLs and under percent-of-liquids arrangements, our margin correlates directly with
the prices of NGLs (although there is often a fee-based component to both of these forms of
contracts in addition to the commodity
sensitive component). As of June 30, 2007, these arrangements accounted for about 38% of our
natural gas volumes.
 23




---



##### Table of Contents




    
    Fixed Recovery Arrangements.Under these arrangements, we generally gather raw natural
gas from producers at the wellhead, transport the natural gas through our gathering system,
process the natural gas and sell the processed natural gas and/or NGLs at prices based on
published index prices. These arrangements provide upside in high commodity price
environments, but result in lower margins in law commodity price environments. We regard
the margin from this type of arrangement, that is, the sale proceeds less amounts remitted
to the producers, as an important analytical measure of these arrangements. The price paid
to the producers is based on an agreed to theoretical product recovery factor to be applied
against the wellhead production and then a percentage of the theoretical proceeds based on
an index or actual sales prices multiplied to the theoretical production. To the extent
that the actual recoveries differ from the theoretical product recovery factor, this will
affect the margin. As of June 30, 2007, these arrangements accounted for approximately 17%
of our natural gas volumes.
    
    Keep-Whole Arrangements.Under these arrangements, we process raw natural gas to
extract NGLs and pay to the producer the full thermal equivalent volume of raw natural gas
received from the producer in the form of either processed natural gas or its cash
equivalent. We are generally entitled to retain the processed NGLs and to sell them for our
account. Accordingly, our margin is a function of the difference between the value of the
NGLs produced and the cost of the processed gas used to replace the thermal equivalent
value of those NGLs. The profitability of these arrangements is subject not only to the
commodity price risk of natural gas and NGLs, but also to the price of natural gas relative
to NGL prices. These arrangements can provide large profit margins in favorable commodity
price environments, but also can be subject to losses if the cost of natural gas exceeds
the value of its thermal equivalent of NGLs. Many of our keep-whole contracts include
provisions that reduce our commodity price exposure, including (1) conditioning floors that
require the keep-whole contract to convert to a fee-based arrangement if the NGLs have a
lower value than their thermal equivalent in natural gas, (2) embedded discounts to the
applicable natural gas index price under which we may reimburse the producer an amount in
cash for the thermal equivalent volume of raw natural gas acquired from the producer, or
(3) fixed cash fees for ancillary services, such as gathering, treating and compressing. As
of June 30, 2007, these arrangements accounted for about 10% of our natural gas volumes.
Approximately 87% of these keep-whole arrangements have fee components.
   ONEOK Hydrocarbon.
 24




---



##### Table of Contents



Chesapeake Energy Marketing.
 Ergon Energy Partners, L.P.
 Prize Operating Company.
    How We Evaluate Our Operations
  Midstream Volumes.
 Upstream volumes.
 25




---



##### Table of Contents



Margins.
 Risk Management.
 Operating Expenses.
  Adjusted EBITDA.
  26




---



##### Table of Contents



General Trends and Outlook
  Natural Gas Supply, Demand and Outlook.
   Crude Oil Supply, Demand and Outlook.
   Impact of Interest Rates and Inflation.
 27




---



##### Table of Contents



Formation and Acquisitions
   Acquisition of fee minerals, royalties and working interest properties from Montierra Minerals &
Production, L.P.
  Acquisition of Laser Midstream Energy, L.P.
  Acquisition of fee minerals, royalties and working interest properties from MacLondon Energy, L.P.
  Acquisition of Escambia Asset Co., L.P.
  Acquisition of Redman Energy Holdings, L.P.
 28




---



##### Table of Contents



Critical Accounting Policies and Estimates
   Financial Accounting and Reporting for Oil and Gas Producing
Companies
   Accounting for the Impairment or Disposal of Long-Lived
Assets,
   29




---



##### Table of Contents



EAGLE ROCK ENERGY PARTNERS, L.P.
 RESULTS OF OPERATIONS
  Three Months
    
    
    Six MonthsEnded June 30,
    
    
    Ended June 30,($ in thousands)
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006Sales of natural gas, NGLS and condensate
    
    $
    217,196
    
    
    $
    125,985
    
    
    $
    327,317
    
    
    $
    240,172Compression, gathering and processing
    
    
    6,883
    
    
    
    3,925
    
    
    
    11,166
    
    
    
    5,946Gain/(loss) on realized risk management instrument
    
    
    1,502
    
    
    
    (241
    )
    
    
    4,501
    
    
    
    570Gain/(loss) on unrealized risk management instrument
    
    
    (28,757
    )
    
    
    (14,930
    )
    
    
    (39,398
    )
    
    
    (35,811
    )Royalty income
    
    
    3,121
    
    
    
    
    
    
    
    3,121
    
    
    
    Lease and bonus income
    
    
    71
    
    
    
    
    
    
    
    71
    
    
    
    Other income
    
    
    
    
    
    
    147
    
    
    
    
    
    
    
    327Total operating revenue
    
    
    200,016
    
    
    
    114,886
    
    
    
    306,788
    
    
    
    211,204Purchase of natural gas and NGLs
    
    
    189,939
    
    
    
    96,245
    
    
    
    280,575
    
    
    
    188,236Segment profit(a)
    
    
    10,077
    
    
    
    18,641
    
    
    
    26,203
    
    
    
    22,968Operating and maintenance expense
    
    
    11,397
    
    
    
    9,115
    
    
    
    19,320
    
    
    
    14,797General and administrative expense
    
    
    5,898
    
    
    
    3,557
    
    
    
    10,821
    
    
    
    6,010Other (income)/expense
    
    
    (91
    )
    
    
    
    
    
    
    1,620
    
    
    
    Depreciation, depletion and amortization
    
    
    14,149
    
    
    
    11,001
    
    
    
    25,779
    
    
    
    20,215Interest-net including realized risk management instrument
    
    
    8,736
    
    
    
    2,566
    
    
    
    16,568
    
    
    
    10,036Unrealized risk management interest related instrument
    
    
    (6,485
    )
    
    
    863
    
    
    
    (4,874
    )
    
    
    (4,112
    )State income tax provision
    
    
    256
    
    
    
    508
    
    
    
    420
    
    
    
    508Net loss
    
    $
    (23,783
    )
    
    $
    (8,969
    )
    
    $
    (43,451
    )
    
    $
    (24,486
    )Adjusted EBITDA(b)
    
    $
    22,159
    
    
    $
    20,899
    
    
    $
    36,252
    
    
    $
    38,011
 
 (a)
    
    Defined as operating revenues minus the cost of natural gas and NGLs and other cost of sales.
Operating revenues include both realized and unrealized risk management activities.(b)
    
    Defined as net income (loss) plus income tax, interest-net, depletion, depreciation and
amortization expense, separation costs, other non-cash operating expenses less non realized
revenues risk management loss (gain) activities and less net income from discontinued
operations. The prior year legal arbitration settlement recorded in Other expense for June 30,
2007 quarter has also been added back to net income (loss). 30




---



##### Table of Contents



Three Months
    
    
    Six MonthsEnded June 30,
    
    
    Ended June 30,($ in thousands)
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006Segment profit:
    
    $
    10,077
    
    
    $
    18,641
    
    
    $
    26,203
    
    
    $
    22,968Less:Operations and maintenance
    
    
    11,397
    
    
    
    9,115
    
    
    
    19,320
    
    
    
    14,797General and administrative
    
    
    5,898
    
    
    
    3,557
    
    
    
    10,821
    
    
    
    6,010Depreciation, depletion and amortization
    
    
    14,149
    
    
    
    11,001
    
    
    
    25,779
    
    
    
    20,215Interest-net including realized risk management instrument
    
    
    8,736
    
    
    
    2,566
    
    
    
    16,568
    
    
    
    10,036Unrealized risk management interest related instrument
    
    
    (6,485
    )
    
    
    863
    
    
    
    (4,874
    )
    
    
    (4,112
    )Other (income)/expense
    
    
    (91
    )
    
    
    
    
    
    
    1,620
    
    
    
    State income tax provision
    
    
    256
    
    
    
    508
    
    
    
    420
    
    
    
    508Net loss
    
    $
    (23,783
    )
    
    $
    (8,969
    )
    
    $
    (43,451
    )
    
    $
    (24,486
    )
  Three Months
    
    
    Six MonthsEnded June 30,
    
    
    Ended June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006($ in thousands)Adjusted EBITDA:
    
    $
    22,159
    
    
    $
    20,899
    
    
    $
    36,252
    
    
    $
    38,011Less:State income tax provision
    
    
    256
    
    
    
    508
    
    
    
    420
    
    
    
    508Interest-net including realized risk
management instrument
    
    
    8,736
    
    
    
    2,566
    
    
    
    16,568
    
    
    
    10,036Unrealized risk management interest
related instrument
    
    
    (6,485
    )
    
    
    863
    
    
    
    (4,874
    )
    
    
    (4,112
    )Depreciation, depletion and amortization
    
    
    14,149
    
    
    
    11,001
    
    
    
    25,779
    
    
    
    20,215Equity-based compensation expense
    
    
    620
    
    
    
    
    
    
    
    792
    
    
    
    Other (income)/expense
    
    
    (91
    )
    
    
    
    
    
    
    1,620
    
    
    
    39Plus:Risk management instruments-unrealized
    
    
    (28,757
    )
    
    
    (14,930
    )
    
    
    (39,398
    )
    
    
    (35,811
    )Net loss
    
    $
    (23,783
    )
    
    $
    (8,969
    )
    
    $
    (43,451
    )
    
    $
    (24,486
    )
 Three Months Ended June 30, 2007 Compared with Three Months Ended June 30, 2006
    31




---



##### Table of Contents



Six Months Ended June 30, 2007 Compared with Six Months Ended June 30, 2006
   32




---



##### Table of Contents



33




---



##### Table of Contents



Other Matters
 Wildfires in Texas Panhandle.
 Environmental.
 Liquidity and Capital Resources
    Cash Flows and Capital Expenditures
  34




---



##### Table of Contents




    
    the acquisition of the Dry Trail plant on December 5, 2003 in the amount of
approximately $18.0 million which was financed through equity of $6.0 million and debt of
$14.0 million;
    
    the acquisition of a 20% interest in the Camp Ruby gathering system and a 25% interest
in the Indian Springs processing plant on July 1, 2004 for approximately $20.0 million,
consisting of proceeds achieved with the sale of the Dry Trail plant;
    
    the acquisition of the midstream assets in the Texas Panhandle on December 1, 2005 for
approximately $531 million, which was financed through an additional equity contribution of
$133 million and debt of $400 million, not including $27.5 million in risk management costs
related to option premiums financed entirely with equity;
    
    the acquisition of the Brookeland gathering and processing facility and related assets
on March 31, 2006 and April 7, 2006 for approximately $95.8 million, which we financed
entirely with equity;
    
    the acquisition of all of the partnership interests in Midstream Gas Services, L.P. on
June 2, 2006 for approximately $25.0 million which we financed with $4.7 million in cash
and $21.3 million in Eagle Rock Pipeline, L.P. units;
    
    the acquisition of certain fee minerals, royalties and non-operated working interest
properties from Montierra Minerals & Production, L.P., and NGP-VII Income Co-Investment
Opportunities, L.P. on April 30, 2007 for an aggregate purchase price of $127.4 million
financed with 6,390,400 of our common units and the extinguishment of $6.0 of debt;
    
    the acquisition of Laser Midstream Energy, LP, on May 3, 2007,including its
subsidiaries Laser Quitman Gathering Company, LP, Laser Gathering Company, LP, Hesco
Gathering Company, LLC, and Hesco Pipeline Company, LLC for a total purchase price of
$136.8 million, consisting of $110.0 million in cash and 1,407,895 of our common units; and
    
    the private placement of 7,005,495 common units to several institutional purchasers in
a private offering resulting in gross proceeds of $127.5 million, on May 3, 2007. The
proceeds from this offering were used to fully fund the cash portion of the purchase price
of the Laser Acquisition and other general company purposes.
     35




---



##### Table of Contents



Working Capital (Deficit).
  
    
    cash balances and marketable securities and cash advances to affiliates increased
overall by $2.4 million and was impacted primarily from the working capital balances
acquired in the Laser acquisition, from the results of operations, timing of capital
expenditures payments, financing activities including our debt activities as well as
members equity distributions;
    
    trade accounts receivable increased by $62.5 million primarily from the receivables
assumed in the Laser and Montierra acquisitions;
    
    risk management net working capital balance decreased by a net $20.6 million as a
result of the changes in the mark-to-market unrealized positions and fair value changing of
the option premiums;
    
    prepayments and other current assets decreased by $1.0 million primarily from the
property and liability prepaid insurance balances;
    
    accounts payable increased by $62.0 million from December 31, 2006 primarily as a
result of the payables assumed in the Laser and Montierra acquisitions, activities and
timing of payments, including capital expenditures activities; and
    
    accrued liabilities increase of $7.1 million primarily reflects unbilled expenditures
related primarily to capital expenditures.
 Cash Flows Six Months 2007 Compared to Six Months 2006
 Cash Flows from Operating Activities .
 Cash Flows Used in Investing Activities .
 36




---



##### Table of Contents



Cash Flows Provided by (Used in) Financing Activities .
 Capital Requirements
     
    
    growth capital expenditures, which are made to acquire additional assets to increase
our business, to expand and upgrade existing systems and facilities or to construct or
acquire similar systems or facilities, or grow our production in our upstream business; or
    
    maintenance capital expenditures, which are made to replace partially or fully
depreciated assets, to meet regulatory requirements, to maintain the existing operating
capacity of our assets and extend their useful lives or well attachments costs to maintain
existing system volumes and related cash flows; in our upstream business, maintenance
capital is defined as capital which is expended to maintain our production and cash flow
levels in the near future.
   37




---



##### Table of Contents



Amended and Restated Credit Agreement
     
    
    an interest coverage ratio (the ratio of our consolidated Adjusted EBITDA to our
consolidated interest expense, in each case as defined in the credit agreement) of not less
than 2.5 to 1.0, determined as of the last day of each quarter for the four quarter period
ending on the date of determination; and a leverage ratio (the ratio of our consolidated
indebtedness to our consolidated Adjusted EBITDA, in each case as defined in the credit
agreement) of not more than 5.0 to 1.0 (or, on a temporary basis for not more than three
consecutive quarters following the consummation of certain acquisitions, not more than 5.25
to 1.0).
  Off-Balance Sheet Obligations.
 Debt Covenants.
 Total Contractual Cash Obligations.
 38




---



##### Table of Contents



($ in millions)
    
    Payments Due by PeriodContractual Obligations
    
    Total
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    2010-2011
    
    
    ThereafterLong-term debt (including interest)(1)
    
    $
    561.6
    
    
    $
    16.1
    
    
    $
    32.9
    
    
    $
    32.9
    
    
    $
    479.7
    
    
    $
    0.0Operating leases
    
    
    4.4
    
    
    
    0.7
    
    
    
    0.7
    
    
    
    0.7
    
    
    
    0.3
    
    
    
    2.0Purchase obligations(2)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total contractual obligations
    
    $
    566.0
    
    
    $
    16.8
    
    
    $
    33.6
    
    
    $
    33.6
    
    
    $
    480.0
    
    
    $
    2.0
 
 (1)
    
    Assumes our fixed swapped average interest rate of 4.92% plus the
applicable margin under our Amended and Restated Credit Agreement,
which remains constant in all periods.(2)
    
    Excludes physical and financial purchases of natural gas, NGLs, and
other energy commodities due to the nature of both the price and
volume components of such purchases, which vary on a daily or monthly
basis. Additionally, we do not have contractual commitments for fixed
price and/or fixed quantities of any material amount. Recent Accounting Pronouncements
 Accounting for Certain Hybrid Financial Instruments Accounting for Transfers and Servicing of Financial Assets and Extinguishment
of Liabilities
 Fair Value Measurements.
 The Fair Value Option for Financial Assets and
Financial Liabilities
 Accounting for Uncertainty in
Income Taxes  an interpretation of FASB Statement No. 109
 39




---



##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures About Market Risk.
 Risk and Accounting Policies
  Commodity Price Risk
      
 Item 4. Controls and Procedures.
 Disclosure Controls
  40




---



##### Table of Contents



Internal Control over Financial Reporting
   
 PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings.
   
 Item 1A. Risk Factors.
 Limited partner interests are inherently different from capital stock of a corporation,
although many of the business risks to which we are subject are similar to those that would be
faced by a corporation engaged in similar businesses.
 If any of the following risks were actually to occur, our business, financial condition or
results of operations could be materially adversely affected. In that case, we might not be able to
pay the minimum quarterly distribution on our common units and the trading price of our common
units could decline.
 The following risks should be read in conjunction with other risk factors disclosed under Item
1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2006. The
following risks are included in this report because of our recently completed Montierra
Acquisition, described in Note 4 to our Unaudited Consolidated Financial Statements included with
this report and the Redman Acquisition and EAC Acquisition, described in Note 15 to our Unaudited
Consolidated Financial Statements included with this report.
 41




---



##### Table of Contents



Risks Related to Our Business
 Because of the natural decline in production from existing wells, our success depends on our
ability to obtain new sources of production and supplies of oil, natural gas and NGLs, which are
dependent on certain factors beyond our control. Our success is also dependent on developing
current reserves. Any decrease in production or supplies of oil, natural gas or NGLs could
adversely affect our business and operating results.
    Natural gas, NGLs, Crude Oil and other commodity prices are volatile, and a reduction in these
prices could adversely affect our cash flow and our ability to make distributions.
  
    
    the impact of weather or force majeure events on the demand for oil and natural gas;
 42




---



##### Table of Contents




    
    the level of domestic oil and natural gas production and demand;
    
    the level of imported oil and natural gas availability and demand;
    
    the level of consumer product demand;
    
    political and economic conditions and events in, as well as actions taken by foreign
oil and natural gas producing nations;
    
    overall domestic and global economic conditions;
    
    the availability of local, intrastate and interstate transportation systems including
natural gas pipelines and other transportation facilities to our production;
    
    the availability and marketing of competitive fuels;
    
    delays or cancellations of crude oil and natural gas drilling and production activities;
    
    the impact of energy conservation efforts, including technological advances affecting
energy consumption; and
    
    the extent of governmental regulation and taxation.
   43




---



##### Table of Contents



Our hedging activities may have a material adverse effect on our earnings, profitability, cash
flows and financial condition.
     Our estimated oil and natural gas reserve quantities and future production rates are based on many
assumptions that may prove to be inaccurate. Any material inaccuracies in these reserve estimates
or the underlying assumptions will materially affect the quantities and present value of our
reserves.
  44




---



##### Table of Contents



Our operations will require substantial capital expenditures, which will reduce our cash available
for distribution. We may be unable to obtain needed capital or financing on satisfactory terms,
which could lead to a decline in our cash flows.
  
    
    volume throughput through our pipelines and processing facilities;
    
    the estimated quantities of our oil and natural gas reserves;
    
    the amount of oil and natural gas produced from existing wells;
    
    the prices at which we sell our production or that of our midstream customers; and
    
    our ability to acquire, locate and produce new reserves.
  45




---



##### Table of Contents



We typically do not obtain independent evaluations of other producers natural gas reserves
dedicated to our gathering and pipeline systems; therefore, volumes of natural gas on our systems
in the future could be less than we anticipate.
  The loss of any of our significant customers could result in a decline in our volumes, revenues
and cash available for distribution.
 Midstream
 Upstream
 We may not successfully balance our purchases and sales of natural gas, which would increase our
exposure to commodity price risks.
  If third-party pipelines and other facilities interconnected to our systems become unavailable to
transport or produce natural gas and NGLs, our revenues and cash available for distribution could
be adversely affected.
  Our access to transportation options may affect our revenues and cash available for distribution.
 46




---



##### Table of Contents



Our industry is highly competitive, and increased competitive pressure could adversely affect our
business and operating results.
  Midstream
 Upstream
  A change in the jurisdictional characterization of some of our assets by federal, state or local
regulatory agencies or a change in policy by those agencies may result in increased regulation of
our assets, which may cause our revenues to decline and operating expenses to increase.
  47




---



##### Table of Contents



We are subject to compliance with stringent environmental laws and regulations that may expose us
to significant costs and liabilities.
    
    
    the federal Clean Air Act and comparable state laws and regulations that impose
obligations related to air emissions;
    
    the federal Clean Water Act and comparable state laws and regulations that impose
obligations related to discharges of pollutants into regulated bodies of water;
    
    the federal Resource Conservation and Recovery Act, or RCRA, and comparable state laws
that impose requirements for the handling and disposal of waste from our facilities; and
    
    the Comprehensive Environmental Response, Compensation and Liability Act of 1980, or
CERCLA, also known as Superfund, and comparable state laws that regulate the cleanup of
hazardous substances that may
have been released at properties currently or previously owned or operated by us or at
locations to which we have sent waste for disposal.
 48




---



##### Table of Contents



Our construction of new assets may not result in revenue increases and is subject to regulatory,
environmental, political, legal and economic risks, which could adversely affect our results of
operations and financial condition.
  If we do not make acquisitions on economically acceptable terms, our future growth will be
limited.
  49




---



##### Table of Contents




    
    mistaken assumptions about future prices, volumes, revenues and costs of oil and
natural gas, including synergies and estimates of the oil and natural gas reserves
attributable to a property we acquire;
    
    an inability to integrate successfully the businesses we acquire;
    
    inadequate expertise for new geographic areas, operations or products and services;
    
    the assumption of unknown liabilities;
    
    limitations on rights to indemnity from the seller;
    
    mistaken assumptions about the overall costs of equity or debt;
    
    the diversion of managements and employees attention from other business concerns;
    
    unforeseen difficulties operating in new product areas or new geographic areas;
    
    customer or key employee losses at the acquired businesses; and
    
    establishment of internal controls and procedures that we are required to maintain
under the Sarbanes-Oxley Act of 2002.
  Our ability to derive benefits from our acquisitions will depend on our ability to integrate
operations to achieve the benefits of the acquisitions.
  
    
    geographically separated organizations and possible differences in corporate cultures
and management philosophies;
    
    significant demands on management resources, which may distract managements attention
from day-to-day business;
 50




---



##### Table of Contents




    
    differences in the disclosure systems, accounting systems, and accounting controls and
procedures of the two companies, which may interfere with our ability to make timely and
accurate public disclosure; and
    
    the demands of managing new lines of business acquired.
  We do not own all of the land on which our pipelines and facilities are located, which could
disrupt our operations.
  Our business involves many hazards and operational risks, some of which may not be fully covered
by insurance. If a significant accident or event occurs that is not fully insured or interrupts
normal operations, our operations and financial results could be adversely affected.
  
    
    damage to production equipment, pipelines and plants, related equipment and surrounding
properties caused by hurricanes, tornadoes, floods, fires and other natural disasters and
acts of terrorism;
    
    inadvertent damage from construction, farm and utility equipment;
    
    leaks of natural gas, NGLs and other hydrocarbons or losses of natural gas or NGLs as a
result of the malfunction of pipeline, equipment or facilities;
    
    fires and explosions; and
    
    other hazards that could also result in personal injury and loss of life, pollution and
suspension of operations, such as the uncontrollable flow of oil or natural gas or well
fluids.
   51




---



##### Table of Contents



Our current debt levels may limit our flexibility in obtaining additional financing and in
pursuing other business opportunities. In addition, we may incur substantial debt in the future
to enable us to maintain or increase our reserve and production levels and to otherwise pursue our
business plan. This debt may restrict our ability to make distributions.
  
    
    our ability to obtain additional financing, if necessary, for working capital, capital
expenditures, acquisitions or other purposes may be impaired or such financing may not be
available on favorable terms;
    
    we will need a portion of our cash flow to make interest payments on our debt, reducing
the funds that would otherwise be available for operations, future business opportunities
and distributions to unitholders;
    
    our debt level will make us more vulnerable to competitive pressures or a downturn in
our business or the economy generally; and
    
    our debt level may limit our flexibility in responding to changing business and
economic conditions.
   Shortages of drilling rigs, equipment and crews could delay our operations and reduce our cash
available for distribution.
  Our and other operators drilling operations may be curtailed, delayed or cancelled as a result of
a variety of factors.
 52




---



##### Table of Contents




    
    unexpected drilling conditions;
    
    drilling, production or transportation facility or equipment failure or accidents;
    
    shortages or delays in the availability of drilling rigs and other services and equipment;
    
    adverse weather conditions;
    
    compliance with environmental and governmental requirements;
    
    title problems;
    
    unusual or unexpected geological formations;
    
    pipeline ruptures;
    
    fires, blowouts, craterings and explosions; and
    
    uncontrollable flows of oil or natural gas or well fluids.
   Restrictions in our amended and restated credit facility limit our ability to make distributions
and limit our ability to capitalize on acquisitions and other business opportunities.
  Increases in interest rates, which have recently experienced record lows, could adversely impact
our unit price and our ability to issue additional equity, to incur debt to make acquisitions or
for other purposes or to make cash distributions at our intended levels.
  Due to our lack of industry and geographic diversification in our midstream operations, adverse
developments in our operations or operating areas would reduce our ability to make distributions
to our unitholders.
 53




---



##### Table of Contents



We are exposed to the credit risks of our key producer customers, and any material nonpayment or
nonperformance by our key producer customers could reduce our ability to make distributions to our
unitholders.
  Terrorist attacks, and the threat of terrorist attacks, have resulted in increased costs to our
business. Continued hostilities in the Middle East or other sustained military campaigns may
adversely impact our results of operations.
   If we fail to develop or maintain an effective system of internal controls, we may not be able to
report our financial results accurately or prevent fraud.
  54




---



##### Table of Contents



Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
   
 Item 3. Defaults Upon Senior Securities.
  
 Item 4. Submission of Matters to a Vote of Security Holders.
  
 Item 5. Other Information.
  
 Item 6. Exhibits.
 2.1
    
    Partnership Interests Purchase and Contribution Agreement By and Among Laser Midstream
Energy II, LP, Laser Gas Company I, LLC, Laser Midstream Company, LLC, Laser Midstream
Energy, LP, and Eagle Rock Energy Partners, L.P., dated as of March 30, 2007 (incorporated
by reference to Exhibit 2.1 in the registrants registration statement on Form S-1 (No.
333-144938)).2.2
    
    Partnership Interests Contribution Agreement By and Among Montierra Minerals and
Production, L.P., NGP Minerals, L.L.C. and Eagle Rock Energy Partners, L.P., dated as of
March 31, 2007 (incorporated by reference to Exhibit 2.2 in the registrants registration
statement on Form S-1 (No. 333-144938)).2.3
    
    Asset Contribution Agreement By and Among NGP 2004 Co-Investment Income, L.P., NGP
Co-Investment Income Capital Corp., NGP-VII Income Co-Investment Opportunity, L.P., dated
as of March 31, 2007 (incorporated by reference to Exhibit 2.3 in the registrants
registration statement on Form S-1 (No. 333-144938)).4.5
    
    Registration Rights Agreement dated May 2, 2007, among Eagle Rock Energy Partners, L.P.
and the purchasers listed thereto (incorporated by reference to Exhibit 4.5 in the
registrants registration statement on Form S-1 (No. 333-144938)).10.14
    
    Common Unit Purchase Agreement By and Among Eagle Rock Energy Partners, L.P. and The
Purchasers Named Herein, dated March 30, 2007 (incorporated by reference to Exhibit 10.14
in the registrants registration statement on Form S-1 (No. 333-144938)).31.1
    
    Certification by Joseph A. Mills pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    Certification by Alfredo Garcia pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    Certification by Joseph A. Mills pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
and 18 U.S.C. Section 1350.32.2
    
    Certification by Alfredo Garcia pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
and 18 U.S.C. Section 1350
 55




---



##### Table of Contents



SIGNATURES
   EAGLE ROCK ENERGY PARTNERS, L.P.By: EAGLE ROCK ENERGY GP, L.P., its general partnerBy: EAGLE ROCK ENERGY G&P, LLC, its general partner/s/ Alfredo Garcia

Chief Financial Officer and Senior VicePresident, Corporate Development(Duly Authorized and Principal Financial Officer)
 56




---



##### Table of Contents



EAGLE ROCK ENERGY PARTNERS, L.P.
 
 EXHIBIT INDEX
 2.1
    
    Partnership Interests Purchase and Contribution Agreement By and Among Laser Midstream
Energy II, LP, Laser Gas Company I, LLC, Laser Midstream Company, LLC, Laser Midstream
Energy, LP, and Eagle Rock Energy Partners, L.P., dated as of March 30, 2007 (incorporated
by reference to Exhibit 2.1 in the registrants registration statement on Form S-1 (No.
333-144938)).2.2
    
    Partnership Interests Contribution Agreement By and Among Montierra Minerals and
Production, L.P., NGP Minerals, L.L.C. and Eagle Rock Energy Partners, L.P., dated as of
March 31, 2007 (incorporated by reference to Exhibit 2.2 in the registrants registration
statement on Form S-1 (No. 333-144938)).2.3
    
    Asset Contribution Agreement By and Among NGP 2004 Co-Investment Income, L.P., NGP
Co-Investment Income Capital Corp., NGP-VII Income Co-Investment Opportunity, L.P., dated
as of March 31, 2007 (incorporated by reference to Exhibit 2.3 in the registrants
registration statement on Form S-1 (No. 333-144938)).4.5
    
    Registration Rights Agreement dated May 2, 2007, among Eagle Rock Energy Partners, L.P.
and the purchasers listed thereto (incorporated by reference to Exhibit 4.5 in the
registrants registration statement on Form S-1 (No. 333-144938)).10.14
    
    Common Unit Purchase Agreement By and Among Eagle Rock Energy Partners, L.P. and The
Purchasers Named Herein, dated March 30, 2007 (incorporated by reference to Exhibit 10.14
in the registrants registration statement on Form S-1 (No. 333-144938)).31.1
    
    Certification by Joseph A. Mills pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    Certification by Alfredo Garcia pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    Certification by Joseph A. Mills pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
and 18 U.S.C. Section 1350.32.2
    
    Certification by Alfredo Garcia pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
and 18 U.S.C. Section 1350